The empty spaces between the red line and the blue line that open up after around 1995 is what John Kenneth Galbraith called "the bezzle" -- summarized by John Kay as "that increment to wealth that occurs during the magic interval when a confidence trickster knows he has the money he has appropriated but the victim does not yet understand that he has lost it."
In Chapter 8 of The Great Crash, 1929, Galbraith wrote:
"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 business 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."In the present case, the bezzle has resulted from an economic policy two step: tax cuts and Greenspan puts: cuts and puts.
7 comments:
Might this simply reflect US-owned wealth in enterprises outside the US (since GDP would miss the associated flows)?
No, because this is unequivocally a boom and bust pattern. At the end of the boom cycle, net worth collapses back to very close to the historical norm of 3.7 times GDP.
«after around 1995 is what John Kenneth Galbraith called "the bezzle"»
Indeed, a lot of long-term graphs have an inflection point around 1995, signaling a regime change. Myself and others have long been asking ourselves what happened in 1995 that made is so obviously an inflection point.
My current best guess is that in 1994 there was a new Republican congressional majority, with N Gingrich's "Contract on America", and the first thing they did was to remove most constraints to expanding leverage, with the enthusiastic complicity of B Clinton and the rest of the Rubin wing of the Democrats.
Of all people the normally unreliable D Luskin spotted that in 1994-1995 risk capital requirements were abolished for various types of lending, and since then, and especially since FAS157 was changed to "mark-to-whatever" after 2008, infinite debt beckons. The Republicans and their New Democrat clones have simply reinvented wildcat banking.
The bezzle is in essence the amount of debt that cannot be repaid. That is the magic property of debt: both the creditor and the debtor can spend the same purchasing power ("money").
From JK Galbraith's "The Great Crash 1929" a very apposite quote BTW as to 1994, and the Republicans being the party for wildcat bankin
«Just as Republican orators for a generation after Appomattox made use of the bloody shirt, so for a generation Democrats have been warning that to elect Republicans is to invite another disaster like that of 1929. The defeat of the Democratic candidate in 1952 was widely attributed to the unfortunate appearance at the polls of too many youths who knew only by hearsay of the horrors of those days. It would be good to know whether, indeed, we shall some day have another 1929.»
Very very funny... Or not :-)
«reflect US-owned wealth in enterprises outside the US»
It is quite clearly mostly real estate (mostly residential, but a good chunk being commercial) bought on margin, with a substantial minority being stocks bought on margin. Some bloggers sometimes publish graphs of volumes of stocks bought on margin and "oh my!" are they telling.
It is all part of what english sociologist Colin Crouch calls "privatized keynesianism", where public spending financed by government borrowing has been in part replaced with private spending financed by private borrowing against capital gains on real property and securities, implicitly guaranteed by the government.
The switch to "privatized keynesianism" has three "advantages" for the anglo-american governments that practice it so enthusiastically:
* Since it benefits only those who have capital gains on assets, who are a rich minority, it does not benefit the majority of wage earners, who are "inflationary".
* Since the borrowing against capital gains is by private persons from private banks, it does not count as public borrowing, even if it is well known that private bank lending is underwritten implicitly by the government.
* It leads to a debt-collateral spiral, as well described by J Stiglitz: the more debt is issued against asset collateral, the higher the prices of assets will grow, which increases the value of the assets as collateral, enabling a further round of debt growth.
The entire system is predicated on asset prices doubling every 12-15 years "forever" (in the UK the same spiral relies on property prices doubling every 7 years in London and 10 years in the south-east of England).
Those graphs would look every more amusing with some additional lines:
* Fed Board "assets".
* Debt to GDP ratio.
* Stocks bought on margin.
Some interesting posts/graphs:
http://angrybearblog.com/2008/09/what-was-it-about-1995-and-us-federal.html
«1995 – The US Federal Reserve effectively eliminated the fractional reserve ratio. Banks were no longer required to back assets that largely corresponded with “broad money” (M3) with cash reserves. The consequence was that banks could effectively create money without limitation»
"Figure 5 of 17" "Total U.S. Debt as as % of GDP" (1870 to 2010)
https://www.researchgate.net/figure/233885954_fig5_Figure-5-The-US-total-credit-market-debt-as-a-of-GDP-includes-Government-and
"Total Credit Market Debt as a % of GDP" (1920 to 2010)
"http://3.bp.blogspot.com/_rteR3sn2Oag/SYqcU4rPTXI/AAAAAAAAAAQ/DzGATfv-pVo/s1600-h/debt+to+gdp.jpg
"USA Money Stock Measures and Debt", "USA Ratios of Debt and Money to Base Money", and most importantly "USA Ratios of Debt and Money to GDP" and "Private Debt to GDP Ratios (USA Australia)", "The Debt Bubble".
http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/
"Figure 4: Household Net Worth as Percent of Personal Income", "Figure 5: The CBO's Estaimate of Potential Output", "Figure 6: Two Estimates of GAP"
http://noisefromamerika.org/articolo/why-the-fed-s-zero-interest-rate-policy-failed
"Total Capital Gains Income"
http://ritholtz.com/2012/03/blame-the-loss-of-capital-gains-for-the-deficit/
"NYSE Margin Debt at Record High"
http://ritholtz.com/2013/10/nyse-margin-debt-at-record-high/
Thanks, Blissex. Very helpful insights.
The first link you post, by the way, is a re-post of an EconoSpeak post by Brenda Rosser.
«helpful insights»
I'll add then some speculation. While I reckon that the direct cause of the debt bubble has been the Republican congressional majority in Congress and republicans being the party of wildcat banking and growing leverage, a similar debt bubble and asset bubble has happened in several other countries in the world roughly at the same time. Indeed probably the original source of the "privatized keynesianism" strategy was the UK, not the USA. Almost all of the countries practicing it are "anglo-american" culture countries.
So there must be a bigger political wave, and I think it was correctly described by Tony Blair in 1987: that the success of the labor movement post-WW2 turned a lot of organized working class people (mostly the descendants of non-protestant-white irish/jewish/italian immigrants) into ravenous middle class propertied rentiers (and the young B Clinton discovered this too), plus the "baby boom" required that politicians of all flavours find a way to redistribute from younger people to older people to fund and later pay pensions.
For pensions taxation would not do, as it would make that redistribution all too overt, and would hit mostly the upper income donors to all parties.
The solution that most anglo-american parties found was a debt bubble to push up asset prices, providing pensions to the ravenous rentier middle class in the form of massive increases in their net worth (and fantastic profit opportunities to CEOs and Wall Street), plus massive immigration and offshoring to keep down wages despite a debt-fueled high pressure economy. Offshore countries contributed vigorously by exporting capital to the USA in a giant "vendor financing" operation.
«The first link you post, by the way, is a re-post of an EconoSpeak post by Brenda Rosser.»
Your EconoSpeak is a good resource that I also read, and comment upon if only to repeat that the lump of labour is a fallacy but the lump of wages is not. :-)
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