Has SAMA surpassed ADIA as the world’s largest SWF? This paper from the Council of Foreign Relations suggests that SAMA’s more conservative investments have allowed it to grow to as much as $500 billion in assets, while ADIA’s riskier portfolio, once estimated to be near $800 billion, may have been halved.

 No idea what I’m talking about? Here is my quick primer on Sovereign Wealth Funds:

Sovereign wealth funds (SWFs) are government-owned investment funds.  Nobody can agree on an exact definition for them.  Usually governments get money for SWFs either from the direct sale of resources, like oil, or from excess foreign reserves accumulated by central banks as they intervene in currency markets.  SWFs usually go after longer-term, higher-risk, and higher-return assets (as opposed to classic official reserves, which are invested in highly liquid and safe assets.)  SWFs can have many goals, including maximizing returns on wealth, saving wealth for future generations, smoothing income, or investing in strategic sectors.  Sovereign wealth funds vary highly in terms of their management structure and how transparent they are.

Some people worry that SWF investment could pose a threat, either because the funds invest with malicious intent, or simply because they represent large concentrations of money.  The fact is, concerns should not be unique to SWFs.  Individuals can act in financial markets with bad intent, or do harmful things out of stupidity.  And while SWFs are big relative to hedge funds and private equity, they aren’t that large compared to pension or mutual funds.   And there are good things about SWFs too.  If foreign governments have a stake in the U.S. economy, they may be more likely to pursue policies that are beneficial to the U.S.  Also, SWFs typically have low leverage, so they can take more losses without those losses spreading through the financial system.  Lastly, they often pursue longer-term, private-equity type investments, which are more stable than portfolio investments. 

 

For those who know all about SWFs, try my fun SWF Matching Game! Match the personal to the SWF who submitted it! 

a.       Temasek of Singapore

b.      Russia National Wealth Fund

c.       China Investment Corporation

d.      Abu Dhabi Investment Authority

e.      Saudi Arabian Monetary Authority funds

f.        Norway Government Pension Fund

 

1.       Wealthy hot-shot SWF seeks super-sexy investment.  I’m willing to take on some risk; even though I may have lost half my value this year, I’m still WAAAY richer than those American hedge funds.

2.       Responsible SWF seeks a balanced portfolio of investments.  Investments must be carbon-neutral, low-pollution, fair trade, unionized, family-friendly, organic, pro-free speech, and not tested on animals.

3.       SWF suffering identity crisis seeks investment in state-owned banks as part of parent country’s financial market bailout.

4.       Ambitious SWF of a parent country with an infinite supply of dollars seeks investment in strategic sector or resources.  No need for the investment to perform financially.

5.       SWF seeks investments around the world, but especially likes Asian markets.  Please don’t confuse me with my sibling GIC; I am much more transparent!

6.       Increasingly wealthy SWF seeks conservative investment.  I can’t give any more details on what I am looking for, as that would reveal too much.

 

Answers: 1:d, 2:f, 3:b, 4:c, 5:a, 6:e

LOLfed (http://lolfed.com/page/2/)and FT Alphaville (http://ftalphaville.ft.com/blog/2009/01/19/51321/ib-salary-data-point-of-the-day/) have disparaging things to say about New York’s Fashion Meets Finance, a social service that aims to match ibankers and people in the fashion industry. 

In retrospect, maybe not such a great match.  Finance isn’t doing to great now, and from what I’ve heard, the high-end fashion industry is doing terribly too.  My guess is that both industries are likely to do very well when the economy is good, and very poorly when the economy is bad, so a couple composed of finance and fashion isn’t well diversified if the economy goes south.  My advice to both is to find someone with an occupation that is NOT highly correlated with the general economy, or better yet, someone with an occupation that is in higher demand during a recession.  You’ll all be happier with an economist anyway.

This is my first post, so let's get right to the substance.  I just received an email asking me what I thought about this article:  http://www.guardian.co.uk/commentisfree/2009/jan/20/george-monbiot-recession-currencies 

The author proposes allowing local communities to issue their own currencies, rather than have the federal government go deep into debt to stimulate the economy. To encourage spending, the community could impose a fee, called demurrage, for holding the money.

The idea of privatizing money is not particularly extreme to me-- the author gives several instances in which it has been done-- but can it do anything to end a recession that current fiscal and monetary policy can't? Issuing local script could increase money supply, but the Fed can do that with monetary policy now.  Issuing local script might allow local governments to increase spending without issuing debt, which sounds great, but is problematic.  Funding governments by printing lots of paper money tends to be an unsuccessful strategy (ask Zimbabwe!-- and by the way, that source of funding isn't really tax free; consumers pay the "tax" in the form of inflation), and anyway, if we really wanted to go down that road, the Fed and Federal Government could do it too.  The demurrage fee doesn't give much advantage either, since inflation acheives the same result (it makes your money lose value, penalizing you for holding it), although a demurrage fee is more direct and might be a more effective option if we get into a deflation situation.

The main benefit would appear to be that the community could choose its own monetary policy.  There would be benefits to this.  Communities with weaker economies, like Detroit, could have looser monetary policy than communities with stronger economies.

There are definate disadvantages to localized monetary policy too.  People would have to convert their currencies more often. Also, local currencies would likely trade at a discount, since they would be less liquid and people would probably have less faith in them.  Keeping track of exchange rates could be confusing. Lastly, moving towards many local currencies might erode faith in the U.S. dollar.  Faith in the dollar has attracted investors looking for a safe haven.  Were that not the case, we could be facing a full-fledged flight of capital and currency crisis. 

In conclusion, I'd like to register my vote of confidence in the Fed.  The idea of local currencies is worth discussing, though, because it helps identify what monetary and fiscal options might be helpful in our recession.