Bezzle is a temporary gap between perceived wealth and long-term economic value.

Nasdaq 100 chart courtesy of StockCharts.com
 

Why the Bezzle Matters to the Economy

Please consider Why the Bezzle 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 at times systematically create bezzle, unleashing 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 far better known among 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, incidentally, when the embezzler has his gain and the man who has been embezzled, oddly enough, feels no loss. There is a net increase in psychic wealth.)"

In this sense, the bezzle is created not just by Ponzi schemers, 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 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, then, is to push total recorded wealth up temporarily before knocking it down to or below its original level. The bezzle collectively feels great at first and can set off higher-than-usual spending until reality sets in, after which it feels terrible and can cause spending to crash.

When asset prices increase for reasons other than real increases in their productive capacity, something very different happens. The overall economy is no better off because there will be no corresponding increase in the productive capacity of that economy.

The owner of such assets, however, feels richer—although only temporarily—because over the long term, asset prices eventually converge to a value that represents their real contribution to the production of goods and services.

More importantly, they find it difficult to accept the implications the bezzle has on the way economic activity is measured and GDP is calculated, with the bezzle distorting the relationship between economic activity and economic growth, mainly because—while the bezzle is being created—there is no way to distinguish between real income and/or profits and bezzle-boosted income and/or profits.

There are other ways the bezzle can affect GDP calculations. One way is through the commingling of real and speculative profits in business sectors in which buying and selling assets (such as land, commodities, and inventory) is part of normal business operations.

Another way the bezzle can slip into GDP calculations is by raising the market price of assets that in turn enable greater asset-based borrowing.

But as Minsky explained, “over periods of prolonged prosperity, the economy transits from financial relations that make for a stable system to financial relations that make for an unstable system.” Because the bezzle is, by definition, temporary (though it may 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 boost to the economy. When that happens, what appeared to be a virtuous cycle becomes a vicious cycle.

Unfortunately, the history of bezzle suggests that, while ordinary households and workers absorb few of the benefits from the creation of bezzle, they tend to absorb most of the costs of its reversal: it is probably not just a coincidence that periods in which large amounts of bezzle are created and then destroyed seem almost always to experience rising income inequality.

The cost of amortizing the bezzle is proportionate to the degree of psychic wealth the bezzle had previously created: the more bezzle that is created, the more painful the adjustment. Notice, too, how self-reinforcing the processes of bezzle creation and bezzle amortization are. This, I would argue, is why investment and asset booms are almost inevitably followed by busts or lost decades.

Key Points 

• The bezzle collectively feels great at first and can set off higher-than-usual spending until reality sets in, after which it feels terrible and can cause spending to crash.
• When asset prices increase 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 Bezzle always reverses
• The cost of amortizing the bezzle is proportionate to the degree of psychic wealth the bezzle had previously created: the more bezzle that is created, the more painful the adjustment. 

Bitcoin Bezzle

Bitcoin logarithmic chart courtesy of TradingView. 

The more bezzle that is created, the more painful the adjustment. That applies to housing, the stock market, Bitcoin, and assets in general. 

Until recently, the only life that Bitcoin has seen has been in a speculative mania environment of endless QE and cheap money. 

From pennies to over $60,000 and now about $21,000. 

How much of the current price is speculative Bezzle? 10%, 25%, 50%, 90%, or 100%?
 

Housing Bezzle

Did the productive capacity of the US go up with soaring housing prices, or did the Fed artificially inflate prices?

China's property bubble is even bigger. It's imploding now. For discussion, 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's Labeled Recession

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