
When George Soros Broke the British Pound (2014) - JackFr
https://priceonomics.com/the-trade-of-the-century-when-george-soros-broke/
======
elmar
This incident was the main reason the UK didn't enter the Euro.

This wonderful BBC documentary explains everything on detail.

[https://youtu.be/K_oET45GzMI](https://youtu.be/K_oET45GzMI)

~~~
elmar
Sometimes I wonder if this incident didn't happen, would the UK had entered
the Euro and Brexit wouldn't be on the horizon today.

~~~
Despegar
The Eurozone is fatally flawed because they share a currency but have no
transfer payments between rich and poor members. So you have countries like
Germany that are effectively subsidized by poorer countries.

It's been a great setup for 20 years if you've been in the German capital
class, not so great for anyone else.

~~~
Reason077
> _“The Eurozone is fatally flawed because they share a currency but have no
> transfer payments between rich and poor members.”_

This is incorrect. The EU has substantial transfer payments. Wealthier EU
countries (like Germany) subsidise poorer ones (like Poland) on the order of
tens of billions of Euros annually.

Regional development (subsidies for poorer areas) is the second largest EU
budget line item after agriculture.

[https://www.bbc.co.uk/news/uk-
politics-48256318](https://www.bbc.co.uk/news/uk-politics-48256318)

~~~
peteretep
Germany paid net €12bn. California has net federal tax receipts of $450bn. Not
identical types of figures, but comparing the tiny transfer payments in the EU
to the gigantic ones in real financial unions is where the difference lies.

~~~
OscarTheGrinch
Pretty sure that billions in Europe have three extra zeros.

~~~
opless
Not when it comes to finance.

Everyone appears to use the short billion these days, and it caused me
significant cognitive dissonance!

------
ummonk
What I would like to see is what led to the pound being so badly mispriced in
the first place. Did they just price it at whatever was the prevailing price?
And was that why the Bank of England ended up with such small reserves?

Presumably they could have priced it lower and bought up Deutschmarks to bring
down the price of pounds and build up reserves to start with when they decided
to fix it.

There is also the question of how much Germany was contributing to the problem
by keeping its currency overly strong, making it harder for other countries to
stay in sync. Presumably if the Germans had raised interest rates somewhat and
/ or bought more reserves from other countries they could have helped relieve
the pressure.

~~~
nostrademons
Market prices for currencies reflect what you can buy with them. If a
country's economy is strong, they're exporting a lot of things that the world
wants to buy from them, and the world wants to invest in a bunch in a number
of securities denominated in their currency, the currency will be strong. If
the country's economy weakens (relative to other countries in the global
economy), the currency will weaken. There could be a lot of potential causes
for that. A generation of lazy people who don't work hard. Poor corporate
leadership that has people building products that nobody wants to buy.
Corruption and misincentives that encourage people to shift value around
rather than producing value. The rest of the world suddenly building out their
technology and capital stock and catching up to your economy.

Britain was the pre-eminent world power up through WW2, so there was a lot of
historical inertia propping up the value of the pound. They recovered slowly
from WW2, though, lost their position as world leader to America, and had a
very rough 70s and 80s. The historical strength of the pound actually hurts in
that regard: it makes their exports less competitive, which leads to industry
moving away from Britain and a generation that has difficulty finding work.
Through their 80s they still had much of their reputation as a world power
(the Falklands war was fought over it); by the 90s it was becoming apparent
that reality did not match reputation.

~~~
ClumsyPilot
> "A generation of lazy people who don't work hard"

I am sorry for derailing, but how does that happen, did they come out like a
faulty batch from a factory?

The mantra of "It's important to work hard" needs to die. Today we have fewer
friends than ever, population is unhealthy and the biggest killer of young men
is suicide.

Please don't perpetuate this nonsense. It should be: "Work smart, and look
after yourself/ your family"

~~~
andybak
That phrase alone gave me a poor feeling about the whole comment. It was
unnecessary and glib.

~~~
nostrademons
It was chosen deliberately. HN has a wide audience. Of the 4 causes I
explicitly listed, most people will shake their heads yes to two of them, feel
indifferent to one, and feel insulted by one. This applies _regardless_ of
which group you belong to. I have friends that would think "Yes, yes, it's the
lazy youth today" and be gravely insulted by the implication that corporate
leadership is incompetent; I also have friends (in government) who would agree
with both the observations on the lazy youth of today and the corrupt
corporate leadership but be gravely insulted by the idea that incentives
within our society might not result in the best behavior.

The meta-point I'm making is that every group believes our current problems
are somebody else's fault, but what we're really facing is a systemic
breakdown of the attributes that make for a functioning society. The other
comment on this article, "Every empire has created the conditions of its
collapse" has it right. When you're _inside_ of the collapse, the idea that
the collapse might be an inevitable result of the empire seems inconceivable,
because the empire is all you've ever known. So a lot of people go around
looking for a human adversary to blame, usually someone who was your
countryman until recently, when really the system that created the country
makes its demise inevitable.

------
mc3
Ah those poor boomers! Paying 15% interest on their £40,000 mortgage. These
millennials don't know how easy they have it, paying 3% on their £200,000
mortgage.

~~~
user5994461
At 15% the boomer could fully pay and own the property within 5-10 years. Then
save or go on to buy a new one.

At 3% the millennial will still not be owning their property after 30 years.

~~~
timthorn
Typical mortgage duration was and is ~25 years. The scenario in the 80s that
gave homeowners relief was that the costs got inflated away (and MIRAS allowed
the interest on a mortgage to be deducted from taxation)

~~~
onion2k
_Typical mortgage duration was and is ~25 years._

The number of 35 year mortgages has risen from 2.7% in 2006 to 15.75% now -
[https://www.theguardian.com/money/2017/jul/29/goodbye-25-yea...](https://www.theguardian.com/money/2017/jul/29/goodbye-25-year-
mortgage-borrowing-trap-35-year-deals) \- and 40 year mortgages are becoming
more common.

------
mjevans
My takeaway from this is that austerity is not a government level solution.
That works for smaller players (even corporations) within a larger system, but
at the level of system where a whole economy's possible size of pie is defined
by laws and regulations cutting back only wastes the potential of the
resources within.

I speculate that a better measure is to direct efforts towards wise
expenditures. Seek to focus the economy on things that will be of benefit when
done, with a focus on long term positive value to the economy and the quality
of life for all.

"John Major had made entering the ERM the centerpiece of his monetary policy
and his plan to bring austerity to England. The events destroyed his
credibility."

...

"If you’re looking for a take away from this story, that’s one of them."

------
lbeltrame
It also happened to the Italian lira at the same time. Up to the point (or
perhaps, the consequence) that the government at the time forcibly withdrew
money (not large amounts, mind you, but if you do some sums...) from all bank
accounts throughout the country overnight.

------
justaguyhere
A bit off topic - does anyone know other blogs like priceonomics? I'm a big
fan - I think the first article I read there was the "Diamonds are bullshit"
one. Must be fun having access to all kinds of interesting data and poring
over them.

~~~
john_minsk
Liked the "Diamonds are bullshit"

Anything similar on watches/suits. THese are mine flaws

~~~
mixmastamyk
[http://paulgraham.com/submarine.html](http://paulgraham.com/submarine.html)

------
dang
Discussed at the time:
[https://news.ycombinator.com/item?id=7752291](https://news.ycombinator.com/item?id=7752291)

------
nostrademons
It's interesting to read this with an eye on current global macroeconomic
conditions.

The dollar is significantly overvalued today, a result of its status as the
global reserve currency. And the consequences of that are all the same ones
mentioned for the pound in the article. The U.S. has been running a large
current account deficit since 1980: we import more than we export. Our jobs
are moving overseas, because it doesn't make sense to employ Americans at the
wages they demand, because the wages they demand are artificially inflated by
the overvalued dollar they're paid in. We need to keep interest rates high
relative to peer countries to maintain the dollar's reserve status. We insist
- through foreign diplomacy if possible and military intervention if not -
that oil-producing companies price their oil in dollars, creating demand for
dollars that would otherwise flow through other currencies. And all of this
has been widely reported for the last couple decades.

The U.S. has stated that they're committed to defending the dollar as the
world's reserve currency. What happens when they can't, and the collective
weight of the market is more than a national government can prop up?

~~~
jk27277
"we import more than we export. " Doubt that. Before you answer with a
statistic, Google "dark matter in accounting" regarding the deficit.

If apple sells an iPhone to Germany. In what export balance does it appear?
What company makes the profits?

~~~
PeterisP
Without putting much analysis into it, IMHO whenever Apple would sell an
iPhone in Germany the effects are as follows:

Goods export worth the "wholesale price" from China to EU;

An EU company (Apple entity in Ireland or Netherlands? the 'double Irish
sandwitch' arrangement which IIRC is still used is a bit tricky, but one of
these) earning almost all of the profits of that deal;

The shares of publicly traded USA company 'Apple' appreciating in value
because the value of the EU company that they fully own increased because they
gained profit and cash (but which won't be repatriated to USA due to tax
reasons).

IMHO that sale wouldn't have any direct effect on USA trade balance and on USD
supply/demand.

Does this make sense? Am I getting something substantially wrong?

~~~
jayalpha
It does not matter if you use Germany or the USA.

iPhones or whatever gets produced in China, likely by Foxconn. Profit margins
are small.

I iphones get sold to Apple HK, apple HK sells them to Apple US or Apple
Germany for a huge mark up. iphones are sold in the US or Germany for a small
mark up.

I don't know if this is apples setup but profits would be accrued in HK tax
free. In the end it does not matter since.

On the balance sheet China or HK is exporting goods to the US or Germany but
all the profits land at a US company - apple.

Amazon, Google, eba, Microsoft is big in Europe. Where do you see their
products in the trade balance sheets? YOU DON'T. Microsoft is not shipping
Windows CDs from the US to the UK or France or Germany.

The bottom line: While the huge trade deficit of the US is not healthy, it is
highly distorted and probably much lower than you think.

"IMHO that sale wouldn't have any direct effect on USA trade balance and on
USD supply/demand."

People buy stocks in the US. They buy them with US dollars. Why are they
buying US stocks? Because these companies are highly competitive. Why are they
highly competitive? Most pay hardly any taxes and their products don't appear
in any trade balance sheet.

------
codexon
It makes me wonder if he would have been successful if he wasn't able to short
10 billion. As the article said, Norman Lamont was planning to defend the
sterling with 15 billion.

~~~
tiernano
It wasn't just him though. By the sounds of things lots of players smelled
blood in the water. Saros has 10bn, but other players probably had a lot more
between them...

~~~
codexon
They may have only done so because they saw Soros betting so much on it.

------
bArray
Forgetting the politics of George Soros (which isn't suitable for HN anyway),
I don't believe he is to blame for the UK government's questionable choices.

To put the estimated £3.3 billion loss into perspective:

* The failed NHS software update/upgrade project cost >£12 billion [0].

* The UK spends ~£9 billion a year (after calculating rebates) to be a minority voting block in the EU [1]. It's currently costing ~£0.75 billion a month to stay in the EU [2].

* The "divorce" settlement to the EU is currently set between £30 billion and £40 billion [2]. To put that itself into perspective, that is each person (including people on death's door and babies) in the UK (~70M) paying the best part of £600 out of their own pocket to the EU - something they never voted to be a part of anyway.

I could go on all day about the UK government's awful handling of money.

[0]
[https://en.wikipedia.org/wiki/List_of_failed_and_overbudget_...](https://en.wikipedia.org/wiki/List_of_failed_and_overbudget_custom_software_projects)

[1] [https://fullfact.org/europe/our-eu-membership-
fee-55-million...](https://fullfact.org/europe/our-eu-membership-
fee-55-million/)

[2] [https://www.bbc.com/news/uk-
politics-49563957](https://www.bbc.com/news/uk-politics-49563957)

~~~
mrtksn
Wow, such a propaganda tone that I am not used to seeing in HN.

"9 billion a year for a voting right" is like saying that the average software
developer in London pays 20K a year to the government for voting rights every
5 years. You obviously don't pay taxes for voting rights, you pay taxes to
sustain or improve the environment you operate in and the voting is about
choosing the people and the path to that.

The "divorce bill" makes it sound like it some kind of a fine or something but
it's actually about the obligation that the UK committed through the years. A
good analogy would be the UK participating in a birthday dinner party,
promising to chip in for the present, ordering the food and the desert but
leaving before the desert arrives so people expect the UK to pay for its
desert as it was already cooked and pay its part for the present they bought.
This is not going away no matter if the Brexit would be hard, soft, mellow or
squishy. If the UK does not honour its obligations, it would be incorporated
in the future trade agreements.

Please don't use propaganda catchwords and talking points here, the topic
itself is divisive but this is beyond that. It is a dishonest portrayal of
reality.

~~~
aembleton
If a net recipient country were to leave the EU would the EU continue paying
them after they had left?

~~~
mrtksn
Paying what exactly? These are not really money transfers, it's not like UK
sending 100 bucks and the EU giving 80 of it to Bulgaria and sending 20 back
to the UK. It doesn't work like that.

The money is used for infrastructure and other stuff, maybe Bulgaria gets 80
bucks for road building but the UK benefits from it by getting the engineering
contract and after the project is completed they use these roads to make
moving nuts from Turkey cheaper and faster so making their chocolate industry
more competitive. Maybe it was UK's proposal to build that road and France
supported the idea because they also want to make the rose petals imports from
Bulgaria and electric hardware exports to Turkey cheaper?

It's not a charity. So yes, if a net recipient country leaves the EU chances
are that they will continue receiving EU funds just like the other countries
that receive EU funds despite never being the EU in the first place.

------
viburnum
I don’t understand why it is that the hike in interest rates had to fail. Had
the speculators bought tied up so much liquidity that nobody had pounds to
sell to the UK’s central bank?

~~~
singingboyo
I think you've got it backwards. If no one is buying and everyone is selling,
the value drops. The central bank couldn't sell back the pounds it had bought,
and couldn't feasibly keep buying more forever.

And, well, no one else would buy pounds in the fixed range:

* The currency spent the morning dropping in value. * This despite the government buying up pounds. * There had been news stories about possible devaluation of currencies in the ERM, and suggestions it will be the pound * The country was in recession - the government has limited flexibility with interest rates.

Against this backdrop, who would buy pounds?

Essentially, as the article notes, it was already a matter of when the pound
would drop, not if. Soros' Quantum Fund and other funds might have made it
happen a bit sooner, but it was pretty clear that the pound was overvalued.

~~~
viburnum
I think that’s begging the question, though. They could have fought it out,
like the Volcker shock in the US from just a few years earlier. Maybe
everybody assumed they wouldn’t do anything as dumb as that.

------
User23
Wynne Godley's Maastricht and All That[1] is a great explanation of why the
Euro was, and in fact is, doomed to failure and the UK was correct to stay
out. This essay was written less than a month after Black Wednesday, so I
assume it was probably influenced by the event. Sadly the lesson was evidently
not learned, as the word "fiscal" doesn't appear a single time in the article.

The key lesson here for states is only ever acquire financial obligations in
your own sovereign currency. This is why the Swiss were able to put a ceiling
on the value of the CHF during the European Debt Crisis. Their ability to
spend CHF is unlimited, so they could just keep expanding their balance sheet
indefinitely buying Euros, which devalued the CHF. A sovereign can always
devalue, but not necessarily do the opposite.

[1] [https://www.lrb.co.uk/v14/n19/wynne-godley/maastricht-and-
al...](https://www.lrb.co.uk/v14/n19/wynne-godley/maastricht-and-all-that)

~~~
TMWNN
>Wynne Godley's Maastricht and All That[1] is a great explanation of why the
Euro was, and in fact is, doomed to failure and the UK was correct to stay
out.

 _The Guardian_ speculated in 2013
[http://www.theguardian.com/business/economics-
blog/2013/jun/...](http://www.theguardian.com/business/economics-
blog/2013/jun/02/britain-euro-what-if-joined) that if Britain had joined the
Euro:

* The mid-2000s British housing bubble, and its collapse in 2007, would have been even bigger.

* Britain would have had to ask the IMF, ECB, and EU for loans.

* The Tories would in 2010 have promised a referendum to leave the Euro and won a majority. Labour would have won fewer than 100 seats, and UKIP would have "made spectacular gains".

* The anti-Euro side would have won the referendum, and the currency would have collapsed.

* "after a deep and painful recession economic recovery began".

* "Britain would have destroyed the euro on departure, and would now be on the point of leaving the EU altogether. The idea that Farage might be the next prime minister would be quite credible."

------
ptah
> The hope was that tighter relations would prevent catastrophic wars from
> breaking out every few decades

This is a crucial fact that has not been mentioned by anyone in public
discourse about Brexit

~~~
aembleton
David Cameron warned that Brexit could trigger World War Three during the
referendum campaign [https://www.mirror.co.uk/news/uk-news/brexit-could-
trigger-w...](https://www.mirror.co.uk/news/uk-news/brexit-could-trigger-
world-war-7928607)

------
aazaa
> ... Countries weren’t ready to give up their national currencies, but they
> agreed to fix their exchange rates with each other instead of “floating”
> their currency and letting capital markets set the rates. Since Germany had
> the strongest economy in Europe, each country set their currency’s value in
> Deutschmarks. They agreed to maintain the exchange rate between their
> currency and the Deutschmark within an acceptable band of plus or minus 6%
> of the agreed upon rate.

Germany's economic policies in particular have had a big effect on the course
of the last 100 years of European history. The hyperinflation following
Versailles and ensuing economic dislocation led in no small part to the rise
of the Nazi party.

The commitment of Germany in particular among European countries to strict
budget controls to avoid another hyperinflation laid the groundwork for Soros'
attack on the Pound.

Continued fiscal discipline has helped make Germany a dominant economic force
in the EU. It set the stage for the Greek debt crisis, and several others in
the works. These all resemble the Pound crisis in that the unusually strong
vigilance against excessive debt in Germany is/was a driving factor.

~~~
the_why_of_y
> The hyperinflation following Versailles and ensuing economic dislocation led
> in no small part to the rise of the Nazi party.

Nonsense - it was _deflation_ caused by austerity policies following the 1929
crash that helped the NSDAP come to power.

[https://www.anderson.ucla.edu/Documents/areas/fac/gem/nazi_a...](https://www.anderson.ucla.edu/Documents/areas/fac/gem/nazi_austerity.pdf)

------
hoseja
Every one of these trades should be taxed with an equivalent of VAT to make
this sort of ruinous speculation nearly impossible.

~~~
smabie
Why would you want to make it harder to buy currency?

------
ceejayoz
The "Soros broke the bank" framing I tend to see in discussions of this is
really quite odd, as if it were some sort of illegal Oceans 11 style heist.

He didn't break the bank. The bank broke itself.

> What kept the pound from plummeting in value was the British government’s
> guarantee that it would keep the value propped up, and the market believed
> that it would. As long as everyone believed that England would stay
> indefinitely committed to buying pounds for around 2.95 Deutschemarks, the
> status quo was maintained.

If you build a house on rotten stilts, and some neighborhood kid comes and
kicks one of them, it's not the kid's fault when the house collapses.

~~~
tjfl
> If you build a house on rotten stilts, and some neighborhood kid comes and
> kicks one of them, it's not the kid's fault when the house collapses.

It's at least partially the kid's fault. Don't go kicking stilts under houses.

~~~
jacquesm
If someone will pay you billions to go kicking stilts there would be few who
could resist. Betting against a nation state is usually a losing proposition,
Soros happened to have large enough boots to do the kicking.

~~~
user5994461
Noting the boots are not his and he risked nothing personally in the process.
hedge fund = betting other people money.

~~~
jacquesm
I don't think they were complaining. Now they have boots too!

