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Msg  474513 of 482759  at  8/27/2021 3:02:29 PM  by


The following message was updated on 8/28/2021 9:20:13 AM.

Why the Bezzle Matters to the Economy

A pretty good white paper on the subject. Charlie Munger added his own insight to the concept.

>Galbraith coined the bezzle word because he saw that undisclosed embezzlement, per dollar, had a very powerful stimulating effect on spending. After all, the embezzler spends more because he has more income, and his employer spends as before because he doesnt know any of his assets are gone. But Galbraith did not push his insight on. He was content to stop with being a stimulating gadfly. So I will now try to push Galbraiths bezzle concept on to the next logical level.

Munger went on to illustrate how rising asset prices, when they rise faster than rises in the underlying long-term economic value, can contribute to what he now renamed the febezzlea clumsy word that has never stuck. Mungers insight was that rising stock or real estate prices can generate income and wealth effects whether or not these rising prices reflect real increases in the earning capacity of these assets, that is to say in their real fundamental values. When they do reflect real increases in wealth, the increase in the investors wealth is matched by an increase in the real productive capacity of the economy. There is no false or distorted sense of wealth.

But 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 richeralthough only temporarilybecause over the long term, asset prices eventually converge to a value that represents their real contribution to the production of goods and services.

When the perceived value of assets outpaces their actual economic utility, the psychic wealth of the economy once again rises, and because this rise is not associated with any corresponding rise in real wealth, it is only temporary (though, as Munger noted, this temporary phase can go on for a very long time). The point is that financial markets can create temporary impressions of false wealth very similar to those of Ponzi schemes without any need for an embezzlera notion, by the way, that economist Hyman Minsky would have quickly recognized as a restatement of the third, Ponzi, stage of his Financial Instability Hypothesis.<


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Msg # Subject Author Recs Date Posted
474523 Re: Why the Bezzle Matters to the Economy hydono 0 8/28/2021 8:31:02 AM

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