Market Overview

George Soros Continues to Warn of Economic Calamity

George Soros, the world's greatest trader, continues to warn of an impending global economic crisis, which could culminate in unthinkable consequences. In a Newsweek exclusive, the legendary investor says, “I am not here to cheer you up. The situation is about as serious and difficult as I've experienced in my career." In elaborating on the nature of the crisis, Soros tells Newsweek that “We are facing an extremely difficult time, comparable in many ways to the 1930s, the Great Depression. We are facing now a general retrenchment in the developed world, which threatens to put us in a decade of more stagnation, or worse. The best-case scenario is a deflationary environment. The worst-case scenario is a collapse of the financial system.”

Undeniably, Soros' ominous warnings accurately reflect readily observable trends which are gaining momentum today. Although he does not claim to know specifically how the future will play out, and holds out hope that the current financial and geopolitical turmoil will catalyze positive change, Soros offers up a rough guide for what the potential downside may look like. In his view, parallels can be drawn between the crumbling financial system in the developed world, as evidenced by the 2008 meltdown and the current global debt crisis, and the end of communism in the Soviet Union.

Soros argues that, “The collapse of the Soviet system was a pretty extraordinary event, and we are currently experiencing something similar in the developed world, without fully realizing what's happening." He goes even further, suggesting that a form of "evil" has corrupted the entire system. “Unrestrained competition can drive people into actions that they would otherwise regret. The tragedy of our current situation is the unintended consequence of imperfect understanding. A lot of the evil in the world is actually not intentional. A lot of people in the financial system did a lot of damage without intending to.” When asked if he is saying that the financial and banking elite who were at the epicenter of the 2008 meltdown were not just wrong, but evil, Soros replies "That's correct."

Although his interpretation is open to a number of criticisms, Soros, unlike so many others, identifies the root of a future crisis as being inextricably linked to the 2008 catastrophe. Specifically, the developed world is grappling with enormous amounts of debt which was transferred onto sovereign balance sheets in order to attempt to stem the initial crisis which was sparked when the U.S. housing market imploded. In turn, these liabilities have become so enormous that investors are becoming increasingly reluctant to lend to countries which are perceived to be distressed. Ground zero for this phenomenon is in the EU.

As a result of unsustainable sovereign debt burdens in the developed world, governments are being forced to implement austerity measures such as raising taxes and cutting spending. Unfortunately, against the backdrop of a very lackluster economic recovery, these measures threaten to weaken growth and plunge the world back into recession. Given that many governments are already saddled with massive debt and central banks have held interest rates extraordinarily low since the first crisis, while at the same time printing enormous amounts of money, the normal monetary and fiscal policy prescriptions implemented during a recession will likely be totally ineffective the next time around. This is the deflationary scenario that Soros is talking about.

According to him, in order to stave off the worst consequences, the eurozone currency union must be saved. “The euro must survive because the alternative—a breakup—would cause a meltdown that Europe, the world, can't afford.” Despite his belief that Greece will default in 2012, and his understanding of the deep risks, Soros believes that this will happen - but only barely. Newsweek reports that he has bought $2 billion in European bonds, primarily Italian debt. Soros' view of danger, however, encompasses not just financial markets, but the identifiable and closely related developing social and political trends being catalyzed by economic uncertainty.

He told Newsweek that “if you have a disorderly collapse of the euro, you have the danger of a revival of the political conflicts that have torn Europe apart over the centuries—an extreme form of nationalism, which manifests itself in xenophobia, the exclusion of foreigners and ethnic groups." He argues that Europe is confronting chaos and conflict. Judging from his words, a widespread military conflict would not seem out of the question. Soros also believes that the United States is at risk of being plunged into a period of significant social upheaval.

Soros believes that the disillusionment in the current institutions of financial and political power in the United States, as manifested by Occupy Wall Street, will catalyze riots on the streets of American cities. In turn, this unrest may be used as an excuse to scale back civil liberties in the U.S. “It will be an excuse for cracking down and using strong-arm tactics to maintain law and order, which, carried to an extreme, could bring about a repressive political system, a society where individual liberty is much more constrained, which would be a break with the tradition of the United States.”

Although he remains a Democrat, Soros admits that he is disillusioned by current party politics. He said, “I would prefer not to be involved in party politics. It's only because I felt that the Bush administration was misleading the country that I became involved. I was very hopeful of a new beginning with Obama, and I've been somewhat disappointed. I remain a supporter of the Democratic Party, but I'm fully aware of their shortcomings.”

Although he paints a frightening and stark picture, the legendary investor remains hopeful that the current challenging period could give rise to future hope. In particular, he is optimistic about the potential of developing economies in shaping a brighter tomorrow. He said that, “While the developed world is in a deep crisis, the future for the developing world is very positive. The aspiration of people for an open society is very inspiring. You have people in Africa lining up for many hours when they are given an opportunity to vote. Dictators have been overthrown. It is very encouraging for freedom and growth.”

Most importantly, Soros recognizes the ability of crises to catalyze positive change. “In the crisis period, the impossible becomes possible. The European Union could regain its luster. I'm hopeful that the United States, as a political entity, will pass a very severe test and actually strengthen the institution.” No matter what you think about Soros' political ideology, this last statement is extremely important. Although the coming years could prove to be extremely difficult, such a crisis may very well lay a foundation of opportunity upon which to build a better tomorrow.

Posted-In: News Hedge Funds Movers & Shakers Politics Psychology Events Global Economics Best of Benzinga

 

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