Damage to Value of Money

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One World, Ready or Not The Manic Logic of
Global Capitalism
Chapter 11 The Alchemists
William Greider
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Key Issues

• Soros Fund
• Enhanced power of finance
• Volatility of Currencies
• Weakness of Political Leaders

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The Quantum Fund

• George Soros was the owner of the fund
• Soros was a wealthy investor with a strategic
  sense of finance
• Rob Johnson was his assistant he was a well know
  and highly educated economist and financial
  investor
• After 3 decades the Fund was worth about 11
  billion

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The Strategy

• 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
• European Currency Crisis
• Black Wednesday
• I believe that the market prices are always
  wrong, Soros p242

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Soros vs. the Governments

• George likes to call the bluff of the
  governments - Johnson p240
• A very rich man who has the power to ridicule the
  governments is frightening. p240
• 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

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Leader of the Pack

• Despite his reputation George Soros could not
  single-handedly overwhelm governments The big
  banks, commercial and investment banks, surf on
  Soros trading behind Soross trades and
  multiplying the amplitude. p245
• When it suited him, Soros virtually announced his
  market positions to the press, inviting others to
  join his crowd. p245

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Enhanced Power of Finance

• Financial assets grow p232
• Debt is the fastest and largest component. P232
• Liberated from old controls (capital confined to
  home markets) p233

Year Financial asset
1992 35 trillion
2000 (prediction) 53 trillion
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Anomaly Between Abundant Capital And High
Interest Rate

• Risk
• The problem lies in a lack of good debtors rather
  than a scarcity of capital. P235
• Wider range of choices
• More choices in emerging market. P235
• Deregulation

Stock Markets 20-year average return
US Germany 11
Hong Kong 21
India 18
Argentina 28
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Government Intervention

• The existence of government intervention is the
  one crucial fundamental that separates the
  present situation from the celebrated financial
  crashes in capitalisms history. P236
• 1982 Third World Debt
• 1995 Japans banking crisis

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Government Intervention (Continued)

• Two large contradictions
• Socializing the costs
• Governments have successfully managed the
  recurring debt deflations largely by shifting the
  bad debts from private holders to the public.
  P236
• Finance capital has captured greater power
• 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

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Damage to Value of Money

• Liberated finance created uncertainty and
  volatility among major currencies
• 5-10 monthly fluctuation in exchange between
  dollar and mark
• Decline of dollar against yen
• Currency troubles spawned globalization of
  industry
• Firms were literally driven offshore by the
  competitive disadvantage induced by their home
  currency. p 250

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Floating Exchange Rate Trouble

• 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

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Results of Liberated Finance and Expanded Trade

• G-7 unemployment rose from 2-3
• Averaged 8 in OECD countries in 1994
• Capital investment declined
• Fell from 24 to below 20 of GDP
• At the heart of the problem was the battle
  between market players and government monetary
  policy

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The Monetary Policy Saga

• Fed anti-inflation policy appreciated dollar and
  increased U.S. offshore production, trade
  deficits
• But, 1985 Plaza Accord began yen appreciation and
  Japanese kudoka
• Japanese policy in 1990s continued to hurt exports

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Major Crisis Averted?

• In 1995, Fed, Bundesbank, and Bank of Japan
  campaigned to weaken yen against dollar
• Governments worried about banking crisis with
  general deflation
• Another example of governments struggling to
  control currency gyrations

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The Winnersand Losers

• Instability aided countries that added market
  share and factories, along with currency traders
• 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

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Putting Humpty Dumpty Back Together Again

• Analogy for reconstructing a stable currency
  system
• Weak political leaders and parties
• Bretton Woods Commission Report
• Proposed a new system to stabilize money
• Only worked if the U.S. dollar was dependable
• Since 1971, the dollar has had four major
  devaluations.

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Major Cause of Devaluation

• Great shift of wealth from the older economies to
  developing nations

The richer one gets, the greater ones stake in
maintaining stable money. p. 256
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Political Power

• Who should have political power over the
  globalized financial system?
• Government Vs. Private Market
• If the government yields, marketplace produces
  greater stability.
• Farfetched claim
• Bretton Wood Commission
• Government will keep responsibility.

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• 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

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Tax It!

• If global disintegration is under way, then
  governments must find the courage to intervene
  before its too late George Soros
• Impose a slight transactions tax on all
  cross-border flows of capital in order to
  increase stability in many values Yale
  Economist, James Tobin
• Not likely due to the weakness of political
  leaders

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Notes

• Manias, Panics, and Crashes
• The Great Crash
• Money Whence It Came
• McKinsey Study
• Robert Dugger
• Financial Times
• Global Asset Location
• Bretton Woods
• Times

• George Soros
• The Alchemy of Finance
• International Economy
• Wall Street Journal
• International Herald Tribune
• Economic Strategy Institute
• The New York Times
• The Economist