Interview with Maria Baltimoro

Mr. BENNETT: We did, indeed.

Mr. SOROS: OK.

Mr. BENNETT: By not acting.

BARTIROMO: Well...

Mr. BENNETT: By not intervening.

BARTIROMO: ...we--we have about a minute left, gentlemen. Let's...

Mr. BENNETT: By not acting.

BARTIROMO: ...switch gears to the Patriot Act. To what extent has the increase in security and the scrutiny on Americans and whereabouts impacted our civil liberties, George Soros?

Mr. SOROS: I think that there--there is a real threat to our security. We do have to take some steps, but to a--to use that to infringe on our liberties is a--a--to--to be resisted. And when John Ashcroft said that those who criticize the Patriot Act are giving aid and comfort to the enemy, I think that is an extremist statement that should not be acceptable.

BARTIROMO: Bill Bennett.

Mr. BENNETT: Well, people are still walking around pretty freely in Sun Valley, Idaho, I expect, and in Washington, DC. Still, the beacon of freedom in the world...

Mr. SOROS: We have to fight for our liberty.

Mr. BENNETT: Mr. Soros--Mr. Soros made a very important point. We let down the Hungarians in 1956 by not liberating them, by not helping them. A lot of the world would have been opposed, but it would have been the right thing to do.

BARTIROMO: All right.

Mr. BENNETT: We're doing the right thing now.

BARTIROMO: We will leave it there. William Bennett, good to have you with us.

Mr. BENNETT: Thank you.

BARTIROMO: Thank you so much for your contribution tonight from Washington. George Soros, we're going to talk about world markets with you in a little bit, so do stay with us.

When we come right back, we'll continue with George Soros, discuss the economic ramifications and the impending conflict in Iraq. We'll also give
you market reaction around the world to the president's speech tonight. You're watching live coverage of CNBC's coverage of the president's speech and the impending war with Iraq.

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Special Program/Analysis: Stock market and how the president's
speech is affecting the Asian markets
MARIA BARTIROMO, host:

Welcome back. We're continuing our coverage of the president's speech tonight. We're going to talk to George Soros in a little bit about the
economic impact of today's events and world markets, but first, let's get a check on the world markets right now and the reaction.

Ahead of the president's speech, the Nasdaq and the Dow Jones industrial average today rose sharply, all in anticipation of Bush's ultimatum to Saddam which, in fact, we did get this evening. The Nasdaq was up 4 percent. The Dow Jones industrial average was up 3 1/2 percent, 282 points higher. As you can see, that was the highest level of the afternoon.

To see how the president's speech is affecting the Asian markets now open, Kaori Enjoji is with us. She is the CNBC Tokyo bureau chief. She's live from the Tokyo Stock Exchange.

Kaori, what's happening right now?

KAORI ENJOJI reporting:

Well, the market has responded very favorably this morning in reaction to the gains we've seen on Wall Street. The morning session has just ended here on the Tokyo Stock Exchange. The Nikkei average is up more than 2 percent, very close to intraday highs and the TOPIX market as well. Across the region, with the exception Aus--with--of Australia, Malaysian markets, Singaporean markets also driving higher this morning.

There's been a lot of concern here about blue-chip exporters and the impact they may suffer should a war erupt and what sort of fallout that would mean for the US economy. And that's part of the reason why the Tokyo stock market has been trailing, languishing, near 20-year-lows, but some investors heartened by remarks this morning at least in a sense that the cautiousness--that the uncertainty has been somewhat lifted. So we're seeing some buying back of blue-chip stocks like Sony. Sony is trading about--at two-week highs, up 3.7 percent.

Some of the key auto stocks are also higher across the board. Nissan and Toyota in particular up about 2 1/2 percent. These major Japanese exporters like auto companies are relying very heavily on demand for the North American market. And although companies like Toyota are doing well this year, they have expressed caution about the full year ahead given uncertainty about the North Acar--American economy, but we're seeing some comeback in the auto sector and also in the banking stocks as well.

Apart from that, big gains we saw in the chip index--the Philadelphia Chip Index helping the tech sector as well with stocks like Kyocera surging this morning. It advances up 8 percent.

So though there was a bit of caution ahead of Bush's speech and a little bit of a pullback off of highs immediately after President Bush's remarks, it's ended the morning session very close to session highs.

BARTIROMO: All right, Kaori. Good to have you with us. Thanks so much.

Kaori Enjoji, CNBC's Tokyo bureau chief.

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Special Program/Interview: George Soros discusses the markets
MARIA BARTIROMO, host:

We're back now with George Soros.

George, you've been compared--you've compared the delusion of the market bubble and the subsequent crash to the situation the Bush administration has placed itself in. Can you explain that concept?

Mr. GEORGE SOROS (Financier and Philanthropist): Yes. You see, bubbles don't come out of thin air. The--they have a solid basis in reality that gets somehow distorted by a misconception. Now the solid bases of the Bush--that--that we have for--for the United States is our dominant position. The misconception is that we can sort of establish American supremacy in--in the world.

Now up to a point, this misconception is reinforced by reality. Let's say we will have a--a--hopefully, a--an easy victory in Iraq. That will get
the--these extremist ideologues of American supremacy more em--emboldened, and eventually, you see, the reality will--that--the gap between the misconcep--conception and the reality will get so wide that it becomes unsustainable. So that's what happened in the stock market with the
technology boom, and I'm afraid this will--is what may happen with our search for supremacy.

Now it looks like it's sort of inavoid--unavoidable, but a--a--a--a boom-bust sequence can be aborted at any time, and the sooner it is aborted, the--the better. And this is why I am trying to alert the American public how we are being led in the wrong direction.

BARTIROMO: Right. Right. Understood. Having said that, what is your expectation of the reaction from world markets and certainly the effect on the economy? I mean, clearly, once we go into Iraq, if that is, in fact, the case this week, we will see a reaction already. We just heard from Kaori.
Actually stocks in Tokyo overnight are trading higher right now. What kind of a reaction would you expect?

Mr. SOROS: N--well, e--exactly a rally. This is the most predictable rally tha--that you can imagine. And if everything goes well, it will probably
carry on for a--for a while. And there is a hope that this will maybe turn things around. I think the most important single factor is the price of oil.
If--if oil comes down, that will be a boost for the economy. So that will have a lot to do with how sustainable the rally is.

BARTIROMO: Oil prices already were coming down this afternoon. Certainly, we're looking at light sweet crude right now, being down about 2 1/2 percent. What would be your best guess as far as the fair value of oil prices today?

Mr. SOROS: Well, that's a very difficult one. The big question is whether the oil fields will be--in Iraq will be secured. Then I think we would go
back to the lower end of the--of the price range, probably not much--maybe in the middle--middle 20s--$20 a barrel. That would be very helpful for the economy. It would offset the current negative impact of higher oil prices. So that, I think, is the single most important factor.

BARTIROMO: George, let me get your take on the dollar. It's, of course, fallen substantially. You were here on "After Hours" with us back in June.
You said that it could fall as much as one-third in the next few years. It has fallen 10 percent since the beginning of June since you said it. What has made it fall? Do you think the dollar is going lower?

Mr. SOROS: Well, that's very difficult to predict. Let's see how this rally helps to strengthen the dollar. If it doesn't, then I'm afraid that you are
in for a continuing dec--decline. Now the dollar ought to s--to strengthen because our--our market is booming, and a military victory celebration ought to help the dollar. Now we have to watch how sustainable that rally is.

BARTIROMO: It sounds like you don't buy into it.

Mr. SOROS: I have my reservations because, you know, th--these currencies go in long trends and are self-reinforcing. And once you have a trend
established, then it will--it will just keep going with some interruptions. We have a $500 billion current account deficit which we have been able to
cover because money has been moving to the United States, but th--what is different now is that we now have a budget deficit, you see, and that will be, I think, a--a big burden both on the dollar and on the economy. At the moment, it doesn't have much effect because the economy is cu--currently languishing. And so a budget deficit is a c--has a countercyclical positive effect...

BARTIROMO: And, of course, we're...

Mr. SOROS: ...but the moment...

BARTIROMO: ...talking about budget deficits in the hun--you know, in the hundreds of billions of dollars...

Mr. SOROS: Very...

BARTIROMO: ...for many years to come.

Mr. SOROS: That's right. And--and now, however, the moment the economy shows some sign of recovery, it will be aborted by a substantial jump in interest rates. So we are going into a period of stop-go substandard growth because of the budget deficit.

BARTIROMO: Which currency would you buy, Mr. Soros, other than the dollar?

Mr. SOROS: It's a--there are not--no easy choices because the--the euro has its own problems, maybe more ser--serious than our--than the dollar.

BARTIROMO: All right. Well, just--just looking for some ideas from probably the most famous currency trader on the planet. Mr. Soros, good to have you with us tonight. It has been a pleasure.

Mr. SOROS: Pleasure.

BARTIROMO: George Soros...

Mr. SOROS: I'm sorry for the sh--shouting ...(unintelligible).

BARTIROMO: Don't be silly. No, it was really a spirited conversation and we appreciate it. George Soros, founder of Soros Management.

Up next, what is next on the military front? We will talk to a reporter on the ground from Qatar near the US command headquarters and a former Defense Department official about his thoughts on the first days of war.

A lot to come on this special coverage. We're back in a moment.