Here’s the story of a man named Soros He was a global finance spec-u-la-tor He was wealthy, and somewhat risky But it all paid off Here’s the story of his sidekick Johnson He was a brilliant investor on his own But when you put ---- the two of them together Those in power groan This daring duo always took a bold position Two steps ahead of the rest Their powers proved to be unwielding And it put the foreign nations in unrest The Quantum Fund The Quantum Fund That’s the story of the famous Quantum Fund
George Soros set up the Quantum Fund in 1969. It was one of the first hedge funds. Now Soros is more of a philanthropist. He donates large sums of money to several causes especially those relating to democratic and capital reform . Johnson graduated from MIT and Princeton and had worked for both the Federal Reserve and the Senate budget and banking committees. He was a well respected investor and with his knowledge and Soros observations together they were quite a dynamic duo. In the mid 90’s the Fund’s growth began to slow yet it continued to grow; 60% in “93, 3% in ’94 and then back to 39% in ’95.
The European Currency Crisis was related to the Bundesbank in Germany. The Bundesbank refused to lower their interest rates which restricted not only their own economy but also Europe in general. Many of the currencies in Europe were beginning to link through the Europe Exchange Rate Mechanism in preparation for the single currency used today, the Euro. Therefore, the countries had to remain with in a fixed band of currency values to each other. When Germany refused to lower its rate it hurt several countries causing them to have to lower their interest rates. Soros recognizing this discrepancy bet against Germany and the other countries by buying European bonds. Black Wednesday occurred in Britain in 1992. Soros bet against England who was trying to defend the pound sterling from deflating. England kept raising the rates which was ultimately hurting the country and Soros was able to make over $1billion from this speculation.
As displayed in the above quotes. Governments came to fear Soros as his tactics usually meant reform in order to correct their inefficiencies.
“Soros major plays would not remain secret for very long since every time his traders placed a buy-or-sell order, their transactions were executed by major banks and brokerages in New Your and Chicago, Europe and Asia. Their trading desks would swiftly pass along the news of what Soros was up to, and if it sounded promising, the firms would duplicate his play themselves. The impact of Soros’s money was thus amplified.”
Rising prices. Finance appears to be extremely optimistic about the future, judging from the trend lines of financial prices. The most alarming aspect of globalized capital is not the speed or volume, however, it is the price (global interest rate). 2.Accumulated savings. The longer an expansionary era continues without the disastrous interruptions of war or depression, the larger the gross pool of accumulated savings will become in relation to the productive economy. In other words, a period of long-running peace and prosperity inevitably feeds the imbalance by piling up a greater and greater store of “accumulated labor.” The world’s investors can now roam freely across three great auctions, each one bidding for use of their money. 1.Old World debt of Europe and America- rapidly growing and requiring more loan. 2.Emerging markets in Asia and some Latin American nations- the new factories, power plants and highways that require financing and promise robust returns. 3.The rising volume of capital –multinational firms need to keep up with the technological contests in advanced sectors.
The most alarming aspect of globalized capital is not the speed or volume, however, it is the price (global interest rate). Starting in the 1980s, this shift has been reflected in the historically high levels of real interest rates. (the nominal interest rate discounted by inflation) In the US, the real interest rate on long term borrowing runs consistently between 4 and 5 %--twice the average rate of US economic growth and nearly twice the historic average for interest rate. More choices in emerging market. The risk and price volatility are much greater in the emerging market, but their higher yields exert an upward pull on the returns offered by other, more traditional forms of investment. . Government’s deregulation of domestic financial systems triggers huge volumes of savings been freed to chase the higher market returns.
Mainly because of those previous disasters, major governments now possess the administrative capabilities to intervene with emergency subsidy, bailouts and market controls when debt or financial prices suddenly crash on a massive scale. For 15 years, together and individually, the governments and their centre banks have been playing the role of fireman for global finance’s misplaced enthusiasms. Many people plausibly assume that governments will continue to succeed in this role.
Finance capital is free to seek its own rewards round the world, but when ill-founded hopes evaporate, global financiers rush back to their home governments (and home tax payers) for rescue and relief. National taxpayers, if they ever manage to grasp how this works, are unlikely to endorse such an open-ended commitment to support global capital, especially since they have been told that capital no longer has any obligations to them. Inequities aside, the process works mainly by transferring the losses from private balance to the public’s—when the public treasuries are already heavily indebted. Even if taxpayers were willing, this approach has the deleterious consequence of cumulatively deepening the governments’ own financial predicament. Thus the reckoning with bad debt is not really resolved as much as it is pushed off into the future—where tomorrow’s citizens will be expected to pay for it. The steady accumulation of financial girth has altered the balance, not only between capital and industry or capital and labor, but also between capital and government. Managers in national governments are supposedly responsible for overseeing a larger and larger global system of private finance and protecting it from disastrous error.
One World, Ready or Not:
One World, Ready or Not: The Manic Logic of Global Capitalism Chapter 11 – The Alchemists William Greider
Key Issues <ul><li>Soros Fund </li></ul><ul><li>Enhanced power of finance </li></ul><ul><li>Volatility of Currencies </li></ul><ul><li>Weakness of Political Leaders </li></ul>
The Quantum Fund <ul><li>George Soros was the owner of the fund </li></ul><ul><li>Soros was a wealthy investor with a “strategic sense of finance” </li></ul><ul><li>Rob Johnson was his assistant; he was a well know and highly educated economist and financial investor </li></ul><ul><li>After 3 decades the Fund was worth about $11 billion </li></ul>
The Strategy <ul><li>His 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 </li></ul><ul><ul><li>European Currency Crisis </li></ul></ul><ul><ul><li>Black Wednesday </li></ul></ul><ul><li>“ I believe that the market prices are always wrong,” –Soros p242 </li></ul>
Soros vs. the Governments <ul><li>“ George likes to call the bluff of the governments” - Johnson p240 </li></ul><ul><li>A very rich man who has the power to ridicule the governments is frightening. p240 </li></ul><ul><li>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 </li></ul>
Leader of the Pack <ul><li>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 </li></ul><ul><li>When it suited him, Soros virtually announced his market positions to the press, inviting others to join his crowd. p245 </li></ul>
Enhanced Power of Finance <ul><li>Financial assets grow p232 </li></ul><ul><ul><li>Debt is the fastest and largest component. P232 </li></ul></ul><ul><li>Liberated from old controls (capital confined to home markets) p233 </li></ul>53 trillion 2000 (prediction) 35 trillion Financial asset 1992 Year
Anomaly Between Abundant Capital And High Interest Rate <ul><li>Risk </li></ul><ul><ul><li>The problem lies in a lack of good debtors rather than a scarcity of capital. P235 </li></ul></ul><ul><li>Wider range of choices </li></ul><ul><ul><li>More choices in emerging market. P235 </li></ul></ul><ul><li>Deregulation </li></ul><ul><ul><li>Savings been freed to chase the higher market returns. P235 </li></ul></ul>11% US & Germany 28% Argentina 18% India 21% Hong Kong 20-year average return Stock Markets
Government Intervention <ul><li>“ 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 </li></ul><ul><ul><li>1982 Third World Debt </li></ul></ul><ul><ul><li>1995 Japan’s banking crisis </li></ul></ul>
Government Intervention (Continued) <ul><li>Two large contradictions </li></ul><ul><ul><li>Socializing the costs </li></ul></ul><ul><ul><ul><li>Governments have successfully managed the recurring debt deflations largely by shifting the bad debts from private holders to the public. P236 </li></ul></ul></ul><ul><ul><li>Finance capital has captured greater power </li></ul></ul><ul><ul><ul><li>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 </li></ul></ul></ul>
Damage to Value of Money <ul><li>Liberated finance created uncertainty and volatility among major currencies </li></ul><ul><ul><li>5-10% monthly fluctuation in exchange between dollar and mark </li></ul></ul><ul><ul><li>Decline of dollar against yen </li></ul></ul><ul><li>Currency troubles spawned globalization of industry </li></ul><ul><ul><li>“ Firms were literally driven offshore by the competitive disadvantage induced by their home currency.” p 250 </li></ul></ul>
Floating Exchange Rate Trouble <ul><li>“ 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 </li></ul>
Results of Liberated Finance and Expanded Trade <ul><li>G-7 unemployment rose from 2-3% </li></ul><ul><ul><li>Averaged 8% in OECD countries in 1994 </li></ul></ul><ul><li>Capital investment declined </li></ul><ul><ul><li>Fell from 24% to below 20% of GDP </li></ul></ul><ul><li>At the heart of the problem was the battle between market players and government monetary policy </li></ul>
The Monetary Policy Saga <ul><li>Fed anti-inflation policy appreciated dollar and increased U.S. offshore production, trade deficits </li></ul><ul><li>But, 1985 Plaza Accord began yen appreciation and Japanese kudoka </li></ul><ul><li>Japanese policy in 1990s continued to hurt exports </li></ul>
Major Crisis Averted? <ul><li>In 1995, Fed, Bundesbank, and Bank of Japan campaigned to weaken yen against dollar </li></ul><ul><li>Governments worried about banking crisis with general deflation </li></ul><ul><li>Another example of governments struggling to control currency gyrations </li></ul>
The Winners…and Losers <ul><li>Instability aided countries that added market share and factories, along with currency traders </li></ul><ul><li>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 </li></ul>
Putting Humpty Dumpty Back Together Again <ul><li>Analogy for reconstructing a stable currency system </li></ul><ul><ul><li>Weak political leaders and parties </li></ul></ul><ul><li>Bretton Woods Commission Report </li></ul><ul><ul><li>Proposed a new system to stabilize money </li></ul></ul><ul><ul><li>Only worked if the U.S. dollar was dependable </li></ul></ul><ul><ul><li>Since 1971, the dollar has had four major devaluations. </li></ul></ul>
Major Cause of Devaluation <ul><li>Great shift of wealth from the older economies to developing nations </li></ul>“ The richer one gets, the greater one’s stake in maintaining stable money.” p. 256
Political Power <ul><li>Who should have political power over the globalized financial system? </li></ul><ul><ul><li>Government Vs. Private Market </li></ul></ul><ul><li>If the government yields, marketplace produces greater stability. </li></ul><ul><ul><li>Farfetched claim </li></ul></ul><ul><li>Bretton Wood Commission </li></ul><ul><ul><li>Government will keep responsibility. </li></ul></ul>
<ul><li>“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 </li></ul>
Tax It! <ul><li>If global disintegration is under way, then governments must find the courage to intervene before it’s too late – George Soros </li></ul><ul><li>Impose a slight transactions tax on all cross-border flows of capital in order to increase stability in many values – Yale Economist, James Tobin </li></ul><ul><ul><li>Not likely due to the weakness of political leaders </li></ul></ul>
Notes <ul><li>Manias, Panics, and Crashes </li></ul><ul><li>The Great Crash </li></ul><ul><li>Money: Whence It Came </li></ul><ul><li>McKinsey Study </li></ul><ul><li>Robert Dugger </li></ul><ul><li>Financial Times </li></ul><ul><li>Global Asset Location </li></ul><ul><li>Bretton Woods </li></ul><ul><li>Times </li></ul><ul><li>George Soros </li></ul><ul><li>The Alchemy of Finance </li></ul><ul><li>International Economy </li></ul><ul><li>Wall Street Journal </li></ul><ul><li>International Herald Tribune </li></ul><ul><li>Economic Strategy Institute </li></ul><ul><li>The New York Times </li></ul><ul><li>The Economist </li></ul>