Chapter 19 Chapter 19 Challenge the Pound

The genius of George Soros was to spot long-term trends faster than anyone else. The first quarter is shocking In September 1992, Soros took the biggest action in his life, which made him the most famous investor in the world in one fell swoop. His famous move this time was against the pound.He picked two very authoritative targets in England. One is the pound sterling, which once had great authority.Pound sterling has become the world's main currency in 200 years, adopting the gold standard system, and was once a symbol of British power just like the British navy.However, due to World War I and the stock market crash in 1929, the role of the pound was greatly weakened.The British government floated the pound and abandoned the gold standard, and its status went from bad to worse.

Another target is the Bank of England.The Bank of England has long represented prosperity and strength, the stalwart of British finance.Nothing can shake its status as the country's stalwart bulwark against market chaos. Soros was going to test the authority of the pound and the Bank of England in a way no one had even imagined before.He's going to do something no one has done before, and he's been preparing for it for a long time. Prelude to the Second War Before he acts, several developments are intertwined. The Exchange Rate Mechanism, established in 1979, was the first stage in an attempt to create a single European currency.A single currency would stabilize European commerce.It will also weaken the ability of traders and speculators to make it difficult for the National Bank to operate, especially when the government is not involved in monetary integration.

With the implementation of the Currency Exchange Rate Mechanism, Western European countries have become increasingly connected.Their mechanism is not fixed on gold, nor is it stable on the dollar, but mutual stability.Each currency floats within a fixed range, and if it exceeds this range, the central banks of the member states are obliged to intervene.Within this fixed range, member countries' currencies can float relative to other national currencies, while the core exchange rate is based on the Deutsche Mark. The process of European integration was strengthened on February 7, 1992, when the Maastricht Treaty was signed.The May Treaty, signed by the 12 member states of the European Union, seeks to establish a regional monetary and economic system for gradual and comprehensive integration.The plan is to establish a European Central Bank and a single currency by 2000, and it also attempts to move Europe towards political integration.

What a grand plan this is. The belief expressed through this expectation is that European countries act together to suppress national interests in the interest of the overall Union. The difficulty is: Someone forgot to tell the European countries that they should act together. The success of economic integration depends more on the coordination of economic policies among countries.But no matter how many documents these countries signed, no matter how important speeches they made, it was impossible for Western European politicians to be truly in tune with one another. In the autumn of 1992, the billions of dollars that Soros used to speculate on the British pound were only a small part of the huge capital in the world financial market.With the advancement of technology and the cancellation of various market restriction systems, trillions of dollars of transactions are carried out every day in the world, and the transaction amount is more than three times that of 1986.American workers' pension companies invested $150 billion overseas, 20 times what they had in 1983.Organizations ranging from Japanese insurance companies to American funds are setting the world on an investment frenzy.

Since 1987, most European currencies have been stabilized on the Deutsche Mark.For example.The exchange rate between the pound and the mark is 1 pound to 2.95 marks, which makes the cost of adding a currency exchange rate mechanism very high. In 1992, it was quite evident that the currencies of several European countries.Not only the pound sterling but also the Italian lira began to lose value against the franc and the deutsche mark, due to the recession in the UK and the belief that it was impossible for the UK to maintain a high exchange rate with the deutsche mark.Speculators believe that the British government will be forced to withdraw from the currency exchange rate mechanism.

The genius of Soros in the third quarter George Soros believed that the currency exchange rate mechanism could not be coordinated.He knew that the only way for European countries to keep speculators at bay was to maintain the same exchange rate in all countries.If exchange rates are diversified, speculators like him will speculate -- taking advantage of weaker currencies.This is the essence of what happened in the summer of 1992. Soros had long foreseen this outcome. The genius of George Soros is to discover the long-term development trend faster than others Gary Glassten, manager of Soros Investment Management, said: "George's genius lies in discovering the long-term trend of things faster than others. George had already realized what was going to happen when the Berlin Wall fell. , so he knows that German reunification will cost a lot more than Chancellor Kohl and others have predicted. His understanding of macroeconomics is exactly what we need. He doesn't have to see the changes in reality, but in his head, he has already imagined Arrived."

Section 4 Who is right and who is wrong Difficulties are mounting in Europe, where, less than a year after the signing of the Maastricht Treaty, it is difficult for several European countries to coordinate their actions. Although the United Kingdom decided to strengthen its economic position, Soros and other investors believed that the United Kingdom could not maintain its high interest rates, and the only feasible solution for the British government was to lower interest rates, which would weaken the British currency and force the United Kingdom to withdraw from the currency exchange rate mechanism.Meanwhile, in London finance, speculators such as Soros were speculating on sterling, and in the first few months they had begun to take a considerable market share.

As time went on, in 1992, the British government was increasingly in an embarrassing situation.Britain needs Germany to lower its interest rates, but that is notoriously impossible. Britain needs to change its policies, but this doubt will destabilize the government and possibly even bring it down. Major had to make a decision, and he insisted that Britain would firmly implement the policy of staying in the currency exchange rate mechanism.Then his chancellor, Lemon, also emphasized his point. But the press was fiercely opposed to the Prime Minister's policy of maintaining the status of the pound at all costs. At the same time as Major was speaking, the exchange rate between the pound and the Mark began to fall below 2.85.

Early July 1992. Six currency experts jointly wrote to the London Times, requesting the British government to withdraw from the exchange rate mechanism.They asked the government to lower interest rates to overcome the economic downturn. But the government is reluctant to lower interest rates because it would weaken the currency and make sterling further vulnerable to speculation and arbitrage.The British government can lower interest rates, but only if Germany's international interest rates are low.However, the German Bundesbank rejected many requests from the British government and resolutely opposed the reduction of its own interest rates.

At the end of July 1992. Criticism mounts, with many financial experts questioning the government's exchange rate policy, asking who would support Mr Major in the face of Britain's economic decline. British business leaders demanded that all countries adopt a consistent exchange rate within the exchange rate mechanism, that is, the parity of the British currency to the mark of 2.60, and they demanded that the interest rate be reduced by at least 3 percentage points. Months later, Chancellor of the Exchequer Lemmon still refused to consider devaluing the currency. Mid-August 1992.

The Chancellor of the Exchequer declared: "We are not devaluing the currency".In response to his critics, he declared: "If we exit the exchange rate mechanism and loosen interest rates, as some have suggested, things will get worse, the pound will fall sharply, and inflation will be very high. "Without withdrawing from the exchange rate mechanism, I will never give up our efforts," he wrote in a newspaper article. August 28, 1992 at 8:26 am. It seemed impossible for Lemon to stand firm.A few minutes earlier, a Ministry of Finance employee was busy polishing the bronze plaque in front of the Ministry of Finance to make it suitable for television cameras.Soon, Chancellor of the Exchequer Lemmon appeared outside the Ministry of Finance, standing in front of the TV cameras, holding his fists and smiling, as if to hide his excitement. The reporters on the scene were not only studying his speech, but also trying to figure out his body language, trying to find out the truth.Lemon nodded repeatedly, usually holding his breath when sensitive matters were involved.When he spoke, he spoke very quickly, showing that he was trying to regain his composure.He didn't want people to interrupt his conversation, he dressed seriously, trying to convey his trustworthiness and reliability, but few people were fooled. He has refused to devalue the pound, hoping to calm financial markets: in case interest rates rise.He believes that Britain will not withdraw from the exchange rate mechanism for a long time.He firmly said: "In order to clarify the position of the UK, I don't think it is possible for the pound to depreciate. The UK will not withdraw from the exchange rate mechanism. We have an absolute obligation to the exchange rate mechanism. This is our policy - the core of our policy." He repeated what he had recently heard in Downing Street: "We will do whatever is necessary." This meant that the government would not hesitate to raise interest rates if needed.He ignored other questions and said exactly what he had published: "We are taking action". Lemmon's public speech comes as the Bank of England actively intervenes in the pound.The Bank of England bought £3.3bn, an attempt by the Bank of England to make clear what the chancellor was saying, which was to prevent speculators from pushing the pound to mark below the minimum level of 2.7780. On that day, the exchange rate between the British pound and the Mark was 2.7946. Lemon's speech and the bank's active intervention did not have the expected effect. "The man himself has doubts," Catherine.Charlton said she was a language teacher and was one of several experts who had analyzed tapes of Lemon's speeches to the Daily Telegraph.Charlton believed that the frequency with which Lemon blinked gave away his secrets. She noticed that while most people blinked 6 to 8 times a minute, Lemon blinked 64 times in a second.Her conclusion: "Normally, if you're telling the truth, your eyes are quieter and you blink less". The body movements, the rate of blinking, the publicity all add up to tell the story that the influence of the British government is waning.Speculators are aware. August 28, 1992. Lemon also delivered another speech, this time after a meeting of EU finance ministers. What is it? He declared that countries within the European Monetary Exchange Rate Mechanism would no longer be aligned. This may sound contradictory. At the end of August 1992. Soros had spoken to Ham Schlesinger, president of the Bundesbank, and knew that Germany had no intention of bailing out the rest of Europe's currencies. One of the messages Soros got from Schlesinger was that Germany would not do anything to harm its own economy. Schlesinger was unwilling to help Britain, and it was impossible for Major and Lemon to try to keep Britain in the exchange rate mechanism. Disaster loomed, and Soros began to believe that a huge investment was possible. "We've been preparing for this for almost six months," said an unidentified spokesman for Soros. "Now we've finally started to implement it." Section 5 Stubborn John Bull Early September 1992. Soros is not the only one speculating on weak currencies in the exchange rate mechanism. Those long-term arbitrage investment companies and multinational companies have also begun to sell vulnerable European currencies. Speculators who traded foreign exchange at banks soon noticed that the currencies they were dealing in were multiplying.Clearly, European central banks are under enormous pressure.These banks will have to spend a lot of money to support their respective currencies, and it is becoming less and less likely that the Bank of England will maintain the position of the pound for a long time. Britain is still holding on. Lemon is running out of money for his trapped pound to buy time. September 3, 1992. There was a sigh of relief in London when Lemon announced that the government planned to buy £7.5 billion from the International Banking Organization, an unprecedented move to try to revive the pound. After that, Lemmon may strengthen the pound to stay in the European currency exchange mechanism, and he is preventing the currency from devaluing. Chapter 6 Everything is ready September 10, 1992. Once again Lemon rejected the devaluation of the pound.On the same day, Major spoke forcefully in Glasgow to the Confederation of British Industry in Scotland: "The choice of currency devaluation, or the choice of currency inflation, would be a betrayal of our future at this time, and I tell you, it is absolutely It's not government policy." The speech won warm applause.Soros had listened to Major and Lemon's speeches, and he didn't believe them. The "reality" for Soros was that Britain would be under enormous pressure to maintain the excessive value of the pound, which had led to an economic depression. (When a television reporter later asked Soros why he didn't believe Lemon, he laughed and said, "What I can tell you is what I've said before: I'm not convinced by what he said.") Soros has been watching the situation, biding his time.Sin realizes that the time bomb is ticking, but he doesn't know when it will explode. "Personally, I didn't envision a breakdown of the exchange rate mechanism," he said. "I just saw tensions internally. But soon the tensions became more public and the dissonance was so great. At one point with the head of the Bundesbank Schlesinger, whose talk was later published in the Wall Street Quarterly, was an obvious call for everyone to give up the pound and make a difference." Schlesinger believes that signing the devaluation of the Italian lira in exchange for German An agreement to lower its own interest rates is unlikely to fully resolve the crisis in European currency markets, and he believes that the way to avoid chaos is currency devaluation.The conversation became a mobilization call for speculators to abandon the pound. For Stanley Druckenmiller, Schlesinger's "horn to march" made the decision to speculate on the British pound more firm. "The real decision is not whether to buy a stake, but how much to invest. At first, I thought it was between $3 billion and $4 billion, but at this point, Soros' instinct, sixth sense, and what made him a great investor Something got involved, and we invested a lot of money. For Soros, it doesn't matter if you're right or you're wrong, but when you know you're right, you go to the limit. We did invest a lot of money, but what we spent All that's left is time. Druckenmiller's reputation has also been boosted by speculation in the British pound.But as usual, Druckenmiller credits Soros with giving him a lot of confidence, encouraging him to invest a lot of money. "I told you, go to the limit," Soros said. Soros was preparing to speculate when the money market crisis erupted. His operation is very complicated because he believes that the disintegration of the currency exchange rate mechanism is a step-by-step development.At first, most European currencies harmonized; then, interest rates in European countries fell sharply: followed by a decline in European stock markets. Therefore, he decided to short sell weak European currencies and invest in interest rates and securities markets.It was a bold move in which Soros and his partners sold $7 billion in sterling, bought $6 billion in marks and, to a lesser extent, French francs. At the same time, Soros bought $500 million worth of British stocks, an operation that assumed a country's stocks would often appreciate in value as its currency depreciated.in addition.Soros also invested in the long-term German and French bond markets, while he shorted his own German and French stocks.Soros' thinking was that a rise in the German mark would hurt its stocks but be good for bonds because interest rates would be lower.Soros has a high reputation, so he can use 1 billion US dollars as collateral, lend 1 billion US dollars and then develop to 10 billion US dollars in investment, so that he dominates the market. Soros is not alone in this kind of speculation, money dealers all over the world are doing it, so the value of the pound is difficult to maintain. Soros is also making a huge investment in New York, "We have 7 billion US dollars in stocks, and our capital in the market totals 10 billion US dollars. This is 1.5 times the capital of our company."Soros said he borrowed 5 billion pounds, and then he exchanged the pounds for marks at a rate of 2.79 marks to 1 pound.Now, he has plenty of solid marks again. So he waits.