Why the Bezzle Matters to the Economy
Please consider Why the Buzzle Matters to the Economy by Michael Pettis.
The bezzle, a word coined in the 1950s by a Canadian-American economist, is the temporary gap between the perceived value of a portfolio of assets and its long-term economic value. Economies sometimes systematically create turmoil, triggering substantial economic consequences that economists have rarely understood or discussed.
In a famous passage from his book The great crash 1929, John Kenneth Galbraith introduced the term bezzle, an important concept that should be much better known to economists than it is. The word is derived from embezzlement, which Galbraith called “the most interesting of crimes”. As he observed: “Alone among the various forms of larceny [embezzlement] has a time parameter. Weeks, months or years may elapse between the commission of the crime and its discovery. (This is a period, by the way, when the hijacker has his gain and the man who has been hijacked, oddly enough, feels no loss. There is a marked increase in psychic wealth.)”
In this sense, the bezzle is not only created by Ponzi schemes, like Madoff, but also in the form of companies – like Enron, for example, or WorldCom – whose accounting frauds result in overvalued assets. and excessively high stock market valuations. Until the accounting frauds are uncovered, there is a collective increase in psychic wealth as the value of the bezzle rises.
The effect of the bezzle is therefore to temporarily increase the total wealth recorded before dropping it to or below its original level. The bezzle feels collectively good at first and can trigger higher than usual spending until reality sets in, after which it feels terrible and can cause spending to plummet.
When asset prices rise for reasons other than real increases in their productive capacity, something very different happens. The overall economy is no better off because there will not be a corresponding increase in the productive capacity of that economy.
The owner of such assets, however, feels wealthier, albeit temporarily, because over the long run asset prices eventually converge to a value that represents their actual contribution to the production of goods and services.
More importantly, they struggle to come to terms with the implications the bezzle has for how economic activity is measured and GDP is calculated, with the bezzle distorting the relationship between economic activity and economic growth, primarily because , while the bezzle is created, there is no way to distinguish between actual revenue and/or profits and bezzle boosted revenue and/or profits.
There are other ways the bezzle can affect GDP calculations. One is to combine real and speculative profits in industries where the buying and selling of assets (such as land, commodities and inventory) are part of normal business operations. .
Another way the bezzle can creep into GDP calculations is by raising the market price of assets which, in turn, allows for greater asset-based borrowing.
But as Minsky explained, “During periods of prolonged prosperity, the economy shifts from financial relationships that create a stable system to financial relationships that create an unstable system.” Because the bezzle is, by definition, temporary (although it could last for a few years or even a decade or two), at some point the bezzle will be eliminated, and its elimination will reverse the earlier recovery of the economy. When this happens, what seemed like a virtuous cycle becomes a vicious cycle.
Unfortunately, the history of the bezzle suggests that while ordinary households and workers absorb little of the benefits of creating the bezzle, they tend to absorb most of the costs of reversing it: it’s probably no mere coincidence that periods when large amounts of bezzle are created and then destroyed almost always seem to experience growing income inequality.
The bezzle’s depreciation cost is proportional to the degree of psychic wealth the bezzle had previously created: the more bezzle created, the more painful the adjustment. Notice also how the processes of creating and dampening the bezzle are self-reinforcing. I would say that’s why investment and asset booms are almost inevitably followed by recessions or lost decades.
- The bezzle feels collectively good at first and can trigger higher than usual spending until reality sets in, after which it feels terrible and can cause spending to plummet.
- When asset prices rise for reasons other than real increases in their productive capacity, the overall economy is no better off because there will be no corresponding increase in the productive capacity of that economy. .
- The Buzzle always reverses
- The bezzle’s depreciation cost is proportional to the degree of psychic wealth the bezzle had previously created: the more bezzle created, the more painful the adjustment.
The more bezzle created, the more painful the adjustment. This applies to housing, the stock market, bitcoin, and assets in general.
Until recently, the only life Bitcoin saw was in a manic speculative environment of endless QE and cheap money.
From pennies to over $60,000 and now around $21,000.
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How much of the current price is speculative Bezzle? 10%, 25%, 50%, 90% or 100%?
Has the productive capacity of the United States increased with the surge in house prices or has the Fed artificially inflated prices?
China’s housing bubble is even bigger. It is imploding now. For more, please see Property Bailouts in China are coming, but they will fail, what about the US?
Finally, Bezzle is another very good reason to expect a long period of weak growth, whether or not it qualifies as a recession.
This post is from MishTalk.Com
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