Soros Says Greenspan Lost Credibility Helping Bush (Update1)
Jan. 29 (Bloomberg) -- George Soros, the billionaire investor, said Federal Reserve Chairman Alan Greenspan has lost credibility for driving the benchmark U.S. interest rate to a four-decade low and advocating tax cuts that he said caused the U.S. budget deficit to balloon.
Soros, chairman of the New York-based Soros Fund Management LLC, said Greenspan sought to help President George W. Bush win re-election. Soros spent $26.5 million, more than any other individual donor or political action committee, seeking to help Massachusetts Senator John Kerry defeat Bush in November's elections.
``Greenspan lost credibility with me when he became too political,'' Soros, 74, said in an interview today at the World Economic Forum in Davos, Switzerland. ``He tried to push interest rates further down in order to help the re-election campaign, and also reached out beyond his sphere of competence by advocating tax cuts which then led to the current deficit.''
The Fed cut interest rates six times in 2001 and 2002, bringing the overnight bank lending rate to 1 percent from 6.5 percent. In 2001, Greenspan supported the first in a series of Bush-proposed tax cuts that ultimately reached $1.85 trillion.
Soros said he expected the U.S. currency to extend its three-year slide, as officials and executives from the U.S., Europe and Asia at Davos blamed the U.S. budget and current account deficits for causing a plunge in the dollar. Microsoft Corp. Chairman Bill Gates, the world's richest man, said yesterday that he's betting on a further slide in the dollar, calling the deficits ``scary.''
The dollar has dropped 47 percent against the euro since 2001.
Dollar's Drop
Federal Reserve spokeswoman Michelle Smith declined to comment on Soros's views.
While the dollar has fallen 2.8 percent against the currencies of its 30 major trading partners over the past year, it's fallen more against the euro, 4.8 percent, because many Asian countries link their currencies to the dollar, limiting changes in their value.
The U.S. current account deficit will likely cause the euro to continue to gain against the dollar. Because Asian currencies are linked to the dollar, their value won't change as much as the euro.
``Obviously the dollar is already undervalued against the euro,'' Soros said. ``It has every sign of getting more undervalued, because all the adjustment is between the dollar and the euro.''
U.S. Deficits
The U.S. trade deficit swelled to a record $609.3 billion last year. The administration said Jan. 25 that its budget deficit would reach $427 billion in the 12 months through Sept. 30, topping the unprecedented $412 billion last year and almost $100 billion more than the gap expected six months ago.
While China loosening its decade-old peg of the renminbi to the dollar would ease pressure on Europe, ``probably it's best not to push China because it might hurt their national pride,'' he said.
The U.S. economy was artificially ``pumped up'' by tax cuts and interest rates, Soros said. The Fed cut the benchmark rate to 1 percent in 2003 and held it there until June 2004. With the central bank now raising rates, the economy is likely to slow in 2005, he said. ``We are limping along.''
`Currency Turmoil'
The darkest cloud on the horizon is the possibility of ``currency turmoil'' because of the current account deficit, which totaled 5.6 percent of gross domestic product at $164.7 billion in the third quarter.
``I'm not predicting it, but I could see it develop,'' he said. ``You do have to do something about the current account deficit. What happens if American ceases to consume 6 percent more than it produces? What happens to the global economy?''
Soros, saying he's ``retired'' from active investing, declined to forecast whether stocks would recover from their slow start this year. The Standard & Poor's 500 index is down 6.4 percent this month.
He also wouldn't predict the direction of bond prices, although he said he's not surprised that the yield on the U.S. 10-year note, 4.14 percent at the close of New York trading last week, is 44 basis points lower than it was when the Federal Reserve began raising interest rates June 30, 2004.
`Tipping Point'
``Something like two-thirds of the debt is financed by central banks accumulating dollars, and then investing it in Treasuries,'' Soros said. ``And this goes on until a tipping point is reached, and this, what might be from an American point of view a virtuous circle turns into a vicious circle.''
Over the past seven months, the central bank has raised the overnight lending rate at what it calls a ``measured pace'' -- a quarter percentage point at each of four successive meetings to 2.25 percent.
Soros said he's satisfied with that pace, although there is a ``tremendous oversupply of liquidity in the world markets.'' The Fed went ``overboard in stimulating'' the economy after the recession of 2001, and therefore there is some vulnerability.
Soros said his spending to defeat Bush was not an ``investment gone bad because when you stand up for principles you have to do it whether you win or lose.'' He said he now believes Democratic presidential nominee Kerry ``did not, actually, offer a credible and coherent alternative.''
Soros said he would remain active in American politics, although he hasn't decided in what form. |
