Don’t Fear Sovereign Wealth Funds
by Ron Paul
Financial Services Committee, Joint Subcommittee Hearing, Hearing on
HR 5512, March 5, 2008
have expressed concern over the growing role played by sovereign
wealth funds in the U.S. economy. Such fears are to a large extent
misplaced, however, as we should be more concerned with the
underlying causes that have allowed sovereign wealth funds to
accumulate as much capital as they have.
The two major
types of sovereign wealth funds are those which are funded by
proceeds from natural resources sales, and those funded by
accumulation of foreign exchange. The former category includes
sovereign wealth funds in Saudi Arabia, Kuwait, and the UAE. Flush
with dollars due to the high price of oil, they are looking for
opportunities to make that money work for them. The high price of
oil is due in large part to our inflationary monetary policy. We
have literally exported inflation across the globe, spurring
malinvestment and a subsequent commodities boom.
major category of sovereign wealth funds includes China’s sovereign
wealth fund, which has the potential to draw on China’s more than $1
trillion in foreign exchange reserves. Because of China’s current
account surplus, it continues to accumulate foreign exchange. Much
of this is due to the United States’ persistent current account
deficit. Inflationary monetary policy and a desire to stimulate the
economy at all costs has led us to become the world’s largest
debtor, and this debt must eventually be repaid. The current account
deficit has come about because our economy does not produce enough
capital goods to satisfy the wants of our foreign creditors. Tired
of holding increasingly worthless dollars, it is only natural that
our creditors would want to purchase tangibles, which in the present
case are stakes in American companies.
bemoaning the fact that foreign governments are using their dollars
to purchase stakes in American companies, we should welcome the
stability that such investment is bringing to our economy. While I
am reluctant as anyone in this room to involve any government in any
sort of intervention into the market, the fact remains that without
injections of capital from foreign wealth funds the results of the
subprime crisis would have been far worse for many financial firms.
Even now we read that Citigroup, despite the massive funding it has
received from sovereign wealth funds, is in danger of collapse
unless it receives additional funding.
I have always
been a staunch advocate of abandoning our loose monetary policy and
facing the consequences now, rather than continuing easy money in
the hopes of never having to face a recession. Now that it is clear
that decades of Federal Reserve monetary manipulation have led to a
severe recession, the thought of sovereign wealth funds investing in
the financial sector holds far more appeal than that of a complete
collapse of major industry players which would cause catastrophic
effects throughout the economy.
wealth funds are a necessary consequence of fiscal and monetary
policies which have left us overextended. Actions to stifle the
operations of sovereign wealth funds and corresponding retaliatory
actions by foreign countries could have the same detrimental effects
on the economy as the trade wars begun after passage of the
Smoot-Hawley tariff. Rather than take actions to limit or prohibit
the actions of sovereign wealth funds, I would urge my colleagues to
take action to end our inflationary monetary policy.
See the Ron Paul File
March 13, 2008
Dr. Ron Paul
is a Republican member of Congress from Texas.