Chapter Six
George Soros versus The Bank of England.
Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.
John Maynard Keynes (1883-1946).
Economist, writer, senior British Treasury advisor.
Chapter Highlights
In the late 1980s, a Hungarian émigré to the UK, George Soros, had written a controversial book called The Alchemy of Finance and, with confidence in its underlying theory of global financial markets, took on and ‘broke’ The Bank of England.
In the early 1990s, the British government was desperately trying to ‘peg’ sterling to the European Exchange Rate Mechanism (ERM), which was dominated by a strong Deutschmark. For relatively complex reasons, this currency-pegging policy is rarely successful in the medium to long term. The main monetary lever to manage the process is manipulation of interest rates by central banks, which, in turn, can wreak havoc on the nasty dynamics between inflation, recession and unemployment.
If there is a substantial gap between ‘economic fundamentals’ and artificially manipulated interest rates, it presents a red flag to speculative bulls, in this specific case the biggest of them all at the time: George Soros.
In a bizarre few hours on September 16th 1992, named Black Wednesday by many commentators, a bullring stand-off ensued between a hapless finance minister raising interest rates by the hour (Norman Lamont) and a calm Soros exploiting the market imperfection this created, cashing in all the while.
This drama had a potentially massive impact on British business, particularly those companies which operated in global markets and had complex financial instruments to manage, e.g. interest rate swaps, convoluted currency hedges, futures and derivatives amongst others.
The day was chaos writ large, but the British government eventually, and predictably, caved in, and some semblance of economic reality was restored as the currency devalued.
The political legacy of that day lives on, including the UK’s decision not to join the Euro in 1999. Many of the issues it raised were at the core of the complexities associated with the Brexit discussions that were taking place as the first edition of Ten Years was published.
This episode demonstrates perfectly the market volatility induced when political ideology and economic fundamentals clash. Most estimates suggest that Soros earned £1bn at a cost to the Bank of England of £3.3bn — not a bad return for a few hours ‘work’.
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