Billionaire investor George Soros on Tuesday predicted a stop-go economy for the United States, saying fears of inflation will drive up interest rates and choke off growth.
Soros, one of the world's most successful hedge fund managers who was speaking at a breakfast hosted by the Wall Street Journal, said borrowing costs are the major headwinds for the economy.
As markets revive, fear of inflation will drive up interest rates, which will choke off recovery, he said.
Rising U.S. Treasury yields have driven mortgage rates back up, threatening a recovery in the housing market and a refinancing boom that has helped preserve the still-fragile health of recession-weary households and the banks that lend to them.
The rise in bond yields and mortgage rates may also act to check the huge recent rally in global stock markets of the past three months, with the Federal Reserve trying to end an 18-month recession and yet not spur inflation.
Soros went back into retirement earlier this year after leading his self-named firm through the 2008 crisis. He made about $1.1 billion last year, according to Institutional Investor's Alpha Magazine.
SOROS ON 'SUPER BUBBLE'
Soros, who made his fortune targeting currencies in tightly controlled markets, said international financial markets need global regulation, even while being critical of regulators and calling for minimal government intervention.
The idea of self-correcting markets is a misconception, he said. What governments need to do, he said, is recognize they cannot prevent bubbles but instead try to control them from getting bigger.
You cannot prevent bubbles from forming but prevent them from self-reinforcement, Soros said.
Soros, who has retired from active fund management, acknowledged that getting regulation right is not easy as he argued both for and against stricter supervision.
The regulators will always be wrong, he said. They should interfere as little as possible.
Regulators, he said, typically try to control money supply and then let free markets take care of everything else, but that is a fallacy.
By the same token, Soros said that efforts by regulators and governments to stop bubbles bursting for more than 25 years gave rise to the most recent super bubble.
Soros cautioned that the U.S. government may be making some serious missteps in dealing with the current credit crunch and recession. Massive stimulus spending and bank bailouts have pumped up the U.S. government's own balance sheet.
He also warned that while the worst of the 2008 crisis is past, investors do not appear to have learned their lesson.
People want to pretend the crisis never happened, he said. They want to go back to business as usual.
(Editing by Leslie Adler)