Which billionaire do you believe?

When veteran investor George Soros speaks, markets listen – the man who once made billions by betting against the British pound is seen by some as being on a par with Warren Buffett.

Overnight, Soros has delivered a chilling warning to global markets by claiming that “we have only just entered Act II” of the global financial crisis as Europe’s fiscal problems worsen.

In a speech to the Institute of International Finance in Vienna (you can read the whole thing here) Soros warned that the global economy was in a position “eerily reminiscent” of what happened after the Great Depression and suggested that moves by European governments to cut their deficits at a time when their economies were still fragile could push the world back into recession.

“The collapse of the financial system as we know it is real, and the crisis is far from over. Indeed, we have just entered Act II of the drama, when financial markets started losing confidence in the credibility of sovereign debt,” Soros says.

“Greece and the euro have taken centre stage, but the effects are liable to be felt worldwide. Doubts about sovereign credit are forcing reductions in budget deficits at a time when the banks and the economy may not be strong enough to permit the pursuit of fiscal rectitude.

“We find ourselves in a situation eerily reminiscent of the 1930s. Keynes has taught us that budget deficits are essential for counter cyclical policies, yet many governments have to reduce them under pressure from financial markets. This is liable to push the global economy into a double dip.”

It’s heavy stuff, and of course there will be plenty who disagree with him violently, pointing to the numerous signs that the global economy is actually in recovery mode. Indeed, Wall Street jumped almost 3% last night on news that China’s exports remain strong.

But as Bloomberg noted in its report of the Soros speech, we should not forget how serious this situation really is. The European crisis has wiped $US4 trillion from global stock markets this year, and the region’s debt-ridden nations will have to raise almost $US2.4 trillion within the next three years to refinance, according to Bank of America Corp.

If the Soros speech has go you a bit down, take heart from retail king Gerry Harvey, who accused his fellow retailers of whingeing about conditions and told a forum that Australian retail is on its way to its “next great boom”.

“We talk about whingeing Poms, we’re the whingeing Aussies,” he said.

It’s a great contrast between the glass-half-full view and the glass-half-empty (or in Soros’s case, the glass half cracked) and different entrepreneurs will sit at different points along the optimism spectrum.

And while we all hope Gerry’s right with his boom-time prediction, the warning from Soros just underlines the fragile state of the global economy right now.

Stay focused on growth, but don’t ignore the warning signs.


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