Posted on 27 June 2011 with 5 comments from readers
Billionaire hedge fund giant George Soros told a panel discussion in Vienna that the world faced a monetary meltdown focused on Greece and that the crisis was developing in front of our eyes.
‘We are on the verge of an economic collapse which starts, let’s say, in Greece, but it could easily spread, he said. ‘The financial system remains extremely vulnerable…
The reasons for a total economic collapse could be many. For instance, hyperinflation, financial market crashes, failure of automated trading systems, or even stagflation could contribute to an economic collapse. An economic collapse may be identified by serious economic depression, increased levels of unemployment, increased levels of poverty, and high civil unrest.
‘I think most of us actually agree that Europe’s crisis is actually centered around the euro. It’s a kind of financial crisis that is really developing. It’s foreseen. Most people realize it. It’s still developing. The authorities are actually engaged in buying time. And yet time is working against them.’
No Plan B
Soros has warned before that the European authorities were doing the wrong thing in playing for time. There is no Plan B. So we have the Greek parliament this week debating an austerity program that will be painful and fail.
It must fail because the cost of Greek debt is so high that the country will have to borrow to pay its interest payments. This is the death spiral of ever greater debts that inevitably ends in bankruptcy.
Only the replacement of Greek debt with a new European bond issued at low interest rates can salvage this mess, although it risks being seen as a free passport to ever greater borrowings. There is no sign of this happening whatsoever.
Hence Mr Soros is right to warn that Greece is the next Lehman in so many words. We are back to 2008 and on the brink of disaster.
Will the Fed come over the hill as the seventh cavalry with a QE3 program? That is what optimistic goldbugs led by Jim Sinclair seem to think will happen.
But the Fed would be taking a big risk in using its firepower in this way. For if it failed to work then its weapon cupboard would be empty.
Financial crises are by their very nature unpredictable beasts but if we follow the 2008 pattern then the markets would be allowed their collapse first and then an effort be made to pick up the pieces later on.
For adventurous investors this is a time to short stocks, other should sit on the sidelines in cash and bonds. Even gold and silver went down in 2008. Soros dumped them earlier this year but they may still be a better safe haven than most other assets.