Unlike the last time a bunch of men gathered at Bretton Woods to determine the monetary fate of the world and set the stage for globalization, this time around the prevailing activity was a casting call for the role of the new Emperor Palpatine. Yet despite that (or maybe because of) George Soros appeared in full Open Society regalia and spoke to Bloomberg TV about how importing foreign asset collateral (also known as exporting debt) through "globalization" is still the name of the game. And obviously while the Hungarian billionaire would not disuss the true purpose for his presence in Bretton Woods, he did have some words of caution for China bulls: "while the big banks under direct central control are in fact refusing to lend, there is a shadow banking system that is growing out of control. There is a real danger there of wage price inflation because prices have gone up, particularly real estate prices have gone up because there was a real estate boom." But to those concerned about the key issue at play, namely the future of the reserve monetary system, some could interpret the following statement by Soros, as a tacit agreement that the end of the dollar is fast approaching: "cautionary words for the dollar: "There's a big question whether the U.S. dollar should be the main reserve currency and in fact it no longer is because it maybe accounts for two-thirds of the monetary reserves. The euro is an alternative and there's a lot of diversification into other currencies and even more into commodities. Not only gold, but actually oil is now an asset class for investors. That has put some upward pressure on the commodities." Of course what actually is decided in B-W will be made clear over the next year or so, once the decision makers have already placed their bets accordingly and pull the rug from under the market.
On stimulus vs. austerity and whether U.S. debt impacts the world:
"If you have a growing economy, you can tolerate a higher level of debt. And if you have too much debt and you have a recession, you get into what they called debt check. This is the big issue. "
"I am afraid it is overshadowed by political considerations. You have a financial crisis in Europe. There is the pressure of Spain and Portugal and so on. But debt is a different problem. Those countries are part of the European bloc and they are not in a position to issue their own currency. We can issue our own currency. In fact, the dollar is quite strong. It is really a matter of political judgment. That is where you have different opinions.”
"There is very a strong push to tighten the budget as a way to reduce government spending. It's a resistance to any kind of tax increase and tightening, particularly the budget of the states. The [U.S.] states cannot issue their own currency. They are in a similar situation to Spain and Portugal. There is a danger that by pushing this too far, you could abort the very fragile economic recovery that you are currently enjoying and push the economy once again into a slowdown or a recession."
"I rather fear these political forces will push it into a recession. In my opinion, the country could actually absorb some more debt in order to get the economy going.”
On the ECB vs. the Fed - who is doing it right?:
"Two different directives govern the European Central bank and the U.S. Federal Reserve. In the case of Europe, it's a one-sided directive. Their only job is to prevent inflation, and in the case of the U.S., it is more balanced, to maintain employment and financial stability."
On whether the U.S. dollar is still a safe asset:
"There's a big question whether the U.S. dollar should be the main reserve currency and in fact it no longer is because it maybe accounts for two-thirds of the monetary reserves. The euro is an alternative and there's a lot of diversification into other currencies and even more into commodities. Not only gold, but actually oil is now an asset class for investors. That has put some upward pressure on the commodities."
On whether the sovereign debt crisis has diminished euro's chances of becoming a reserve currency:
"The euro is under a cloud, but that is exactly because there are some inflationary pressures from the price of commodities, particularly now oil and also food prices have risen. That is what has induced the European Central Bank to raise interest rates at a time which is, in my opinion, quite inappropriate…It is not appropriate in current circumstances when you have a number of countries that are suffering from too much debt and high interest rates that they have to pay."
On China's economy:
"China has really stimulated its economy full force very successfully and now it is trying to rein in the rate of growth, and is exercising very strong constraints on the banking system. But because of that constraint, and because of the big demand for money, a shadow banking system has arisen and is growing very rapidly. So while the big banks under direct central control are in fact refusing to lend, there is a shadow banking system that is growing out of control. There is a real danger there of wage price inflation because prices have gone up, particularly real estate prices have gone up because there was a real estate boom."
"Therefore, wage demands have risen, and we now have 20%, 30% wage increases. The Chinese government has made a mistake not allowing its currency to appreciate, which would have controlled the price of inflation. Instead of that, we now have this wage pressure, which is a little bit out of their control."
On the Chinese economic approach and whether they did something right:
"[The Chinese] were the major beneficiaries of globalization. They were the big winners in the financial crash because their economy was largely isolated because they have capital controls on their currency. They have a two-tiered currency system, whereas the rest of the world allows free movement for capital, and you had a runaway expansion of credit and leverage which then resulted in the financial crash, and China was largely immune. So, they benefited tremendously."
"Their system, which really stands in contrast to the international system, international capitalism with free movement of capital, and then there is a system where the state controls the economy. That system actually has performed significantly better than the international system. So now it is beginning to be imitated by others, but I think it is a tremendous mistake, because that was just one particular set of circumstances when it worked better. They had an advantage because they were the only ones that were controlling capital flows. So as a result, they not only control their own currency, they effectively controlled the world currency system. Now other countries, defensively, are beginning to follow them. For instance, Brazil just doubled the surcharge on capital inflows. That is not good for Brazil, and it is not good for the global economy."