George Soros, speculator and proud
By Alberto Mingardi
George Soros has a new book, “The Tragedy of the European Union. Disintegration or Revival?” that consists of a series of interviews with Gregor Peter Schmitz, Europe Correspondent for the German magazine Der Spiegel. The book is sometimes very interesting and insightful, sometimes plainly, even ostentatiously, “politically correct.”
Soros is a complex figure. He belongs to the American left, which he generously funds, but he also played a very important role in fighting the remnants of communism on the cultural ground, in Eastern Europe. He blames the crisis on “market fundamentalism”, but he does not spare regulators and central bankers. His theory of “reflexivity” was built upon reading Karl Popper, but is not completely unappealing to Austrian economists. A few years ago he was invited to the Cato Institute to debate a new edition of “The Constitution of Liberty” (the one beautifully edited by the late Ronald Hamowy). He was confronted by Richard Epstein, who was merciless in pointing out that Soros (or his speechwriter) did not really “get” the book. However, I would venture that some of what he said on that occasion may have not displeased Hayek. Personally, I found his short essay “My Philanthropy” a very insightful piece on the subject.
In this series of interviews, Soros talked with Schmidtz at length about his well-known set of favorite subjects: his theory of “reflexivity,” market fundamentalism, the need to raise taxes on the rich, et cetera.
However, Soros also defends–rather effectively–speculation. “There is very little difference between speculation and investment,” he argues. “Basically, the only difference is that investments are successful speculations, because if you successfully anticipate the future you make a speculative profit.”
He illustrates his thinking with the following passage, where he strongly emphasizes the signalling value of speculation.
Schmitz: But when you speculated against the British pound, the United Kingdom had to leave the European Monetary System. That led to chaos in the markets while you made a fortune basically overnight.
Soros: Look, even if I had not speculated against it, the British pound would have been devalued. There would have been a sterling crisis without me. When the markets are as large as they are in major currencies like the pound and the former deutschemark,no single investor can have any lasting effect. If I had been the only one speculating, my speculation would not have been successful. I succeeded only because the rest of the market was doing the same thing. It was not my actions but Britain’s policy of keeping the pound overvalued that led to chaos. More specifically,it was the policy differences between the British and German central banks that caused the crisis. I was merely better than others in detecting these differences and better in betting on it.
Schmitz: That is a very convenient excuse. Someone else would have won it. How exactly did you try to improve the system in the case of your speculation against the pound?
Soros: I was not trying to improve the system. I was speculating that the pound would have to be devalued,and I was right. So I made money. If I had been wrong, I would have lost money. But a weakness in the system was exposed by speculators like me, and that is ultimately a good thing. The forced devaluation of sterling, which made me so famous, actually had a very beneficial effect on the British economy, as almost everyone subsequently agreed, including John Major and even his finance minister, Norman Lamont, and central bank governor Eddie George,who spent billions trying to fight off the speculation.In fact, Britain emerged from recession within months of the devaluation and then enjoyed its longest ever period of steady non inflationary growth. I am not trying to take credit for helping the British economy in this way–I am just pointing out that, in this particular case, my successful speculation had a clearly beneficial result. To use a Marxist term, I shortened the birth pangs of an inevitable event.