11 Timely Insights From George Soros On The Economy


In the past six months, hedge fund manager George Soros has been an outspoken critic of the economic recovery.

You probably won’t agree with him on every point as he describes the key arguments the market is dealing with right now, but his predictions on what will happen are worth paying attention to.

We’ve gone through many of his recent interviews and selected his main points.

His quotes are dated in chronological order.

February 20, 2011: The Republican party is going to force spending cuts and the extension of the Obama tax cuts and it will have a negative effect on the economy

'The Republican Party is going to pursue a very strong effort to cut services by refusing to have any tax increases, by forcing the extension of the Obama tax cuts also for the top one or two per cent.

'You have built in a budget deficit, therefore, you've got to cut services, and they'll oppose any kind of additional new -- new taxes. I think this agenda will be successful, but it will be pursued, I think, to -- to an extent where it's more directed at cutting services and achieving the ideological purposes of the Republicans, rather than to get the economy going. So I -- I think this will have a negative effect on the economy.'

Source: Fareed Zhakaria's interview with Soros

February 20, 2011: When QE expires, interest rates are going to go up, which will choke off the recovery

February 20, 2011: Cutting spending before private demand is stronger will hurt employment

April 18, 2011: We're not about to have a replay of 2008

'I don't think we are about to have any type of replay of the financial crisis that we experienced in 2008.'

'At the same time, there are unresolved issues that are also not about to be resolved: the regulations that have been enacted are actually the result of a very imperfect political system.'

Source: NPR

April 18, 2011: The financial system takes up a very large part of our economy but we haven't yet decided if that's a benefit or a detriment

'We haven't decided whether this swollen financial system is a benefit or a detriment to the country. Because currently, the financial system takes up a very large part of our economy, a large part of the profits generated by companies. Is that something that's a disease? Or something that's a great source of strength?'

Source: NPR

June 9, 2011: The crisis in which we find ourselves is a failure of the prevailing dogma about markets: the efficient market hypothesis and the rational expectation theory

'The collapse of the financial system as we know it is real, and the crisis is far from over.'

'The crisis in which we find ourselves is ... a failure of the prevailing dogma about financial markets. I have in mind the Efficient Market Hypothesis and Rational Expectation Theory. These economic theories guided, or more exactly misguided, both the regulators and the financial engineers who designed the derivatives and other synthetic financial instruments and quantitative risk management systems which have played such an important part in the collapse

Source: Dealbook

June 9, 2011: Financial markets always provide a distorted view of reality

'I have developed an alternative theory about financial markets which asserts that financial markets do not necessarily tend toward equilibrium... It can be summed up in two propositions:'

1. 'Financial markets, far from accurately reflecting all the available knowledge, always provide a distorted view of reality.'

2. 'Financial markets do not play a purely passive role; they can also affect the so-called fundamentals they are supposed to reflect.'

Source: Dealbook

June 9, 2011: Currently credit-controlling tools are fixed irrespective of the market's mood. Authorities need to vary margin and capital requirements to control asset bubbles.

'In order to control asset bubbles it is not enough to control the money supply; you must also control the availability of credit... The best-known tools are margin requirements and minimum capital requirements. Currently, they are fixed irrespective of the market's mood, because markets are not supposed to have moods. Yet they do, and the financial authorities need to vary margin and minimum capital requirements in order to control asset bubbles.'

Source: Dealbook

June 26, 2011: Weaker euro-region economies will probably have to exit the Euro

July 12, 2011: The euro crisis was caused by holding European countries responsible for bailing out their own institutions

'Angela Merkel, Germany's chancellor, insisted there should be no joint EU guarantee: each country would have to take care of its own institutions. That was the root cause of today's euro crisis. The financial crisis forced sovereign states to substitute their own credit for the credit that had collapsed, and in Europe each state had to do so on its own, calling into question the credit-worthiness of European government bonds.'

Source: Financial Times

July 12, 2011: A Greek default may be inevitable and some contagion in Portugal and perhaps Ireland is unavoidable

'A Greek default may be inevitable, but it need not be disorderly. And, while some contagion -- to Portugal and perhaps also Ireland -- will be unavoidable, the rest of the eurozone needs to be ring fenced.'

'Winning support for this requires a plan B for the EU itself.'

Source: Financial Times

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