George Soros: Bad Recession, Maybe a Depression

Apparently, Americans like the way the economy has turned since the Democrats took control of Congress in January 2007, we just voted for more of the same. If you hate corporate America, you probably like what has been going on since 2007.

Although the Democrats came to power by promising to abandon the neoconservative goal of democracy in Iraq and freedom in the Middle East (which they label as "worse than Saddam") and elsewhere, the Democrats' strategy this cycle, which worked, was to achieve enough stability in Iraq and in the war on terror to take that off the table while weakening the US economy and engorging the deficit, and then to make the election about economic weakness. So they fully funded the war in Iraq, including the surge, but opposed free trade, supported bailouts, attacked credit markets, raised the minimum wage, and supported a tax disadvantage for investment income. And they enlisted the help of Soros.

Soros got rich shorting the Pound until the Bank of England had to stop trying to maintain it. He makes a lot of money in the doom business. He calls his philosophy "reflexivity", and the idea is that uncertainty in markets can be created, and because the act of betting on weakness helps create that uncertainty you can make money with the vicious cycle you create. (You can also, according to Soros, make money by creating upside bubbles and "virtuous cycles", but that is more difficult because it is easier to undermine confidence than to create it--as Warren Buffett recently discovered.)

Almost certainly Soros has put a lot of money into helping the Democrats to weaken the US economy, and now wants to unwind his positions into continued weakness. Once his bets are hedged, he can change his outlook and then start covering his short positions and making money on the rebound. I guess it is called "being smart".

I suspect that, as with most predators, it will turn out that Soros's tactics are actually beneficial in the long run, since the way to combat his tactics is to think independently, to question the common wisdom when it is feeding itself, and to hedge your bets. Even without Soros, these cycles would happen, but Soros teaches us how and why they happen.

Mazzula of VA 12:17PM November 14, 2008