Will Sovereign Wealth Funds Rule the World?

Article excerpt

Sovereign Wealth Funds are huge, scarily big.

Though unknown to most Americans, these -government-owned funds have been getting lots of attention in the financial press as well as among the world's top central bankers and finance ministers. The Senate Banking Committee heard lengthy testimony on them earlier this month.

These funds are mostly the product of accumulated US dollars by China, with its massive trade surplus, and by oil-exporting countries reaping generous profits from oil at $90 plus per barrel.

How big are they? Estimates vary. The 28 nations with Sovereign Wealth Funds (SWFs) have, in total, assets of $2.1 trillion, figures Edwin Truman, an expert at the Peterson Institute for International Economics in Washington.

By 2011 or 2012, SWFs could have piled up $7 trillion to $8 trillion, guesses Harvard University economist Kenneth Rogoff, a former chief economist for the International Monetary Fund (IMF).

SWF assets could be $3 trillion now and $10 trillion by 2012, reckons Simon Johnson, IMF research director.

Whatever their size, the huge piles of SWF money ready to be deployed across borders make some financiers edgy.

"Our nation is not doing well in the global economic competition," Patrick Mulloy, Washington representative of the Alfred P. Sloan Foundation, told the Senate Banking Committee Nov. 14. He cited concerns that SWF money will be used not just for economic reasons but also for political and strategic purposes.

Securities and Exchange Commission Chairman Christopher Cox said in a speech at Harvard Oct. 24 that "the fundamental question presented by state-owned public companies and sovereign wealth funds does not so much concern the advisability of foreign ownership, but rather of government ownership." These financial and business entities could act in the interests of foreign governments, not necessarily the interests of the United States.

Warren Buffett, the famed billionaire investor, has worried that as long as the US has major foreign trade deficits (some $700 billion a year), it has to "give away a little part of the country" each year. The US could end up with a "sharecropper economy," where Americans largely work for foreign-owned firms.

Mr. Rogoff isn't so bothered by SWFs. He figures SWFs will do "more good than bad" in an increasingly globalized world economy. …