From the 1950s until the early 1990s, the fundamental value of the US economy (measured by GDP) was roughly equal to American households’ net worth (Figure 1). Wall Street (in yellow) accurately reflected the productive value of Main Street (in brown). Since then, asset prices have diverged from their underlying economic utility, sending ‘psychic wealth’ to record highs. But how can net worth so materially outstrip the productive capacity of the economy? How can you be worth more than you produce?
Forty years of globalisation brought us cheap goods, cheap energy, cheap labour. These forces kept inflation low, pinned interest rates and risk premiums to the floor and ultimately made capital inexpensive. Borrow more, spend more, grow more.
The result was a golden era for asset owners, and the rise of portfolio values created a substantial wealth effect. After all, investors’ behaviour tends to reflect the value of their portfolios.
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The bezzle is the amount by which they collectively feel better off, between the creation and the destruction of the illusion.