Photo illustration by John Lyman

World News


The National Security Implications of SWFs

Karl Marx once said to the effect of “All political behavior is the result of economic phenomena.” Today, while the United States is still the acknowledged first economic power on Earth, that standing is in danger of being overtaken with the rise of SWFs throughout the world. Carl Von Clausewitz in his epic On War discussed the importance of massing one’s strength and bringing superior forces to bear upon the battlefield. His most famous quote is “War is a continuation of politics by other means.” If this is true, combined with Marx’s observation on political behavior, then the ability to deploy massed financial and investment means that the rise of SWFs throughout the world are changing the world’s economic and financial macroeconomic models.

SWFs can deploy massed funds in geopolitical situations that benefit their home country’s economy and political standing, wielding economic and financial power with their SWF. This developing phenomenon has already been witnessed by China’s use of its SWFs (there are official four SWFs) in the development of their Belt and Road Initiative (BRI). What is ironic with these developments, is that should the United States develop its own SWF, with monetary and mineral assets of between $128.6 trillion to $200 trillion, the United States would reinforce its standing as the dominant economic power in the world for the next 100 to 200 years.

A Short History of Sovereign Wealth Funds

The term “Sovereign Wealth Funds” was first coined by Andrew Rozanov in the Central Banker Journal. In his article, Mr. Rozanov described the emergence of SWFs as a new phenomenon on the world investment scene in 2005. Since then, the SWFs have exploded on the world financial scene with little or no public recognition of their emerging dominance on investments worldwide. In 2005, Mr. Rozanov evaluated the value of SWFs as $895 billion. In March of 2018, the value of SWFs was calculated to be $7.45 trillion. These SWFs easily dwarf any privately held investment funds. While many SWFs subscribe to the Santiago Principles governing SWFs, the Santiago Principles are voluntary and there is no enforcement mechanism, making the Santiago Principles toothless, and little more than a propaganda piece for the SWFs.

The first non-federal SWF fund was begun in Texas in 1854, The Texas Permanent School (PSF) fund, followed by the Texas Public University Fund (PUF) in 1876. The first federal SWF was the Kuwait Investment Authority founded in 1953. Today there are 81 top-ranked SWFs as calculated by the Sovereign Wealth Fund Institute. As noted above these combined SWFs have a worth of $7.45 trillion.

A listing of the 81 largest SWFs can be found here.

While the SWFI top-ranked SWF is the Norwegian Government Pension Fund Global, an argument can be made that it is China, with an assortment of four federal SWFs, which is by far and away the richest and most powerful SWF. The Chinese Corporation Investment (CIC) fund is the largest of these Chinese SWFs. The total aggregate value of these four funds available to the Chinese government comes to $1.59 trillion. There are several banks in China whose assets total more than $10 trillion, but most of these funds are the personal assets of the Chinese people and are not available to China’s SWFs for investment and consumption purposes. CIC’s income for investment in 2017 was $103.5 billion.

The Financial and Political Power of National SWFs

China’s recent military buildup and seizure of the Philippine’s Exclusive Economic Zone (EEZ) in the South China Sea has been made easier by the success of China’s SWFs. The cost of the artificial island Fiery Cross Reef is estimated to have cost China $11.5 billion. The latest known increase in military spending for China was $13.3 billion, easily financed by CIC’s earnings from 2017.

The Investment Corporation of Dubai has been using DP World, which it purchased in 2006, to expand its political and military presence in the sensitive geopolitical area of the Gulf coast and Somaliland. DP World has purchased a 30-year concession, with a 10-year automatic extension, in the Port of Berbera on the Red Sea in the Republic of Somaliland. Berbera is located just across from Yemen, with the strategic Bab-el-Mandeb Strait in between them. Some 4 million barrels of oil pass through these straights daily. The UAE military is training the Somaliland military and establishing a naval base in the port. DP World is also developing the port of Bosaso in Puntland, another breakaway region of Somalia, and is currently considering investing in a third port in Barawe.

The Russian SWF, the Russian National Wealth Fund, is also active in using its SWF in furthering its political and military objectives.

Using its SWF, Russia has been following a policy of gaining influence in what they call the “Middle Eastern and North African” countries, aka MENA. The Russian goal is to increase its economic and political ties with the Persian Gulf states rich with oil. Due to budgetary shortfalls, and the use of the Russian SWFs to pay for deficits in the Russian state budget, the Russian National Wealth Fund is in financial trouble and may be liquidated in the immediate future.

These examples are only a small sample of how SWFs are using their financial power in shaping politics in sensitive regions.

Without its own SWF, the United States will lose its economic standing in the world.

The United States currently owes the world over $22 trillion. As of this writing, the US will reach its statutory borrowing authority in September of 2019, and a new budget deal has been reached, with an increase in the deficit of $1 trillion. For 2019, the amount of money spent on the interest alone for the debt will be $389 billion.

The continuing increase of resources allocated to servicing the debt of the United States is estimated to reach $918 billion in 2028. The United States has assets of between $128 trillion to $200 trillion as noted above.

By establishing its own SWF, the United States would be able to reduce its debt by $10 trillion within 5 to 10 years, and at the same time fund the US budget without resorting to deficit spending.

If the assets of the United States are invested in economic enterprises, and assuming a return of investment of 2.5% on 1/2 of the federal assets (the Chinese SWF CIC reported a return on investment of 17.59% for 2017), the United States would earn $2.5 trillion per annum. This would allow the United States to begin paying down its external debt, eliminate deficit spending, and still have enough funds to reinforce its other obligations.

Unless the United States takes these steps, it will face 2 stark choices, dramatically reduce its spending or default on its debt obligations and thus throwing the world economic framework into chaos and economic collapse.