Soros warns of global depression ... U.S. & China agree to co-operate

TheDailyBell - Issue 243 • Thursday, April 02, 2009

"Money and not morality is the principle of commercial nations." Soros warns of global depression if G20 fails


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If the G20 meeting of world leaders this week results in nothing but more hot air, billionaire George Soros says all bets are off - the global economy is heading for a huge meltdown. "That could push the world into depression. It's really a make-or-break occasion. That's why it's so important. The chances of a depression are quite high - even if that is averted, the recession will last a long time. Look, we are not going back to where we came from. In that sense it's going to last forever." While most investors are worried about the sorry state of the global markets, Soros finds the economic gloom-and-doom "exhilarating," and reckons a full-blown depression is inevitable. "I have to admit that actually I flourish, I'm more stimulated by the bust," Soros said in an interview with the Times of London. "On the one hand, there's the tremendous human suffering, which is very distressing. On the other hand, to be able to handle the situation is exhilarating." This recession, Soros said, is a "once-in-a-lifetime event," particularly in Britain and the United States. - Money News

Dominant Social Theme: A money master is gloomy.

Free-Market Analysis: George Soros sees the G20 meeting as a last gasp. Why are we not surprised? Soros never met a government conclave that he did not want to support, or not in the latter stages of his career anyway. And Soros, who is worth billions, has plenty of credibility. He is accurate about the markets, so shouldn't he know whereof he speaks?

If George says that the G20 is the last best hope of the global economy, then it must be, right? Let us peer a little deeper and examine what Hollywood calls "the back story." Maybe we will find some information not immediately obvious on first glance.

Let us, like the Ghost of Christmas Past, travel back in time to gaze with wonder at a young George Soros being tutored at the London School of Economics by no less a free-market genius than FA Hayek himself. Yes, correct, Soros' mentor Karl Popper was best friends with Hayek, the great apprentice of the greatest of all free-market economists, Ludwig von Mises. Soros was thus well aware of Hayek from an early age, and aware of the Austrian School itself (and Mises, etc.), the great free-market, gold-based school of economics.

And what did George Soros do when he graduated? Well, he didn't apply Popper's somewhat incomprehensible theories. Heck, no. The secret to Soros' great success, as he progressed throughout his career was very obviously the application of free-market business cycle economics to currency trading. It is quite clear as you look at Soros' trading career that he makes most of his money when the business cycle is heading down -- and that he understands paper-money business cycles -- and their propensity to crash and burn -- as well as anyone. He has literally made billions from his insights -- both now and in the 1990s, when he made his controversial and tremendously profitable bets against the British pound.

In fact he made so much money -- and hurt the pound so badly -- that he was apparently called in for a special audience with the Queen of England. (This is more than a decade ago now.) We would have liked to be a fly on the wall for that one! It must have been a royal version of "scared straight." For immediately, upon removal from the Queen's gaze, Soros began a career of intense governmental activism, suggesting over and over (and funding his newfound beliefs) that the only way to create a stable society was through intense, governmental regulatory activism.

Riddles within riddles. At this time, and even earlier, Soros was the author of several absolutely incomprehensible books that attempted to explain his trading strategy in the most arcane and incomprehensible way possible. He made his former mentor Popper look positively simplistic, a very hard thing. But Soros himself is not so hard to figure out - if you examine his background, his free-market knowledge base and examine his trading strategies.

He is one of the best free-market traders of all time. And again, with this downturn, he has made literally billions, betting against various currencies. Sooner or later we think he will bet against the US dollar and go out in a blaze of glory having made billions more in a fortnight. Yes, George is surely energized and "exhilarated" as he says. It is his time once again, free-market trader that he is. He is in his glory because he is trading against a business cycle that is at its most accommodating for his style of money-making.

But you will not learn that from George Soros!
Read his books and you will come away shaking your head and wondering how the guy ever made a dime. Read his political manifestos about the necessity for an activist global government and you will, if you are a free-market thinker, wonder if he understands anything about economies at all. He is all "paper money" all of the time in his public belief structure. But his trading strategies betray an acute understanding of fiat money, of precious metals and the weaknesses of the current Western monetary system.

So the key to Soros is to understand that more than almost anyone, he successfully applies free-market business-cycle analysis (top down, obviously) to currency trading and makes and wins his biggest bets when inflation and fiat-money destructiveness are at their peak.

He is a fascinating man, this George Soros. He dissembles insofar as his trading techniques are concerned (they are straight out of Hayek and Mises, though he pretends otherwise) and the powers-that-be apparently scared him so much after his victories over the pound that he set up a series of non-profits to support global government. You know, she scares us, too. We wonder what she told him.

Conclusion: Now you know a little more about free-market thinker George Soros, who made his many billions by applying Austrian business-cycle analysis to the marketplace. (Maybe you don't believe us -- OK, go investigate his background yourself; we think if you have an open mind you will come to conclusions similar to ours.) Like many powerful men, he hides behind obfuscation and his profit-making methods are other than he represents them to be. What are we to do with such clever men who understand the truth but are so circumspect and fearful that they will not speak it?




U.S. and China agree to co-operate


Getty Images

The meeting on Wednesday between Barack Obama and Hu Jintao, his Chinese counterpart, on the sidelines of the G20 summit had been described by some as "the G2" and marked the first encounter between the two men. During the meeting Mr. Hu stressed China's commitment to strengthen macro-economic control and expand domestic demand, the White House said. The two leaders agreed to work together to renew world economic growth, strengthen the financial system and establish a "strategic and economic dialogue" group that would first meet in Washington later this year. The White House also announced that Mr. Obama would visit China in the second half of the year. But with China demonstrating that it now wants to play a much more decisive role in international economic affairs, their meeting may have also set the tone for the rest of the London summit. While talk of an emerging "G2" ignores the increasingly multilateral basis of financial diplomacy, it does reflect the reality that on a growing range of international issues, little can happen without agreement between the US and China. - Financial Times

Dominant Social Theme: Powerful nations standing together.

Free-Market Analysis: The summit is over - the real summit that is. We've written a great deal about the run-up to the G20 meetings now taking place and the PR effort that has been leveraged to make sure that the United Nations through the International Monetary Fund gets more clout as a global financial regulator. But it all hinged on China (and America, too, of course). So in a way, as the article above points out, the G20 meeting was really a G2 meeting. Russian leaders met with Obama earlier, and headlines were produced. But Russia is a fading power with a population of 150 million. China has well over a billion people and the country and its economy are still on something of an upswing.

So it is China and America, yoked to the plow of the world economy. What did the leaders of these two great countries decide? Well, it sounds like the IMF will get a bit more clout, but probably won't lead the parade as strongly as some globalists may have hoped. Of course, you may not see this perspective reflected in any post-G20 communiqués. These may make it sound as if the IMF has taken over the world. But now we are not so sure. Here is some more from the article excerpted above:

On the IMF issue, China has been under pressure from the US and the UK to make a substantial contribution to boosting the Fund's coffers, similar to the $100bn already pledged by Japan and the European Union. China initially pushed back strongly against the idea, arguing that it was still a poor country. Yet over the past two weeks the Chinese line has softened somewhat, prompting speculation that it will inject substantial new funding. However, Chinese officials have also made clear that their condition is accelerated reform of the IMF to boost China's voting rights. More-over, Hu Xiaolian, deputy governor of the central bank, said last week that a quicker way for the IMF to raise new funds might be for it to issue bonds that China and other countries would buy. "Having made these points forcefully, the Chinese now realize they would gain a tremendous moral advantage by appearing flexible and providing more resources to the IMF at a critical time for the institution and the world economy," says Eswar Prasad, a professor at Cornell University and former head of the IMF's China division. Observers had been watching closely the conversation about China's ideas for a new global reserve currency using an IMF currency basket. But the issue was not raised in Wednesday's meeting. Although the same idea is being pushed by Russia and has support from other developing economies, some observers do not believe that China will lobby too hard at the summit for the proposal. (FT)

This sort of conforms to what we expected. It is China, not Russia that holds trillions worth of American dollars. The idea that China would undermine its expansive trove treasuries never made much sense. The Americans have been very clever in this regard. They saw early on that an expanding China would have no choice but to deal with the West. Tiananmen Square was a turning point. The desperate old men of the Chinese communist party realized they would have to move much more quickly to bring more prosperity to China if they wanted to retain what power remained to them.

Obviously, they cut a deal, formally or not. Like Japan in the 1980s, the Chinese began moving goods out the door like a house-a-fire. To fund America's buying spree of Chinese goods, the Chinese government bought American paper. Now they have a great deal of it and are not likely to upset the applecart unless sorely aggrieved. Anything they do to the West will come back to bite them.

Conclusion: Chances are China is going along with the program, which seems to be to move incrementally not exponentially - no matter what the French and Germans say they want. The IMF will get more power, especially from a regulatory standpoint, yes, but not too much more. There is likely little or no chance for gold to be included in some sort of daring new currency basket. The Americans for some reason have seemingly put a break on too much G20-style globalism, which is kind of ironic since the Americans really invented the IMF (and the United Nations) in the first place. It does kind of make sense, however. Obama and the UK's Gordon Brown, too, are being fairly radical at home in terms of broadening governmental powers. Obama especially, and those who stand behind him, may not wish to add broad-based global thrust to the current domestic governmental consolidation now taking place. Now is not yet the time. It will be interesting to read the final G20 communiqué. Or more to the point, it will be interesting to read between the lines.




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