The bezzle
In the 1950s economist John
Galbraith coined the concept of the ‘bezzle’, defined as the inventory of
undiscovered embezzlements in the economy.
The bezzle increases during periods of irrational exuberance in the markets and before the victims become aware of the fraud.
In good times, funds are plentiful and investors too
trusting, but in recessionary times these dynamics are reversed.
The creation of the undisclosed bezzle can be doubly powerful in stimulating spending in the economy as wealth and leverage increases.
But ultimately the reversal and destruction of
fictional wealth will have an equivalently strong impact via the negative
wealth effect.
Recent periods of zero interest rates unleashed speculative excesses on an epic scale, but much of the perceived increase in wealth is proving to be illusory.
As central bankers dial
interest rates back up from the zero lower bound, consumers are becoming
increasingly alert to the shrinking of the bezzle.
The waves of government stimulus
rolled out through the pandemic may have been necessary but were also bound to
become another significant source of bezzle in the economy.
Illusory wealth
While the bezzle might be most
aptly characterised by the most infamous frauds, fugazzis, and Ponzi
schemes, such as the Bernie Madoff swindle, asset prices levitating far above
their fundamental or productive values can also create unsustainable or illusory
psychic wealth across equities and housing markets.
In the residential property
market space, Australia’s hinterland boltholes and coastal escapes which were
frequently selling sight unseen through the pandemic and attracting ebullient
$3 million bids have been repriced lower towards $2 million, and brutally so in
some cases.
The bulk of the $½ trillion unwind in Australian housing equity to date has largely stemmed from the upper price quartile.
This includes sectors of the market which benefited most from the zero
interest rate policy and the ‘race of space’ away from higher-density city
living and apartment towers with unusable shared facilities.
The bottom end of the residential housing market has to date held up in a more robust manner, which will be a welcome relief to the recent first homebuyers who took advantage of the government’s first home loan deposit scheme.
This partly
reflects the steep increase in building materials and trades costs, which has
underpinned the lower end of the market, as well as sharply rising rents.
New South Wales Premier
Perrotet has also successfully passed the historic first homebuyer law through
Parliament, which will reduce upfront costs for first homebuyers entering the
market in the state prospectively and is set to increase first homebuyer demand
up to the $1.5 million price point.
Overall, however, market
sentiment remains cautious for now, and will likely remain so for as long as the
cash rate target is being ratcheted higher.
Fixed rate pain
Historically, Australia only
had around one-fifth of mortgage balances on fixed rate products, but this
market share ballooned from the September 2020 quarter all the way through
until the end of 2021.
With the most common tenor of fixed
rate mortgage in Australia being two years, the fixed rate cliff is now kicking
into gear, and the ensuing reset will send a few tremors through household
balance sheets, in turn impacting the consumption of household goods and
services.
In the commercial real estate sector, secondary-grade office space which was previously selling on record low yields also faces challenges.
Rents are falling as weak tenant demand and low
office occupancy rates have persisted long after the most onerous of the COVID-19
restrictions passed, in turn shifting demand into the discounted A-grade stock.
Galbraith posited that the
bezzle is eliminated during periods of growing trepidation in the markets, with
much of the reversal in paper wealth typically being absorbed by retail punters
and ordinary households.
For now, each month tighter monetary
policy is sucking money out of the economy, and investors have become more sceptical.
We shouldn’t be too surprised.
As Galbraith foretold, every bezzle ends.
