George Soros On The World's Shifting Challenges

Tyler Durden's picture

Authored by George Soros, originally posted at Project Syndicate,

As 2013 comes to a close, efforts to revive growth in the world’s most influential economies – with the exception of the eurozone – are having a beneficial effect worldwide. All of the looming problems for the global economy are political in character.

After 25 years of stagnation, Japan is attempting to reinvigorate its economy by engaging in quantitative easing on an unprecedented scale. It is a risky experiment: faster growth could drive up interest rates, making debt-servicing costs unsustainable. But Prime Minister Shinzo Abe would rather take that risk than condemn Japan to a slow death. And, judging from the public’s enthusiastic support, so would ordinary Japanese.

By contrast, the European Union is heading toward the type of long-lasting stagnation from which Japan is desperate to escape. The stakes are high: Nation-states can survive a lost decade or more; but the EU, an incomplete association of nation-states, could easily be destroyed by it.

The euro’s design – which was modeled on the Deutsche Mark – has a fatal flaw. Creating a common central bank without a common treasury means that government debts are denominated in a currency that no single member country controls, making them subject to the risk of default. As a consequence of the crash of 2008, several member countries became over indebted, and risk premia made the eurozone’s division into creditor and debtor countries permanent.

This defect could have been corrected by replacing individual countries’ bonds with Eurobonds. Unfortunately, German Chancellor Angela Merkel, reflecting the radical change that Germans’ attitudes toward European integration have undergone, ruled that out. Prior to reunification, Germany was the main motor of integration; now, weighed down by reunification’s costs, German taxpayers are determined to avoid becoming European debtors’ deep pocket.

After the crash of 2008, Merkel insisted that each country should look after its own financial institutions and government debts should be paid in full. Without realizing it, Germany is repeating the tragic error of the French after World War I. Prime Minister Aristide Briand’s insistence on reparations led to the rise of Hitler; Angela Merkel’s policies are giving rise to extremist movements in the rest of Europe.

The current arrangements governing the euro are here to stay, because Germany will always do the bare minimum to preserve the common currency – and because the markets and the European authorities would punish any other country that challenged these arrangements. Nonetheless, the acute phase of the financial crisis is now over. The European financial authorities have tacitly recognized that austerity is counterproductive and have stopped imposing additional fiscal constraints. This has given the debtor countries some breathing room, and, even in the absence of any growth prospects, financial markets have stabilized.

Future crises will be political in origin. Indeed, this is already apparent, because the EU has become so inward-looking that it cannot adequately respond to external threats, be they in Syria or Ukraine. But the outlook is far from hopeless; the revival of a threat from Russia may reverse the prevailing trend toward European disintegration.

As a result, the crisis has transformed the EU from the “fantastic object” that inspired enthusiasm into something radically different. What was meant to be a voluntary association of equal states that sacrificed part of their sovereignty for the common good – the embodiment of the principles of an open society – has now been transformed by the euro crisis into a relationship between creditor and debtor countries that is neither voluntary nor equal. Indeed, the euro could destroy the EU altogether.

In contrast to Europe, the United States is emerging as the developed world’s strongest economy. Shale energy has given the US an important competitive advantage in manufacturing in general and in petrochemicals in particular. The banking and household sectors have made some progress in deleveraging. Quantitative easing has boosted asset values. And the housing market has improved, with construction lowering unemployment. The fiscal drag exerted by sequestration is also about to expire.

More surprising, the polarization of American politics shows signs of reversing. The two-party system worked reasonably well for two centuries, because both parties had to compete for the middle ground in general elections. Then the Republican Party was captured by a coalition of religious and market fundamentalists, later reinforced by neo-conservatives, that moved it to a far-right extreme. The Democrats tried to catch up in order to capture the middle ground, and both parties colluded in gerrymandering Congressional districts. As a consequence, activist-dominated party primaries took precedence over general elections.

That completed the polarization of American politics. Eventually, the Republican Party’s Tea Party wing overplayed its hand. After the recent debacle of the government shutdown, what remains of the Republican establishment has begun fighting back, and this should lead to a revival of the two-party system.

The major uncertainty facing the world today is not the euro but the future direction of China. The growth model responsible for its rapid rise has run out of steam.

That model depended on financial repression of the household sector, in order to drive the growth of exports and investments. As a result, the household sector has now shrunk to 35% of GDP, and its forced savings are no longer sufficient to finance the current growth model. This has led to an exponential rise in the use of various forms of debt financing.

There are some eerie resemblances with the financial conditions that prevailed in the US in the years preceding the crash of 2008. But there is a significant difference, too. In the US, financial markets tend to dominate politics; in China, the state owns the banks and the bulk of the economy, and the Communist Party controls the state-owned enterprises.

Aware of the dangers, the People’s Bank of China took steps starting in 2012 to curb the growth of debt; but when the slowdown started to cause real distress in the economy, the Party asserted its supremacy. In July 2013, the leadership ordered the steel industry to restart the furnaces and the PBOC to ease credit.  The economy turned around on a dime. In November, the Third Plenum of the 18th Central Committee announced far-reaching reforms. These developments are largely responsible for the recent improvement in the global outlook.

The Chinese leadership was right to give precedence to economic growth over structural reforms, because structural reforms, when combined with fiscal austerity, push economies into a deflationary tailspin. But there is an unresolved self-contradiction in China’s current policies: restarting the furnaces also reignites exponential debt growth, which cannot be sustained for much longer than a couple of years.

How and when this contradiction will be resolved will have profound consequences for China and the world. A successful transition in China will most likely entail political as well as economic reforms, while failure would undermine still-widespread trust in the country’s political leadership, resulting in repression at home and military confrontation abroad.

The other great unresolved problem is the absence of proper global governance. The lack of agreement among the United Nations Security Council’s five permanent members is exacerbating humanitarian catastrophes in countries like Syria – not to mention allowing global warming to proceed largely unhindered. But, in contrast to the Chinese conundrum, which will come to a head in the next few years, the absence of global governance may continue indefinitely.

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Colonel Klink's picture

Completely agree with your sentiment! +1  Same goes for iCON, Buffett, Munger, et. al.

Breaking news, this just in:

OBAMA RATED THE 5TH BEST PRESIDENT!From a total of 44 US Presidents: Obama is rated as the 5th best President ever! The publicity release said,"...after only 5 years in office, Americans have rated President Obama the 5th best president ever." The details according to TEXAS A&M Study: Reagan & Lincoln tied for first, 23 presidents tied for second, 17 other presidents tied for third, Jimmy Carter came in 4th, and Obama came in fifth!

Dr. No's picture

Well at least he is in the top 5!

Colonel Klink's picture

I'm sure they pulled it from Obama's government statistics!

fonestar's picture

ROT IN HELL GEORGE SOROS!!

Colonel Klink's picture

I hear he's buying bitcoin.

nope-1004's picture

"All of the looming problems for the global economy are political in character."

 

LMFAO!!!  Just what you want the masses to believe, hey Buffet... I mean, Soros.  Friggin' pig.  When is enough enough for you?  Admitting the MASSIVE, structural insolvency in the banking sector might just get you some brownie points Soros.

Until admission time, keep spreading lies to skim off the masses.

Your character is Sickening.

 

NotApplicable's picture

Gotta love how George points out the "fatal flaw" in the Euro, but fails to mention how it was by design, and how this crisis will be used to "fix that flaw" with further political integration.

Colonel Klink's picture

No failure, it's ALL BY DESIGN!

pods's picture

Hey George, DIAF you slimy asshole.

-everyone

Soul Glow's picture

We saw a definative bottom in gold here....

http://www.zerohedge.com/news/2013-12-31/and-now-gold-soaring

We are on the support line, 1200 for gold and 20 for silver, and when you see the above remind yourself that algorythems are controlling the trading.  So the algobots are swooping in at these very certain price levels, which they have been set to do by order and instruction.  It's only a matter of time before we close above 1300, probably in the next few weeks, easily by the end of the month.

Four chan's picture

that picture of him should be used at all times. lol its gold.

kralizec's picture

He should have his Che moment and have that mug retired to t-shirts too!

infotechsailor's picture

"The European financial authorities have tacitly recognized that austerity is counterproductive..."

 

Nobody told me that cutting spending was counter productive.

zaphod's picture

"Then the Republican Party was captured by a coalition of religious and market fundamentalists, later reinforced by neo-conservatives, that moved it to a far-right extreme."

The reason lefties love this line of thinking is that there is no way to refute it. Lefties make general statements that can say anything, but can not be argued with.

I've grown to see the republican party as part of the problem, but it is not for anything Soros believes.

aVileRat's picture

Maybe I'm still hungover but didn't George just repeat most of what ZH has been saying for a year now ?

- Euro is fucked, wallpaper is getting old hat

- Breakaways will be driven by political manouvering and old alliances made on threats (Russia) will have zero impact in the ZIRP world

- Japan is fucked. Wanatabe will be doing tricks by 2030.

- Savings are being killed by non-core inflation and stagnant wages. World is running out of runway to get the whole thing moving again.

Best part of fight club/financial markets: doesn't matter how big you are on paper, Getting punched in the face is still, getting punched in the face.

 

chubbar's picture

And here is the "tell" on how they plan to do it!

Future crises will be political in origin. Indeed, this is already apparent, because the EU has become so inward-looking that it cannot adequately respond to external threats, be they in Syria or Ukraine. But the outlook is far from hopeless; the revival of a threat from Russia may reverse the prevailing trend toward European disintegration.

Enter the  Russian Bogey man! Talk about transparent.

czardas's picture

I think he is saying that the politicalization of human existence (something he had a part in) has necessarily turned every problem into a political issue.   Today, we consult the government for what we wear, eat, buy, build, tax, donate, drink, smoke, trade, travel and educate.   There is no sphere that does not have federal oversight or mandates...making every problem a political one. 

mr.n3utr0n's picture

He lives in a box with the like minded that are out of touch, drinking cocktails, getting drunk, patting each other on the back and deluding themselves from a lofty perch

mkkby's picture

George Soros -- all problems are solved by a one world governement.  The UN is not powerful enough because there is dissent. 

Not said but implied -- this one world gov needs the power to enforce their will on everyone else, ie crush dissent.

Well, I nominate the NSA for that job.  Just give them a 100 million man army and general alexander can be the second alexander the great.

I hope there is a hell and G. Soros will be screaming in pain for all eternity.

CPL's picture

There is no uHaul behind his hearse.  Count on it.

fonestar's picture

Yes, that would totally make sense for people who depend 100% on the auspices of TPTB to buy Bitcoin wouldn't it?

Colonel Klink's picture

I said it knowing the trolling would bring you out.

At Soros' age, I've heard he can't be LONG anything.

G.O.O.D's picture

Agreed, that ole fvker wont even buy green bananas

USA USA's picture

CORRECTION:

 

You mean Obama's ASS

NoDebt's picture

That's funny.  I'm using that.

RacerX's picture

It's shit propoganda like this (O 5th best prez ever) that makes me realize we're not much different than NK.

all-priced-in's picture

Obama is the 5TH best US president.

There have been 43 presidents

5 are tied for 1st

10 are tied for 2ND

15 are tied for 3RD

12 are tied for 4TH

and Obama is 5TH.

 

Colonel Klink's picture

He must be a low information ZH'er since it went over his head.

Canadian Dirtlump's picture

First is the worst, second's the best, third's the one with the hairy chest.

astoriajoe's picture

Reading the whole paragraph won't actually take very long.

jcaz's picture

Of course, that poll was taken in Compton and DC.......

NIHILIST CIPHER's picture

KLINK        OBAMA RATED 5TH BEST PRESIDENT.............By the Communist Party and Texas A&M, fixed it.

holgerdanske's picture

Good one. I think O$ama has been dealt a bad hand, and then played even worse.

Well, you have voted for him, but the rest of the world suffers.

 

 

Leonardo Fibonacci2's picture

Soros the old fart is married to a woman 62 years younger than him.  He is 89 and she is 27!!!  Fuking vampire

quasimodo's picture

Well, one thing I won't hold against that old codger is going for the younger snatch

At his age it looks like an old dried up cow pie you see on the wagon trail,but at 27 still resembles a fresh peach.

Meat Hammer's picture

That might have been one of the most incongruent and nonsensical pieces of written work I have ever read, besides it being chocked full of lies.

And I'm pretty sure Soros was pooping himself as he wrote it.  How old is that fucker?

If there was ever a person who could use a nice myocardial infarction, it's Georgie.

overmedicatedundersexed's picture

has soros moved into that secure pent house in vagas? who runs his empire? does everyone change into germ free clothing with white gloves before an audience with the mogol? perhaps his handlers keep his meds titrated well.

MachoMan's picture

That might have been one of the most incongruent and nonsensical pieces of written work I have ever read, besides it being chocked full of lies.

Exactly.  This quote stood out quite a bit:

As a result, the crisis has transformed the EU from the “fantastic object” that inspired enthusiasm into something radically different. What was meant to be a voluntary association of equal states that sacrificed part of their sovereignty for the common good – the embodiment of the principles of an open society – has now been transformed by the euro crisis into a relationship between creditor and debtor countries that is neither voluntary nor equal. Indeed, the euro could destroy the EU altogether.

Not to state the obvious here george, but how has this worked every single time it's been tried?  More importantly, why does it work out this way?

 

Canadian Dirtlump's picture

Soros is channeling Rob Ford in that pic.

 

http://img.gawkerassets.com/img/19b7y9i9vswelgif/original.gif

 

Either way, he's powered by Satan without a doubt which probably means we'll be cursed with the spectre of his existence for a number of years.

drstrangelove73's picture

Decoded:

QE-good;

Tea Party-BAD!!

Lordflin's picture

So now this undead creature is a stand-up comic...

DosZap's picture

He looks like Barney Frank just laid the wood to him.LOL.You would think with Billions he could afford a decent haircut.

 

Dr. Engali's picture

Fuck you Soros. Hopefully Putin arrests your sorry ass and throws you in a cell with a couple big sex starved guys named Bubba.

Colonel Klink's picture

Close, his name would be Boris.

Queue Boris Alotovcrap issuing an official denial.  I don't know what the "nickname" is for Russian "whitenecks" who are in prison.

Zero Point's picture

Apparently Boris is tired of Thai "girls".

Who knows where that could lead.

Colonel Klink's picture

Lady Boyris?

Disclaimer - I'm a big fan of BA.  I await his arrival and delivery of rebuttal in a fashion that only Boris can.

Son of Captain Nemo's picture

If that's a new picture He don't look very good!

NoDebt's picture

He's got a crazy look about him.  Excuse me, an ECCENTRIC look.  Rich people are never crazy.

Hedgetard55's picture

That is not George soros. It is Professor Irwin Corey.

 

http://www.irwincorey.org/