Economic History Case Studies: Financial Combat with George Soros (1992-1997)

“In [the School of Financial Warfare] you learn your lessons, and they stay learned [as Military Arbeit], but the [Command Responsibility for its Quality of Arbeit] are high.”

-Ernst Jünger In Stahlgewittern, ca. 1920

“I’ve learned many things from [George Soros], but perhaps the most significant is that it’s not whether you’re right or wrong [in Financial Warfare], but how much [Geld] you make when you’re right and how much [Geld] you lose when you’re wrong.”

-Stanley Druckenmiller, ca. 1994

If I were to give you, the reader of my Blog, $1,000,000,000 United States Notes pegged to the Work-Standard, what would you spend it on and why? How much would you be willing to spend on foreign currencies? How far are you willing to go for the actual Currencies and not just the Foreign Exchange Certificates? Would it surprise you that Financial Warfare can become an actual thing under the Work-Standard?

No matter what you decide to spend that Geld on, I can definitely guarantee that Speculation will continue to exist in some form or another, even within a Socialist world order. The challenge is not whether it is possible for all countries on Earth to abolish Speculation vis-à-vis the World State Organization because that would be the realization of Absolute Peace on Earth. Until that happens, Absolute War is always a given in the realm of Socialist Finance. The Totality of every Socialist nation under the Work-Standard must always be ready to join the civil defense of the Central Bank against Speculative Attacks.

Since the legal end (as opposed to the official end) of World War II on September 12, 1990, the world has witnessed ferocious financial combat between nation-states and speculators, turning the concept of FOREX (Foreign Exchange) into a battlefield. The image of trench warfare characterized by World War I has recently given way to the image of speculators laying siege to the Totalities for their Geld (if Socialist) or Kapital (if Liberal Capitalist) before rapidly assaulting their Central Bank’s Fixed Exchange Rates with fixed bayonets. Economic history insists that no speculator in the 1990s has made an entire fortune in Financial Warfare than George Soros. Nobody outside of Socialist Economics and Socialist Finance can understand how George Soros made his fortune without understanding what a Speculative Attack is.    

Financial Combat: How to Visualize a Liberal Capitalist Speculative Attack

A Speculative Attack is a relentless assault on the Exchange Rate of a Financial Regime, preferably those Fixed Exchange Rates preferred by the Work-Standard. Here, the speculators look onward from their trenches [Read: FOREX Financial Market/Kontor Office IV] and watch on as their friendly artillery pieces [Read: monetary policies] soften up the enemy defenses. The command officer [Read: the person in charge of the office space] is going to then order everyone to prepare for the upcoming assault.

Everyone [at the FOREX Market or Office IV] decides that now is the time to move in the kill and launch the Speculative Attack. They cannot wait any longer. The artillery bombardment has ceased and it is finally their chance to climb out of the trenches and advance across No Man’s Land. The distinctions between “what is war?” and “what is peace?” begin to dissapear in the midst of an impending financial bloodbath. Seriously, do the Liberal Capitalists need to describe this in gruesome terms, as if they are actually trying to wage war on an entire nation-state?  

As they race across No Man’s Land, the speculators become these Prussian-like stormtroopers with their fixed bayonets [Read: Foreign Financial Instruments] and grenades [Read: Foreign Currency], rushing and exchanging grenades and rifle fire with the enemy [Read: Cashing in the Financial Instruments and converting Foreign Currency to more valuable ones].

In the midst of this adrenaline rush, the speculators will try to capture as much of the enemy’s defensive positions [Read: FOREX Reserves] before launching a daring charge on the command post [Read: a bank run on the Central Bank] amidst raining mortar shells [Read: Mechanization Rates] and machine gun fire [Read: the enemy’s emergency reserves borrowed from other banks]. If they succeed in capturing the enemy’s command post, they get to dictate the Exchange Rate, shifting it from a Fixed Exchange Rate to a Floating Exchange Rate of their choosing. However, not every Speculative Attack succeeds, and the Work-Standard that most Speculative Attacks against any nation-state, especially more so in the case of a Socialist International Economic Order (SIEO) will be repelled by the Totality of a Socialist nation-state.     

This is how Liberal Capitalist Finance operates during a Speculative Attack. Speculative Attacks are not supposed to be another these get-rich-fast schemes that everybody and their mothers ought to clamor for under Liberal Capitalism. Entire fortunes (and in the case of the Work-Standard, actual lives) can and will come to an untimely demise due to hostile Speculative Attacks. This failed Speculative Attack, shown above, can be juxtaposed by the emotional state of this investor below, who grew increasingly distressed during the Economic Bubble that burst in 1987 when Wall Street crashed on Black Monday that year. The 1985 Plaza Accord ensured that this would happen. The Japanese Lost Decade, however, is an entirely different matter altogether.

We can expect something similar to be directed at any Socialist nation that decides to peg its own Currency to the Work-Standard. Liberal Capitalist Finance will throw everything it has at Socialist Finance because the very notion of the Work-Standard is capable of going above and beyond even the wildest imaginations of those people who thought Cryptocurrencies or Modern Monetary Theory will protect them against Speculative Attacks. We must realize that when a Speculative Attack is directed against the Military Sovereignty of an entire Socialist nation, it should be considered an act of military aggression against the Totality and its entire livelihood.  

Beware: In the event of a Socialist world order, Speculative Attacks will be considered a war crime because they are just as easily capable of inflicting harm toward religious and medical personnel, which is already a war crime in itself. Religious and medical personnel do not just contribute to the Life-Energy Reserve of their Socialist nation, they are also its biggest contributors of Actual Arbeit and Actual Geld. That is why Speculative Attacks should be banned in a Socialist world order as one of the top priorities for the World State Organization (WSO) to govern the conduct of Financial Warfare between nation-states and their financial speculators [Read: armed forces].

Black Wednesday: Soros vs. Bank of England (1992)

The following comes from the insightful article entitled, “The Day George Soros Broke the Bank of England To Make $1.1B”:

Less known by the general public than Warren Buffett or Peter Lynch, George Soros is nevertheless a legend in the investment world. George Soros’ most brilliant move was probably the one that saw him literally broke the Bank of England on September 16th, 1992.

To do this, [Soros] took advantage of the European Monetary System (EMS) to carry out a speculative attack that I propose to rediscover in detail in what follows.

After a period of sustained growth, associated with a moderate rate of inflation and a gradual decline in unemployment between 1983 and 1988, the situation began to reverse from 1989–1990. Inflation rose from 3.3% in January 1988 to a high of 10.9% in September 1990.

During this period, the United Kingdom decided to join the Exchange Rate Mechanism (ERM) in addition to its membership in the European Monetary System.

This Exchange Rate Mechanism obliges the central bank of the participating country to defend an exchange rate pivot, intervening in the market if necessary. The idea behind the decision taken by the British in October 1990 was that joining the exchange rate mechanism would reduce inflation and bring stability to exporting companies, by controlling the exchange rate to limit its volatility.

The pound sterling entered the ERM at a relatively high rate compared to the historical rate of the British currency.

For many, it was obvious that the pound sterling was overvalued. This was a way of calming inflation. Indeed, the latter made it possible to reduce the price of imports such as raw materials and energy. However, this overvalued pound quickly penalized exporting companies.
In 1990–1991, interest rates were very high in the United Kingdom to control the exchange rate as much as possible. Combined with an overvalued exchange rate and the bursting of the real estate bubble, this situation led the country into a recession:

It is at this precise moment that George Soros comes into action.

He has a brilliant or demonic idea. It all depends on how you look at it. Given the economic situation in England and the level of foreign exchange reserves, a major speculative attack could force England to leave the EMS and devalue its currency.

George Soros figures that by shorting the British pound, it would be a jackpot.

To keep the pound within the fluctuation range allowed by the EMS and to avoid a forced devaluation, the Bank of England has two options:

  • Counterattacks by using/selling its foreign exchange reserves. [Note: The Work-Standard version has the Kontore and State Commissariats of Wages and Prices blaring air raid sirens, signaling to the Totality that they must begin pooling together enough Geld to purchase a gigantic sum of Foreign Currencies.]
  • Raise interest rates to attract foreign capital and counter depreciation. [Note: The Work-Standard version has the Central Bank raising the Mechanization Rate and the Council State mobilizing the contributors of all Digital Arbeit and Military Arbeit to prepare immediately for the national civil defense of the Totality.]

Both options come with major drawbacks.

The first solution is limited by the number of reserves available, while the second would have an impact on the level of investment and therefore on growth. You can see here the inverse relationship between interest rates and investment.

The situation is clear for George Soros. If he and his partners manage to deplete the reserves of the Bank of England, by shorting the pound sterling and ensuring that the Bank of England does not have enough money to meet this attack, then the only solution for England would be devaluation.

Indeed, a significant increase in interest rates is unthinkable in a period of recession like the one England is going through.

On September 16, 1992, George Soros took short positions on the British pound for an amount of 10 billion pounds. Even better, Soros managed to convince other investors and investment banks (JP Morgan, Bank of America, Jones Investment, …) that the pound sterling would collapse in the event of a massive and coordinated attack.

To counteract the massive sales of sterling, the Bank of England first used its reserves to buy back sterling. But foreign exchange reserves were too low at the time for such a powerful speculative attack.

The Bank of England was finally forced to give up the fight a few hours after the attack, announcing its exit from the European monetary system with a devaluation of about 15%.

George Soros and all the funds and banks that participated in this large-scale attack were then able to repay the loans they had taken out in sterling, but with a devalued pound against the US dollar. By selling short, i.e. by betting on the fall of the pound, George Soros’ capital gain on this operation was estimated at 1.1 billion dollars.

This legendary move will forever be associated with George Soros.

However, this operation was not without risk. Indeed, three major risks could have allowed the British currency to resist and the speculators to lose a lot of money:

  • Poor coordination between speculators.
  • Anticipation and a strong response from the Bank of England.
  • Coordinated interventions by other central banks to support the pound sterling.

Nevertheless, it is almost impossible to maintain a fixed exchange rate in the long run when there are asymmetric shocks and the disparities between countries become too great.

Asian Financial Crisis: Soros vs. Bank of Thailand (1997)

This Business Insider article is entitled, “Here’s how George Soros broke the Bank of Thailand”:

The Quantum Fund is arguably the world’s most successful hedge fund. Under the stewardship of George Soros, Jim Rogers, and later Stanley Druckenmiller, the fund produced an average annual return for investors of 30%. During the three decades between 1970 and 2000 a $1000 investment with Soros in 1969 would have grown to $4 million by the year 2000, an annual growth rate of 30%.

The Quantum Fund didn’t follow a set trading strategy. Trades were placed based on economic and political conditions in certain markets. While there’s no doubt that Soros and his team were extremely skilled at their profession, is also reasonable to say that there was a fair amount of luck involved in the Quantum Fund’s returns over the years. The team tended to place large leveraged bets on single ideas, most of which paid off handsomely but a single loss could have decimated decades worth of returns for investors, Soros and Rogers (the co-founders reinvested the vast majority of their profits and fee earnings from the fund over the years).

The Quantum Fund’s bet against the Bank of England in 1992 is probably the fund’s most famous trade. But this only one trade in the story and the Quantum Fund recorded many other successful trades over its life. One of the more controversial trades (or group of trades) put on by the fund was against a basket of Asian currencies, specifically the currencies of Thailand and Malaysia just before 1997 to 1998 Asian Financial Crisis.

The Asian Financial Crisis started as a localized currency and financial crisis in Thailand, but tremors soon spread to other Southeast Asian countries–including Malaysia, Indonesia and the Philippines. By the fall of 1997, the contagion extended its reach to South Korea, Hong Kong and China, the year after Russia and Brazil saw their economies enter a free-fall, Japan fell into fell into recession at the end of 1998 and the US financial system balked at the possible bankruptcy of the infamous Long Term Capital Management.

The Asian Crisis started in August 1997, only a month after Thai authorities abandoned the US dollar Thai baht peg. The baht had been pegged to the dollar for more than a decade, and the Thai authorities had been encouraging banks and big corporates to borrow US dollars unhedged to fuel domestic lending for much of this period. However, as the US dollar got stronger in the mid-90s, Thailand’s trade and capital accounts deteriorated, firm’s found it difficult to meet dollar debt obligations and it became apparent the peg was unsustainable.

As soon as the peg was abandoned, it quickly became clear how bad the situation had deteriorated. Thai authorities left the peg on July 2, 1997, and by October 24 the free floating baht had depreciated by 60% against the dollar. Thailand’s troubles triggered a wave of speculation against other Asian currencies and over the same period the Indonesian rupiah, Malaysian ringgit, and Philippine peso depreciated by 47%, 35%, and 34%, respectively.

In an attempt to resist devaluation, the Bank of Thailand, purchased baht with dollars in the foreign exchange market, raised interest rates and restricted foreigners access to baht during the first few months. All of these measures decimated the bank’s credibility. Foreign exchange reserves collapsed from $37.2 billion in December 1996 to $30.9 billion in June 1997, excluding off-balance sheet obligations to deliver $23.4 billion dollars in the forward market over a 12-month period. While raising interest rates only served to damage the country’s weakening financial sector more. In May 1996 the Bangkok Bank of Commerce incurred over $3 billion in bad loans and was taken over by the government and by the end of 1996 office vacancy rates in Bangkok exceeded 20%. Thailand’s external debt at that time stood at $100 billion.

Still, initially these actions worked, and the shorts were squeezed in early 1997, but the measures also used up all of the bank’s firepower leaving it with nothing to defend the currency with if the speculators returned.

The Quantum Fund suffered only marginally from this move. The team used futures to bet against the baht, so they were able to keep the trade open throughout the turbulence and wait for the ultimate end.

The central bank’s comedy of errors only served to attract more hedge funds to speculate against the baht. After some initial success against speculators in early 1997, by August the central bank had run out of money and tools to fend off the hedge funds, which, sensing blood returned in droves.

The bank eventually broke, the baht devalued and Soros profited. Even though Thailand’s troubles did unfold into a global crisis, the country needed the devaluation and if the central bank hand not wasted all of its reserves fighting hedge funds, a more orderly rebalancing could have taken place. Soros himself has remarked:

“For instance, by selling the Thai baht short in January 1997, the Quantum Fund managed by my investment company sent a market signal that the baht may be overvalued. Had the authorities responded to the depletion of their reserves, the adjustment would have occurred sooner and been less painful. But the authorities allowed their reserves to run down; the break, when it came, was catastrophic.”

Asian Financial Crisis (Cont.): Soros vs. Bank of Hong Kong (1998)

The following is from Mainland Chinese state media outlet, CGTN, on the Asian Financial Crisis that also involved Soros. This one is entitled, “How Hong Kong Survived the 1998 Financial Crisis”:

In the summer of 1998, as a financial earthquake devastated Asia’s economy, the Hong Kong Special Administrative Region (HKSAR) government won a hard-fought battle to defend the Hong Kong dollar and Hang Seng Index (HSI) against speculative attacks led by American billionaire investor George Soros.

Backed by Beijing, the Hong Kong Monetary Authority (HKMA) made the controversial decision on August 14 to enter the market, buying up 118 billion HK dollars’ (15 billion U.S. dollars) worth of stocks and futures in two breathtaking weeks of trading, and eventually driving out international speculators.

The 1990s saw the liberalization of capital markets in Asia. International hot money was pouring into Asia amid praise for the ‘Asian Miracle’ and bloated optimism. As a key commercial hub with the freest economy in the world, Hong Kong also benefited from the boom, particularly in the property market. But a storm was brewing.

On July 2, 1997, just a day after Hong Kong’s return to China, Thailand became the first casualty in the Asian financial crisis, following a calculated attack on the baht from international speculators. The country was forced to abandon the baht’s fixed exchange rate with the U.S. dollar, effectively crashing the currency.

The crisis quickly spread across the region as predatory hedge funds, such as Soros’ Quantum Fund, feasted on the bloodbath by shorting the Asian markets. One after the other, the currencies of Malaysia, Indonesia, the Philippines and South Korea were brought to the ground. The huge influx of foreign capital that had fueled Asia’s boom was quickly pulled out, leaving a trail of destruction.

In 1997, Hong Kong’s economy was more resilient than its Asian peers. The real estate market was booming, and the HSI peaked at 16,673 points in August. However, leading international opinion at the time was bearish on the city’s economic future with China.

Speculators saw the perfect opportunity to make a killing.

By then Soros was unstoppable, having amassed many billions of profits wreaking havoc around Asia. The reviled financier, who famously attacked the British pound in 1992 then the Mexican peso in 1995, held remarkable sway over international hot money. Few thought a small but open economy like Hong Kong stood a chance against the veteran investor.

Since July 1997, Soros and others launched a series of attacks on the HK dollar. With limited options to fight back, the HKMA responded each time by raising the interest rate to make the speculators’ bets costlier. The interest rate shot up nearly 300 percent overnight at one point in October. As a result, Hong Kong’s real economy suffered.

The interest defense was powerless against the speculators’ double attacks on both the Hong Kong dollar and the Hang Seng equity market, which were impacted by the hikes. The speculators would gain either way.

On August 13, 1998, the HSI fell by more than 60 percent to 6,660 points. Hong Kong’s property market deflated by half and the GDP shrank 5.5 percent.

Rumors had begun to spread about a devaluation of the Chinese renminbi, which led to bank runs. The speculators were betting on the HKMA to give up the HK dollar’s linked exchange rate with U.S. dollar.

The U.S. dollar peg, which had been in place since 1983, was a pillar for Hong Kong’s externally oriented economy. China’s currency was shielded from open attacks, but could have been forced to weaken in order to maintain export competitiveness. Nevertheless, its stability was vital to public confidence in Hong Kong.

The Chinese government repeatedly pledged that the renminbi would not be devalued. At a press conference in March, then Chinese Premier Zhu Rongji promised that the central government would protect Hong Kong from the financial crisis ‘at all costs.’

‘The authorities of Chinese mainland have also expressed unequivocal support for the HK dollar’s link to the U.S. dollar,’ said HKMA chief Joseph Yam in a speech in March. ‘There is a standing offer for extending help, if help is required, in the use of the mainland’s foreign reserves (140 billion U.S. dollars).’

With this reassurance, on August 14, the HKMA and then Finance Secretary Donald Tsang declared war on speculators.

After record trading of 79 billion HK dollars (almost 10 billion U.S. dollars), the Hang Seng Index was pushed up against crushing pressure from speculative selling, closing at 7,829 on the final day of the showdown on August 28.

The HKSAR government defeated Soros, who was forced to walk away with losses. The intervention committed as much as 10 billion U.S. dollars of Hong Kong’s 96 billion forex reserves.

The intervention, dubbed “gamble of the century,” took great courage since it would damage the city’s laissez-faire reputation. The move was widely criticized by international opinion leaders, including Nobel Laureate Milton Friedman and then Federal Reserves chairman Alan Greenspan.

Carl Schmitt’s Demand for Arbeit: “Legality has become a poisonous dagger, with which one party stabs the other in the back.”

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