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When George Soros Broke the British Pound (2014)

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Re: When George Soros Broke the British Pound (2014)

#31
post #26

What I would like to see is what led to the pound being so badly mispriced in the first place. Did they just price it at whatever was the prevailing price? And was that why the Bank of England ended up with such small reserves? Presumably they could have priced it lower and bought up Deutschmarks to bring down the price of pounds and build up reserves to start with when they decided to fix it. There is also the quest…

Market prices for currencies reflect what you can buy with them. If a country's economy is strong, they're exporting a lot of things that the world wants to buy from them, and the world wants to invest in a bunch in a number of securities denominated in their currency, the currency will be strong. If the country's economy weakens (relative to other countries in the global economy), the currency will weaken. There could be a lot of potential causes for that. A generation of lazy people who don't work hard. Poor corporate leadership that has people building products that nobody wants to buy. Corruption and misincentives that encourage people to shift value around rather than producing value. The rest of the world suddenly building out their technology and capital stock and catching up to your economy.

Britain was the pre-eminent world power up through WW2, so there was a lot of historical inertia propping up the value of the pound. They recovered slowly from WW2, though, lost their position as world leader to America, and had a very rough 70s and 80s. The historical strength of the pound actually hurts in that regard: it makes their exports less competitive, which leads to industry moving away from Britain and a generation that has difficulty finding work. Through their 80s they still had much of their reputation as a world power (the Falklands war was fought over it); by the 90s it was becoming apparent that reality did not match reputation.

Re: When George Soros Broke the British Pound (2014)

#33
post #2

The "Soros broke the bank" framing I tend to see in discussions of this is really quite odd, as if it were some sort of illegal Oceans 11 style heist. He didn't break the bank. The bank broke itself. > What kept the pound from plummeting in value was the British government’s guarantee that it would keep the value propped up, and the market believed that it would. As long as everyone believed that England would stay i…

Breaking the bank is a gambling term where you make and win a bet the house can't cover.

It's very apt.

Re: When George Soros Broke the British Pound (2014)

#34
post #26

What I would like to see is what led to the pound being so badly mispriced in the first place. Did they just price it at whatever was the prevailing price? And was that why the Bank of England ended up with such small reserves? Presumably they could have priced it lower and bought up Deutschmarks to bring down the price of pounds and build up reserves to start with when they decided to fix it. There is also the quest…

It was a political choice. The idea was to avoid inflation and keep prices low for consumers. Of course the same action strangled exporters but they don't vote much...

Indeed, and that's also why the trade was so good. The pound couldn't possibly get much higher, but it could break and go far far lower. That's why Soros bet 200% of his fund on this position, huge upside with very small, tolerable downside.

Re: When George Soros Broke the British Pound (2014)

#35

It's interesting to read this with an eye on current global macroeconomic conditions. The dollar is significantly overvalued today, a result of its status as the global reserve currency. And the consequences of that are all the same ones mentioned for the pound in the article. The U.S. has been running a large current account deficit since 1980: we import more than we export. Our jobs are moving overseas, because it…

> The U.S. has stated that they're committed to defending the dollar as the world's reserve currency. What happens when they can't...

What happens if they already ain't? The narrative of the us$ being the reserve currency is old, but today it is even less convincing...

Re: When George Soros Broke the British Pound (2014)

#36

It's interesting to read this with an eye on current global macroeconomic conditions. The dollar is significantly overvalued today, a result of its status as the global reserve currency. And the consequences of that are all the same ones mentioned for the pound in the article. The U.S. has been running a large current account deficit since 1980: we import more than we export. Our jobs are moving overseas, because it…

U.S. dollar share of global currency reserves at lowest since 2013

> of the market is more than a national government can prop up?

The US is not propping up the USD like UK did.

Re: When George Soros Broke the British Pound (2014)

#40

It's interesting to read this with an eye on current global macroeconomic conditions. The dollar is significantly overvalued today, a result of its status as the global reserve currency. And the consequences of that are all the same ones mentioned for the pound in the article. The U.S. has been running a large current account deficit since 1980: we import more than we export. Our jobs are moving overseas, because it…

There are upsides and downsides to being a reserve currency though that other nations might not want to take on, a non nation state currency that wants/needs to inflate might be a better bet.

The US built up on the good side of being a reserve currency.

> The advantages of reserve currency status for the dollar are well known. The world’s willingness to accumulate dollar reserves in the post World War II period first removed and later reduced the requirement of maintaining balance of payments equilibrium, or, more specifically, current account balance. By removing or weakening this restraint, U.S. policymakers had more freedom than policymakers in other countries to pursue strictly domestic objectives. We ran current account deficits year after year, balanced, or paid for, by capital inflows from our trading partners. The good side of that was that we could import real goods and services for domestic consumption or absorption and pay for them with paper, or the electronic equivalent. In other words, our contemporary standard of living was enhanced by others’ willingness to hold our currency without “cashing it in” for goods and services, or, before 1971, gold. [1]

The US is in the bad side of this process now and losing because of the reserve currency status.

> The bad side of our reserve currency status, although seldom recognized, was that the very leeway that enhanced our current standard of living built up debt (and/or reduced foreign assets) to dangerous levels. I remember well when, in 1985, the United States ceased being a net creditor nation to the rest of the world and, instead, became a net debtor nation. Our net indebtedness has only grown over the years, and hangs over us like the legendary sword of Damocles. [1]

Every nation knows that being the reserve currency comes at great risk and harms middle class and internal markets eventually. It might even be a fatal flaw. What other country wants to take that on other than one with decades and decades of growth ahead of them and an already robust middle class they can devolve.

Being a reserve currency helps build up the middle class and then when you switch to debt, which is natural as a reserve currency, it slowly widdles it away. US is scraping the barrel and the middle class is all but tapped, stagnation and lower purchasing power since the 70s in lower/middle class is evident. Worker share of GDP being on a long dwindle down [2] and velocity of money is off a cliff [3].

[1] https://www.forbes.com/sites/bobmcteer/2013/09/05/reserve-cu...

[2] https://fred.stlouisfed.org/series/W270RE1A156NBEA

[3] https://fred.stlouisfed.org/series/M2V

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