Davos 2013: Soros says financial markets still not understood

Mr Soros quipped that "go-stop" was better than "no go at all"

The world still does not fully understand how financial markets work, according to investor George Soros.

Speaking at the World Economic Forum in Davos, Mr Soros, who made his billions betting on the markets, said the established theory had "collapsed".

He also warned that Germany was "out of tune with the rest of the world" when it came to handling the euro crisis.

He said there was a risk of a credit bubble forming, which was "the big, unresolved issue".

"It should be possible to withdraw the additional credit [injected by authorities] as the economy gets going but it hasn't been done yet. And therefore there's a fear this could result in runaway inflation," he said, adding that this fear was particularly strong in Germany.

Growth priority

In a wide-ranging discussion, Mr Soros said: "The established theory has collapsed but we haven't actually got a proper understanding of how financial markets operate.

"We have introduced synthetic instruments, invented derivatives where we don't fully understand the effect they have."

He also said that the response of authorities to inject liquidity into the economy had stabilised the markets, but the priority now should be to steer the economy back to growth.

"The first phase of the manoeuvre is pretty well complete, but the second phase we haven't yet started," he said.

But he added: "We are facing a period of go-stop, which is far superior to no go at all."