George Soros, speculators and the Bank of England

The man who broke the Bank of England

George Soros is known as “the man who broke the bank of England”, one of the most famous speculative trades in history.

In those years, hedge funds were not as “popular” as today, but they already played an important role in the investment world.

However, contrary what the people think, they are not responsible for the great moves of the market, neither they were responsible for the “Bank of England´s bankruptcy”.

George Soros Bank of England 1992

In other words, it was not George Soros or any other speculator who forced the Bank of England to devaluate. It had to devaluate the pound, with or without hedge funds.

The fact that there exist hedge funds is just a mere anecdote.

Everything started with the creation of the ERM (Exchange Rate Mechanism), with which some European countries compromised to maintain quasi-parity with the German mark.

Those currencies, including the pound in 1990, could not fluctuate more than 6% against the mark. That was an abandonment of the free exchange rate model for a fixed one.

Countries which wanted to maintain equilibrium would have to make sure that their currencies would not fluctuate too much.

This was the first attempt to build a sort of European currency.

As in any case in history, every attempt to maintain parity without fiscal and political union has failed. For that to happen, you only need slightly different labor and fiscal policies.

George Soros European Union

We have had, and still have, something similar with the creation of the euro. It is a similar concept, but with more political integration. All participants in Europe compromised to maintain certain limits.

Evidently, for that system to work, an equal fiscal and political union should occur. As with the pound in 1992, there are only two ways: more integration to Europe, or the break-up of the euro. Which will be the chosen way?

It is clear that elites are looking for the total integration, a way that seems logical if we analyze human cycles coldly.

George Soros saw clearly that the pound was overvalued against the rest of the major currencies. It was only a matter of time before the pound had to devaluate, with or without Bank of England intervention.

Let´s put an extreme example. Suppose that there are two countries that agree to form a ERM.

After some years, one of the countries has a sort of “Bolivarian” government, similar to Venezuela. In that case, the private economy of that country would collapse, as well as foreign investment in the country.

Nobody wants to invest in a country that is threatening you with confiscation.

How long do you think an ERM between Germany, and Venezuela would last?

George Soros England Bank

The English case did not need anything so extreme. The exchange rate in 1992 was simply not sustainable for the pound. Fiscal, economic and monetary conditions could not be maintained with respect to the German mark, unless the Bundesbank adopted a radical devaluation. As it was not the case, the only way was a devaluation of the pound or the Bank of England rising rates to 30% (for example).

However, the English Government knew that it could not raise interest rates to 30% without a major collapse of the economy.

What I mean is that it was not Soros the man who broke the Bank of England, but it was the Bank of England the one who broke itself.

Rather, it was the English public, with its monetary and fiscal policies of the last years, the one who broke its own central bank, which could not maintain the initial conditions.

Conditions which were too good for the British public when they were made. It could also be seen as if it was the German Bundesbank which broke the Bank of England when it refused to destroy (subsidize the English) their monetary policy.

With all those circumstances, it was a matter of time before the pound collapsed.

“It takes two to tango”

George Soros Sterling bet

The ones who read the situation correctly, like Soros, benefited from it.

After all, the work of a man like Soros is being right more often than being wrong. In case he failed to do that he would be unemployed.

The civil servants in the Bank of England are different. They will keep their jobs whether they are right or they are wrong. Who,  you think has more motivation to be right?

When Soros and other hedge funds sold so many pounds in that market, there had to be counterparties in equal size. In that case, if the English Central Bank workers were intelligent they would wait for the pound to collapse, before buying, knowing that it would recover in due time.

Their defense of the pound was helpless, but not because of any Soros “attack”, but because the fundamentals of the trade were too obvious.

Soros, or any hedge fund can have a profit if there is no one wanting to take the other side. In addition, there were hedge funds which profited from the trade, there were others which took serious losses.

It was not Soros who made the pound to devaluate.

It was not any hedge fund which makes the Venezuelan bolivar depreciate as it does every year.

It is no any speculator that forces the Zimbabwean dollar to collapse as it did.

It was not any speculator that sent the Saint Petersburg Stock Market to zero in 1917.

It was not any speculator who made the Greek Stock Market collapse a 95%.

The Greek market fell because the fundamentals of their economy were (and still are) so bad, not because any guy like Soros “shorted” it. Likewise, there will be a day when the Spanish Stock Market will completely collapse because the fundamentals of the economy are horrendous, not because any “evil” speculator is destroying its (pathetic) economy.

Unfortunately, the masses will always think that it is the speculators the ones responsible for their sufferings, but nothing further from the truth.

The masses will, some day, make possible that the “speculators” will not break any other central bank, or any stock market or economy.

Nevertheless, that day, will be a very sad day for the World, because that day we will have entered the Socialist Era.

  1. Another question is that Soros, through his contacts in the big banks, may have access to privilege information, with which his operation could be benefited. Question that is irrelevant for the collapse of the pound in 1992, which would have happened anyway, with or without Soros.

 

P.S. This is a personal translation from my spanish blog www.brokerparacompraracciones.com.

Thanks for reading and sharing.