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Tuesday, April 07, 2009

Soros: Don't put blind faith in the Fed

Soros warns don't put blind faith in the Fed's ability to unwind the current super easy monetary and credit policies.  Soros in early 1990s successfully attacked British Pound simply based on the same rationale that government's words are NOT to be trusted.

This is the most likely scenario of what will happen:

As economy slowly takes hold and begins to recover, investors' jittery on inflation will immediately surface, and this will push up long-term interest rate on, say, 10-year T-note.  The Fed has the choice of raising short-term interest rate, the Fed funds rate, to lower investors' inflation expectations.  But inside FOMC there will be a huge debate: a lot of people who worry about raising interest rate too soon will criple the nascent recovery, will ask Bernanke to stay put; otherwise, it will drag the economy down back into water again.  The Fed will hestiate, hesitate and debate back and forth, until they suddenly realize inflation expectations begin to get out of control.   What we will end up with is a slow recovery (due to this extraordinary asset/debt bubble) and high inflation at the same time.  What is this called?  Yes, "stagflation"!


Link to George Soros' interview