George Soros Discusses the Double Jeopardy

Hedge fund guru George Soros said the flight from the U.S. dollar as a reserve currency is "generating a bubble in commodities." In a conference call publicizing his upcoming book, "The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What it Means," Soros cited dollar weakness and the rise in the cost of food as the setup for "the Double Jeopardy of recession and inflation."

"We probably are now in a recession in the United States," he intoned darkly.

Soros, who once turned the British pound on its ear, doesn't refrain from sampling the fruits of commodities himself once in a while. Soros referred to his Brazilian investments in ethanol production while taking a question on emerging economies. "Brazil is doing relatively well - one of the most prosperous economies," he said.

The Hungarian-born financier explores a favorite theory of his in the new book - that it is human nature to ignore uncertainty. Markets have refused to acknowledge uncertainty in recent years, Soros claims. The oft-cited tendency of markets to move to equilibrium, punctuated by random deviations, is a misconception in Soros' view. "Deviations are not random ... cannot be self-corrected and are eventually self-defeating." Hence, the paradigm is wrong.

Soros told HAI: "There has been increased speculation in commodities, which has become an important asset class for institutional investors, who've contributed to the rise in prices. That's not the only reason, of course, that oil is at $108 and food prices have gone up. ... There is a lot of talk of raising margin requirements and I think that would be a very wise move. It wouldn't seriously reduce prices, but it would have some moderating effect.

"But for the rest ... the idea that all this financial turmoil is occurring and will not affect the real economy is an untenable idea."

Soros zeroed in on leveraged investments. "Hedge funds need to be regulated. Everyone who uses leverage needs to be subject to regulation. Financial authorities so far have not accepted the responsibility to control asset bubbles," he declared.

 

Comments

[sorgmot]

Welcome to the big leagues where lofty opinions about national financial structures and currency exchange rates are common tea time chatter.

One might point out that that financial history can be seen as the rise and fall of monopolies, cartels, currencies, and interest rates on those currencies all within a particular nation-state. And there are many nation-states on planet Earth each questing for the well being of the human power groups within that hold winning political power.

Currency exchange rates play a big role in displaying the scores by which the winners and losers are identified.

Interest rates in USA dollar terms have been declining since 1980. The 20 year decline from 1980 to 2000 took the dollar value of all USA asset classes higher. Houses sold for more and more while the monthly payment on the house stayed the same. More debt cost the same as less debt in the prior year did. The same old bond sold for more and more as the years went by. No one defaulted. So, every one wanted to lend US dollars and foreigners were happy to sell goods in the USA, take payment in USA dollars, and hold them while their value grew. Foreigners undersold USA producers to get their hands on USA dollars. This led to some not so-so-great results on both sides of the trade. Money did not get invested in the exporting countries and Japan, for example, stagnated. All around the globe, other nations did too.

On the USA side, during the 1980 to 2000 period, there was a huge collapse in manufacture companies and jobs as other businesses in other countries undersold USA companies and took their business away. Then, as internet access expanded, service sector jobs were also taken overseas and lost in the USA as those services were under sold.

Let us not forget the Wall Street wonder kids who worked at getting foreign dollar holders and themselves more on their USA dollar money. How? By leveraging, buying existing high interest rate debt with dollars borrowed at new lower interest rate debt.

But, what happens when the 1980 to 2000 run down in USA interest rates comes to an end? It had to, unless everyone wold tolerate zero interest rates and the infinite food and asset prices caused by zero interest rates.

Now the USA is at the end of interest rate reduction. Foreigners can no longer undersell us and make gains as our interest rates keep on falling. Foreigners do not want to hold their low interest rate USA bonds because they loose value as the dollar falls. Now the game is played backwards, commodity prices go up in USA dollars, USA interest rates go up, USA asset prices fall, USA price to earnings ratios fall, house prices fall, and etc..

The bottom line is and will be for some time is that people who borrowed USA dollars to buy USA assets will be treated as USA people were treated in the 1930's.

And then in 200