I’ve been musing about monetary velocity because it points to a possible diagnosis on a that nasty feeling in a lot of guts today. How much of our current prosperity is built on false hopes? I’m not the first and definitely not the smartest guy to think about that. So lets introduce the concept of “the Bezzle.” The Bezzle the queasy-making part of that gut feeling. The term comes from JK Galbraith’s history of the Great Depression.
“In many ways the effect of the crash on embezzlement was more significant than on suicide. To the economist embezzlement is the most interesting of crimes. Alone among the various forms of larceny it 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.) At any given time there exists an inventory of undiscovered embezzlement in — or more precisely not in — the country’s businesses and banks. This inventory — it should perhaps be called the bezzle — amounts at any moment to many millions of dollars. It also varies in size with the business cycle. In good times people are relaxed, trusting, and money is plentiful. But even though money is plentiful, there are always many people who need more. Under these circumstances the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly. In depression all this is reversed. Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous. Commercial morality is enormously improved. The bezzle shrinks. https://www.goodreads.com/quotes/tag/bezzle
The economic magic is that; for a while; maybe for a very long while; we all get to live like that magic million dollars existed. Until it doesn’t…
The Bezzle is the monetary equivalent to Schrodinger’s cat. The money exists twice in two different states of reality. You embezzle a million dollars. For a time, you live like a millionaire. But your victim also keeps living like a millionaire. You are both spending with the confidence that million dollars exists. And, for a time, it does exists in two different realities. Until it is observed. One reality collapses. A million dollars disappears in a puff of smoke (smelling vaguely of singed cat hair).
The Bezzle concept suffers from two problems.
- It exists only when un-observed. It is reliably, necessarily forgotten exactly when it is most relevant. The Bezzle only exists when people are credulous. They have to believe that magic million dollars is real. And that depends on people forgetting about the Bezzle.
- It isn’t easily quantifiable. This is the ultimate sin in modern economics. You can’t build clever models explaining it. Clever models get you tenure. And talking about the Bezzle tends to repel folks in finance. There’s a bit of Bezzle sprinkled into most financial products – especially the more profitable products.
That leaves the Bezzle unloved and un-observed. Tucked in the same box as Schrodinger’s cat. Except in the rants of dangerous amateurs (like myself).
The next post will start to tie the prior 3 posts together (loosely as is my wont). Monetary velocity is declining. Fed intervention is delivering diminishing returns. And now have this concept of the Bezzle – magical, imaginary, temporary wealth. My guess (and it is just a guess) is we can get a rough estimate of the the Bezzle from how much (or how little) money is circulating. It isn’t huge – a few Trillion. But that’s enough to do some damage.