Soros: “There is a General Flight from Currencies” → Washingtons Blog
Soros: “There is a General Flight from Currencies” - Washingtons Blog

Friday, October 16, 2009

Soros: “There is a General Flight from Currencies”

Given that countries world-wide have been running their printing presses night and day, are investors starting to get nervous about all currencies?

Well, George Soros said at a conference the other day:

There is a general flight from currencies.

And Andy Xie writes:

At a recent lecture I gave in Hangzhou, one wealthy member of the audience said: “Property may be 100% overvalued. But I will still get half when it comes down. Paper money will be worth zero.” The allure of this latest tale is that the economy doesn’t matter. If the world is in recession, so what? If stock and property markets collapse, so what? We just run away from paper money, right? Better to borrow to buy assets. This is where bank lending policies come into play. But the more willing the banks are to lend, the hotter the asset markets become...

Paper money loses value over time at the rate of the difference between inflation and interest rates, so if the inflation rate is 6% and the bank deposit rate is 2%, paper money loses 4% per annum, or 0.33% per month. Stocks and properties in China may be 100% overvalued, with only two decades of relatively high inflation justifying their prices. However, persistently high inflation leads to currency devaluation, which triggers capital flight and, eventually, an asset market collapse. This story simply won’t hold together for long.

A case in point is the US Savings and Loans crisis of the late 1980s and early 1990s. The US Federal Reserve kept monetary policy loose to help the banking system. The dollar went into a prolonged bear market. During the descent, Asian economies that pegged their currencies to the dollar could increase money supply and lending without worrying about devaluation, but the money couldn’t leave home due to the dollar’s poor outlook, so it went into asset markets.

When the dollar began to rebound in 1996, Asian economies came under tightening pressure that burst their asset bubbles.

The collapsing asset prices triggered capital outflows that reinforced asset deflation. Asset deflation destroyed their banking systems. In short, the US banking crisis created the environment for a credit boom in Asia. When US banks recovered, Asian banks collapsed.

Is China heading down the same path?

Does this confirm what John Exeter, Antal Fekete, Darryl Schoon and maybe even Alan Greenspan have been saying: that when investors lose confidence in fiat currencies, they move into gold and other hard assets?

1 comment:

  1. Yessir, bingo. When confidence in fiat vanishes (monetary faith destruction) there is general flight to hard assets. It is not about inflation, it is not about deflation. It is fear itself, i.e. faith in the system as such. We are on the threshold, but the snowballing journey already began. Soros is right, there is no way back. We are in planetary default mode, because peak credit is a fact. To reinflate and to defer the inescapable day of reckoning (i.e. default) the sovereigns all around the globe incur further debt atop the old one, which can only accelerate the process. In the end all will be printing "like there is no tomorrow". It is controlled demolition of fiat currencies Bretton Woods system. In the process dollar will crush, as the whole unipolar, american world order. Next one, with new currency, is around the corner. It is inescapable, in this finite world and infinite exponential (interest) growth. As simple as that. Crash was baked into the cake right from the start and it was planned for ca 70 years, because dynamics of full cycle of planetary debt takes some seven decades to run. Sorry gals and boys to disappoint you, but there is no fire escape.


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