George Soros is one of the greatest speculators in our history. He started out as a value investor (comparing stocks with their intrinsic values), but over the years, his philosophy evolved.
He managed to create his own Hedge Fund (with an initial fund of 2-3 million), and started speculating in currencies, indices, futures…
How did George Soros break the Bank of England?
George Soros is considered the king of bearish investment (with stocks that are sinking in the stock market), as evidenced by the fall of the pound sterling.
Central banks now have the power to influence currencies. They have the power to issue more and more banknotes, to control interest rates, to expand or reduce their cash ratios… so only a madman would think of going against them.
In 1992, Germany was already unified after the fall of the Berlin Wall. Germany increased its public spending to make investments that would support the growth of its economy, and this increased public spending caused the deficit to grow, and with it inflation.
Faced with this situation, Germany’s central bank was forced to raise interest rates (to reduce the movement of capital and thus control inflation).
At that time, the euro was not yet established, and each country had its own central bank totally independent of the other countries, as well as its own currency. In Germany there was the Deutsche Mark, and in England the British Pound Sterling.
For this reason, the countries of the euro zone needed to establish a common currency exchange rate to facilitate trade, giving rise to the European Exchange Rate Mechanism, or ERM.
Through this mechanism, it was established that, depending on the German mark, the other currencies should be within a range of value (around 6%), in order to maintain stable exchange rates.
Many countries within this system were forced to raise their interest rates in order to comply with the agreements to stay within the established band. This made the Deutsche Mark gain value.
Let’s put ourselves in the situation, if the Deutsche Mark did not stop gaining value, the rest of the currencies, being subordinated to the Mark, were forced to appreciate their currencies to comply with the EQF agreement.
At that time, England was in a deficit situation, so, in order to enhance their economy, they needed to lower their interest rates (to enhance the circulation of capital within their economy). However, in turn they needed to raise the exchange rate due to the rising value of the Mark.
And this is where George Soros comes in, as he realizes the situation and states that the fall of the pound sterling is practically inevitable, because the situation they were in was contradictory (they needed to raise and lower the exchange rates at the same time) and therefore unsustainable.
George Soros invested 1.5 billion to the fall of the exchange rate through futures and derivatives. This move by Soros caused thousands of investors to bet against the pound as well, and Soros went from investing 1.5 billion to investing 10 billion.
Finally, on September 16, 1992, Soros converted his 10 billion British Pounds into German Marks, thus making the pound’s price pale (due to its abrupt fall), and generating more value in the Mark (which implied an even greater increase in the value of the pound), and that is how the fall of the pound sterling occurred.
Soros made $1.1 billion in a single day, becoming the first man to beat an entire Central Bank.
This is the main reason why the British do not want to be in the euro, and it was the main condition for leaving the European Union. They did not want to be involved in this situation again, finding themselves limited to the outside.
Since George Soros founded his investment fund in 1979, he has managed to obtain average annual returns of 25%, together with his strategy of compound capitalization, managing to minimize the losses due to impacts generated in the great crises, thus making him one of the most important billionaires of our days.
