The End of the EA$Y credit era

"Everything that could go wrong did. What started with subprime mortgages spread to all collateralized debt obligations, endangered municipal and mortgage insurance and reinsurance companies and threatened to unravel the multi-trillion-dollar credit default swap market. Investment banks' commitments to leveraged buyouts became liabilities.”

George [Soros] continues, "If federal funds were lowered beyond a certain point, …..the ability of the Fed to stimulate the economy comes to an end." Where is that point? George Soros didn't want to say, but he probably feels it is getting very close and the reason why he wrote this article. Maybe at or slightly below 3%?

For believers of the theory that low interest rates can save us, just look at Japan for the last 10-15 years; zero or even negative interest rates have not helped much to stimulate the economy after the burst of both stock and real estate bubbles. George’s most interesting statement is: "the current crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency."

What he didn't say is, if US dollar loses its reserve status, there is no obvious replacement currency, at least not at this moment. What happens then? One possible, likely and logical solution could be that countries around the world would consider gold as their reserves again.

Does George Soros imply that we are returning to gold standard?

Thomas Tan, CFA, MBA