Bellerbys Economics - Mr Stephenson

Thursday, November 08, 2007

Bad Moon Rising

As the native Americans might have said - there's a bad moon rising over the US economy.

In fact, it could be argued that there are three bad moons rising - Alan Greenspan, Warren Buffet and now George Soros. All three of these economic heavyweights have spoken out over the last few days about the state of the US economy. After years of easy-credit, largely financed by the Chinese government and Japanese and German banks, the chickens have now come home to roost - the housing market is on the verge of collapse and the volume of bad debts has increased to hundreds of billions of dollars, severely damaging Citigroup, the biggest US bank and bringing poor old Northern Rock in the UK to the verge of bankruptcy.

Last week it was Warren Buffet and now yesterday, George Soros recommended to all his followers that they should dump their dollar assets as quickly as possible (I hope the Chinese government is listening - and if your parents have dollar accounts, tell them to switch to Euros, yen or spaghetti or something). Of course being George, he will then hoover up the cheap dollars later and hope to make a killing but that's just his job. Remember, George made a billion dollars (not a million, a billion) when he drove the pound out of the ERM on Black Wednesday nearly fifteen years ago - but that's another story. (And don't think I've forgotten that part of that billion was some of my taxes - grrr!)

So who is George Soros? Well, probably one of the top five most influential investors in the world today - not just because of his own considerable fortune (the world's 80th richest person) but also because of the enormous investment fund he controls. He was born in Hungary in 1930. His first name was Georgy Schwartz. His family were Jewish in origin but were secular in belief. However, when the Nazis took over Hungary in 1944, these fine distinctions didn't mean very much - so George's father sent him to England. He graduated from the LSE in 1952. He moved to the USA in 1956 and slowly worked his way up through the investment houses until he was able to start his own fund in 1970.

Apart from Black Wednesday, George was also largely responsible for the Asian economic crisis of 1997 when he advised his followers to start dumping the Thai baht (ring any bells?) The Malaysian Prime Minister called him a vampire who sucked the blood of the people. Of course, the US economy is much, much, much stronger than the Thai economy in 1997 - but even so...

George is a lifelong Democrat - remember his family suffered under Nazism - and he has used his great fortune to promote democracy in Eastern Europe since the 1970s, supporting many human rights movements in the region, including Charter 77 and Solidarnosc. More recently, he has supported education, recently donating $100 million to the development of an internet structure for Russia's regional universities. He is also an active supporter of Mohammed Yunus' Grameen Bank which provides microcredit to poor farmers in Bangladesh and India.

He has fought tirelessly against George Bush and is an active supporter of Hilary Clinton for the next presidency.

Philosophically, he argues that investment markets are not perfect markets as suggested by economic theory but suffer from reflexivity - a herd instinct. The secret of success in the markets is in judging when the herd instinct has gone too far in one direction and then betting against it. He also argues that this applies to other areas of life - that people are mimetic and would rather 'go along' with the general view than take a stand when they have to - this is why humanity has suffered from philosophies, governments and 'common wisdoms' that are simply irrational - and eventually cost money. Well, it seems to have worked for him so far - so why not think about it and let me know your views?

Have a good day in the education market!


  • I agree. It is proven psychological phenomenon that people (hence markets) are driven by conventional wisdom.
    Strange, but sometimes people do not need to know the reason why do they doing something, as long as others do it. Contradiction with rationality assumption. I have read very good article about this in FT today:

    By Blogger LSE, at 11:45 pm  

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