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Soros is right

January 29th, 2010 · No Comments

On multiple fronts…

Soros: U.S. Economy Needs Inflation
By: Dan Weil

Hedge fund billionaire George Soros says a decline by the dollar against China’s renminbi, or yuan, would help the U.S. economy.

“The U.S. would actually benefit from a higher renminbi,” Soros told CNBC.

“It would help by making U.S. exports more competitive to China, but also would help to introduce an element of inflation in the US. In the current circumstances that would be very helpful.”

The Chinese government currently fixes the renminbi at an artificially low rate against the dollar to promote exports.

The U.S. trade deficit with China totaled $209 billion in the first 11 months of 2009.

When Soros says inflation is necessary, that’s because it would reflect growth in the economy.

A stronger renminbi would also be in China’s interest, he says.

“It would be a great benefit for the rest of the world. Since China depends on the rest of world for exports, it would again benefit China. It (a stronger renminbi) cries out as the most efficient way of bringing inflation under control.”

However, the Chinese don’t like being told what to do, Soros points out.

“They don’t like the Treasury Secretary of the U.S. telling them. Maybe I’m not that important that I can say it,” he quipped.

China remains a pillar of strength in the world economy, Soros says.

“Right now it’s overheating,” he acknowledged.

“But they are moving to cut back. They have inflation, and they are now actively raising capital reserve requirements. Until they finish the job, the markets are liable to be under pressure. But once they succeed, I think China will remain a very attractive area for investment.”

Soros strongly supports President Obama’s bank reform plan.

“I think it’s a step in the right direction, because the banking system has to be changed,” he said.

“This idea of allowing total freedom has turned extremely sour at a considerable expense.”

Soros approves of the idea of separating commercial and investment banks and forbidding commercial banks from using government insured deposits to finance their own trading activities.

“This is the right thing, however it’s not enough,” Soros said. “You still have the problem of too big to fail in the financial activities of . . . investment banks. They will still be too big to fail.”

He said, “The idea that we would let Goldman Sachs go bust after the experience we had with Lehman Brothers isn’t credible.”

To solve this problem, either investment banks have to be broken up or strict capital requirements have to be imposed on them, Soros says. That way, “If banks speculate for their own accounts, they have to have their own capital to back it.”

Tags: Credit Crisis · Reform Capitalism