Gareth Vaughan on friendships between rich & poor reducing poverty, the end of hands-off US govt, how the world's most powerful gold trader was taken down, China's fossil fuel investment & the country whose money melts like ice cream

This Top 5 comes from interest.co.nz's Gareth Vaughan.

As always, we welcome your additions in the comments below or via email to david.chaston@interest.co.nz. And if you're interested in contributing the occasional Top 5 yourself, contact gareth.vaughan@interest.co.nz.

See all previous Top 5s here.

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1) How friendships between rich & poor people reduce poverty.

The New York Times has a story on a major new study that suggests the key way to reduce poverty is more friendships between rich and poor people. The study itself was published in Nature. The social media-enabled scale of the study is quite something. It analysed the Facebook friendships of 72 million people. According to the NY Times, this covers 84% of US adults aged between 25 and 44.

The study shows areas where people have more friendships cutting across class lines significantly increases how much they earn in adulthood. These cross-class friendships are described by the researchers as economic connectedness, and the study shows they have a bigger impact than school quality, family structure, job availability or a community’s racial composition. As the NY Times puts it, the people you know can open up opportunities.

This is a US-centric study and the conclusions outlined above may seem fairly obvious. But the sheer scale of this study is mind blowing and very interesting. In a US that's deeply partisan these days the study might also offer a clue on how to bring people with different political beliefs together. And perhaps ironically the study uses social media, which with its bubble worlds for users, is a key contributor to partisan divisions.

Social capital, the network of people’s relationships and how they’re influenced by them, has long intrigued social scientists. The first known use of the phrase was in 1916, by L.J. Hanifan, a school administrator in West Virginia. Since then, researchers have found that ties to more educated or affluent people, starting in childhood, can shape aspirations, college-going and career paths.

But the new study is the first to show that living in a place that fosters these connections causes better economic outcomes, using a significantly larger data set than other studies, covering 21 billion Facebook friendships.

The researchers limited the data, which did not include names, to active Facebook users. They estimated users’ incomes based on their ZIP codes, college, phone model, age and other characteristics.

For each low-income Facebook user, the researchers determined where the person was currently living, and how many high-income friends they had. That gave them a measure of how economically connected each neighborhood was. Then they compared the new data with earlier research that used tax records to measure how much a particular neighborhood raised low-income children’s economic prospects.

The researchers were also able to link almost 20 million users to both their high school and to their parents on Facebook. Using those ties, they repeated their analysis, this time on high school connections between children of rich and poor parents, to measure the impact of relationships made early in life. They did a similar analysis for teenage Instagram users. And they built on an earlier analysis of siblings who moved at different ages to show that it was the place that made a difference, versus something about the families who moved to those places.

Each analysis had the same result: The more connections between the rich and poor, the better the neighborhood was at lifting children from poverty. After accounting for these connections, other characteristics that the researchers analyzed — including the neighborhood’s racial composition, poverty level and school quality — mattered less for upward mobility, or not at all.

“It’s a big deal because I think what we lack in America today, and what’s been dropping catastrophically over the last 50 years, is what I call ‘bridging social capital’ — informal ties that lead us to people who are unlike us,” said Robert Putnam, the political scientist at Harvard who wrote “Bowling Alone” and “Our Kids,” about the decline of social capital in the United States. “And it’s a really big deal because it provides a number of avenues or clues by which we might begin to move this country in a better direction.”

2) How the IRA heralds the end of passive, hands-off US government.

US President Joe Biden signed the Inflation Reduction Act (IRA) into law last week. The Atlantic's Robinson Meyer writes that whilst most attention has focused on the IRA being a climate act, there's a lot more to it. Meyer argues that the IRA effectively makes a bet relevant to anyone who plans to buy or sell something in the US during the next decade, who plans to trade with a US company, or who relies on US military power. 

The idea is this: The era of passive, hands-off government is over. The laws embrace an approach to governing the economy that scholars call “industrial policy,” a catch-all name for a wide array of tools and tactics that all assume the government can help new domestic industries get started, grow, and reach massive scale. If “this country used to make things,” as the saying goes, and if it wants to make things again, then the government needs to help it. And if the country believes that certain industries bestow a strategic advantage, then it needs to protect them against foreign interference.

The approach is at the core of how the IRA seeks to resolve climate change. Democrats hope to create an economy where the government doesn’t just help Americans buy green technologies; it also helps nurture the industries that produce that technology.

This reflects a homecoming of sorts for the United States. From its founding to the 1970s, the country had an economic doctrine that was defined by its pragmatism and the willingness of its government to find new areas of growth. “Yes, there was an ‘invisible hand,’” Stephen Cohen and Brad DeLong write in their history of the topic, Concrete Economics. “But the invisible hand was repeatedly lifted at the elbow by the government, and placed in a new position from where it could go on to perform its magic.” That pragmatism faded in the 1980s, when industrial policy became scorned as one more instance of Big Government coming in to pick so-called winners and losers.

The IRA is not the only bill intent on bringing back industrial policy. The two other large bills passed by this Congress—the $1 trillion bipartisan infrastructure law and the CHIPS and Science Act—make down payments on the future as well; both laws, notably, were passed by bipartisan majorities. They alone would be notable commitments to a different vision of the next decade. But it is in the IRA that these general commitments become specific, and therefore transformative.

3) How Uncle Sam took down the world’s most powerful gold trader.

Readers may remember my previous Top 5 featured Bloomberg's coverage of the Chicago trial of Michael Nowak, who headed up precious metals trading at JPMorgan for more than a decade, and his colleagues Gregg Smith and Jeffrey Ruffo, for allegedly conspiring to manipulate gold and silver markets.

Now Bloomberg has summarised the background to the case. It started when the Federal Bureau of Investigation picked up Christian Trunz, a JPMorgan colleague of Nowak & Co, at Fort Lauderdale airport in December 2018 when he was returning from his honeymoon.

At the Justice Department, the road to JPMorgan began with a decision to begin hunting down traders who made bogus offers to buy and sell commodities that they never intended to execute. The criminal fraud unit hired data consultants to go through billions of lines of trades to spot patterns of market manipulators.

As the vast quantities of data was scrutinized, there were certain traders that stood out. And they worked at JPMorgan.

With the data in hand, investigators went looking for cooperators, which they found in Trunz and his former colleague John Edmonds. Both relatively junior traders pleaded guilty to their own misconduct and agreed to testify against the desk’s boss.

Nowak was arrested in September 2019, sending a shock wave through the metals world, but the Covid pandemic meant it would be another three years until the trial finally took place.

In his testimony, Edmonds, who’d started in an operations role at JPMorgan, described spoofing on the desk as a daily phenomenon and felt obliged to take part because it was part of the normal strategy.

The Justice Department’s move against JPMorgan’s most senior bullion bankers was celebrated in some corners of the gold and silver markets, where investors and bloggers have long accused the bank of a large-scale scheme to manipulate prices lower. Those allegations prompted multiple investigations by the Commodity Futures Trading Commission, the most recent of which was closed in 2013 after finding no evidence of wrongdoing.

The case against Nowak and Smith made no allegations of a systematic plot to suppress prices, instead arguing that they spoofed markets over very short periods of time, and in both directions, to benefit JPMorgan's most important hedge fund clients.

Nowak and Smith were found guilty on charges they manipulated markets. Ruffo was acquitted of charges he participated in the conspiracy. Spoofing, by the way, refers to large orders intended to manipulate prices that were quickly canceled. Nowak and Smith won’t be sentenced until next year. Lawyers for the pair maintain their innocence.

Bloomberg reports the US Justice Department’s crackdown on spoofing has so far led to the conviction of 10 traders at five different banks. Meanwhile, JPMorgan has paid US$920 million to settle spoofing allegations.

4) Fossil fuel investment rising in wealthy parts of China.

Some of China's wealthiest regions are continuing to increase investment in fossil fuels, the South China Morning Post reports. Citing Greenpeace research, the SCMP says although the likes of Guangdong, Zhejiang and Shanghai have tipped money into developing low-carbon technology and renewable energy, they also continue increasing the amount of money spent on fossil fuel projects, notably gas.

Greenpeace suggests although some regions may be moving away from coal, they're  using fossil gas instead.

Chinese President Xi Jinping announced in April that the country would in 2026 start phasing out the consumption of coal, which currently accounts for over 60 per cent of China’s power generation. The plan is part of the country’s goal to have renewable energy account for 80 per cent of national energy production by 2060, when the country is supposed to achieve carbon neutrality.

While China’s economic hubs are heeding Beijing’s order to turn away from coal, Greenpeace found that these regions are shifting to fossil gas instead.

Guangdong, for instance, announced last year that it would ban the construction and expansion of coal-fired power plants and company-owned captive power stations in core areas of the Pearl River Delta. However, Greenpeace found that the province has also invested in 68 fossil gas power projects and 25 fossil gas infrastructure projects so far this year.

5) The country whose money melts like ice cream.

Argentina has an unfortunate history of economic woes and sovereign debt defaults. Now The New York Times reports that despite major volatility and big falls this year, some Argentines see cryptocurrencies such as bitcoin as a safe haven in comparison to their peso fiat currency.

That's because as Marcos Buscaglia, an economist in Buenos Aires, puts it in the NY Times article; “Money here is like ice cream. If you keep a peso for too long, it melts in terms of how much you can buy with it.”

About one-third of Argentines believed that savings kept in pesos in a local bank would hold onto their value over two years, the lowest percentage among respondents in 15 countries surveyed in June by Morning Consult, a data firm based in Washington.

Nearly 60 percent of Argentines believed that Bitcoin, one of the most popular cryptocurrencies, would retain the value of their savings over that same period, the survey said.

With inflation expected to reach 90 percent by December, the peso’s worth keeps tumbling, pushing up prices of everyday products, from toilet paper to tuna fish, and making it virtually impossible to save.

Now, many Argentines are turning to cryptocurrencies as one way to escape the peso. About one-third of Argentines said they bought or sold cryptocurrencies at least once a month, double the percentage of people in the United States, according to a separate survey by Morning Consult.

The story notes that many Argentines lost money when the TerraUSD, a so-called stablecoin, collapsed in May. It also points out that people in low-income and emerging countries have become the biggest cryptocurrency users.