George Soros: 'We face the most serious recession of our lifetime'

Last Updated: 1:40am BST 26/05/2008

George Soros, 'the man who broke the Bank of England', tells Edmund Conway of his fears for the economy

'This is a period of wealth destruction. The people who make money will be few and far between. There will be a lot more money lost than made." When George Soros - the phenomenally successful hedge fund manager - says this, you know something is wrong, very wrong. And indeed it is. The 77-year-old billionaire sinks back into the sofa in his Chelsea townhouse and exhales.

He has managed to make money almost consistently for over half a century - from his early days as one of the world's first major hedge fund traders to his involvement in Black Wednesday as the man who "broke the Bank of England", and in the latter years generating multi-billion-dollar annual profits throughout the 1990s. The conditions today are almost uniquely dismal, however.

"I think this is probably more serious than anything in our lifetime," he says. In short, his feeling is that the United States and Britain are facing a recession of a scale greater than the early-1990s, greater even than the 1970s.

"I think the dislocations will be greater because you also have the implications of the house price decline, which you didn't have in the 1970s - so you had stagflation and transfer of purchasing power to the oil producing countries, but here you also have the housing crisis in addition to that."

· The financial crisis in full

Such apocalypticisms would be less worrying were it not that Soros was among the few prominent experts who warned of the dire consequences facing the American economy years ago, when the housing bubble was still inflating.

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But even cottoning on to the big economic story early on hasn't meant guaranteed success. He returned from retirement last summer, and no sooner had he started trading than he pulled hundreds of millions of dollars of investment out of the US and the UK. It was enough to help him to a 32pc return last year. But amid the turbulence of 2008, he admits he is barely breaking even.

One of the problems is that leverage, the juice that has driven the hedge fund and finance trade in recent years, has all but dried up; the other is that the impending economic slump will be far-reaching and painful.

In the UK, the economic clouds are particularly dark, he says. "House prices have risen over the years and are further away from sustainable than in practically any other country, in terms of household indebtedness and the relationship of house prices to incomes." The slump may be more gentle than in the US, he adds, but it will be more drawn out.

"This is going to be compounded by the fact that the financial industry weighs more heavily on the economy than in other countries, because London is the centre of the global financial system, and you have the unfortunate condition that the Bank of England is bound into inflation targeting, and is not in a position to lower interest rates until you have an economic slowdown."

The nice decade, he says, borrowing a phrase from Bank Governor Mervyn King, is over and now the Bank has struck a "Faustian bargain between economic slowdown and inflation".

Ah, the Bank of England. There can be few more eventful relationships between one man and a bank than this one. There is no doubt he remains proud of his central role in Black Wednesday, when he helped drive Britain out of the Exchange Rate Mechanism, making around a billion dollars in the process. He is reminded of it by the fact that sterling has recently fallen some 20pc against the euro.

"It's much better than the straitjacket sterling was in when I broke the Bank of England."

For which, by the way, he is, rightly, unapologetic: "The ERM would have been abandoned even if I had never been born."

The son of the ERM, meanwhile, the euro, looks unbreakable in comparison - by speculators, at least.

But as hedge funds and other speculators pile in to the current crude oil boom, the Hungarian-born investor instead focuses on the wider picture - maintaining his estimated $8.5bn (£4.3bn) fortune, much of which he spends on his philanthropic and political ventures - most notably his Open Society Institute, which has a particular focus on Eastern Europe. However, don't try to read any of his politics into his trades, he insists.

"As a hedge fund manager, I do not claim to be serving the public interest. I am in the business to make money," he says. "It's a difficult point for people to understand and there's a general attitude when they see people profiting to say that markets are immoral, or making money by speculating is immoral.

"It's really the job of the authorities to set the rules, and there are times when some people break the rules or engage in improper activities, like the sub-prime mortgages. The impact fell particularly heavily on black and Hispanic minorities.

"It is a scandal, and I think you can blame [former Federal Reserve chairman Alan] Greenspan for not regulating the mortgage industry. But that's very different from speculating in government bonds or financial instruments, and that's a difficult point to get across, but I feel very strongly.

"Markets play a very useful role and they are amoral, not immoral."

Comments

Interesting Reading but probably over dramatic. Soros is after all a speculator himself and wants to see the markets move. He probably is already hedged in the direction he wants to lead us.
Personally, the UK housing markets needs to come down drastically, maybe, as bad as the US but probably not as fast so Soros may be right about timing.
Oil and commodities (including food) will fall as nothing goes up forever (basic logic "what goes up, must come down").

If Food prices keep rising, people will start dieing and "Speculation" should have no part in Global Famines surely.

I would not be surpised to see Oil at,or below, $60 this year or early next so hedge Funds should be careful.

The financial system DOES need regulation and Goverments have a responsibility in this. Free markets are good in theory but in practice they leave a lot to be desired.

All this from an ex Natwest Banker, now an entrepreneur in North America who is looking to a brighter future when these clouds pass as they surely will!
Posted by John on May 26, 2008 6:42 AM
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I wonder if Soros is gambling on revaluation of the Gulf currencies? It will be interesting to see what brings them down, revaluation or an oil price crash. But Soros is usually a bit early with his forecasts, and maybe on oil too.

George is of course correct, but it is too easy to blame the B of E. Their brief is to keep inflation in check using an indicator that strips out rises in house prices. The cost of housing makes up about 30% - 40% of most people's budget. If the cost of housing rises it is of course inflationary but the CPI didn't show it.

Had the BoE raised interest rates 5 years ago to burst the bubble we would not be in this predicament now. Gordon Brown claimed all the credit for giving them independence but the mistake was to give them the wrong target.

Don't blame the B of E, they just did their job.

KC Yoon
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