George Soros predicts deflation spiral caused by German prudence

By Michael Baxter 6 Oct 2010 [1 Comment | 1,007 views]

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Yesterday was one of those days when so-called gurus spoke out. It was a day of blaming, too. George Soros focused his latest tirade on Germany, accusing the country, or rather its central bankers, of dragging the Eurozone into a Japanese-style downward spiral. Then the world’s third richest man laid into fat cat bankers, saying they should be allowed to go broke. And finally, there’s Dominique Strauss-Kahn, head honcho at the IMF, who has rattled off a comment fit to spook the markets.

So this is what George had to say: “Deficit reduction by a creditor country such as Germany is in direct contradiction of the lessons learnt from the Great Depression of the 1930s. It is liable to push Europe into a period of prolonged stagnation or worse.”

Now, one could say dear old George isn’t all that popular with some. After all, it was he who cost the UK Exchequer a very substantial fortune in 1992, not to mention the Thailand government’s fair share of problems in 1997.

These days of course, George, who by the way has built up a massive stockpile of gold, tries to portray himself as being somewhat cuddly and philanthropic. Not all are convinced.

Others say he really is not qualified to speak. Sure, he is good at ruthlessly exploiting a country’s weakness to make himself a shed-load of dosh, but that does not make him an expert on macro-economic policy.

Nassim Taleb, author of The Black Swan, said in his previous book, Fooled by Randomness: “Soros wanted to be taken seriously as a Middle European professor who happened to have gotten rich owing to the validity of his ideas (it was only by failing to gain alpha acceptance by other intellectuals that he would try to gain alpha acceptance through his money, sort of like a seducer resorting to an appendage of a red Ferrari to seduce the girl).”

But the critics of Soros surely miss the point. He made his money through pretty impressive judgement calls on the validity of various countries’ economic policies. He spotted the flaws in the UK government’s policy in 1992 and sold sterling, betting against the Bank of England until eventually forcing the bank to capitulate. It could be said his actions cost the Exchequer a lot of money. But equally, it could be argued he did the UK a favour, hastening our departure from ERM and bringing forward the point at which the UK’s longest ever run of economic growth could begin.

Anyway, earlier this week, when giving a talk at Columbia University, he also said: “Under duress, the euro has begun to remedy its main shortcoming, the lack of a common treasury.” He added: “But it is far too early to celebrate because the emerging common fiscal policy is dictated by Germany and Germany is wedded to a false doctrine of macro-economic stability, which recognizes only the threat of inflation and ignores the possibility of deflation.”

Japan is engaging in another spot of quantitative easing. It seems the US and the UK may well follow, but the European Central Bank is surely set to stay firm.

In Germany, printing money is seen as an anathema. The wound from the Weimar Republic – when hyperinflation created such devastation of the economy that the way was left open for the Nazi party – is still present.

Curiously enough, back in 1997, when George Soros was adding to his reputation as a speculator who wreaked havoc, Joseph Stiglitz was tearing his hair out at the World Bank. Back then Uncle Joe was yet to win his Nobel prize, but he was the chief economist at the World Bank. And it was he who looked on in horror, first as Soros shorted the Thai Baht, possibly kicking off the 1997 Asia crisis, and then as the IMF was called in. The IMF enforced certain austerity policies on the region, probably creating its biggest critic, in the shape of Stiglitz, in the process.

Back then Stiglitz and Soros were on opposite sides of the baht divide, although no doubt both agreed the country needed a cheaper currency, contrary to the views expressed by the IMF.

But today, it seems little more than wafer thin paper divides their respective views; and Stiglitz has also heaped criticism on Germany, predicting that ultimately Germany may leave the euro.

And that brings us to young Mr Buffett. Like George, he is something of a philanthropist. Of course, Soros is a pauper, struggling to work out where his next golden chicken nugget will come from, in comparison to Buffett. But the two men have something else in common – they are not immune to criticising banks and their system of rewards. This is what Warren had to say, see: Buffett says to let bankers go bust and call equity rally. Is he right?

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