George Soros, the hedge fund operator who famously “broke the Bank of England” in 1992 after short selling sterling to force the pound out of the ERM, has given an interesting interview to a British newspaper.

“This is a period of wealth destruction. The people who make money will be few and far between. There will be a lot more money lost than made.

“I think this is probably more serious than anything in our lifetime. I think the dislocations will be greater because you also have the implications of the house price decline, which you didn’t have in the 1970s, so you had stagflation and transfer of purchasing power to the oil producing countries, but here you also have the housing crisis in addition to that.”

In other words he believes that the United States and Britain are facing a recession of a scale greater than both the early-1990s and the 1970s.

In the UK will be hard hit, he says. “House prices have risen over the years and are further away from sustainable than in practically any other country, in terms of household indebtedness and the relationship of house prices to incomes.

“This is going to be compounded by the fact that the financial industry weighs more heavily on the economy than in other countries, because London is the centre of the global financial system, and you have the unfortunate condition that the Bank of England is bound into inflation targeting, and is not in a position to lower interest rates until you have an economic slowdown.”

However, “It’s much better than the straitjacket sterling was in when I broke the Bank of England. The ERM would have been abandoned even if I had never been born.

“As a hedge fund manager, I do not claim to be serving the public interest. I am in the business to make money,” he says. “It’s a difficult point for people to understand and there’s a general attitude when they see people profiting to say that markets are immoral, or making money by speculating is immoral.

“It’s really the job of the authorities to set the rules, and there are times when some people break the rules or engage in improper activities, like the sub-prime mortgages. The impact fell particularly heavily on black and Hispanic minorities.

“It is a scandal, and I think you can blame Greenspan for not regulating the mortgage industry. But that’s very different from speculating in government bonds or financial instruments, and that’s a difficult point to get across, but I feel very strongly. Markets play a very useful role and they are amoral, not immoral.”

I’ve written a post in Syntagma on how 9/11 caused the credit crunch and most of the problems now facing the world.

These problems include, rocketing food prices, chronic wars in the Middle East, the credit crunch, high oil and commodity prices, and the slow motion global recession.

On the credit crunch. Economist Joseph Stigler’s book The Three Trillion Dollar War argues persuasively that Alan Greenspan’s policy of holding interest rates below optimal levels, for longer than anyone deemed necessary, was aimed at masking the enormous cost of the Iraq war on the American economy.

Together will rising house prices, the loose policy opened the way to a splurge of mortgage lending to the U.S. trailer-park poor, the sub-prime end of the market, and the rather guilty repackaging of it into faux Triple-A assets, which were sold on around the world. From those actions, we now have the words “Great Depression” hanging over us again.

On commodity prices, led by oil, now standing at close to $120 a barrel and its knock-on effect in all other markets, especially food, the same argument applies.

“In an inflationary environment, merchants tend to hoard their stocks in warehouses, betting on higher prices down the line. It’s a one-way bet right now, so a lot of the world’s grain output is locked away, pushing up prices at an even greater rate and shoving millions into hunger.”

Read the whole of the article.

This article is adapted from a piece which appeared in Syntagma on February 26.

The American economy is now in recession. A slew of new data clearly reveals both a marked downturn in activity, combined with a rise in inflation — something not seen since the stubborn “stagflation” period of the 1970s.

Some economists expect a robust return to growth later in the year off the backs of aggressive rate cuts by the Fed, and a financial package from the President that will see cheques delivered to taxpayers — and others on low incomes — by June.

That may not be enough, especially as it’s now emerging that the Iraq war is the principal cause of worldwide recessionary trends from two directions : the rise in the price of oil, and the low interest rates that led to reckless lending to the sub-prime market.

A new book by Nobel prizewinning economist Joseph Stiglitz powerfully demonstrates these effects. The Three Trillion Dollar War — The True Cost Of The Iraq Conflict outlines the immense downside across the globe of what must now be deemed a policy catastrophe.

In terms of the current credit crunch, which arose out of the sub-prime mortgage fiasco, many — including Syntagma — had blamed Alan Greenspan, then Chairman of the U.S. Federal Reserve Bank, for keeping rates too low for too long. Combined with steeply rising house prices this gave the banks a one-way bet for lending to the trailer-park poor.

However, it’s becoming clear that the low-rate regime was engineered to mask the terrifying cost to the American economy of the wars in the Middle East.

We can now begin to assess the extent of the disaster to American interests the war is continuing to inflict. The conflicts have led to a strengthening of Gulf, Chinese and other sovereign wealth funds, which have bought up large chunks of prime U.S. assets, including blue-chip bank stock, while, in some cases, simultaneously enjoying a bonanza from higher and higher oil prices.

In ten years, bank stocks should prove exceptionally rich investments as they recover from current adverse credit conditions. The war has given secretive foreign funds a one-way bet.

It’s hard to estimate the effect all this will have on American power and influence around the world. A war that was meant to eliminate Al Qaeda and secure the world’s oil supplies, has had precisely the opposite effect.

Joseph Stiglitz works out the numbers and they make depressing reading.

The news that stagflation is reappearing on the scene is another blow for the West’s economic stability. Stiglitz’s book is required reading for all who want to understand the future of the global economy over the next two decades and the causes of the misery to come.

This is going to be a long haul.