For the information of the few who haven’t heard, George Soros is known as “the man who broke the Bank of England” in the Sterling crisis of September, 1992, when he reputedly earned $1,000,000,000 dollars for his hedge fund by selling Sterling prior to its devaluation. This incident is often used by journalists to further the myth of the big, bad, speculator. In fact, Soros was just a messenger bringing the bad news – he was not the cause of the devaluation. The real cause was the unwillingness of the UK government to increase interest rates for domestic policy reasons. They wanted to have their cake and eat it too. Keep interest rates low to fuel economic growth, and keep the pound strong to avoid inflation. However, the latter task – keeping Sterling strong – they thought they could export to the German Bundesbank, which was obligated to intervene on Sterling’s behalf according to the terms of the European Monetary System (EMS). But the Bundesbank was furious and would not play the Brits game unless they contributed something, in particular a healthy hike in UK interest rates. The UK refused, and the die was cast. The Bundesbank pulled out of the market and let Sterling collapse. Soros was astute in reading the situation correctly, but was not a prime cause. Nor was he alone. The major UK banks earned far more than Soros by selling their own currency. When the Bank of England finally did react with a 2% hike – it was too late to stem the flow. It is always this way.
Currency crises are always caused by politicians trying to peg their currency at an unrealistic exchange rate until it is forced to move suddenly in a crisis, instead of letting it gradually shift in a free floating environment. Speculators at most help to tip a falling wagon, and in normal markets are actually supporting the weakest currencies of the deficit countries trying to pick up the interest differential. Indeed that is their economic raison d’étre — to clear the market so supply equals demand. The currency market is greatly misunderstood by the public, as well as by most economists. I was also confused at first, and it took me years of intensive study and trading experience to figure out what was really going on.
I spent about two years traveling around Europe selling my forecasting system, picking up a respectable number of clients, but also meeting substantial resistance from many businessmen, including many traders who did not have an adequate understanding of the market or the risks they were taking. It was the Wild West in modern choreography those days, with yuppie golden boys in their Porsches taking on the role of the gunslingers. Most of them were utter disasters for their companies. This was the market I call the forex jungle (forex = foreign exchange in the market slang). The market and most of the people trading in it were undisciplined, unprofessional, unsophisticated, overconfident, and inexperienced – a disastrous combination. It lasted throughout the eighties and early nineties, and changed only gradually. A shake-out occurred as the currency loss disasters followed each other on the front pages like a repeating nightmare: Freddie Laker, British Aerospace, Jaguar, Volkswagen, Lufthansa, Boliden, Sony, and on and on in a never-ending story. For every one that made the papers, there were ten that were kept discreetly silent.
By the end of 1983, I was tiring of the repetitive nature of my business, especially the many rejections. Every month I would send out about fifty thick envelopes to clients and prospects with detailed analyses, performance reports, etc. One day, my son Fry was asked at his kindergarten what his father did for a living. “He sells paper”, said Fry.
That was bad enough. But then, a few weeks later, while in London, after a long, hard day of presentations and no successes, my final meeting was with a very arrogant British banker, who, it turned out, was only interested in picking my brain, and not in doing business. As I was leaving, his parting shot to me was: “Dr. Jackson, if your system is so bloody good, why are you selling it?”. I returned, rather annoyed, to my hotel. But his comment kept echoing in my head until I realized that he was absolutely right. I should be using my system to trade my own money. If my figures were right, it would be a much more profitable business, even with the limited capital I had saved up. I was through using my valuable time trying to convince skeptical businessmen that they could earn a lot of money using my system. The thought of being free of all that aggravation was a driving factor.