Davos 2013 - An Insight, An Idea with George Soros

Hello and welcome to an

idea

. I am very pleased to welcome billionaire philanthropist and former hedge fund manager George Soros. Today we are going to discuss the difference between natural phenomenon and social phenomenon. An

idea

. A great idea. Soros who has really guided you through life is a joy to me, it's basically something I developed when I was a student and it has really guided me in both making money and spending it. Now tell us the basics and exactly when you thought of it. There was a special moment when you thought that actually this is what you know our society is.

No, when I was a student I was studying economics and at the same time I was reading an auto popper the philosopher and studying the basic economic theory of perfect competition that I originally assumed perfect knowledge and then I was reading a popper who made it clear that perfect knowledge is unattainable, that even in science you can't validate theories, you can't see them, only falsify them, so the two ideas were directly contradictory and I sided with Popper and you also know that economics used a lot of mathematics and I was not very good at mathematics, so I prefer to question the assumptions that mathematics was based on and that is how I came to recognize that economics ignored . this fundamental difference between natural phenomena and social phenomena because in natural phenomena the imperfect understanding that is part of human nature inevitably does not enter into this sequence of events that you are studying so that you can establish universal validity.

The laws that can be used to both predict and explain this are actually really beautifully constructed. Natural sciences in social phenomena this does not work because imperfect understanding enters the sequence of events and introduces an element of uncertainty that is actually absent in natural phenomena. In phenomena you also have the uncertainty principle in physics, but this human uncertainty principle is an additional source of uncertainty, so when Heisenberg discovered the uncertainty principle, it did not change the behavior of the quanta he was referring to, where and when it is discovered. a theory about social issues, can actually change society, so when we say that Karl Marx proposed his theory of history, it actually changes history, this is a great idea that didn't have much traction at first, but you felt vindicated in 2008, right?

I mean, I developed this, in fact I first published it in 1987, The Alchemy of Finance, and I called it alchemy to indicate that it's not, it's not intended to be a scientific explanation of a financial markets phenomenon, but it's a better one. explanation that the scientist we did not do or this fundamental difference, so you know, the alchemists made a big mistake when they tried to change the behavior of metals through hocus pocus. They should have gone to the financial markets because there you can really change the sequence of events through hocus-pocus. So what lessons have we really learned from the crisis?

Well, then let's say that my interpretation of financial markets that I presented in '87 was basically ignored, it was recognized or studied in business schools, but academic economists, I mean, basically ignored it, but then with the financial crisis that worsened in August 2007, but which actually predicted it quite well in Davos in January 1987 and then culminated in the bankruptcy of Lehman Brothers, which really shook up the existing efficient market hypothesis, the theory of rational expectations, because it didn't actually allowed If that happened, then that's when this my construct, which is based on two pillars of failed capability and reflectivity, then it gained traction and that's when you could really start having public discussions about it until then, I developed it quite a bit.

Well, on my own, because it wasn't seriously discussed, so it really requires a lot more development and it has had so far and, in fact, I also established or founded the Institute for New Economic Thought which is not really dedicated to reflexivity as such, but where where within which you know you can also discuss an activity what it means for the future what is your big prediction for the next two or three years are we in a phase where it is very easy to go back to what It happened in 2008 because we are in such a fragile state, well, I mean, the unfortunate fact is that the established theory has collapsed, but we don't really have a proper understanding of how financial markets operate and we have introduced invented synthetic instruments, since you know, derivatives and where.

No, we don't fully understand the effect they have and the concept of equilibrium, which was basically borrowed from Newtonian physics, is not applicable to financial markets because they actually are. It is not that balance is impossible, but that it is an extreme. in reality it is not achieved, you can be fine, sometimes you are close to equilibrium but at other times you are very far from equilibrium without any particular tendency to return to equilibrium and in fact we have been since 2008 in this territory far from equilibrium because when the financial markets collapsed and they really did it and the authorities had to intervene to keep him on what I call artificial respiration and the artificial respiration was to replace the credit of the state sovereign credit with the financial credit that collapsed and that meant a kind of delicate maneuver of two phases where you actually had to inject additional credit into a situation that was a visual crisis situation caused by too much leverage and too much credit, you actually had to add more to correct the situation and bring it under control.

So when a car skids, you must first turn the steering wheel in the same direction as the skid to regain control, because if you don't, the car flips over, so you first regain control and then correct the steering. What the authorities did was actually something they learned from the previous occasion in the '19, '30s, when they did not do this, when they tried to balance the budget, when there was not enough demand, they actually created a depression, so this was the lesson that quantitative easing, let's say, was pioneering. by Bernanke is, let's say, the lesson learned from the 1930s, but what is the car doing driving?

What is the car doing or not doing? We are in the first phase of the maneuver, it is quite complete, but we have not completed the second phase. it still started and now they had the euro crisis which has actually worried me for the last year because the emphasis placed on the injection of sovereign credit revealed a flaw in the construction of the euro, a fundamental flaw that the authorities themselves did not realize because the government debt of member countries is designated in a currency they do not control, so they actually have debt in a foreign currency similar to that of less developed countries.

The developing world recovered in dollars or in dollars or in any other foreign currency, so that added risk which was the unrecognized credit risk, that is, the danger of default, because if you issue it in your own currency, you have there is absolutely no reason to default because you can always print well, but the member countries could not read or print euros, so they could default and therefore suddenly, when the markets realized this and were slow to realize Mind you, they took a tremendous risk. Bonus, are we now in danger of having a credit bubble because of all this cheap liquidity?

Yes, well this is a big problem, the unsolved problem, I think it should be possible to withdraw the extra credit as the economy gets going, but it hasn't been done yet and therefore there is a fear of This could result in rampant inflation. This is the fear that is particularly prevalent in Germany, which is why Germany and the Eurozone, because it is dominated by Germany, are out of step with the rest of the world. world, so although the financial crisis and the euro crisis have been somewhat brought under control in

2013

, this disagreement about how to handle the recession actually remains very acute and, in fact, has become more acute this year than before because The last holdout in the rest of the world, i.e.

Japan, changed course earlier this year, but how difficult is it for central banks to decide when they have to absorb this liquidity? Yes, for this it is a maneuver that has to be carried out by central banks, but it is difficult to decide when is not the ideal time to do it; It's probably impossible to do it and it's going to be a bit complicated and in fact, the most likely thing is that the economy will really gain momentum and and in India, the money injected into the system gains momentum, interest rates will shoot up and stop the recovery, for what we are facing, I think, is a period of stopping or stopping which is far superior to not moving forward at all and he said at the beginning that your great idea helped you decide how to make money but also how to spend it.

Can you give us concrete examples? Well, yes, I mean, for example, when I established a foundation in the United States because you know the foundation is dedicated to promoting. Open society, which is an idea that I felt took over from Carp's offering. The first thing is that I discovered that the concept of an open society that guided me in establishing my involvement in the Soviet Union and the collapse of the Soviet Union is also flawed. So when I applied the theory, I discovered that it actually has a flaw, so that is an example of the recognition of the widespread influence of these conceptions in shaping the course of history, so the idea that guides me is also a flaw in this.

An example: when things in this former Soviet Union calmed down, the revolution subsided, so I wanted to address the shortcomings of what I have considered one of the most developed and successful open societies in the United States and So I established an active foundation in the United States. United and two of the first topics we tackled were topics that were basically insoluble problems where the way you approached the insoluble problems made them worse than necessary and one of them. of these problems is actually death, it's more like you know olive oil is inevitable and it's actually quite unacceptable to our consciousness because they see the disappearance of our consciousness oh, it's anathema to our thinking and that's why we invent all kinds of myths. and things to make acceptable what is basically unacceptable and in the case of the United States, the United States there really is a cult of denying rather than accepting it and that in many ways makes the process of dying much more painful and If not you accept it beforehand and if you don't accept it beforehand, there comes a point where, I mean, you have to accept, eventually you give up the fight and you just accept it, and I think that that project had a great impact, particularly in the medical profession that He also denied death, so death in ovens was not accepted as something that needed to be addressed or was not accepted as an issue for medical reimbursement, so of course doctors and nurses were trained to fight it further. beyond anything, so you don't have to accept it properly, so the thinking has really changed and I also think the public opinion has also changed a little bit in that sense, sir.

Soros I think we're about to finish I just want to have one last thought from you Do you think everything is fallible? Do you think that everything can have a defect? And is this what we have to take away from you? Great idea, yes, I mean, it's a very good, let's say practical, assumption to make to recognize that your way of thinking and acting may be flawed and this and, in fact, inevitably, if you really have something that works , it will overload it. It is given too much importance until it becomes defective, so that even the prepared natural sciences, which actually produce fantastic results, have been overloaded by applying methods and criteria to the study of social phenomena, so that what works in the field of natural phenomena can really work. be misleading when applying those methods to social phenomena, so it is a very good example of a true idea becoming overloaded and even becoming misleading and central bankers, policymakers and governments must understand this to avoid the next crisis, it is very difficult.

We have to accept it and, of course, in particular the institutions, the governments cling to their mistakes and the euro crisis is the perfect example because it is largely self-inflicted because, having the bottom line of a mistake original, has not actually been admitted. recognized and corrected mr. thank you

soros