This story is particularly relevant because it's about the Bank of England trying to maintain a peg in the face of changing market conditions. Many have treated Tether's peg (to the USD) as immutable or inviolate but it's subject to the same market forces as any other peg. A peg is only as strong as how much money you have to defend it.
But here we are as Crypto Andys are learning the hard way why the financial system is the way it is.
"A peg is only as strong as how much money you have to defend it."
Which is why, in the case of the Soros story, it was the Bundesbank that broke the BoE, not Soros.
The Bundesbank refused to issue DMs to buy up spare GBP liquidity. And that broke the peg.
For a peg to work the currency issuers on both side of the fence need to act in unison, since intervention can only cap, not collar. If both play their part then the peg will be unimpeachable.
Until the Federal Reserve decides to maintain stable coin pegs by buying them up in return for new dollars when the dollar strengthens against them, then the whole concept is doomed.
It's not the market that decides whether a peg survives. It's the currency issuer on the strengthening side.
> A peg is only as strong as how much money you have to defend it.
Emphasis on liquid money. You know, the reason why central banks started QE is that banks don't want to invest into long term assets and just keep their reserves at the central bank. QE effectively turned a fixed term asset like treasuries into a short term overnight asset that you can sell and buy instantly.
It has no relevance to tether. It's strategically trivial to peg 'paper USD' to USD by having full USD reserves and allowing redemption. Pegs between different national currencies has no such solution
The differences being for large states that it was/is a question of how much you want to spend defending something, rather than how much you have, unless you are under attack by another state. And, for a large state run by rule of law it's not a question of going to 0 as for stable coins, instead it's going down by 20% (worst case).
This has been discussed many times, but there is no responsibility on Soros part ; broadly speaking, he speculated that an event would happen, and it did, thus he benefited from it.
Technically, that is not quite true. He sold $10 billion borrowed pound sterling that day, in collusion with others, which appears to have been the straw that broke the camel's back.
Sure had the pound sterling been sound, that would not have been enough. But it was at the time a lot of money, and it's unclear what would have happened had he not done it.
A lot of people lost a lot of money that day. Not just speculators or stock-traders, but many home-owners lost their homes, a lot of businesses defaulted and many people became unemployed as a consequence of what happened that day.
So, there's some motivated resentment against him.
To remain in the ERM the UK had to raise interest rates to alarming levels causing a deep and unnecessary recession. A lot of negative equity for home owners, unemployment rising back to 3 million. It's was unsustainable. Soros and the other speculators did us a favour ejecting us from it. The UK had about 15 years of low inflation growth after we that so Soros deserved a medal.
the irony is by breaking the UK out of the ERM: Soros enabled brexit
if the UK had stayed in the ERM it would have joined the euro and exiting would have been impossible
Soros is very, very much against brexit, to such an extent he funded numerous remain campaigns and continued to fund campaigns dedicated to overturning the result (Trump style)
…and many normal people have suffered so bankers could have their fun. This is so evil on so many levels, that few people in suits can have such an impact of whole country finances. We all believe in a dream that it’s competition and market prices that drive economy, and then this happens.
I don't think the Bank of England was having fun, they were under political pressure.
> This is so evil on so many levels, that few people in suits can have such an impact of whole country finances.
Absolutely, it's immoral for central banks to manipulate currency markets. It only strengthens the argument for central banks to have defined mandates and be free from political interference.
> We all believe in a dream that it’s competition and market prices that drive economy, and then this happens.
Well, the BoE tried to enforce its will on the market and predictably failed. Once the charade ended, inflation came down over the next years the British economy recovered from the recession it was in before the event.
Wait, you don't actually blame Soros for this, do you?
Soros was a disciple of philosopher Karl Popper, one of the 20th century's most influential philosophers of science. Popper was a big influence on empirical falsification. Popper wrote the book The Open Society and Its Enemies that has greatly influenced political ideals both in the left and the right wing in western democracies.
In 2009 Financial Times published an essay by George Soros, where he describes his general philosophical theory "reflexivity", that he applies to life and investing. Reflexivity is an extension of Poppers ideas and are very well grounded.
They explain very well the reasoning that led to breaking of the Bank of England.
This headline is needlessly aggressive. A massive bet one way or the other on a currency is all that was done and he was right. There's no "breaking" here.
Since open speculation can not be considered manipulation under the legal framework today I suppose you ask about the Bank's role in the problems created for itself. So... Isn't the entire point of Bank of England and other central banks to manipulate the market, so why would they be prosecuted?
It was Druckenmiller idea and analysis under Soros fund and management ; also Soros encouraged sizing the bet up, he could have done the opposite and the trade wouldn't be as discussed as it has been, I guess. So yeah, some credit should go to Druckenmiller, I agree, but it makes sense to quote Soros name.
For a financial novice, it's unclear what Soros actually did. It would be useful to explain what "shorting the pound sterling" actually means and the mechanics by which that places pressure on the Bank of England.
At the time the Bank of England had committed itself to maintaining the value of Sterling at a rate that was widely considered to be too high.
Soros and a bunch of other large funds and banks decided to take on a coordinated short position. So they...
- borrowed very large sums of Sterling
- exchanged the Sterling for Dollars (or maybe DeutschMarks?)
- waited for Sterling to depreciate
- Sterling now being much cheaper they then used the Dollars to buy back the original loan amount of Sterling and have plenty of Dollars left over
- repaid the loans
The large amounts of Sterling that they were selling would have increased the downward pressure on the price of Sterling, forcing the Bank of England to sell foreign currency reserves to keep the value within the narrow limits it had committed to as part of the ERM.
Due to the open nature of the market other currency speculators would have been aware that all this was going on, and they too started shorting Sterling, further increasing the pressure and forcing the BoE to sell more reserves.
At some stage it became apparent that this was unsustainable and Britain exited the ERM and devalued the currency, creating massive profits for the speculators.
I've been thinking of this event as soon as I saw the stablecoins collapsing. I happened to be in London visiting friends the week the pound lost the peg and even though I'm not in the biz and in fact back then didn't really pay attention to the financial markets at all this was quite exciting.
Soros was a disciple of philosopher Karl Popper, one of the 20th century's most influential philosophers of science. Popper was a big influence on empirical falsification. Popper wrote the book The Open Society and Its Enemies that has greatly influenced political ideals both in the left and the right wing in western democracies.
In 2009 Financial Times published an essay by George Soros, where he describes his general philosophical theory "reflexivity", that he applies to life and investing. Reflexivity is an extension of Poppers ideas and are very well grounded.
This essay explains very well the reasoning that eventually led to breaking the Bank of England as well.
No. And some currency are particularly weak right now to this kind of attacks[0], like the CHF, as well as the colonial CFA.
The theoric ideas to resist this for a country is either:
to let your currency fluctuate freely, as the free market theory wants. But this is basically selling your small and medium business production to companies that can do faster arbitrage than them. I know this is the liberal way, but when you think about it, this is not viable if you have any industry and free trade agreements with a countries with richer banks/companies. This would be economic suicide for Mexico if you want an example.
Other way to resist this is to have a lot of dollar/eu bonds and sell them. If you have more bonds than the attacker money, you "win" (the attacker doesn't loose much either). I'm pretty sure some money can be capted during an attack for HFT firms, but don't quote me on that, and i'd like confirmation from someone actually working with HFT systems here
And the last way is having one of the strongest currency in the world. Dollar, Euro, Yuan basically. Pound and Yen "waste" their respective central bank millions each year
[+] [-] merricksb|3 years ago|reply
https://news.ycombinator.com/item?id=30720876 (151 points/55 days ago/175 comments)
[+] [-] jmyeet|3 years ago|reply
But here we are as Crypto Andys are learning the hard way why the financial system is the way it is.
[+] [-] neilwilson|3 years ago|reply
Which is why, in the case of the Soros story, it was the Bundesbank that broke the BoE, not Soros.
The Bundesbank refused to issue DMs to buy up spare GBP liquidity. And that broke the peg.
For a peg to work the currency issuers on both side of the fence need to act in unison, since intervention can only cap, not collar. If both play their part then the peg will be unimpeachable.
Until the Federal Reserve decides to maintain stable coin pegs by buying them up in return for new dollars when the dollar strengthens against them, then the whole concept is doomed.
It's not the market that decides whether a peg survives. It's the currency issuer on the strengthening side.
[+] [-] imtringued|3 years ago|reply
Emphasis on liquid money. You know, the reason why central banks started QE is that banks don't want to invest into long term assets and just keep their reserves at the central bank. QE effectively turned a fixed term asset like treasuries into a short term overnight asset that you can sell and buy instantly.
[+] [-] plsbenice34|3 years ago|reply
[+] [-] sgt101|3 years ago|reply
[+] [-] pru567|3 years ago|reply
[+] [-] hnthrowaway0328|3 years ago|reply
[+] [-] belter|3 years ago|reply
[+] [-] id|3 years ago|reply
[+] [-] bionsystem|3 years ago|reply
[+] [-] spacemanmatt|3 years ago|reply
[+] [-] zosima|3 years ago|reply
Sure had the pound sterling been sound, that would not have been enough. But it was at the time a lot of money, and it's unclear what would have happened had he not done it.
A lot of people lost a lot of money that day. Not just speculators or stock-traders, but many home-owners lost their homes, a lot of businesses defaulted and many people became unemployed as a consequence of what happened that day.
So, there's some motivated resentment against him.
[+] [-] drumhead|3 years ago|reply
[+] [-] blibble|3 years ago|reply
if the UK had stayed in the ERM it would have joined the euro and exiting would have been impossible
Soros is very, very much against brexit, to such an extent he funded numerous remain campaigns and continued to fund campaigns dedicated to overturning the result (Trump style)
[+] [-] szastamasta|3 years ago|reply
[+] [-] unmole|3 years ago|reply
I don't think the Bank of England was having fun, they were under political pressure.
> This is so evil on so many levels, that few people in suits can have such an impact of whole country finances.
Absolutely, it's immoral for central banks to manipulate currency markets. It only strengthens the argument for central banks to have defined mandates and be free from political interference.
> We all believe in a dream that it’s competition and market prices that drive economy, and then this happens.
Well, the BoE tried to enforce its will on the market and predictably failed. Once the charade ended, inflation came down over the next years the British economy recovered from the recession it was in before the event.
Wait, you don't actually blame Soros for this, do you?
[+] [-] CamelCaseName|3 years ago|reply
Because it's the Bank of England that was fixing the price. By breaking the peg, Soros introduced competition.
[+] [-] pjc50|3 years ago|reply
It really is competition and market prices that drive the economy... controlled by a few people in suits. And money itself is part of the market.
[+] [-] kache_|3 years ago|reply
[+] [-] pasiaj|3 years ago|reply
In 2009 Financial Times published an essay by George Soros, where he describes his general philosophical theory "reflexivity", that he applies to life and investing. Reflexivity is an extension of Poppers ideas and are very well grounded.
They explain very well the reasoning that led to breaking of the Bank of England.
https://www.ft.com/content/0ca06172-bfe9-11de-aed2-00144feab...
[+] [-] gigatexal|3 years ago|reply
[+] [-] 55555|3 years ago|reply
[+] [-] tener|3 years ago|reply
[+] [-] Y-bar|3 years ago|reply
[+] [-] refurb|3 years ago|reply
[+] [-] lvl102|3 years ago|reply
[+] [-] bionsystem|3 years ago|reply
[+] [-] kareemsabri|3 years ago|reply
[+] [-] t_scytale|3 years ago|reply
At the time the Bank of England had committed itself to maintaining the value of Sterling at a rate that was widely considered to be too high.
Soros and a bunch of other large funds and banks decided to take on a coordinated short position. So they...
- borrowed very large sums of Sterling
- exchanged the Sterling for Dollars (or maybe DeutschMarks?)
- waited for Sterling to depreciate
- Sterling now being much cheaper they then used the Dollars to buy back the original loan amount of Sterling and have plenty of Dollars left over
- repaid the loans
The large amounts of Sterling that they were selling would have increased the downward pressure on the price of Sterling, forcing the Bank of England to sell foreign currency reserves to keep the value within the narrow limits it had committed to as part of the ERM.
Due to the open nature of the market other currency speculators would have been aware that all this was going on, and they too started shorting Sterling, further increasing the pressure and forcing the BoE to sell more reserves.
At some stage it became apparent that this was unsustainable and Britain exited the ERM and devalued the currency, creating massive profits for the speculators.
[+] [-] andsoitis|3 years ago|reply
This article (https://www.investopedia.com/articles/forex/08/greatest-curr...) talks about going short, going long, strangle and straddle, it also talks about a couple of illustrative events, including Soros v. British Pound.
[+] [-] unknown|3 years ago|reply
[deleted]
[+] [-] gumby|3 years ago|reply
[+] [-] juusto|3 years ago|reply
[+] [-] Tarq0n|3 years ago|reply
[+] [-] pasiaj|3 years ago|reply
In 2009 Financial Times published an essay by George Soros, where he describes his general philosophical theory "reflexivity", that he applies to life and investing. Reflexivity is an extension of Poppers ideas and are very well grounded.
This essay explains very well the reasoning that eventually led to breaking the Bank of England as well.
https://www.ft.com/content/0ca06172-bfe9-11de-aed2-00144feab...
[+] [-] Taryns|3 years ago|reply
[deleted]
[+] [-] unknown|3 years ago|reply
[deleted]
[+] [-] brabel|3 years ago|reply
[+] [-] orwin|3 years ago|reply
The theoric ideas to resist this for a country is either:
to let your currency fluctuate freely, as the free market theory wants. But this is basically selling your small and medium business production to companies that can do faster arbitrage than them. I know this is the liberal way, but when you think about it, this is not viable if you have any industry and free trade agreements with a countries with richer banks/companies. This would be economic suicide for Mexico if you want an example.
Other way to resist this is to have a lot of dollar/eu bonds and sell them. If you have more bonds than the attacker money, you "win" (the attacker doesn't loose much either). I'm pretty sure some money can be capted during an attack for HFT firms, but don't quote me on that, and i'd like confirmation from someone actually working with HFT systems here
And the last way is having one of the strongest currency in the world. Dollar, Euro, Yuan basically. Pound and Yen "waste" their respective central bank millions each year
[0]: https://ideas.repec.org/p/nbr/nberwo/5285.html
[+] [-] unmole|3 years ago|reply
[+] [-] neilwilson|3 years ago|reply
At that point there is no patsy in the market, and liquidity constraints will deal with the situation. For every seller there has to be a buyer
Couple it with the occasional 100% margin calls if the price moves too much and the risk of getting caught naked becomes very high indeed.