Black Wednesday, Research Paper Example

What role did George Soros and other speculators play in the Pound’s crash?

The Black Wednesday, 16^th September 1992 was a very significant day in the financial market in Britain. This was the day that George Soros together with other speculators, forced the government to withdraw the pound from ERM, European Exchange Rate Mechanism, a situation that resulted to the crash of the pound. The withdrawal of the pound from ERM was prompted by inability to maintain the lower limit as agreed. George Soros was a high profile investor in the currency market and his role in short selling the pound was consequential to its crash while he accumulated one billion pound in his accounts after the transaction. The loss after this trade between the months of August to September averaged about 800 million pounds (Soros, 2007). This projected another loss to the taxpayers which was attributed to devaluation. This situation triggered the efforts of treasury to support the pound at a cost of 27 billion pounds of their reserve.

Did the devaluation actually help Britain in some ways?

The entry of Britain in ERM was motivated by the need to maintain their currency at about 2.7 marks relative to the pound. However, this was untenable since the inflation rate at Britain was high compared to that of Germany. The problems of inclusion of the pound in ERM were compounded by economic strain associated with reunification inherent in Germany, thus adding pressure to the mark being the ERM core currency. European unification experienced a bumpy passage towards the Maastricht Treaty that was to initiate the euro.

This was the beginning of the efforts of speculators in focusing ERM anticipating the time period to fight the natural forces of the market with the use of fixed rates of exchange. The increase in the interest rates by Britain attracted the interests of speculators, including George Soros, to the pound, which was the beginning of heavy currency shorting.

Britain was forced by circumstances to pull out of ERM due to the huge losses attributed to artificially buying back its currency. This was a very difficult time for Britain although at last it was able to strengthen its pound due to excess interest along with high inflation being removed from the economy of Britain in reaction to the beating. Soros gained 1 billion pound from this deal and gained the global reputation of the premier speculator in currency.

How did this crash in some ways reveal the potential for the current Euro Crisis?

The onset of financial crisis of 2008 has necessitated for the reduction of interest rates and weakening of the pound. With deepening euro crisis, the pound has appreciated in strength. The monetary policy in Britain has been tightened so that value of pound is preserved. Pulling out of the gold standard improved economic situation of the country. Important lessons were learnt from the regime of fixed currency that followed the euro crisis together with the recession which was economically disastrous. Similar mistakes however have been repeated in Euro areas. The history of Britain reveals a nation that continuously attempts to strike above its global weight at the expense of shattering her economy. The combined forces of the 1920s depression, resistance to currency devaluation during 1950s to 1960s, the 1970s supporting exchange rate and catastrophic ingress in to ERM at an extremely sky-scraping rate were consequential to disastrously failure. These forces were ghastly consequential to the economy. This trend has continued to date with Britain striving for the position of a superpower which is untenable and hardly achievable. This crash situation has then revealed the potential for the current Euro Crisis

What role did the Danish rejection of Maastricht help trigger the collapse of the Pound?

Maastricht had a treaty otherwise called Treaty on European Union, signed on 7^th February 1992 in Maastricht city in Dutch. This treaty was responsible the creation of a single currency structure that was named the euro at later dates. The issuance of euro was the obligation of European Central Bank in Frankfurt. On 2^nd June, 1992, a referendum was conducted in Denmark against Maastricht Treaty whose results was rejection of this treaty. This rejection had a significant implication to European integration and signals of “permissive consensus” were given to this integration which was in existence in majority parts of continental Europe (Cowan, 2011).  This was the onset of extensive scrutiny to all issues associated with European integration.  The Danish rejection of Maastricht therefore was consequential to hobbling of European dream whose focal point was the euro. This had brought about the need to bail out some of the weak Euro zone members from this financial crisis, Germany included, which is a serious threat to the survival of the bloc.

What do you think will be the roles of the BRIC Countries in the next two decades?

The economic implication of BRIC Countries, also called the “Big Four” or BRIC economies” is the newly advanced countries that are at an equal phase of economic development and includes Brazil, Russia, India as well as China. South Africa has also been incorporated in the group which gives the acronym of BRICS. These countries are associated with varied projections in terms of their economic power with some analysts projecting a potential increase in their power to the extent of overpowering the G7 countries by the year 2027. The countries have been associated with rapid economic growth that will see them eclipse the economies of the global richest economies in the next two decades.

Available statistics indicate that, the BRIC economies cover about 25% of global land area and 40% of global population. However, by 2010 their combined national income was only 25% of the gloss global income. Plans are underway for the BRIC economies to join in to a single political alliance that will facilitate for the conversion of their escalating economic capabilities to an advanced geopolitical clout. The BRIC economies have been on record for trying to instigate equitable, democratic as well as multi-polar world order global order during a summit held at Yekaterinburg in 2009. This summit had follow-up meetings in Brasilia, Sanya and New Delhi in 2010, 2011 and 2012 respectively (Steven, 2006).

Plans for the transformation of the political systems for BRIC for embracing international capitalism have also been documented. Two members of BRIC, India and China are anticipated to dominate the international market in the supply of manufactured products as well as services. The other two members, Russia and Brazil are the dominant potential raw materials suppliers.

The BRIC economies are very keen on their strengths and weaknesses, thus taking the measures of cooperation in efforts of complementing each other. For example, the strength of Brazil has been seen in continuous supply of resources, services as well as in manufacturing, Russia and Brazil are the dominant commodity suppliers while India has extensive inefficiency in terms of energy use but has a significantly huge population. The huge populations among the BRIC countries facilitate eclipsing G6 countries in terms of their combined wealth. However, their levels of per capita income are significantly low relative to the norms of contemporary industrialized nations (Mackintosh, 2014).

This is a very crucial phenomenon for consideration by multinational corporations because it has vital implications on the world markets. The multinational corporations are likely to embrace the opportunities attributed to huge potential markets offered by the BRIC economies and engage in the production of cheap and affordable manufactured products for consumers in the BRIC countries. The presence of China and India in global manufacturing as well as service industry has already been evident and the global developed nations are already aware of this fact.

South Africa was incorporated in BRIC in 2010 and its contribution is influencing the investment potential and economic growth of Africa. China is the biggest partner in trade with South Africa while India has indicated her intentions to proliferate her commercial ties with South Africa as a representative of Africa, being the largest economy in Africa.

Therefore, the roles of the BRIC Countries in the next two decades will be to control about 50% of the global GDP. The BRIC countries are under remarkable economic growth towards emerging markets which will lead to the transformation of global economy.

References

Cowan, Alison Leigh “How Do You Say ‘Billionaire’ in Esperanto?”. The            New York Times. 2011.

Mackintosh, James “George Soros picks up $5.5bn as Quantum Endowment fund soars”. Financial Times. Retrieved February 25, 2014.

Soros, George. “On Israel, America and AIPAC”. New York Review of Books. April 12, 2007.

Steven Drobny, “Inside the House of Money”, John Wiley & Sons: Hoboken, NJ, 2006.