Breaking the Buck

In 1992, George Soros broke the Bank of England.  This is hailed as the greatest currency trade of all time.  Of course, it was not so great for England.  The pound fell by 30% over four months, and England had to drop out of the Exchange Rate Mechanism (ERM).  Soros is estimated to have netted $1 billion on the trade.

Jeremiah wonders if a modern-day Soros might not be planning an attack on our own inflated currency.  Soros has stated that a new world currency must replace the dollar.  Chinese banks are working to replace it with the yuan, and they have also asked the IMF to designate their Special Drawing Rights (SDR) as the world’s supreme currency.

Because SDRs are denominated in several national currencies, no single currency would enjoy an unfair advantage.

So, what would a speculative attack look like?  First, you need a thesis – some anomaly that is open to arbitrage.  In England’s case, it was the ERM.  When they say Soros “broke” the Bank, this currency peg is what broke.

America enjoys exactly such an anomaly.  Because the dollar is the world’s reserve currency, we are able to fund our national debt below market rates.  This makes American bonds a likely target for short sellers.  The thesis would be, “given America’s debt problems, bond yields should be 7%,” or, “the dollar should be worth fifty yen,” or both.

Next, you need another currency to trade long.  Helpfully, the IMF has just designated two new reserve currencies – the first since the Euro was created.  Any trader can now take a  speculative position in Aussies versus the dollar.

This brings us to the final requirement – a trigger.  You must launch the attack at a key point, and stampede other holders – like the Bank of China – into dumping their reserves.  Note that while the Fed can bid bonds up, they cannot simultaneously protect the dollar.  Our epic national debt is a fundamental weakness, and the thesis for an attack.

The trigger could be any event that spooks the bond market – a war, a downgrade, a default, or a weak bond auction.  The event could also be orchestrated.   Keep an eye on the next bond auction, January 10.  Happy New Year!

See also: Soros Convenes ‘Bretton Woods II’


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