Britannia Radio

Soros: “There is a General Flight from Currencies”

George Washington Blog
Friday, October 16, 2009

Given that countries world-wide have been running their printing presses night and day, are investors starting to get nervous about all currencies?

Well, George Soros said at a conference the other day:

There is a general flight from currencies.

And Andy Xie writes:

At a recent lecture I gave in Hangzhou, one wealthy member of the audience said:“Property may be 100% overvalued. But I will still get half when it comes down. Paper money will be worth zero.” The allure of this latest tale is that the economy doesn’t matter. If the world is in recession, so what? If stock and property markets collapse, so what? We just run away from paper money, right? Better to borrow to buy assets. This is where bank lending policies come into play. But the more willing the banks are to lend, the hotter the asset markets become…

Paper money loses value over time at the rate of the difference between inflation and interest rates, so if the inflation rate is 6% and the bank deposit rate is 2%, paper money loses 4% per annum, or 0.33% per month. Stocks and properties in China may be 100% overvalued, with only two decades of relatively high inflation justifying their prices. However, persistently high inflation leads to currency devaluation, which triggers capital flight and, eventually, an asset market collapse. This story simply won’t hold together for long.

A case in point is the US Savings and Loans crisis of the late 1980s and early 1990s. The US Federal Reserve kept monetary policy loose to help the banking system. The dollar went into a prolonged bear market. During the descent, Asian economies that pegged their currencies to the dollar could increase money supply and lending without worrying about devaluation, but the money couldn’t leave home due to the dollar’s poor outlook, so it went into asset markets.

When the dollar began to rebound in 1996, Asian economies came under tightening pressure that burst their asset bubbles.

The collapsing asset prices triggered capital outflows that reinforced asset deflation. Asset deflation destroyed their banking systems. In short, the US banking crisis created the environment for a credit boom in Asia. When US banks recovered, Asian banks collapsed.

Is China heading down the same path?

Does this confirm what John Exeter, Antal Fekete, Darryl Schoon and maybe even Alan Greenspan have been saying: that when investors lose confidence in fiat currencies, they move into gold and other hard assets?