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There’s a large body of empirical evidence to show that countries with high levels of corruption also have weaker growth and share price returns, as well as higher levels of economic and market volatility. So, what to make of the fact that crony capitalism is now becoming a feature of the US market?
From targeted regulatory enforcement to tariff carve-outs, contracts awarded to friends and family, and other forms of horse-trading going on between the Trump administration and countries and companies around the world, it’s hard to argue that American oligopoly isn’t on the rise.
The Saudi Crown Prince Mohammed bin Salman, for example, is engaging in sensitive national security conversations with President Donald Trump, even as the Trump family real estate business is in talks with the Saudis about a big construction project. Trump’s artificial intelligence and crypto tsar, David Sacks, has hundreds of tech investments poised to benefit from policies Trump is pushing.
A big question is when, and how, all the ethical concerns get priced into US assets?
A recent investor letter on the topic from the investment advisory firm JC Goodgal provided a useful framework for thinking about the different oligarchic vectors at play in America right now. It outlines five areas of Trumpian transactionalism, including government as investor (think Intel), tariffs as a political tool, a more permissive crypto regime, unprecedented donor power and headline deals that announce favoured market players.
While the Trump family’s tentacles have worked their way into many industries, from finance and technology to real estate and defence, digital assets are perhaps the most obvious place to look for conflicts of interest that could infect the larger economy.
Consider one complicated example involving the stablecoin of the Trump family crypto venture World Liberty Financial, which was used by Abu Dhabi’s MGX in a $2bn transaction linked to Binance. That company was co-founded by Changpeng Zhao, who received a presidential pardon in late October, after previously pleading guilty to a criminal charge relating to lax money laundering controls.
Then there are Trump supporters like the Winklevoss brothers, whose Gemini platform was charged with the unregistered sale of assets during the Biden administration, only to settle with the Securities and Exchange Commission this year. The Winklevoss twins are big Republican donors (they’ve even chipped in for the construction of a new White House ballroom) and, not surprisingly, their platform is embedding itself deeper and more quickly into the US crypto infrastructure than many competitors. This autumn, Gemini announced a Nasdaq partnership.
None of this is surprising; indeed, it has become the background noise of this administration. But sooner or later, the reality and even the perception of “pay for play” does have a tangible market effect. As the JC Goodgal letter notes, “when the rulebook appears adjustable for well-connected actors, market pricing begins to incorporate expectations of preferential treatment . . . that expectation, in turn, distorts capital formation, steering flows towards firms perceived as ‘policy sheltered’ and away from smaller innovators with equivalent or better technology but less access”.
What is perhaps most concerning is that all this is not playing out at the edges of the financial system, but right at the heart of it. Large banks that once eschewed cryptocurrencies are now lending against clients’ crypto holdings. Retailers are thinking about issuing their own coins.
But crypto is volatile. In the past few weeks alone, crypto firms have lost about $1tn in market capitalisation, which has wiped out the year-to-date gains. That chimes with the asset and growth volatility typical in places where the corruption indices are higher.
The question is how it all ends. My bet is that, at some point, a crypto led-crisis in the US will prompt a market downturn, exacerbated by the selling of Treasuries by the large crypto platforms that now hold as many as some countries do (Tether has more than Germany or South Korea). Depending on the geopolitics of the moment, China and other US adversaries might pile in and sell T-bills too, adding fuel to the fire.
That sort of financial downturn would have a greater impact on the real economy than in the past. Not only are Americans more exposed to the markets than ever before, they are also saving less than they were before Covid-19. Meanwhile, the fact that the normal market cycle has been so stretched out — putting aside the brief V-shaped dip of the pandemic, it has been 15 years since the US and the world had a synchronised recession — means that a downturn would probably have a bigger impact than previous ones.
What would the political ramifications of all this be? More populism at home, certainly, but also perhaps some fundamental changes to the global financial system. I could imagine, for example, that China and its allies might use such a moment to go to the IMF and negotiate for a move away from the dollar-backed system to something more globally balanced. Certainly, it’s easier to make the argument for such a shift if that system is seen as being politically compromised.
While crony capitalism may yield short-term gains for some, its long-term costs are high.
