With thanks to Felix Salmon for arranging the invitation.
There’s an episode of House where he has to get rid of one of the people for his new team. By the end of the episode, the sharpest person in the group has said everything that we would have expected to hear from House—and is therefore summarily dismissed, since hearing one’s own opinions being spoken by someone else is less useful than being challenged.
I had a similar feeling with George Soros’s conversation last Wednesday morning with Chrystia Freeland, sponsored by Reuters and held in the NASDAQ building that, er, graces Times Square. So what follows isn’t everything Soros said so much as what he said that either (1) you wouldn’t already know from reading this blog or Paul Krugman or (2) added details or touched on an interesting issue.
UPDATE: Krugman finds another similarity between himself and Mr. Soros.
The Recent Crisis and Its Causes
Soros declares that there was twenty-five to thirty (25-30) years of a “Super Bubble,” which has now burst. It seems from the discussion that Soros believes the SuperBubble was worldwide. Recovery is being hindered by some policies—Germany’s talk about austerity was especially mentioned—by Soros sees strong hope in the Trade Shift that has accompanied the crisis. He noted that the “global economy is a lot better than the US economy,” and that he expects to see it continue growing even if the U.S. (or Europe, due to the German leadership, or even both) fall into a :double-dip.” (In this he is arguably more of an optimist than many.)
Key to this shift has been the growth of bilateral relationships. He noted obliquely that these developed in part because many governments—most especially the Chinese, who have been “the great beneficiary of globalization”—do not want to change their capital controls, but sees them as facilitating the new paradigm. He expects that the next move will be that Hong Kong (with the HKD remaining independent of the RMB) will become as London did in the 1960s and 1970s, the intermediary of choice for the growing market (now China, then Europe).
There is a strong need to increase Chinese domestic demand, which he rightly expects is being partially facilitated by the recent wage increases. While there is a need to shift from the previous US-Chinese symbiotic relationship (essentially, bonds for exports), Mr. Soros is “not sure there will be” further advancement in that relationship without greater domestic Chinese consumption. He declared that the Chinese economy has become “the motor” of the world economy, but also noted that it is a smaller motor, so the world economy is not moving so fast.
In that context, he was asked by a gentleman from Fidelity Capital if it is time to move from the USD to a “basket” as the World Reserve Currency. (As regular readers know, this is an issue near and dear to my heart.) Stating the obvious, Soros noted that having “a more neutral currency” (which may not be an exact quote) would be helpful in correcting the imbalances, which are largely due to the dollar being the International Reserve Currency. He agreed that a basket Reserve Currency would improve the market. (I—and I suspect David Beckworth—might agree that it would provide for easier remedies, but I’m not convinced it would provide for a better market, since arbitrage opportunities and issues of asymmetric information would be more likely to skew outcomes.)
Soros is very sympathetic to the Chinese people themselves. He notes that they work hard but that their labor is harnessed to an undervalued currency to the benefit of the State. He described the Chinese mercantile system as being “State Capitalism,” which he calls a “very powerful” model, while also noting that it is not so good as the previous “International Capitalism.” Since he noted that “International Capitalism”; is synonymous with “the Washington Consensus,” this leaves him having damned China with very faint praise. (Though, in fairness, he is even more negative about Russia, which he described to Jim Holt as an example of unsuccessful State Capitalism, whose success or failure is primarily driven by the price of oil. He also sees a real possibility of China developing into an Open Society—another point on which he is rather an optimist.)
Where he is not positive about China is its Real Estate market, which is skewed in part due to the political structure. The Chinese version of mercantilism allows government officials to own three (3) properties, which has been a very good way for those workers to get rich through selling and “trading up.” The primary solution to this bubble, he believes, would be initiating a property tax, which would produce a carrying cost on properties and therefore mitigate the speculative aspects of the bubble. (Soros essentially notes that, as with the United States, labor is overtaxed and capital undertaxed in China. Since China has excess productive labor, the benefits flow to the state. Implicitly, the U.S.’s excess produced the differential model discussed above, which worked well for both parties for some fifteen (15) years.)
But all is not bread and roses in Soros’s view of China. An Indian journalist sitting next to me asked the obvious question: Has being a democratic country “hamstrung” India as compared to China? Soros came back to his key theme of the need for growth in Chinese domestic demand, noting that the Indian economy is more stable precisely because there is now domestic growth—growth that will be facilitated in China only as that State evolves both politically and economically. He noted that the Chinese people, to date, have been willing to accept limits on their individual freedom for its benefit in growth, but he does not see other countries being willing to accept such limits on their own freedom to support China’s growth. If I ever had any doubt that Soros is a more devoted Popperian than I, it was eliminated in that moment.
Other Powers, and Some That Might Be
Soros spoke positively of Turkey (Dani Rodrik may have a counterpoint), negatively of Germany (from a policy perspective; when asked by a reporter from Crain’s what we will look back on and see as stupid, he replied that “fiscal rectitude, from a timing point of view, is wrong.”), and generally positively of the Euro, declaring in response to a question about Ireland and Greece that “If anybody would leave [the Eurozone] it would be Germany.”
His key point about the Euro is one that is often found in the literature of financial crises, including the previous Great Depression: there is a European Central Bank, but there is not a central Treasury. But this appears to be de facto being remedied by the Solvency Crisis, with “back-up funds” being developed and used. Soros noted a key distinction that is often missed in discussions: there was not a crisis of the EUR, but rather a European banking crisis, which was exacerbated by policy disagreements between France and Germany. (Germany won, though his view of whether this victory will be relatively Pyrrhic is left as an exercise.)
Again, he looks to the Chinese as an indicator, who started putting their money—you know, that 4 Trillion RMB stimulus and the revenues that have followed it—into the EUR as soon as it reached around 1.20. The Chinese bought the EUR, the Chinese bought Spanish bonds, the Chinese stabilized the market. The Chinese did something no one else can do for them—bought another currency on the open market.
And this is the key to understanding Soros’s attitude toward Japan. You think this is easy, realism? The Japanese are correct to worry about their currency, Soros notes, because, while the RMB is the strongest currency in the world, you cannot own it because of capital controls that the Chinese government maintains because they do not want to have both rising wages and an appreciating currency in their export-based economy. Accordingly, per Soros, any appreciation of the RMB “has to be done in an orderly manner.” In the meantime, the Japanese did the only thing they could.
Mr. Soros was by no means a fan of the Obama Administration. Echoing Glenn Greenwald, he notes that the Obama Administration should have corrected the excesses, the abuse of power, of the Bush Administration. Despite this (and what follows), Soros believes Obama “may well be elected to a second term.”
As a matter of handling the banks through the crisis, Mr. Soros noted that the Administration should have injected Equity into the banks, but notes that he believes the Obama team found this politically unacceptable. The result is that the government effectively nationalized the banks’s liabilities and “allowed” them to “earn their way out of that hole,” through practices such as increasing consumer credit card rates.
(My memory of the events is somewhat different, since part of what the Fed received for its TARP funds were warrants on those banks—warrants that have subsequently been sold and counted as if the revenue against the original loans to make them appear more “profitable” in the eyes of several bloggers and financial journalists [including, for instance, Robert]. But certainly there was no AIG-like structure imposed, no U.S. equivalent of Northern Rock, no matter how much saner than would have been.)
To no one’s great surprise, Mr. Soros does not believe that Mr. Obama is “anti-business.”
The biggest fault he found with the Administration’s approach to the crisis is that they depended on the “confidence multiplier” to make recession shallower and shorter than it otherwise would have been. The problem with a confidence multiplier is, of course, that when the results do not match the expectations, the “multiplier” becomes a disappointment, and therefore a drag on expectations going forward. Mr. Soros described this as what happened.
If this scenario is true, then the decision not to ask initially for a $1.2T stimulus, with a chance to end up with a better mix and higher absolute amount of actual stimulus funding, will go down as the tombstone for the Administration, not “just” a spanner in the possible continuation of the Administration’s economic team (h/t Mark Thoma on Twitter). But, hey, the recession has been over for more than a year, so things are getting better, with the upcoming elections more resembling the signpost of 1982 than 1932. At least in some timestream.
This one was pulled all over the place, so it should come as no surprise. Gold is, per Mr. Soros, the only active “bull market” right now. He is also not optimistic about the ending of that market. Gold is “the ultimate bubble”—may be going higher, but is certainly not safe and is not going to be forever.
Mr. Soros admits a similar attitude toward oil, but at least there the commodity has intrinsic value. As Vincent Fernando, CFA, notes, owning something other than gold at least gives you the possibility of “productive assets.”
I’ve left out a few things, including the roundelay that resulted when one journalist attempted to discuss Mr. Soros’s firm’s holdings in a company he said he didn’t the firm owns. But in general the feeling one gets when presented by Mr. Soros the person is that he is an optimist, perhaps incurably so. Things are rough, and they will probably continue to be rough for a while, but in the longer term, things are getting better for all.
I’m guessing he won’t be speaking at The March to Keep Fear Alive. But Mr. Colbert—let alone his predecessor at the Washington Monument—would do well to book him as a guest.