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In my Commodities Essential newsletter a few weeks ago I spoke about George Soros. He’s in the thick of it again, and I’m talking about him again. But first, here are a few of my comments from January 27:  

Soros has an ability to put a finger on global capital flow and its catalysts like few others. The Alchemy of Finance is one of Soros’ books that predated the 2008 credit crunch and its fallout, but explains some of the key reasons why capital moved the way it did during that time.  

So when Soros plays dumb in a major media interview, people take notice.

He basically said that he has no real clue where to invest; he is scared of what might transpire in the coming years; he expects riots and violence in the streets (of the US).  

One wonders what provokes such concern from Soros who is a guy that knows everything about economics or at least knows someone who does. Not to mention, Soros has quite the global presence and connections to key policymakers.  

Here are a couple theories one could deduce, considering the above:  

1)      George recognizes the path to rescuing Europe is coming to a dead end and the eurozone’s collapse will be too much for the global financial system to overcome, leading to serious deflation and depression.

2)      George recognizes the path to reelecting Barack Obama is coming to a dead end and warding off a major, imminent great depression through addition fiscal and monetary stimulus will be Obama’s only chance at defeating the somewhat more fiscally austere GOP.

3)      Further on those two points, George recognizes the path to bringing the US into a new world order requires an admission that a collapsing eurozone will bring down the global economy and will require the US to devote resources to help build a global system of governance in order to manage an increasingly global economy.

4)      George is talking his book, setting the bar extremely low and buying in, hoping that when global economic Armageddon is avoided investors will become optimistic on better-than-expected data and bid up asset markets.  

Today read an interview revealing George is at odds with the austerity pressure on Greece, which is very much spear-headed by Germany and Chancellor Merkel. I recommend you read the entire interview at Der Spiegel – it is a good one.  

Der Spiegel seemed to do a good job at pressing Soros to explain the intent and seeming contradictions in his comments. Now let me try to do the same thing:  

SPIEGEL: Are the new austerity guidelines for countries like Spain, Italy or Greece too tough?  

Soros: They create a vicious circle. The deficit countries have to improve their competitive position vis-a-vis Germany, so they will have to cut their budget deficits and reduce wages. In a weak economy, profit margins will also be under pressure. This will reduce tax revenues and require further austerity measures, creating a vicious circle. Markets do not correct their own excesses. Either there is too much demand or too little. This is what the economist John Maynard Keynes explained to the world, except that he is not listened to by some people in Germany. But Keynes explained it very well — when there is a deficiency of demand, you have to use public policy to stimulate the economy.  

I take issue with this – there is no better-known force than markets at correcting excesses; and perhaps no better force than bureaucracies at creating excesses. Plus, the use of public policy very much depends on one’s definition of ‘demand deficiency.’ The deficiency Soros speaks of is simply a necessary market correction of excess and artificial demand, but it goes against his political philosophy to make such an admission. (Only a very limited amount of public policy usage can bring about growth/prosperity.)  

SPIEGEL: But it was the abundance of “cheap money” that was at the core of the last financial crisis. Would we not repeat the same mistake if we pledged billions of fresh money to countries in crisis?  

Soros: I know it sounds as though we are repeating exactly the same mistake. But let’s compare the situation on the global financial markets to a car that is skidding. When a car is skidding, you must first turn the wheel in the same direction as the skid. And only when you have regained control can you then correct the direction. We went through a 25-year boom in the global economy. Then came the crash in 2008. The financial markets actually collapsed, and they had to be put on artificial life support through massive state intervention. The euro crisis is a direct continuation or consequence of the 2008 crash. This crisis isn’t over yet and we will have to spend more state money in order to stop the skidding. It is only afterward that we can change the direction. Otherwise we will repeat the mistakes that plunged America into the Great Depression in 1929. Angela Merkel simply doesn’t understand that.  

What George doesn’t understand, or refuses to admit, is the failed policies that exacerbated the depression and made it so Great. It is suggested that a true, unimpeded cleansing would have been short-lived. But it would have greatly undermined the workings of a shadow banking system which was, to a degree, still in its infancy; but the interests were just as powerful.  

SPIEGEL: But you push for lower interest rates or access to “cheap money,” for instance. Both steps would help you as an investor.  

Soros: That is true. But it would also help all other investors and it would help to preserve the global financial system. In that sense, I am concerned with my own interests. But I am also retired and no longer actually managing the fund. Nevertheless, I think that I perhaps understand the financial system better than some of the people who are in charge. So, as a citizen, I feel justified in trying to give advice. I am not arguing for the policies I support to make a profit. I make it a principle in my advocacy to put the public good before my private interests.  

Again, I would imagine George is choosing to leave out just how intimately he knows the financial system. In fact, it is the current distortion of the global financial system that likely drives George’s advice. To wit:  

SPIEGEL: You have repeatedly pushed for the introduction of euro bonds. German Finance Minister Wolfgang Schäuble responded by saying: Euro bonds give the wrong incentives because you “spend money you do not have to pay the bills of others.”  

Soros: People like Schäuble don’t seem to understand that the heavily indebted countries are now at a severe disadvantage, because they have basically become heavily indebted in a foreign currency, the euro. They do not control it, and so they are in the same position as third world countries in Latin America were in at the beginning of the 1980s, where the countries became indebted in dollars. It was a situation that led to a lost decade there. Europe now faces a lost decade. That is the reason we need euro bonds and a new EU fiscal compact.  

Of course, find ways to create new demand for credit, as that is what greases the financial and public sector growth initiatives. Interesting that George brings up the Latin American crisis of the 1980s … because that’s when a majority of major US banks were on the ropes, insolvent based upon bad debts and overleveraging. The cure for banks then was to increase the profits made on borrowing cheaply and lending at higher rates, all facilitated by the Federal Reserve. European banks face similar insolvency, bad debts and junky collateral. The problem is that demand for credit does not exist and thus the ECB is trying to nurse banks back to life from said carry transactions i.e. inverted yield curve that ultimately subsidizes the financial system to the expense of consumers. A collapse in Europe’s banking system will be a systemic global event. It may damage much of what  George has worked to accomplish as the serfs lose more confidence in government to solve problems and will likely turn to the private sector.   

SPIEGEL: Do you also support the idea, as demanded by the Occupy movement, that rich people like you should pay higher taxes?

Soros: I do. And I do not support the Republicans who want to save me from paying taxes.

SPIEGEL: What is your tax rate?

Soros: My effective tax rate is relatively low, but only because every year I contribute at least the maximum 50 percent of my income to my foundation.

SPIEGEL: If you support the idea of higher taxes, then why don’t you just pay more taxes instead of giving the money to your foundation?

Soros: Because I think that my foundation uses the money better than the government does. In any event, I do pay taxes.

SPIEGEL: You are basically saying that you are smarter than the government.

Soros: Well, I have greater freedom of action than a bureaucracy. I also care more about the causes to which I contribute.

SPIEGEL: So how can you then turn around and tell other rich people that they should pay more taxes?

Soros: If every rich person gave 50 percent of their wealth to charity, I would not say they should pay more taxes.  

The truth shall set you free. Imagine that – letting private citizens allocate their own wealth based upon the causes they support.  

George, I have my own question for you: If you and your foundation can make better decisions than government, why support administrations who want to take more from private citizens?   

Maybe Warren can give us clues into George’s tax dilemma; from  

Warren Buffett is very much a political entrepreneur; his best investments are often in political relationships. In recent years, Buffett has used taxpayer money as a vehicle to even greater profit and wealth. Indeed, the success of some of his biggest bets and the profitability of some of his largest investments rely on government largesse and “coddling” with taxpayer money.  

Warren and George – separated at birth?  

So, should we be concerned with the direction Merkel is “steering” Europe? If it sets the stage for another 1930s redo, then yes; we should all be concerned as the probability this path cannot be avoided, regardless of all the good intentions, seems to be creeping higher every day.  

There is some good that comes with the necessary pain of deleveraging and deflation, eventual benefits from a market cleansing process elites and bureaucrats ignore in order to scare the populous and perpetuate a system that slowly corrodes the health of an economy while it enriches the power interests.  

The problem is indeed the common currency, as George alluded in the interview. But the solution is not to micro-manage a recovery in a flawed currency system, but rather to reform or remove the flaws. But that, of course, changes the structure dramatically in a way the micro-managers don’t want changed.