Saturday, 18 April 2009

Soros and Sterling

Yesterday I was walking back from my lunch break, and I stopped to pick up a coffee. Having no cash I nipped to the adjacent ATM machine to withdraw a 10 pound note. Disintrested and my mind completely elsewhere I put my card and followed the all too slow process of withdrawing cash. In automatic motion I clicked the buttons and saw some thing yet my fingers were still pressing and I had my cash before I vould realize that this ATM machine gave me the option to withdraw euros. Now I found that rather strange. It was Liverpool Street station and Stansted airport is on the route but I I had just finished George Soros' book, and a few thoughts came to mind. The dollar is looosing ground, but is it thathappening THAT fast?

Soros, in his book, The New Paradigm for Financial Markets : The Credit Crisis of 2008 and What it Means, talks about how the dollar is loosing ground. Now what I like about Soros, that he acknowledges some important events and if he was not a financier, I bet he would have made a good historian. He talks about the Arab Oil Embargo of 1973, when the recycling of Petrodollars by the banks pushed the dollar to become the world's currency. (Funny how the oil embargo served rather than tarnished Western domination - well, it did negate Keynsian economic theory though, so Arabs did have some effect on the 20th century). Countries with weaker currencies, with weaker currencies and unstable economies, either used the dollar as a reserver currency, pegged there currency to the dollar, or those going the distance, dollarised their currency.

According to Mr. Soros, who, for the sake of entertainment, graduated from LSE the same year Paul Volker, the ex-Fed chairman and now heads Obama's Economic Advisory board (they graduated in 1952), thinks that the days of the dollar as the world currency are numbered, if not over.

According to Soros, the international financial system is under the control of number of financial authorities representing the developed countries, mainly the IMF, the World Bank, and if I will allow my self to add to that the SEC and the FSA, which both are watchdogs for the financial centers of New York and London respectively. These institutions, as he says, are "more equal than others". They constitute the Washington Consensus. The Washington Consensus is a set of "10 commandments" for countries to adopt as policies for economic development (such as privatization , free trade, tax reform and similar neo-liberal guidlines, and of course, deregulation), and in exchnage they receive aid from the Bretton Woods institutions. This leads to a globalized economy, and the way the system is structured, the United States, and to decreasing decrease the UK and the world's biggest economies enjoy veto power.

This structure, and specifically the deregulation that was so strongly encouraged, looks great when its working, yet when a sever crisis such as the current one comes a long, it shows how fragile the system is, and it all comes crashing down. With the car industry failing, the banking in shambles, and the housing market crashing, the US will be forced to into converting some of its reserves held in bonds , and some of its assets into cash to finance all these rescue packages and TARP funds.

The dollar is loosing ground.

"The invasion of Iran has much to do with the rise in the price of oil and the unwillingness of the rest of the world to hold dollars. This will reinforce and extend the current commodity boom and create inflationary pressures. The decline of the dollar as the generally accepted reserve currency will have far reaching political consequences and raise the specter of a breakdown in the prevailing world order. Generally speaking, we are liable to pass through a period of great uncertainty and destruction of financail wealth before a new order emergrs." (Soros 2008).

Soros should know a thing or two about currencies. He sure knows about the sterling, as he almost single handedly broke the Bank of England in Black Wednesday in 1987, when the BoE withdrew the pound from circulation before the markets closed. He should know about the dollar as well I guess, he did co-author a book with Paul Volcker !

Which brings us back to the ATM machine in Liverpool Street. Is the Euro the new currency? Or is it just the bank being clever, trying to get customers, or is it the customers demanding euros in atm machines? I talked about the Amero and the Khaleeji in a previous post, but, all these are pretty much either in the not-so-near future, or may never even materialize, but with the sterling at just 1.1 against the euro, I am thinking, is this the end of the Pound?

Probably not, but this ATM sure yanked my chain....or did it?

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