Tuesday, April 07, 2009

WHEN GEORGE SOROS SPEAKS, PEOPLE SHOULD LISTEN

Reuters has an interesting (and pretty short) piece regarding George Soros' take on the current state of the financial crisis, the effects of the Private-Public-Geithner Bullshit Plan or whatever it's called, and the short-term future of the U.S. & world economy (H/T Yves). A few highlights:

"I don't expect the U.S. economy to recover in the third or fourth quarter so I think we are in for a pretty lasting slowdown." ... The recovery will look like "an inverted square root sign," Soros said: "You hit bottom and you automatically rebound some, but then you don't come out of it in a V-shape recovery or anything like that. You settle down -- step down."

* * *

"What we have created now is a situation where the banks who will be able to earn their way out of a hole, but by doing that, they are going to weigh on the economy.

"Instead of stimulating the economy, they will draw the lifeblood, so to speak, of profits away from the real economy in order to keep themselves alive."

He also had a few very sharp (and important to understand) words about the future of the U.S. dollar as the world's de facto reserve currency. This is essential to understand not only for the standard macro-economic/political/moral reasons I usually bandy about here, but because it's something we each need to understand so we can protect our savings, incomes, and livelihoods going forward:

He also said the U.S. dollar is under selling pressure and one day could be replaced as a world reserve currency, possibly by the International Monetary Fund's Special Drawing Rights, a currency basket comprising dollars, euros, yen and sterling.

"I think the dollar is now under question and I think the system will need to be reformed, so that the United States will be subject to the same discipline as is imposed on other countries," said Soros, whose famous bet against the British pound earned his Quantum Fund $1 billion in 1992.

"Being the main issuer of international currency, we have been exempt and we have abused that because we have effectively consumed 6.5 percent more than we have produced. That is now coming to an end."

Soros said there was a risk of a "tipping point" for the dollar which would see it slump, triggering higher interest rates and choking growth.

"This leads you to what used to be stagflation -- stop, go. And I think that is what's probably in store, rather than . . . hyperinflation."

China recently proposed greater use of SDRs, possibly as an eventual global reserve currency.

"In the long run, having an international accounting unit rather than the dollar may, in fact, be to our advantage so we can't splurge -- you know, it felt very good for 25 years but now we are paying a very heavy price," Soros said.

In short, remember some of the stuff we talked about a couple weeks ago in posts and comments: Here, here, and here. The US monetary system -- whereby a private bank with quasi-governmental privileges issues debt instruments backed only by future issuances of those same debt instruments along with the full faith and credit of the debt-addled government that mandates that all debts private and public must be settled with those debt instruments -- is a gigantic ponzi scheme. And like all ponzi schemes, the jig is up when the bagholders can't find new buyers (i.e., new suckers).

The jig isn't yet up, but it's a whole lot closer than it's ever been. Take a look at the final highlighted sentence in the Soros piece. China has gone on record suggesting a switch away from the dollar as the reserve currency. China has been the biggest buyer of dollars and dollar-denominated debt. Mostly so they could keep it high against its own currency, so we Americans could keep buying the cheap shit it was peddling. But if the U.S. is in a depression, and folks stop buying China's goods (throwing its own tenuous economic growth into danger), why will it bother continuing to purchase a weak currency that will never be worth its supposed face value?

The answer is, China won't.

Right now it's good to have your savings in the dollar or dollar-denominated notes. But sooner than you think -- maybe tomorrow, maybe five years, maybe somewhere between those points -- the house of cards is gonna fall on you. And if all your savings and income are in dollars, you'll be broke. The Age of Pyramids is coming to a close.

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8 Comments:

Blogger Smitty said...

And if all your savings and income are in dollars, you'll be broke.

So now I'm confused again. What am I to save in or what am I to earn? My wage is in dollars, right? I get a paycheck that represents a sum of dollars. I am unaware of alternatives that I can earn in.

9:26 AM  
Blogger DED said...

I think Mike is suggesting investing in commodities, like gold and oil.

12:27 PM  
Blogger Smitty said...

like gold and oil

Oil is so early 2000s.

2:33 PM  
Blogger Weaseldog said...

Soros has caught up to my 1999 prognostications.

"What we have created now is a situation where the banks who will be able to earn their way out of a hole, but by doing that, they are going to weigh on the economy.

"Instead of stimulating the economy, they will draw the lifeblood, so to speak, of profits away from the real economy in order to keep themselves alive."


When a fundamental understanding of the hierarchy of wealth becomes contagious, look out! It means the tide is out, and the skinny dippers have been found out. they'll keep lying to us, insisting they aren't naked, but it's pretty obvious to all that look, that they are.

It may take a while before Obama realizes that he's not selling us on his new fashion trend. but I doubt he'll care.

Soro's I think has confused 'Earning' with 'Stealing'.

Let's rewrite that.

"What we have created now is a situation where the banks who will be able to, steal their way out of a hole, but by doing that, they are going to rip the heart of the economy and destroy America.

"Instead of stimulating the economy, they will draw the lifeblood, so to speak, of profits away from the real economy in order to keep themselves alive. They will be forced to remain bloodsucking vampires for all eternity, forever hiding in the shadows, staying away from the burning and withering glare of the sun."

4:05 PM  
Anonymous Anonymous said...

Will the stimulus help in the long term? Maybe, but that’s likely to come at the expense of deficit and inflation. We have been through several downturns before (see, for instance,
http://www.recessioninfocenter.com
so, maybe we should just accept that it’s part of the economic cycle

8:14 PM  
Anonymous Applesaucer said...

"So now I'm confused again. What am I to save in or what am I to earn?"

Confused is the only reasonable response to monetary instability. This is one of the tragedies of monetary policy that jerks us around: the fed inflates like crazy in the early part of the decade, leading to a lagged commodity-price explosion, so people start to make adjustments; meanwhile, the Fed has already slowed down money growth in the middle part of the decade, leading to a lagged, deflationary scare. So people deploying their savings into homes, fuel efficiency home modifications, hybrid cars, commodities, etc. get wiped out.

So all of a sudden, cash has been king since last Summer, but guess what: the Fed has inflated like never before since the Fall. The Adjusted Monetary Base has more than doubled (unprecedented by a long shot) and other monetary aggregates are growing at double-digit rates.

At some point this money will filter into *something.* But what? And when?

How do you protect yourself?

And by that I mean: how do you allocate your savings in such a way that you protect yourself from merely *losing ground.*

Impossible to know for sure and that's what makes this so awful.

Applesaucer

8:45 PM  
Blogger Mike said...

So now I'm confused again. What am I to save in or what am I to earn? My wage is in dollars, right?

Applesaucer summed it up nicely. The trick is to find something that will, at least, protect your assets against inflation. What you choose is up to you. I'm not expert enough to suggest anything, and even if I was an expert, I wouldn't tell anyone what to do. We each have to figure it out on our own.

DED suggested a couple of traditional inflation hedges, and there's certainly validity in both. But the truth is, if the dollar will be debased, it's purchasing power against everything will go down. If the price of organic eggs rises by 25%, then putting all of your basket in one egg (groan!) would be a good idea . . . if you could store eggs for the long haul.

Which you can't.

So what do you choose instead? Gold? Crude oil? Other commodities? I don't know.

But the idea is to shift some of your savings into something that trades against the dollar, not shifts with it.

They will be forced to remain bloodsucking vampires for all eternity, forever hiding in the shadows, staying away from the burning and withering glare of the sun.

Very poetic, Weas.

Will the stimulus help in the long term? Maybe, but that’s likely to come at the expense of deficit and inflation.

That sounds contradictory to me.

maybe we should just accept that it’s part of the economic cycle

The "economic cycle"? What does that mean? The policy of monetary inflation spurts followed by periods of monetary inflation slowdowns causes the "economic cycle." I accept that the federal reserve causes these destructive cycles as a necessary by-product of their pro-banking policies.

6:06 AM  
Blogger Weaseldog said...

I don't buy organic eggs. I have chickens.

In a crunch, if I can't feed the chickens, well, chickens are tasty...

Investing in things that will cut your expenditures over the long haul, is a good strategy in any financial environment.

In game theory, the best strategies usually involve keeping your options open. Staying liquid, and able to react to changing circumstances. Maximizing your choices while avoiding situations where you are trapped by circumstances, is often your best play.

Cutting debts and limiting exposure to risk, is always sound advice.

12:02 PM  

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