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Key Issues

• Soros Fund

• Enhanced power of finance

• Volatility of Currencies

• Weakness of Political Leaders

The Quantum Fund

• George Soros was the owner of the fund

• Soros was a wealthy investor with a “strategic sense of finance”

• Rob Johnson was his assistant; he was a well know and highly educated economist and financial investor

• After 3 decades the Fund was worth about $11 billion

The StrategyHis basic investment strategy involved

identifying the fundamental misalignments in market perceptions – prices or political judgments that would be sharply reversed once markets or governments were compelled to recognize them. p241

– European Currency Crisis– Black Wednesday

“I believe that the market prices are always wrong,” –Soros p242

Soros vs. the Governments

• “George likes to call the bluff of the governments” - Johnson p240

• A very rich man who has the power to ridicule the governments is frightening. p240

• The national governments expected to guarantee stability were trapped between two worlds – their obligations to domestic economies and the new force of the global market. p242

Leader of the Pack

• Despite his reputation George Soros could not single-handedly overwhelm governments… The big banks, commercial and investment banks, surf on Soros – trading behind Soros’s trades and multiplying the amplitude. p245

• When it suited him, Soros virtually announced his market positions to the press, inviting others to join his crowd. p245

Enhanced Power of Finance• Financial assets grow p232

– Debt is the fastest and largest component. P232

• Liberated from old controls (capital confined to home markets) p233

Year Financial asset

1992 35 trillion

2000 (prediction)

53 trillion

Anomaly Between Abundant Capital And High Interest Rate

• Risk – The problem lies in a lack of good debtors rather than a

scarcity of capital. P235

• Wider range of choices– More choices in emerging market. P235

• Deregulation – Savings been freed to chase the higher market returns.

P235

Stock Markets 20-year average return

US & Germany 11%

Hong Kong 21%

India 18%

Argentina 28%

Government Intervention

• “The existence of government intervention is the one crucial fundamental that separates the present situation from the celebrated financial crashes in capitalism’s history”. P236

– 1982 Third World Debt– 1995 Japan’s banking crisis

Government Intervention (Continued)

• Two large contradictions – Socializing the costs

• Governments have successfully managed the recurring debt deflations largely by shifting the bad debts from private holders to the public. P236

– Finance capital has captured greater power• The finance system now has the ability to turn

around and punish governments. The steady weakening of government authority, alongside its rising debts, suggests an abnormal arrangement that is not sustainable. p237

Damage to Value of Money

• Liberated finance created uncertainty and volatility among major currencies– 5-10% monthly fluctuation in exchange

between dollar and mark– Decline of dollar against yen

• Currency troubles spawned globalization of industry– “Firms were literally driven offshore by

the competitive disadvantage induced by their home currency.” p 250

Floating Exchange Rate Trouble

• “Since the early 1970s, long-term growth in the major industrial countries has been cut in half, from about 5% a year to about 2.5% a year. Although many factors have contributed to this decline in different countries at different times, low growth has been an international problem, and the loss of exchange rate discipline has played a part.” p 250

Results of Liberated Finance and Expanded

Trade• G-7 unemployment rose from 2-3%

– Averaged 8% in OECD countries in 1994

• Capital investment declined– Fell from 24% to below 20% of GDP

• At the heart of the problem was the battle between market players and government monetary policy

The Monetary Policy Saga

• Fed anti-inflation policy appreciated dollar and increased U.S. offshore production, trade deficits

• But, 1985 Plaza Accord began yen appreciation and Japanese kudoka

• Japanese policy in 1990s continued to hurt exports

Major Crisis Averted?

• In 1995, Fed, Bundesbank, and Bank of Japan campaigned to weaken yen against dollar

• Governments worried about banking crisis with general deflation

• Another example of governments struggling to control currency gyrations

The Winners…and Losers

• Instability aided countries that added market share and factories, along with currency traders

• Victimized by currency fluctuations were workers, companies, and economies of the U.S. and Japan---as well as anyone who has to adjust to the currencies p 254

Putting Humpty Dumpty Back Together Again

• Analogy for reconstructing a stable currency system– Weak political leaders and parties

• Bretton Woods Commission Report– Proposed a new system to

stabilize money– Only worked if the U.S. dollar was

dependable– Since 1971, the dollar has had four

major devaluations.

Major Cause of Devaluation

• Great shift of wealth from the older economies to developing nations

$-

$100

$200

$300

$400

$500

UnitedStates

Germany Japan Other AsianNations

“The richer one gets, the greater one’s stake in maintaining stable money.” p. 256

Political Power

• Who should have political power over the globalized financial system?– Government Vs. Private Market

• If the government yields, marketplace produces greater stability.– Farfetched claim

• Bretton Wood Commission – Government will keep responsibility.

• “National governance and broader social priorities could be swiftly reasserted over capital and its movements in the old-fashioned way: by taxing it.” p. 257

Tax It!• If global disintegration is under

way, then governments must find the courage to intervene before it’s too late – George Soros

• Impose a slight transactions tax on all cross-border flows of capital in order to increase stability in many values – Yale Economist, James Tobin– Not likely due to the weakness of political

leaders

Notes• Manias, Panics, and Cra

shes• The Great Crash• Money: Whence It Came• McKinsey Study• Robert Dugger• Financial Times• Global Asset Location• Bretton Woods• Times

•George Soros•The Alchemy of Finance•International Economy•Wall Street Journal•International Herald Tribune•Economic Strategy Institute•The New York Times•The Economist