The "Power Elite" becomes worried

When people like George Soros speak, the world listens. It usually arouses attention on the issues of mega speculation : what is he buying or more importantly, what is he "shorting big time" this time ? Not this time. In fact, the recent interview of Soros in the run-up to the G-20 meeting next weekend is unveiling the thoughts of a powerful man becoming increasingly worried.

George Soros has become famous for a couple of remarkable achievements. As a son of an Hungarian Jewish immigrant, Soros narrowly survived the Holocaust in Budapest and had all the trouble in the world of making it into the London School of Economics. When graduated, the city of London was closed for him so he had to chase his luck in the "big apple". On 16/09/92, Soros got his revenge and made more than a bio USD on betting against £. Afterwards, Soros kept himself busy with filanthropy and writing, inspired by Popper and his magnum opus "The Open Society and its Enemies". And it's on this last point that Soros earlier this week elaborated further in German newspaperDie Zeit.Some remarkable quotes from the man :

1. The German policy is a danger for Europe, it could destroy the European project....Germans are dragging their neighbors into deflation which threatens a long phase of stagnation... Germany has isolated itself economically and its differences with France are deeper than they have been in a decade.

2. A collapse of the euro cannot be ruled out, this would be tragic, but if Germany doesn't shift strategy, the euro-zone would be better off without Germany in the common currency. The current German strategy, leading to a period of extended stagnation, will inevitably lead to nationalism, social unrest and xenophobia (resonance of the open society and its enemies)

In exiting the crisis, there are currently two main economic views and neither of them eye friendly, this from a political, social or total effort perspective :

1. The German way of handling things. Basically it entails putting the house in order asap and not escaping "social responsibility towards future generations". Debt is not an answer to debt, the Ponzi game stops right here, bite the bullet for as long as it takes. From a political point of view, this is "harakiri". Faced with hard facts, politicians around the globe should basically now telling the following story to their respective electorates :"Time's up, money is no longer there, the only buzz word for the coming 25 years is deleveraging".

2. The Soros approach which goes for the "nice and steady approach", is of a Keynesian nature and mainly inspired by policy mistakes during the great depression. Its main current advocate is Paul Krugman who even goes as far by stating that policy mistakes back then were in the end solved by WWII. And we really do not want to repeat that mistake. Also Roubini points in this direction, urging German spending as counterbalancing power for countries imposed by heavy austerity. Again returning to Soros, his fear is based on his historical experience of the thirties where periods of heavy crisis and austerity planted the seeds of undemocratic forces. The Soros-Krugman approach might ease the pain and be socially more acceptable, it merely increases the total cost whilst spreading it over a longer period of time.

What to make of this? Is Soros "long" euro or is his current trading book constructed to benefit from Euro-zone growth ? Most likely Soros - as a messenger of the Power Elite - is deeply concerned about the economic environment and the political handling of the current crisis on both sides of the ocean. Soros wanders if those who are in charge have a clear view on the consequences of huge cutbacks on spending and tax hikes. If not handled with care, it could indeed imply that the European social contract of the past 50 years is overturned in a very speedy fashion. We have already seen social disturbances in the South of Europe and they are still taking place but are not reported anymore. And this is probably just the beginning.