He is Chairman of Soros Fund Management LCC, a private investment management
firm that serves as principal advisor to the Quantum Group of Funds. He is the
author of The Crisis of Global Capitalism.
When you, as an investor, as a trader, look out at the world, six months,
nine months down the road, what kinds of things are you looking for?
The financial markets generally are unpredictable. So that one has to have
different scenarios ... The idea that you can actually predict what's going to
happen contradicts my way of looking at the market.
Actually, I see tremendous imbalance in the world. A very uneven playing field,
which has gotten tilted very badly. I consider it unstable. At the same time, I
don't exactly see what is going to reverse it. Certainly, a slowdown in our
economy would leave the world extremely vulnerable, because the U.S. economy
is, today, the single engine that is driving this very big plane. So if that
engine were to conk out, you'd have a very serious problem. It's a question
[of]: Can you repair the other engines before this one gives out? Because even
though people say that we live in a new world, and the past is not relevant ...
cyclical fluctuations are not eliminated. That's my main concern.
... I just want to clarify ... that what you have is a very uneven playing
field. You have excess liquidity at the center and a great deficiency of
capital at the periphery. The money is still flowing from the periphery towards
the center. So we ought to find a way to inject liquidity in the periphery.
Instead of that, we can only inject liquidity at the center. The Federal
Reserve can lower interest rates, and has done so.
What you need is a mechanism to provide capital to countries like Brazil, which
is where money is fleeing. Interest rates are very high. The country is going
into recession. So this is what creates a tremendous imbalance, at the moment,
which is not sustainable. It could lead to ... if this engine now gives out,
then you have a problem.
I mean, in fact, there is a certain danger that because of the injection of
liquidity, our financial markets have become overheated. You have signs of
speculation, excessive speculation in areas like Internet stocks, and so on.
You could conceivably have at some point a crash that would then have negative
effects on the real economy ... In this country. And then, indirectly, on the
rest of the world ...
He is a Washington-based journalist who has worked in newspapers, magazines
and television for over 35 years. His most recent book is One World, Ready
or Not, The Manic Logic of Global Capitalism.
Many people think this crisis, that's been with us for the last 19, 20
months, is over. What's your view?
My view is nobody knows yet whether this is over or not. But I would remind
people, we've had three or four false dawns in the last two years where the
newspapers began reporting that recovery was in sight. Almost always those
judgments were based, not on the real economies in the world, what people were
doing and producing and buying, but on financial indicators.
This present moment is very much based on some currencies in Asia that got
hammered a year ago, have recovered a bit and now seem stable. Stock markets
are reviving in some countries. If you look at the real economies, what's
really happening to industry and commerce in those countries, they're still
very negative. So I will feel like we may be coming out of this when I stop
seeing unemployment rising in those countries, stop seeing so many bankruptcies
increasing--indicators like that, the real health of the economy.
We have, what, 40% of the world in recession or depression still?
Yeah, and we have something like half the world in recession or depression. The
German economy, which is one of the big [ones], has been contracting for two
quarters now. People in Europe are very nervous about a European-wide
recession. The U.S., it's true, keeps chugging along. On the other hand, we
have a negative personal savings rate. People are spending more than they're
earning, despite the fact that wages have been increasing. We have falling
profit rates ...
If you were a person who had his or her retirement savings in the stock
market, would you be worried?
Yes ... I'm among those who felt it was an inflated price bubble for a long
time, several years, and it keeps going up, defying all sorts of predictions.
Nevertheless, one of two things has to happen. Either the stock market will go
down considerably. We hope not all at once, but dramatically ... or those
people who have invested their money in the stock market are going to be
disappointed by the return. Just simply by the arithmetic--if you paid an over
valued price for a stock, you're going to get a smaller return than you
anticipated. I don't think we can escape from one or two of those
When people discover that that's the case, that they're not really going to get
that 12%, 15% appreciation in their money, maybe they will accept that maturely
and simply accept it. History tells us that that's not what happens. What
happens is people say, "I'm getting my money out of here, because I'm not
getting what I thought I was promised by the market. So I'll put it somewhere
else." If a lot of people do that at once, then you've got a financial panic
... ultimately, the problem in the stock markets--you can argue over whose
numbers you're using--but basically those stock markets are predicting a
continuation of extraordinary profit levels, double digit profits from companies
at the very time those profit rates are coming down and have been for a year
and a half now.
Somebody's got to be wrong. I don't think it's the companies. They can see
what's happening ... The collapse in demand in overseas markets and the falling
crisis for goods ... that put a squeeze on American companies even if they
aren't big overseas exporters, because you've got all these foreign goods
pouring in here. It makes it impossible for a company to raise its prices.
Probably it has to cut prices. That squeezes profits. If you squeeze profits
long enough, then the company's got to cut back on new investment. You see
you're in a chain of bad events. That's where we are. Maybe we'll glide out of
it and bottom out and things will turn around, but I wouldn't bet my mortgage
on that at this point.
Looking at the global economy, you think we're at a critical moment and that
we have been for the last year or half year. What is your sense? What is it
The critical moment that faces the global system now is: Will governments be
wise enough to learn from these catastrophic events and reform the system? That
is, impose some rules on, particularly, global financial markets, but some other
aspects as well. Not to shut it down, but to keep it alive and moderate its
pace and help countries protect themselves against the ravages of fickle
financiers running in and out of their economy.
I am gloomy at the moment because I don't see much prospect of those reforms
being done seriously in a timely manner. If they're not, then it is very clear
that we'll be back in crisis, whether that's six months or 18 months or two
years from now, I don't know and nobody else could say. But the fundamentals
are now clear and we're not acting on them ...
He is a well known military strategist and consultant, and Senior Fellow at the
Center for Strategic and International Studies in Washington DC. He is the
author of Turbo Capitalism: Winners and Losers in the Global Economy.
Do you think the possibility of a global recession, if not depression, is a
very real one right now?
As we speak, the possibility of a global recession is a very real one. On the
one hand, you have the base of the world economy. You have the impoverishment
that comes from very low commodity prices stretching from Wisconsin to Chile,
Wisconsin pork bellies, Chile copper, everything in between, the oil in
Venezuela, and so on. It affects entire countries ... Somebody should be out
there pumping demand into the system. Instead of pumping demand, we have the
United States running a surplus because of the politics of it.
... Now, what was avoided would be the coherent, united, harmonious, and smart
intervention by the authorities. Given what happened last October when the
crash took place, there were some waves and panic, and people were suddenly
afraid that they wouldn't have a pension, their mutual funds would disappear.
People asked themselves how much money they still had invested in the
old-fashioned way, you know, just by putting it in bonds and banks.
At that moment, there was no harmonious response. It was all done by the
American Federal Reserve. Alan Greenspan and the Federal Reserve acted.
Everybody else talked or did nothing ... I don't think [the Federal Reserve is]
going to be sufficient to prevent the [next] crash, which will come sooner or
... It's like having a great ball there on the top of an incline of a slope and
when accelerated down, the only thing supporting it is just the Federal
Reserve, the American regulatory financial and control system, because no
global mechanism has been set up; no coordination has really been set up
between the American and the Europe and the Japanese economic controlling
At most, there is a liaison between the central banks, but they only control
monetary policy, so we have a contradiction here. We have a global economy with
no global financial control mechanism. Therefore, a crash is only a question
He is the former Deputy Undersecretary of the Commerce Department under the
Clinton administration and is now president of an international advisory firm.
He is also an adjunct professor of international and public affairs at Columbia
You ... [have] compared global economics to plate tectonics ...
... When you look at the global economy, one way to view it is using a plate
tectonic model where there are fault lines all the way around. When there's a
shift of one of these fault lines, particularly a big shift, it can be felt all
the way around the world and we saw that last summer.
There was a fault line underneath the Russian economy. It shifted. The impact
was on Brazil where there was another fault line which shifted and caused a
problem throughout Latin America. You saw that with the Asian financial crisis
where there were fault lines under a number of these economies that we reset
into disequilibrium as a result of too much capital and too many
foreign-denominated loans coming in while currencies were valued wrong ...
Well, that fault line moved and what happened? Demand fell off enormously, and
that's how the energy was passed through this system of economic plate
tectonics, if you will, and it affected the countries of Latin America. Why?
Because most of them export commodities--40% of Chile's exports is copper, and
40% of their exports goes to Asia. So at that time all of a sudden you've got a
consequence in Chile.
Even to this day there are fault lines that could shift and could set off
another set of these things. Wall Street with an Internet bubble in the middle
of it is a fault line. Japan with a weak financial system and uncertainty about
whether the government's latest round of reforms after round of reforms over
the course of the past decade, are going to work is another fault line. China,
with the value of the yuan and whether they're going to devalue, is another
fault line. A spreading war in Kosovo, a conflict in the Middle East near the
source of oil, these are fault lines that exist out there. We have to recognize
that in the global financial system right now these aren't isolated, these
aren't remote from us. They can affect us and they can affect other markets in
a fairly immediate way.
So you don't think that this rolling crisis is over?
... Personally, I'm a little worried because I think there is a bubble in the
middle of the Wall Street economy. No one should have any confidence in the
Japanese ability to fix their problems, because they haven't been able to do it
so far and they haven't taken sufficiently dramatic steps, although they may.
The Chinese could be spooked by a variety of other things and need exports to
produce hard currency ... We are still in an era or period in which confidence
is not restored, and until it is restored, until there is a deep sense that
we're back on the upward track, we stand vulnerable to upsets like the upsets
we've seen in the past year.
Is there a danger that the wrong lessons are being drawn from the crisis of
the last year and a half, two years?
... Not only is there a danger, there's a certainty that the wrong lessons are
being drawn by some people. By most of the people at the center of the
international financial system, are the wrong lessons being drawn? I don't
know. I don't see the IMF being highly responsive to this. I don't see it
having learned its lessons. I see that lending $5 billion more to Russia seems
to me to be at best an accounting transaction, at worst another waste of money.
I see still an absence to be able to address questions of social equity in an
effective way, and so these things will take a while to formulate, but the
general trend within the markets is to be fairly thoughtful about this at the
highest levels, and there is a general movement toward understanding things
Part of the problem is that in emerging markets, just as some of them are not
highly liquid financial markets, they are not highly liquid information
markets, and as a result a little bad information can cause quite an upset just
as an inflow of too much money or an outflow of too much money can cause quite
an upset of these markets.
So they're still volatile? They're still erratic?
Volatility is the toughest issue to deal with because the pipelines are getting
bigger and bigger through which money goes. It allows it to go in quickly. It
allows it to go out quickly. The amount of information people have allows them
to make decisions very quickly. The mentality of a lot of these investors is
not a long-term mentality in terms of the portfolio investors, and volatility
is a big risk for a lot of these places. That's why you'll see some kind of
modified capital controls in a lot of these countries growing even though that
has not been for a long time the policy of international financial
It's just inevitable in a medium- and a small-sized country that they want to
protect themselves against that kind of disequilibrium. You will always see
greed and self-interest drive markets to places that reason wouldn't.
He was a top portfolio manager for George Soros's Quantum Fund, a private
investment fund, from 1992 to 1995. He left the money management business in
It's like we're talking about some chess game in the sky. Most of us don't
even have any idea ... that this game is going on.
Yes, I think that's partially true. The nature of the abstract thinking that's
going on in the investment community is sometimes discernible through comments
you see in the financial pages. But the way in which all of these prices that
affect employment and how goods are bought and sold and what countries
experience boom and which countries are in stagnation, I don't think that that
connection between how the investor-trader world is setting prices and then the
real consequences is well established.
Or well known to ordinary folks ...
... We're seeing Russia, much of Latin America, most of Asia, go through
episodes in their economies, in their economic life, that are as deep and
damaging and painful and profound as the Great Depression was in the United
States. At the same time, the United States is an economy which is
characterized by its proportionately smaller exposure to international trade
and international influences, and our stock market's at an all-time high. We're
at a time when people are almost religious in their worship of markets. The
market is now our master. If you espouse a social goal in America today,
someone will say to you, "No, the market won't support that."
The market is a tool. We should have a political and social consensus on what
our objectives are as a society and use markets to facilitate that. But now the
servant's the master. It's almost as if the market is a religious icon. I see
that mirrored in the very, very high valuation of the United States stock
market and the tremendous conviction that citizens have throughout the country
that the United States is good, is right. The free market is great, and the
stock market is where you put your money.
People used to put their bank balances into gold or bank accounts or CDs,
so-called safe things. The stock market was considered risky. Now the stock
market is where everybody puts their money 'cause that's considered safe and
lucrative. That's a bothersome notion to me. As I mentioned earlier, making
money is about changes in perception. Our society has such conviction now that
the stock market is a good place. That perception is reflected in prices. The
change in perception that's going to make stocks go up further is becoming even
... The ability for perception to change and change valuation in the stock
market seems to me approaching the time when the only news that will be
meaningful is bad news. That will change your perception. That will make my
dentist stop lecturing me about how I have to be in the stock market with all
of my wealth because, four out of five years, it's better than bonds. We're at
a dangerous point with regard to equities in the United States, and I mentioned
it's a little bit like fiddling while Rome burns 'cause the world is struggling
all around us right now. And if the United States runs into a downward spiral,
declining stock prices ...
Soros has said if things don't change, there is the real danger and
possibility that we are headed for a worldwide recession, if not
Do you share that fear?
I think that George is accurate. There's an old saying by a now deceased
journalist, American, named Christopher Lash, and he said, "Meritocracies are
only stable if a large number of people are winners. Otherwise they change the
In the economic outcome, if the United States is successful and the rest of the
world goes through the kind of transitions and violence that they have in
recent years, and that persists, and for instance, if the U.S. slows down,
we've talked about it, and it amplifies the pain in other areas, they will not
view themselves as bad performers in this system. They will try to change the
The nature of the trading system in the world and commerce is at risk in the
current time, because large number of people are suffering; large numbers of
people have had their lives disrupted and had their expectations about the
continuity for growth and progress and employment and wealth accumulation
shaken to its foundation. And that sows the seeds of political dissent and the
impetus to a change in the way the world is organized.
He is the Ford International Professor of International Economics at MIT.
He specializes in international trade and finance and his most recent book is
The Return of Depression Economics.
What is the biggest question in your mind today?
Oh, the biggest question is what about the big advanced countries? This is an
enormous human tragedy. But so far, it's only affected people who didn't have
that much money to begin with. So in dollars and cents terms, it doesn't really
matter that much. The question is: Can this thing spread to us? By us, I mean,
basically, all the advanced countries, all of the rich, stable, democratic
countries of the first world.
So far, mostly it hasn't, but there are some scary things out there. The
Japanese are fairly close to entering into a deflationary spiral. The United
States had one heck of a scare in the fall when the bond market froze. I
remember a Fed official in a private meeting, when people asked him what are we
going to do about this, [he] said, "Pray," which was not very encouraging. We
got out of that. We don't quite know how. So the scary question, the big
question is: How immune are the big advanced economies? I'd give you 10 to one
odds that it's not the 1930s over again for those economies, but those are not
the kinds of odds I'd like to be hearing.
Aren't we already seeing [people] in the oil industry, steel industry, in
this country beginning to feel the effects?
Yes. Clearly some groups are hurt, because they are dependent on those markets,
or one way or another are directly in the path of this storm. On the whole, the
United States' economy remains astonishingly prosperous in the face of what's
going on there. There's no necessary reason why that can't continue. But then,
there was no necessary reason for any of this to happen. So you've got to be
concerned. The great revelation here is that we don't know what we're doing as
well as we thought we did. Problems we thought were solved are not solved.
Economic analysts like me, economic managers like the people at Treasury,
hopefully know something, but don't know as much as we thought we did. That
means that problems that we thought were impossible may turn out to be quite
real in the modern world.
In your Foreign Affairs article, you talked about whether or not
governments would take enough steps to stimulate demand at this moment
If you look at two of the three great centers in the advanced world, Japan,
first and foremost, and then also Europe, you start to wonder, what are they
thinking? Look at Japan right now. It's an economy that's been shrinking for
the past two years. Prices are falling. Wages are falling, which never happens.
You say, "Well, they must be moving heaven and earth to get that economy moving
again." The answer is, they aren't. They're spending a lot of money on public
works, but they're not printing a lot of money. When the yen surged in value
for complicated market reasons, which is a terrible thing for an economy that's
on the verge of a deflationary spiral, the Japanese actually seem to be proud
So that's scary. That's making me wonder, is it really possible that here in
the modern world, there are people who don't understand even that much and are
prepared to take those kinds of risks with a big economy? If you look at
Europe, where they talk about price stability and are sitting there again on
the edge of deflation, you wonder, are they prepared to do what's necessary?
Meaning, spend money?
Well, in particular, print money. You print money, and you spend money. Print
money is the easier alternative and the preferred one, if you can do it. Again,
the Europeans start to talk about the virtues of the strong Euro, which is the
last thing they need right now. What worries me about Japan and Europe is the
people in charge seem to be like the old line about French generals, prepared
to fight the last war. They remember very well the inflation of the 1970s and
early 1980s. They remember the excesses of speculation in their markets during
the bubbly economy in Japan during the 1980s. Here, they are in a world which
is that world turned upside down, where the clear and present danger is
deflation, not inflation; where the problem is crashing asset prices, not
overvalued ones. They don't seem to be prepared to make the mental shift. And
when they do, it might be too late.
Add into that mix the U.S. economy running a [budget] surplus. Isn't that a
problem at this moment in time?
... Well, so far that's not a problem, because U.S. consumers are making up for
it. What happened is the U.S. government has gone from heavy dissaving to
substantial saving. But U.S. consumers decided to stop saving altogether at the
same time, so it hasn't created a problem.
I'm less worried about the U.S. I don't think that we are a contractionary
force in the world now, or are likely to be. And in Greenspan I trust--not
really, but the fact is, that the U.S., whatever criticisms you can make about
its policies and for the rest of the world, our domestic policies are more
flexible, more open minded, than that of anyplace else. That is one of our
great strengths ...
If Asia heads into depression and Europe is in a deflationary cycle, how
long do we think that we are protected?
Oh, we have to move fast. The world is not all that integrated. It is possible
to have prosperity in the U.S. while the rest of the world is in trouble. It's
possible in principle, but we'll have to move fast. If there is a slump that
spreads to the first world oustside the U.S., then we have got to cut interest
rates, start spending that budget surplus ... The Great Depression would have
been easy to stop in 1930. It was very hard to get out of by 1935. The point
is, that the time to act would be quickly. I think Washington understands that.
Famous last words?
He is the Galen L. Stone Professor of International Trade at Harvard University
and the Director of the Center for International Development. He has served as
an economic advisor to governments in Latin American, Eastern Europe, Russia,
Asia and Africa.
A growing number of observers have pointed out similarities in certain
trends in the 1990s that were also trends in the 1930s. You've written some
about that yourself ...
There's a question whether 1999 is 1929. We had a booming stock market in 1929
and then went into the world's greatest depression. We have a booming stock
market in 1999. Will the bubble somehow burst, and then we enter depression?
Well, some things are not different. The volatility of international capital
played a big role in the onset of the Great Depression. The volatility of
international capital is obviously destabilizing markets today.
There is, in my view, one fundamental difference, though. I think it really is
so fundamental that the analogy doesn't hold in the end. In 1929, the world was
on a gold standard. That meant that every major currency in the world was
linking the value of its currency to gold ... with the price of the currency
set to gold, you couldn't really do very much in terms of expanding the money
supply in a depression, and so on. We only got out of the Great Depression as
countries got off the gold standard, which was a long, arduous, tumultuous and,
eventually, tragic process.
The good news for 1999 is, we are not on a gold standard. We have independent
national currencies or regional currencies, in the case of the euro. If we did
go into a recession, something that's always possible for the U.S. or Europe,
we could lower interest rates and expand the money supply without worrying
about the price of gold.
If the whole world went into recession, all the major central banks could cut
interest rates and expand the money supply. Indeed, last summer in 1998, when
there was an intense moment of fear after the Russian default of a worldwide
credit crunch, the Federal Reserve Board cut interest rates several times and
successfully overcame that fear. I think that was important to a good monetary
policy. So this is the big difference in my view. Could it happen again? It
would take absolutely horrendous policy mistakes. The system itself is a lot
safer right now, because we are not bound by the straight jacket of the gold
Do you think that the stock market bubble, but more, the sense of American
prosperity, is ever going to be affected by what is happening in the rest of
The U.S. is in a bit of a euphoric mood. Euphorias come to an end. We hope they
don't come to an end with a recession, much less a crash. There's a lot of
strength in the U.S., but there's a lot of froth also. The froth will blow off.
We're going to have to face up to some realities that we're not fully facing up
to right now.
Ten years ago, there was a lot of euphoria about Japan ... [and] fear in the
U.S., that we're about to be taken over or fully owned by Japan. Well, this was
a lot of hysterical market misunderstanding. Opinions in markets just bounce
off of each other. We see it happening again.
The U.S. has a sound economy. It also has a cyclical economy. It also has stock
market values right now that are hard to explain on historical norms. While
it's always possible that everything can be based on the new economy, it's also
quite possible that we're doing a little bit of exaggeration in just how
wonderful things are.
Do you have any sense that Washington policy makers are reconsidering some
of the policies? ...
I think within a limited range of issues, they're thinking, "What about
exchange rate recommendations? What about short term capital flows?" There is
some discussion of some real issues. The broader issue of the real role of the
U.S., the foreign assistance aspect of that, who's going to pay for the
security of a global economy? No, we are not doing any broad rethinking right
now. This is the end of an administration. That's usually a pretty terrible
time for any real ambitious thinking.
Does that worry you?
I've been worried all through this decade. I'm more worried at the end of the
decade than I am at the beginning of the decade, because you have so many of
the poor countries of the world in utter crisis right now. I don't see that
crisis getting better. I don't see much real and serious attention. By serious,
I mean something that might cost us something.