Given that the corona virus chose the election year to appear in the U.S., it is instructive to examine the response of the U.S. authorities.

Specifically, the authorities, are driven by two goals:

1. Prove that the government can handle Corona
2. Prove that the Corona presence in the U.S. will not lead to justify stock market collapse.

Since a failure in achieving one of the goals will weigh heavily on Trump’s re-election chances, the best option for the U.S. government is to deny the existence of the problem and to reassure the public. Thus, we can identify 3 separate efforts aimed at calming the population before shit hits the fan in fullest.

First, there is the commander in chief, Trump, attempting to jawbone the markets higher through the voice of Larry Kudlow. Larry chimed in on 28th February, saying that “Stocks looks pretty cheap”. Here, I must ask- cheap in comparison to what exactly? If a mere 10% correction makes the stocks cheap (as opposed, to say, a 50% plunge), then the situation of the economy and the stocks must be excellent.

Secondly, Trump is also urging the Fed to cut rates, which the market has already priced in. This is also a purely cosmetic move, as even Trump realizes (he is far from being stupid), that printing money does nothing when the supply of goods stops due to a literal death threat.

CDC response is hardly any better, test kits are not delivered, and in a historical re-run of “don’t ask, don’t tell” no one is reporting anything. The call to “stop buying masks” should be viewed in the same vein – do not create the semblance of panic, because if you do, others who do not panic yet, may join the fun. While some moves are made and telegraphed, they intend to show that everything is under control.

In conclusion: U.S. government is very much afraid to upset the apple cart of public confidence, and due to already shaky economic situation it cannot say the truth outright.

It will be interesting to compare U.S. response of pretending to the response of the Chinese and Iranian authorities. I’ll try to do it in the next post.

In this post I would like to borrow an idea from Taleb’s “anti-fragile” book. Basically, Taleb states that certain systems become stronger if subjected to periodic stress. For example, bones and muscle mass grow stronger if you exercise rigorously in a gym, and stress them with heavy workloads.

According to Taleb, the same can be said for instance about the political system in Italy. On the first glance, the system is clearly dysfunctional- Italians change their governments as frequently as a magician in circus changes cards he holds in front of the audience. Yet, this nonsensical behavior has an unexpected benefit- the people are used to various political shocks, and do not put that much trust in their elected busybodies, being sure that they will be gone by the next year. The politicians are aware of this attitude and behave accordingly.

Compare this for instance with any Arab regime that got toppled during the Arab Spring. The rigidity came with a lack of stress on the system. The trust of citizens in the ability of the regimes to provide them with a certain standard of living has failed, and the government was pretty sure it could handle the situation. A quite predictable clash ensued.

The sudden event tests the trust of the system in its ability to deal with the matter. In my opinion, the incapable and incompetent governments, have a thing or two going for them, as no one seriously expects them to cope with the problem once it arises. Trust of the population has already been eroded, and the people have learned to do without the bumbling bureaucrats. Now, obviously, the danger of people deciding to do entirely without the government still exists, but as far as the threats go, this one was always in the background.

However, if we will have a perceived strong state (say, pre “yellow vests” France) and people with “socialist mind set”, where they feel entitled to the good stuff, we are going to have a major crisis. People will be unable to receive their entitlements, as the government will be unable to provide them, and they will not be able to do without them. In that case, I think this combination will prove to be a very explosive one with potentially drastic consequences.

Obviously, in a proper capitalist state (but where I can find one?), the issue of trust in the system does not exist. The state is not expected to babysit you. Thus, the stress of caring out for yourself is put mainly on the individual and several entities, which lessens the systemic impact of the crisis (limited spill over).

Conclusion, which seems likely to tested by Corona, is that capitalist states will prove to be more robust in face of a massive crisis, and the societies of “somewhat failed” socialist states will fare better than the society of strong socialist states.

In my opinion the world of finance is the most important systemic lynchpin in our lives, enabling commerce and thus the ability to rise above the poverty that self-autarkist behavior will inevitably bring.

Gold played and still plays a vital role in this system, and I thus I think it will be important to spend a bit of time and space to discuss its role in the context of trust.

Gold has been used as money by the humankind for quite some time, because it fulfilled the characteristics of being durable, portable, divisible, uniform, being in limited supply, and being generally acceptable. After 1971 however, gold ceased de-jure (if perhaps not de facto) being part of the financial system. In 1971 Nixon has decreed that the U.S. dollar will no longer be convertible to gold, and because every other currency at that time was fixed at a certain rate vis-à-vis the dollar, every currency became a fiat currency, i.e. not backed up by gold.

Leaving aside for now the question whether Nixon’s decision has been wise or not, this change has been based largely on population’s trust in the system. After all, theoretically, fiat currency if prudently managed, can be a proper substitute for gold. Citizens trust the government not to debase the currency by printing too much, and if this trust is maintained, the boat is not rocked to the point of capsizing.

Nevertheless, gold remains a good barometer of citizen’s distrust. As shown by Dmitri Speck in his book “the Gold Cartel”, The U.S. government and the Federal Reserve considered rising gold prices as a signal indicating weakening status of the U.S. dollar. In order to send a different signal to the market, U.S. government has in the past periodically intervened in the gold market by selling gold, thus lowering its price.

Obviously, lowering the price of gold solves nothing of the fundamental issues that increased its price in the first place. However, as a trust management tool, such a move can indeed be effective, provided that the underlying issues (such as too low interest rate) are being addressed as well.

If the government will grossly misjudge and mishandle the situation (say, will engage in money printing on a great scale that will bring hyperinflation), the price of gold can suddenly skyrocket. In that case, the loss of trust will be immediate, and, more importantly, broad, spilling to other areas as well, either due to over reaction, or due to connectivity between the “finance universe” and our regular lives. At an extreme scenario, with finance system in shambles, other parts of citizens’ lives will follow suit and cease to function. In Venezuela, for instance people were reduced to killing animals in the zoo for food. Somehow, I doubt that people there are especially trusting.

Therefore, it is imperative for the government to ensure that the loss of trust will never, ever, be a sudden one, and that mistakes can be reliably and conveniently blamed on somebody else.

Thus I view with great suspicion current RICO charges leveled up at J.P.Morgan, which is charged with systemic precious market manipulation. At this point, the regulator has for decades (!) received complaints about precious metals manipulation, and it is not all that difficult to notice the ridiculous concentrated position of the bank at the silver market.

Assuming the regulator did not suddenly decide to keep the law (this may happen with an individual but not with an entire bureaucratic system), I can only assume that this is done for trust management purposes. The price of gold after the brutal 2011 correction started to climb up again. The finance system is risking the loss of trust, and the government correctly decides to limit the damage to the finance sector alone, by shifting the blame to the agent.