Almost 70 years ago, John Kenneth Galbraith explained that during a bull market there is a period when an embezzler enjoys his ill-gotten gains, but the victim does not yet know he has lost out. Think of rich Europeans who invested with Bernie Madoff, and spent their summers in Saint Tropez and their winters in Saint Moritz believing that Madoff was compounding their assets at a steady 12% a year. While the “bezzle” was on, the economies of Saint Moritz and Saint Tropez hummed along nicely, and the world seemed better off. In this interval, there were two engines of “unfounded” economic activity: Madoff bought watches, yachts and holiday homes, while the investors he was conning spent as if their balance sheets were still rock solid.
