Riding a Tiger

The Emerging Market Bezzle

Originally published in the Informanté newspaper on Thursday, 15 October, 2015.

After the 1929 stock market crash, the world was dumped into chaos. For years, the Great Depression lingered, and once recovery was in sight, the Second World War erupted. It is thus no surprise that the seminal work on the Great Crash of 1929 was only penned in 1955, by John Kenneth Galbraith.
One of the most enduring concepts put forth by Galbraith in his treatise, was the ‘bezzle’. Principally, this gave the crime of embezzlement an economic view. In Galbraith’s interpretation, embezzlement is quite a unique crime, in that a period of time from weeks to years may elapse between when the crime occurred, and when it was discovered.

There thus exists a period of time where the embezzler has the gains of his or her crime, but the victim is unaware of it, and thus has no feeling of loss. The economy, in effect, has an increase in perceived wealth from the view of its participants. Galbraith posited that this mismatch between actual and perceived wealth, or an ‘inventory’ of embezzlement, existed in all economies, and he named this the ‘bezzle’.

The ‘bezzle’ is naturally larger during the good times, but shrinks during the bad. After all, during the good times, people are more relaxed, they trust one another and money keeps flowing. But when times get tough, money is watched like a hawk. Everyone is assumed to be untrustworthy until they are proven otherwise, and audits get tougher — the ‘bezzle’ is reduced.

During the last financial crisis, the extent of the ‘bezzle’ became gradually known. Once the good times stopped, the megafraud cases of Allen Standford and Bernard Madoff were suddenly exposed, and perceived gains by large companies were revealed to be actual losses. Even in South Africa, we can see Eskom ‘bezzle’ suddenly being exposed when excess capacity was required for growth.

But in Eskom’s case, this might actually be an explanation of the ‘febezzle’. Coined by Charles Munger, the long-time business associate of Warren Buffet, this expands the meaning of ‘bezzle’ to a ‘functionally-equivalent bezzle’ or ‘febezzle’. Munger expanded the definition to include perceived wealth created by legal means — essentially when two parties believe they are creating wealth for both, when in fact it’s simply a transfer of wealth that the losing party has not realised yet.

Stock market bubbles are a prime example of this, since wealth in a high-priced stock seems real enough, but when the bubble bursts, you suddenly find your wealth is worth about as much as the paper it is printed on. This ‘febezzle’ however, does not only affect individuals. After all, governments themselves enter into transactions in the market for their debt, essentially borrowing from the future. It is usually when the future comes to pass that the ‘febezzle’ disappears.

In the emerging markets, this manifests as dollar-based loans made at a time the economy was strong, and the exchange rate reasonable. The loans and the products and infrastructure they fund seem cheap now, and we all seem to benefit. But when the tide of investment pulls back, the exchange rate suffers, and the debt burden become onerous, only then does the ‘febezzle’ pop, and now countries such as South Africa have serious worries about their fiscal situation, their investment-grade rating, and their future growth.

In Africa in particular, corruption is the ‘bezzle’ we usually build up during the good times, and only crack down on when times are tough. Namibia, specifically, is currently experiencing good times, and it is admirable that the current government is still focusing on its elimination and the promotion of good governance. As we see in the global market, tough times might be coming sooner than we think.

It was perhaps Ramalinga Raju, chairman of Satyam Computer Services (India’s Enron) who put it best,

“It’s like riding a tiger, and not knowing how to get off without being eaten.”

While the ‘bezzle’ might temporarily make people feel better, since perceived wealth has gone up, in the end it is actual wealth that matters.

Originally published at theoryofinterest.blogspot.com on October 15, 2015.