George Soros Sees World Financial Collapse

Famous billionaire investor and hedge fund creator George Soros said on Friday the world financial system has effectively disintegrated, adding that in his view there is no prospect of a near term resolution to the financial crisis.

Soros hardly needs an introduction as a successful investor. He is viewed as the man most responsible for inventing the hedge fund industry and the 2%, 20% fee structure. Soros is perhaps best known for making over a billion Dollars by shorting the British Pound in the early 1990′s. He still has the distinction of being known as “the man who broke the Bank of England. In 2008 one of Soros lead hedge funds made an 8% return in a very tough year. The average performance for hedge funds in 2008 was a loss of 18%.

“We witnessed the collapse of the financial system,” Soros said at a Columbia University dinner. “It was placed on life support, and it’s still on life support. There’s no sign that we are anywhere near a bottom.” Soros is not talking about ancient history, he is speaking of the present world wide financial meltdown.

Paul Volcker spoke at the same dinner. Volcker was Chairman of the Federal Reserve under United States Presidents Jimmy Carter and Ronald Reagan (from August 1979 to August 1987). The federal funds rate, which had averaged 11.2% in 1979, was raised by Volcker to a peak of 20% in June 1981. The prime rate rose to 21.5% in ’81 as well.

Volcker’s action as an inflation fighter worked. Volcker’s Fed is widely credited with ending the United States’ stagflation crisis of the 1970s. Inflation, which peaked at 13.5% in 1981, was successfully lowered to 3.2% by 1983. At the Columbia University dinner Volcker said “I don’t remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world.”

Not very encouraging words from two of the still most highly respected men in the financial world. I believe that the real financial panic is just getting underway and the consequences will be felt for many years. We are not in a normal recession, or even a mild depression. We are in a deleveraging of excessive debt that has built up over many years.

We are in a super down cycle that will lead to a restructuring only after the present structure is pretty much destroyed. There is a long way to go. The stimulus program may help mitigate some areas of the meltdown but in a super cycle capital will be destroyed faster than the government, even with the power of the printing press, can restore it. No matter what the government does the deleverging process will continue until the market begins to stabilize on its own terms and time table.

The instability of paper currencies in a fiat money world is rapidity leading on the part of investors to a mistrust of any currency to retain its value. This mistrust is causing gold as an investment store house of value to enter an entirely new phase. It seems no one but brain washed passive citizens and politicians think that the various governments of the world have a clue as to how to get us out of the meltdown mess.

When super successful investors like George Soros are saying that there is no bottom below perhaps we should all be preparing for the worse. The long crisis is just getting underway in earnest and will put the United States and Americans to a severe test of survival.

It is important to realize that it is highly unlikely that conditions will ever return to “normal”. In time a new financial system of some sort will likely emerge. I doubt that anyone at this time has a good idea as to what that system may be and what path we will follow to get there. The only thing I am sure of is that a lot of pain will be experienced in every developed and emerging country before conditions stabilize.