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George Soros: “People don’t realize that the system has actually collapsed”

George Soros, who knows a thing or two about finances, likens the threats to Europe and the United States to that of the dying days of the Soviet regime.

“Something similar is happening in the West,” Mr. Soros told Bloomberg Television. “You had a financial crisis where the market did actually collapse, but it was kept alive by the authorities. People don’t realize that the system has actually collapsed.”

The Hungarian-born financier said he himself is confused by Europe’s woes.

I am confused too but this is an interesting way of looking at it. I have been under the same impression a lot of people are, that the system is teetering on the edge and policy makers are being pushed by markets to save/reform it. But what if what Soros here says is true? What then?

Source: George Soros likens troubles in U.S., Europe to Soviet collapse, Globe & Mail

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.

38 Comments

  1. Diego Méndez says:

    1930s all over again with the Third World War being a trade war?

  2. Dave Holden says:

    The “system” has suffered from two decades of policy facilitating moral hazard. If you view “collapse” as in passing a point where policy can no longer change in this respect he may be correct.

    • David Lazarus says:

      I do agree with him, but the thing is we do have a working model to go to. The regulations of banks from the 1930′s gave us 50 years of incomparable stability. I would also add in a new proviso to stop banks operating across borders except for trade banks like Standard Chartered, who are well capitalised and operate in stable markets such as trade finance.

  3. Anne Droid says:

    and what followed after the USSR collapsed ? A free market thats what.

    Let the markets be free.

  4. David Lazarus says:

    What we are seeing is not a collapse in capitalism but a complete collapse in neo-liberal economics as practiced by Greenspan, Rubin and Summers. The debt bubbles that Thatcherism, Reaganomics and Monetarism demanded has run its course. You cannot push more debt on the people, they will not tolerate having more debts imposed on them to bail out super wealthy bankers. In some ways Europe is actually well prepared for such a transition. The wealthy in Europe have called for higher taxes, the public still have support for government and so could transition very much more easily. The debts imposed on everyone by the banks need to be cleared possibly by allowing the banks to collapse and then nations taking over the banks, breaking them up, and then regulating them so that they can never create the same problems again.

    Trade wars might happen but I think that they will not explode into international wars. Europe could face pressures to become more efficient in terms of meeting local demand rather than allowing multinationals to I do see civil wars being much more likely. The old guard refusing to adapt to the coming changes. Revolutions are even more likely. These could be peaceful or violent. It depends on how the old guard exit.

    In this respect my prospects for the US are worse than Europe. It is far more polarised and that makes rational debate much harder.

    • Stevie b. says:

      David “You cannot push more debt on the people, they will not tolerate having more debts imposed on them to bail out super wealthy bankers….The debts imposed on everyone by the banks need to be cleared possibly by allowing the banks to collapse and then nations taking over the banks, breaking them up, and then regulating them so that they can never create the same problems again.”

      Exactly! Roll on Occupy Wall Street and all the other financial centres following on from the OWS lead.

      I hope i’ll be forgiven from quoting from myself in a post to an article in the Telegraph yesterday by Jeremy Warner. It may be a bit rambling but it’s what I (and judging by the reaction plenty of others) feel:

      “King said on Channel 4 news that he’s -really sorry- for pensioners on fixed incomes or anyone about to retire on what is likely to be an even
      poorer annuity rate than before.

      So there we are. King is really sorry for all the millions on or about to be on a fixed income.
      So that’s all right then – thank you Sir Mervyn – most kind – I’m sure we all feel a lot better.

      How very ruddy dare he? How dare he screw millions of people [tax-payers included] to save the necks and maintain the lifestyle of the few? He should help jail and not bail the bankers who caused this situation, never mind the ruddy regulators who allowed it all to develop (& not excluding the so, so kind Governor of the BoE)

      He actually admits he hasn’t got a clue as to what
      might happen next, so why is he choosing to go down the road most certain to cause the greatest pain to the majority whilst letting the privileged minority get off scot-free?

      Let shareholders suffer(as they should) & bondholders take haircuts (as they should),
      whilst protecting depositors and hiving-off the spiv side to separate Lloyd’s of London type entities from core banking. This way the wide-boys can keep their speculative gains but also be totally responsible for the at-some-point inevitable
      (computerised) future losses and we can all get back to monetary sanity. “

      • David Lazarus says:

        I have said for the last three years that the zero interest rate policy was the biggest theft of pensioners income. Annuities are based on long dated gilts and if governments decide to mis-price them the insurance companies will either have to lower the returns to annuity holders or risk bankruptcy.

        Maybe we should make all government pensions financed this same way so that any policy that screws pensioners also screws Ministers and senior civil servants own pensions.

        Shareholders will probably all be wiped out on most of the big UK banks. Governments bailed out the banks leaving shareholders whole supposedly to make the resale of government shares easier. The real reason is to avoid panic. If it were clear that many banks were insolvent then it would damage the credibility of bank regulation in many countries. US regulators will go on about how strong US banks are after 2008 and the subsequent recapitalisations. It ignores the fact that the banks will have paid themselves more as well. The big US banks will be unable to survive a tsunami of credit default swaps that is why Geithner is running around trying to make sure defaults do not happen.

        • Stevie b. says:

          “Maybe we should make all government pensions financed this same way so that any policy that screws pensioners also screws Ministers and senior civil servants own pensions.”

          Nice! Not forgetting the good old guv’ner of the BoE.

  5. Edward Harrison, we have plenty of options:
    1. Reset the current system back to start. IMHO one of the worst options.
    2. Build a non FIAT global currency for trade, based on barter or resource baskets or some other value base rooted in reality.
    3. Build national currency, e.g. on mutual credit. Tallysticks worked well for many centuries. Just imagine how cool or “tally sticks” could be with the IT & Internet-technology, that we have at our disposal today.
    4. Adjust private vs. public property priorities. There is no “either or” even if neoliberals want us to believe so. We should increase the priority of public property protection.
    5. Implement basic income: One of the biggest burdens on the money system is that is has to be value storage and trade currency all at once. There is an inherent conflict in this. The optimal trade currency would be respend very quickly. A storage currency per definition isn’t. Demurrage is fine on trade currencies and disliked by people who want to save. With a granted basic income for everyone saving for the future becomes to some degree obsolete. Also the rationalization conflict, that only the owner of the machine profits from the new efficiency gets resolved.

    … these are just the things that instantly came to my mind. We probably have many more options. I am aware that these points are not put together to a complete concept yet – we have to do that as a whole. I just want to point out, that we have a lot of building blocks and options.

  6. Tom Hickey says:

    Ravi Batra predicted this in 1978 in The Downfall of Capitalism and Communism. He go the time frame for the collapse of the USSR correct but was a bit late on capitalism. He put forth a revised projection in 2007, The New Golden Age: The Coming Revolution against Political Corruption and Economic Chaos.

    William Strauss and Neil Howe also deal with this coming “awakening” in The Fourth Turning (1997), based on generational shifts. We seem to be in the midst of this epochal change now.

    What’s next? I think it is an open-ended question. There are just too many variables (complexity) and too much uncertainty (unknown unknowns) to make much of a stab at it now. We seem to be just on the brink of the second leg down in Great Depression II, for instance. I expect this turmoil and shake out to last pretty much through the decade of the twenty teens. A lot can happen in that time span.

  7. steve says:

    I expect the west will travel deeper into socialism, while the east continues its adoption of capitalism (ok, maybe more like mercantilism, but with the possible exception of the early U.S. that’s all their has ever really been.)

    Each will get what it seems to want. The west will get greater equality at the expense of prosperity and a near permanent wealthy class (albeit less wealthy in relative terms) with much less social mobility.

    The east will see continued growth with greater wealth disparities but also greater social mobility. I believe it will be an Asian century. Although, I hesitate to call a particular country for top rank. Both China and India look like strong contenders.

    • David Lazarus says:

      Europe yes, but the US, I think will spiral for quite some time. The US has decades of anti socialist propaganda to overcome. That will delay its stabilisation.

      I agree with you on the Asian century. Medium term it will be China, though linger term I think that India could be the number one country.

    • Diego Méndez says:

      Social mobility is higher in equality-driven Scandinavia than in the US.

      The idea that you must, really must lose something (social mobility or whatever) if you strive for an egalitarian society is the result of decade-long brainwashing.

  8. osmar says:

    The system doesn’t work for first world countries! but why when the latinamerican countries applied the same correctnees the system did work??? Because of dictator regime? Or first world doesn’t want to accept the painfull method? The first world doens’t want to loose their first world benefits! I think this is a moral crisis not a economic one!

    • Diego Méndez says:

      Don’t be so excited about the firt world’s decay. No matter where you live, things are going to turn very sour for your country.

  9. Namazu says:

    One version of “what then” is Dimitri Orlov’s “Collapse Gap” scenario, under which the U.S. is likely to fare even worse than the USSR did given the brittleness of our physical and social infrastructure. For a little more nuance with your Armageddon porn, I strongly recommend the writings and podcasts of James Howard Kunstler. Personally, “what then” includes a contingency plan to move to one of a handful of Asian countries on short notice. Hope to see some of you there: the first round is on me.

    • David Lazarus says:

      I think that collapse depends on how gradual the decline is. The US has had a slow but steady decline in living standards for many for thirty years. Eventually there will be a revolt but it depends on how egregious the disparity becomes. The fact that the US elected Obama who espoused change but in some respects has failed to deliver was a sign that the public are angry.

  10. history repeats says:

    What is happening now, is what has happened after almost every other debt crissis. Government bailouts and deficits stress the sovereign. They tax bondholders in the end with a period of extended negative real interest rates.

  11. Blissex says:

    «I have said for the last three years that the zero interest rate policy was the biggest theft of pensioners income. Annuities are based on long dated gilts and if governments decide to mis-price them the insurance companies will either have to lower the returns to annuity holders or risk bankruptcy.»

    But most soon-to-be pensioners are dumb and only care about the size of their pension account, and tehrefore want tax-free capital gains, as they don’t care for the income returns.

    The past 30 years have seen a very strong political demand by the middle/upper classes for massive, repeated tax-free capital gains, and ever increasing credit and leverage, and decreasing interest rates to deliver them.

    The problem is that to continue to deliver capital gains interest rates have to go down all the time, not just once, as they did for the past 30 years, and now that they have reached zero (even if only for campaign donors in the financial industry) the capital gains bonanza has run its course. The only possible other way to generate more capital gains with a zero interest rate is to allow ever increasing leverage ratios, and this has been done too, but eventually these wipe out theoretical equity. Never mind, as insolvent companies have been allowed to pretend this did not happen by allowing them to mark-to-fantasy, but eventually counterparties have seen through that, and in 2008 the whole financial system collapsed because everybody knew everybody else was insolvent, and would only trade with the government.

    So the series of low-tax or tax-free capital gains for most voters has ended, and what next? For now most voters have not seen massive capital losses except on their homes, and thus have been happy to continue voting for more happy juice.

    • David Lazarus says:

      You are confusing two problems. Prior to retirement people want capital gains to get the biggest pension pot so that they can then buy the annuity which gets them the highest income. Annuities will generally be paying out slightly more than the long term interest rate depending on whether it is a capital protected annuity. So at retirement they want high interest rates. Overall these are not incompatible. Prior to the monetarist experiment with the main economies there was a balance of interest rates and capital gains. Interest rates were higher. It meant that investment decisions had to exceed interest rates, which reduces mal-investment. Low rates meant that anything could pay off.

  12. Positroll says:

    Since I am tiring of all this doom and gloom, some numbers from August, published today (Monday) out of Germany’s statisical office. In short: Germany does export more to the rest of the world and imports more from the Euozone. Exactly what the doctor ordered …

    http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/DE/Presse/pm/2011/10/PD11__373__51,templateId=renderPrint.psml

    General:
    Exports up 14,6% year on year, up 3,5% from July (seasonally adjusted; twice as much as expected).
    Imports up 12,0% year on year, 0,0% from July
    (seasonally adjusted).

    to / from Eurozone
    Exports up 11,5% year on year.
    Imports up 13,0% year on year.

    to / from non-Eurozone Europe:
    Exports up 15,1% year on year.
    Imports up 11,0% year on year

    to / from rest of the world:
    Exports up 17,1% year on year.
    Imports up 12,8% year on year

    • Diego Méndez says:

      What the doctor ordered was more consumption in Germany and higher disposable income for German workers.

      In other words: Germany (and China) should export less and import more. Global imbalances are not rebalancing significantly.

      Germany is psychologically in a very good mood now. Germans have no idea what’s coming to them in some months’ time.

      • Positroll says:

        Why the hell should Germany try to export less to the BRICS and others like Indonesia, Turkey and the OPEC countries (mostly investment goods like heavy machinery to build mines, factories, hospitals etc; and lots of cars to China and Russia)? That’s how they earn the money to pay their workers more, as they have started doing this year:

        Nominal wages rose +4,2% year on year in Q2 2011 (real: +1,9%) http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/DE/Content/Statistiken/VerdiensteArbeitskosten/AktuellVVE,templateId=renderPrint.psml
        Some German unions now asking for a 8% raise in the next round, which might be one reason why the ECB is so overly afraid of inflation …

        • Diego Méndez says:

          Because bilateral trade balances make no sense, that’s why.

          Only trade balances between Germany (or Spain) and the rest of the world combine make sense.

          If Germany has a huge trade surplus with the rest of the world, the rest of the world must run a huge trade deficit. That’s what global imbalances are about, welcome to reality.

          China depends on consumption in countries like Spain and the US. Brazil and other commodities exporters depend on Chinese factories’ growth. And German exports depend on commodity exporters.

          In other words: if Spain and the US do not run a trade deficit, Germany cannot run a trade surplus.

          You can get adjustment through global depression, or through higher German wages. Inaction means imminent global depression and possibly trade war.

          • Positroll says:

            While I must admit my economics classes date quite a few years back, I still have to disagree: If German exports help the BRICS (etc) economies to grow faster then their imports from Germany grow, all is fine in my books.

            China is different, in the sense that they sell mostly comsumer goods to the US, made possible by an artificially depressed Yuan, all the while putting pressure on US wages to go down (compared to high-wage, long holidays Germany).

            That is not to say that Germany should not try to increase imports; imO the current fiscal situation would allow e.g. for lots of investment in the German railroad infrastructure (not high speed rail, but cargo – especially in the Rhine-Ruhr area, Stuttgart-Zurich and along some west-east corridors).

            P.S. The US could easily get rid of (most of) its trade deficit if it were ready to raise gas taxes to something approaching European levels and investing the proceeds at home in infrastructure …

          • David Lazarus says:

            @positroll Yes higher gas taxes would reduce the balance of trade deficit and also go a long way towards reducing the deficit as well. Though I do agree with you that during this downturn simply using it to boost activity is even better.

          • Diego Méndez says:

            @Positroll, both China and Germany sell artificially cheap goods due to an artificially depressed currency (nowadays, the euro peg means the Spanish euro is too expensive and the German euro is too cheap).

            You say this is all right since Germany sells investment goods, not consumer goods. In fact, this isn’t right for two reasons:

            Reason 1. Germany sells investment goods that enable China to produce consumer goods and Brazil and OPEC to produce oil for China’s unsustainable, misallocated-capital-led growth. So, at the end of the day, Germany’s trade surplus does not reflect Germans improving the world economy with new technology, but Germans selling artificially cheap goods, financed with German credit, to expand unsustainable global trade trends.

            In other words: German policies are contributing to global imbalances, hence destroying (German) capital in the process. You have a China bubble, you have a Brazil bubble, you have an oil bubble, and all three of them constitute the German export bubble soon to get bust.

            Reason 2. You are looking at global imbalances as something that could be reduced in the long term with the right policies.

            If there was infinite liquidity, infinite patience on the part of the unemployed and markets wouldn’t test currency pegs, you are right that global imbalances could self-correct. China and Germany would have inflation over a long period and their currency peg to deficit countries would start working against their exports (they’d basically get more expensive).

            The problem is: things do not work that way. They didn’t in the Tequila crisis in 1992, they didn’t in the Asian financial crisis in 1997-8, they didn’t in Argentina in 2001 and they won’t this time.

            The unemployed will revolt, the markets won’t support unsustainable currency pegs and a huge financial crisis will follow, possibly so large that the world starts de-globalising at a very rapid pace.

          • David Lazarus says:

            Yes I see a reversal of globalisation policies accelerating. Capital controls might be the start.

          • Positroll says:

            “both China and Germany sell artificially cheap goods due to an artificially depressed currency”
            Does California sell artificially cheap goods due to being in a currence union with Nevada? Sorry, but I don’t buy that argument re: the Eurozone (but if one were to look at things that way, I would like to add that the reverse was true a few years back: the DM-EUR exchange rate was fixed on a basis that was calculated during ECU times when Germany was booming for a year or two after unification. Germany paid for that (and other mistakes) with high unemployemnt and austerity from 1995-2005. Nobody back then complained about Spain competing unfairly (though there were complaints against Ireland for pushing its corporate tax to extremely low levels) …), so the current wining in this respect is getting irritating (though I’d agree that the ECB should lower its interest rates to help them out of the current mess).

            Re China: If you read M Pettis’ blog you will find that China will soon be forced to move to a more consumer oriented model (more Miele kitchen appliances to be sold …), and I am – like him -relatively confident that they can get there without a big bust.

            One last point that tends to be forgotten: If Germany were to raise its labor costs too fast, it wouldn’t be Greece or Spanish workers profiting – it would mostly be Chinese companies taking over, leaving Europe in an even worse situation, considering that much of Eastern Europe in one way or the other the depends on the German chain of production …

          • Diego Méndez says:

            Positroll,

            don’t take it as personal or as “this is all Germany’s fault”. It isn’t. It’s a systemic crisis.

            Germans can’t understand the final consequences of their own export bubble just as, say, Spaniards couldn’t imagine their home bubble would end up so catastrophically badly.

            Germany arguably entered the eurozone with an overvalued German euro, but Germany could adjust because the periphery didn’t pursue deflationary policies. If every euro country had pursued an internal devaluation in 1998-2008, maybe Germany would have kept 20% unemployment and would be on the brink of revolution now.

            Add a global depression and you start to understand the euro periphery’s situation as of today.

            I agree with Michael Pettis in almost everything. As you read him, you surely know he shares my views on the eurozone and China’s investment bubble. He forecasts a reduction from 10% to 3% GDP growth in China in the next few years.

            He is confident that the government will sort it all out and there will be no democratic revolution, but Positroll, always remember he is writing a blog from Beijing, in the middle of a repressive dictatorship. He cannot say the political system will go under!!!!!

            3% GDP growth in China means the Chinese bubble turns bust, the Brazilian bubble turns bust, the oil bubble turns bust and the German export bubble turns bust. It will end globalization as we know it.

            Germans are just ordinary people. They’re not super-humans. We cannot expect them to understand the dangers they are facing while being in a very feel-good moment.

            This is not a crisis of character, but a crisis of an obsolete global system.

          • Positroll says:

            “It will end globalization as we know it.”
            Well, I guess we’ll just have to agree to disagree there. The future will show who’s right …

  13. Blissex says:

    «So at retirement they want high interest rates»

    This is a silly argument: what rentiers want at any point in time is a high total return, whether it comes from capital gains or dividends and interest rates, and the sort of capital gains that people were getting in the bull market were generating returns above any historical interest rates or dividends.

    The silly argument comes most likely from the usual misconception: that capital gains somehow are not income like dividends or interest rates, and thus for example they should be taxed a lot less or not at all than “income” like dividends or interest rates.

    Just wealthy rentier propaganda.

    The past few decades of ever gushing capital gains via asset price bubbles have been the largest income redistribution policy in history, from people with no or little property to people with more property.

    If anybody has been investing for “income” (dividends or interest rates) in the bull years they really misjudged the speculative fervor of the times.

    • David Lazarus says:

      Yes you are right that total return is what everyone is after. Though pensions are funded by annuities and these are funded by long dated gilts or Treasuries. That is when pensioners want higher interest rates. Also interest rates boost dividend payments. In fact in the past savings had a lower return than investment in the stock market as higher dividends could boost share investments and have potential capital gains as well, though they had additional risk. Though if they had higher interest payments that boosted their total returns they can re invest those interest/dividend payments. So total return is important.

      I am not looking at it from a rentier perspective. In fact I am very much in support of higher capital gains taxes. In fact they should be charged at the same marginal rate as income.