This morning I came across an interesting article on the USA Today website where David J. Lynch talked about billionaire investor and philanthropist George Soros. While the article focused on Soros’ “reflexivity” theory, the piece also shed light on his latest economic outlook for the United States. Lynch wrote:

The credit crunch that erupted last year prompted Soros to return to investing, to protect his portfolio from the gathering financial catastrophe. Several months later, Soros says the U.S. has weathered the “acute phase” of the markets crisis. “But the impact on the real economy is yet to be felt,” he says.

Soros makes no bones about his judgment that the current financial crisis is the “worst since the 1930s.” He sees the subprime mortgage debacle as the signal event that unhinged both this decade’s housing bubble and a 25-year-long “super-bubble” that originated in the debt-laden policies of the Reagan administration.

But despite Soros’ apocalyptic rhetoric, the Dow is hovering near 13,000 and unemployment is a relatively low 5%. Soros explains the disconnect with the tale of the man who falls off the Empire State building and thinks to himself halfway down: “So far, so good.”

“That’s where we are right now,” Soros laughs.

Sobering, to say the least. The co-founder of the Quantum Fund with Jim Rogers blamed the failure of regulators, including former Fed Chair Alan Greenspan, for cultivating the crisis. On housing, Soros is predicting more declines in U.S. home prices, and that Americans will suffer a noticeable decline in their standard of living. He said:

I’m afraid that will be the case, and it will be hard to take. And it will be politically unpalatable, and it will probably give rise to all kinds of populist political appeals (for) a way out that will also be very dangerous.

The Hungarian-born investor also believes that efforts by the Federal Reserve to pump cash into the banking system and the U.S. government to provide $168 billion in economic stimulus will be ineffective. Lynch wrote:

Talk — from Bush administration officials and Wall Street optimists — of an economic recovery later this year “is totally without foundation,” he says.

Source:

“Soros sees ‘reflexivity’ theory of economics as life’s work”
David J. Lynch
USA Today, May 13, 2008

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