Soros Sees End of Dollar-Backed Credit Expansion

[EV_Ares]

(Updated)

By Edward Evans and Jenny Strasburg

Jan. 23 (Bloomberg) -- Billionaire investor George Soros said the post-World War II era of easy credit backed by the U.S. dollar will end as the nation's economy slips into an ``almost inevitable'' recession.

``The current crisis is not only the bust that follows the housing boom, it's basically the end of a 60-year period of continuing credit expansion based on the dollar as the reserve currency,'' Soros said in a debate today at the World Economic Forum in Davos, Switzerland. ``Now the rest of the world is increasingly unwilling to accumulate dollars.''

A U.S. recession is all but certain as lenders and investors stop the flow of credit, while the global economy probably will avoid contraction, Soros, 77, said later in a Bloomberg Television interview.

``I think it is almost inevitable that the turmoil in the financial markets will affect the real economy,'' said the founder of New York-based hedge-fund firm Soros Fund Management LLC, which has $17 billion in assets. China and India are benefiting from globalization to a degree that ``I don't expect a global recession,'' he added.

Rising defaults on U.S. subprime mortgages spread to broader credit markets in August, hurting the U.S. economy's main engine as banks cut money for consumer lending. The U.S. Federal Reserve, which yesterday announced its first emergency rate cut since 2001 in an effort to calm U.S. recession worries, is ``doing the right thing, lowering interest rates,'' just not quickly enough, Soros said.

Behind the Curve

``I think the Fed is well behind the curve and has been reacting instead of being proactive,'' he said, adding that the primary blame lies with former Chairman Alan Greenspan.

``Alan Greenspan mishandled it by keeping interest rates too low too long and also ignoring dangers in the housing market,'' Soros said.

The U.S. dollar will remain ``the most important reserve currency,'' Soros said. ``This is the end of credit expansion based on the mistaken belief of market fundamentalism, that you should let markets have total freedom.''

Inflation Risk

Rising commodities prices prove the presence of inflationary dangers, meaning the Fed ``can go too far'' in cutting interest rates, according to Soros. Crude oil rose to a record $100.09 a barrel Jan. 3, and gold for immediate delivery reached a record $914.30 an ounce Jan. 14.

``You do have inflationary pressures coming into play,'' Soros said in the Bloomberg Television interview.

In 2005, Soros passed control of his hedge-fund firm to his sons, about 15 years after he backed away from day-to-day management of the firm to concentrate on philanthropy. He resumed a bigger role in investing last year.

The firm's Quantum Endowment Fund returned 32 percent in 2007, thanks to winning bets on currencies and Chinese and Indian stocks. The gain outpaced the 10.4 percent average return of hedge funds globally, according to Chicago-based Hedge Fund Research Inc.

Soros made $1 billion in 1992 betting against the pound, forcing the British government to abandon a peg to a basket of European currencies. He was also the biggest financial backer of the failed effort to prevent President George W. Bush from winning a second term. The euro has gained 55 percent against the dollar since Bush entered the White House in January 2001.

Hedge Fund

In April 2000, after chief investment strategist Stan Druckenmiller and portfolio manager Nick Roditi left the firm, Soros told investors he would change the risk profile of his fund, reducing target returns to about half the 30 percent average achieved under the guidance of Druckenmiller, who took over day-to-day management of Quantum in 1989. Druckenmiller was central to Soros's money-making currency bets in 1992.

Soros Fund Management this month named BlackRock Inc. co- founder Keith Anderson to be its new investment chief, replacing Soros's son Robert, 44. Anderson, 48, starts next month.

``It's an extremely difficult, very, very trying period for investors,'' Soros said in the Bloomberg Television interview. ``People who get it right and pick the bottom will come out ahead, and people who miss it will suffer the consequences.''

Link to Bloomberg story: http://www.bloomberg.com/apps/news?pid=20601170&refer=home&sid=aaqgpmbosZVM

[Winterblues]

1. But Debt and "Deficits don't matter, Reagan proved that" says Cheney.

I am sure Cheney knows exactly what he is talking about. He has been right so damn often....:sarcasm:

[originalpckelly]

2. I bet he does.

He'll probably make a bundle off of the dollar devaluation.