
We live in a Financial World dominated by the collapse Europe, huge problems in the US, and the emergence of China as an ecomomic power (according to Soros, since the financial crisis started in the US in 2008, China became the motor of the global economy“).
In other words we are on the brink of colossal change.
Stir in markets at such extremes that in the case of the US Bond Market it is practically mathematically impossible for it to improve to any degree, and this may well be one of the the most important times in history to be paying close attention to really smart people like George Soros.
The Resistible Fall of Europe: An Interview with George Soros
Editor’s note: On May 12, George Soros was awarded the Tiziano Terzani Prize for his 2012 book Financial Turmoil published in Italy by Hoepli. The following interview is adapted from a press conference held in Udine, Italy, on that occasion.
SOROS: I have been very concerned about Europe. The euro is in the process of destroying the European Union. To some extent, this has already happened, in the sense that the EU was meant to be a voluntary association of equal states. The crisis has turned it into something that is radically different: a relationship between creditors and debtors. And, in a financial crisis, the creditors are in charge. It is no longer a relationship between equals. The fate of Italy, for example, is no longer determined by Italian politics – which is in a crisis of its own, I would say – but rather by the creditor/debtor relationship. That is really what dictates policies.
QUESTION: But the stock markets are apparently in good condition. Why do you think we are in a crisis? Do you think this kind of honeymoon will go on for a long time?
SOROS: The answer is no. We are in what I call a far-from-equilibrium situation. Therefore, it cannot last. But I am not in a position to predict the future.
QUESTION: The spread between German treasury bonds and Italian treasury bonds has decreased despite the current financial difficulty. Do you think this could delay the introduction of Eurobonds – which, if I am correct, you support – as a possible solution to remedy the current discrepancies among rates in Europe.
SOROS: Yes, I think it could, because this could continue, and the discrepancy in the rates would not disappear, though it would remain within a range that could be tolerated for an indefinite period. Of course, it would be a big handicap for Italy, making it m
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Interview with George Soros
Complete transcript of an interview with George Soros in Hong Kong on April 4, 2013.
Chinese Economy and the new Leadership
Q: What do you think of China’s economic performance in the past year?
A: Since 2008, when the financial crisis started in the US, China became the motor of the global economy. It became the driving force moving global economy forward. China’s economy is much smaller still than the US. It is smaller than the US consumer [economy]. Therefore, the growth has been slower since 2008 than it was before. So I rate China’s contribution quite high.
Q: What are the main threats to the Chinese economy?
A: They are partly external, because of the slow growth, and the inability of the global economy to continue to absorb the ever-increasing Chinese exports. And internal, because China has to change its growth model. China has to reorient itself from export and investments to domestic consumption.
It is going to be a very difficult transformation, because the household consumption is only 1/3 of the Chinese economy. Exports and investments are 2/3. The growth of 1/3 cannot make up for the slower growth in the 2/3. Therefore, the overall growth rate will have to be significantly slower than it has been up to now. That is a very important point.
I don’t have enough knowledge to have an estimate [of China’s GDP growth rate this year], but the official estimate is 7.5 per cent. The important point is that it is less than the 8 per cent which was considered sacrosanct until now. It was in fact significantly exceeded in reality. That means significantly lower growth.
Q: What will China’s economic transformation be like in a few years?
A: I think the period of rapid growth when the overall economy was growing more than 10 per cent in reality is over, and it is unlikely to recur. It is a phase of growth that occurs at the early stage of economic transformation, and it does not occur in the more mature phase that China is today entering.
Q: What do you expect from the new government after the new leadership took power?
A: I believe they are aware of the need to make this change. I should have said earlier that this change doesn’t necessarily have to occur today — the old model can last for another year or so, but it cannot last another 10 years. Therefore, the new leadership that has to think in terms of 10 years must embark on this change, especially that, in my opinion, the change was already delayed by the previous leadership which only had one or two years to go, and therefore they extended the life of the old model. That actually creates additional problems for the new leadership because with the extension, some serious imbalances have developed in the last year or so.
Shadow Banking
Q: What are the imbalances?
A: By stimulating investments, the capacity of industry increased, but the market didn’t increase enough. Therefore, the profitability of production, both of export and of investment themselves, declined. That creates financial problems — it increases the bad loans that banks have made. And also, the government has started cutting back on the availability of cheap credit. Therefore, particularly the real estate companies were forced to borrow in the quasi-bank markets. And that borrowing cost is much higher, at a time when the investments were less profitable. When it comes to repaying the loans, there may be some difficulties in collecting the money.
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