Is the social licence a real thing?

May 18, 2020

A disturbing article appeared today in mining.com (https://www.mining.com/draft-university-of-sussex/) claiming evidence of massive market manipulation to depress the attractiveness of investments in cryptocurrencies and gold. In normal times this would warrant a shrug from most people because they are not invested in these so-called ‘safe havens’. The difference today is that we have a new threat to seek safety from – currency collapse.

The pandemic has prompted rich countries to prop up their banks from the foundations up. They are delivering cash directly to citizens and small businesses. That prevents a depression and the deflation in asset values that comes with it. That, in turn, helps banks avoid huge write downs. It is a version of what Milton Friedman called ‘helicopter money’ – distributing cash to the population by pushing bales of bills out the cargo bays of helicopters.

So where does all this helicopter money come from? Governments borrow it, from themselves and bond investors. It’s like a bet on the future prosperity of the country that’s printing the money. So which countries have the best odds?

Investors call them ‘safe haven’ currencies. They are the ‘reserve currencies’ of the world: USD, JPY, GBP, EUR. As long as investors buy bonds from these countries during uncertain times, the countries can print money without spurring inflation. That assures that the countries can replay the investors in script that has more or less the same value as it had at the time it was lent. But what happens if there are competitive safe havens?

Gold is a traditional safe haven, especially when government debt starts to look like it would take a complete fantasy future to repay it. Cryptocurrencies have recently been proposed as alternatives to the traditional currencies too.

Yesterday US officials admitted that it could take up to two years for the economy to return to ‘normal’ and that maybe the so called ‘normal’ will remain elusive until there is a vaccine. That possibility has already sent some investors looking for alternative safe havens.

Helicopter money itself can give investors the jitters. Argentina has been practicing a version of helicopter money for decades. It has a maze of social benefits that have created an entrenched class of entitled citizens with decisive political clout. The country is today negotiating a ‘restructuring’ (i.e., a loss for bond investors) to avoid its ninth default. Could this ever happen to the US or the UK if politics prevented them from grounding their helicopters? Again, some investors are looking for alternative safe havens.

But it could never happen in the USA, right? Well maybe not as a deliberate policy. But what about a capillary action from the bottom up? Landlords (i.e., investors) are already taking a haircut on their return rates from tenants who have been locked down. Rent is just not being paid. That trickles up to the banks who financed the property. That, in turn, trickles up to the government. Government response: borrow more by telling investors that prosperity will return tomorrow, as soon as the poor tenants and small business owners get back on their feet.

Obviously, a lot of groups have an interest in having investors stick to the traditional safe havens. The include investors already invested in those currencies, the governments of those countries, the recipients of helicopter money, and owners of assets denominated in those currencies.

That leaves us with a lot of suspects when we go looking for the party or parties behind the massive manipulation of the markets for alternative safe havens. The mining.com article cites research by Dr. Carol Alexander at University of Sussex Business School. I couldn’t find the research reported on her webpage, but maybe it will be posted soon. In any case, the article says that Alexander says, “The lack of integrity by a few powerful market players is causing a major financial market melt-down from which the current form of our global economy may never recover.”

Ahem. Well maybe. Maybe the alternative safe havens will never recover. What is for sure, someone with a lot of wealth wants to see them lose their attractiveness, probably so that the reserve currencies remain the only game in town for safe haven seekers. That reeks of desperation.