French President Nicolas Sarkozy, the current head of the G20, started the year talking about overhauling the international monetary system, and even implied he was prepared to consider measures to replace the U.S. dollar as the world’s reserve currency. (That arrangement was Nixon’s gift to the world in 1971: By removing the discipline of the gold standard, he left the value of the currency at the centre of world trade to the whims of American policy makers.) Six months later, Sarkozy’s ambition has been severely clipped. Victory at the G20 summit this autumn in Cannes would now be getting agreement on adding the Chinese yuan to the basket of currencies used to set the value of the Special Drawing Right, the accounting unit used by the IMF and no one else.
Everyone knows the massive accumulation of foreign currency reserves in China and other Asian countries, combined with big budget deficits and low interest rates in the U.S. and Europe, are creating the conditions for further instability. Yet it took the G20 finance ministers 1 1/2 years to simply agree on the guidelines they will use to measure whether the world economy is drifting off track. No serious corrective action has been taken, and none is planned.
“It is incremental change in the face of massive system failure,” says attendee Simon Johnson, a professor at the Massachusetts Institute of Technology’s Sloan School of Management who was formerly chief economist at the IMF. “On a macro level, I don’t think there is anything you can do about it. The structure of the world economy is what it is.”
In the summer of 1992, George Soros brought the Bank of England to its knees, betting that the authorities would succumb to political pressure rather than protect the value of the pound by jacking up interest rates. He led a run on the pound, and won. Now he wants to break economic orthodoxy. INET is run by Robert Johnson, formerly of Soros Fund Management. The think tank’s goal is to blow up the econometric models that so dramatically failed to predict the financial crisis and recession, and replace them with approaches that recognize randomness is a fact of life, not an outlying variable. Change the way people think about economics and you change economic policy. Soros’s contribution to INET is funding anti-establishment research that seeks to show that economics is actually more about behaviour and history than math.
Paradigm shifts happen over decades, but Soros can’t wait that long. He retired from active investing in 2000, although he did return to portfolio management in 2007 and 2008, racking up about $4 billion (U.S.) in two difficult years. Soros’s Quantum Fund averaged returns of 31% between 1969 and his retirement three decades later. That easily earns him a place in the ranks of the world’s most successful investors. Now, in his eighth decade, Soros has evolved into one of the greatest forces in nature: a billionaire who is thinking about his legacy. As The Edge signals that it’s time to go, a Belgian reporter squeezes in one last question. He asks Soros whether he sees himself as a modern-day John Maynard Keynes, the British economist who revolutionized his profession and helped shape the Bretton Woods agreement.
“Yes, I do, actually,” Soros says. “There are not many people who know the market and care about the public interest. I have made enough money for myself. That is in fact my motivation.”
John Maynard Keynes died April 21, 1946, of a massive coronary thrombosis, at 62. The previous month, he had been in Savannah, Georgia, for the inauguration of the IMF as the overseer of the fixed-exchange rate system created at Bretton Woods.
The Savannah gathering was bittersweet for Keynes—probably more bitter than sweet. He quarrelled with the Americans, picking up where he had left off in Bretton Woods two years earlier. The original conference was taxing for Keynes, and not only because he already was in ill health. More than 700 delegates from 45 countries converged on the Mount Washington, but the talks were really between two men: Keynes, an adviser to the British Treasury, and Harry Dexter White, a senior official in the United States Treasury Department.