I have long assumed that foreign governments use their trillions of US dollar currrency to buy our debt. China (whom the US consumer throws dollars at like money really does grow on trees) buys approximately one billion dollars of US treasury bills a day. However, this morning I was reading an article online by Joshua Kurlantzick that detailed what he referred to as "the next big market catastrophe"- sovereign wealth funds.
Governments have piles of US dollars and US consumers pretty much drive the world economy. Our voracious appetite for objects and oil is not going anywhere. When we buy goods in US dollars, foreign companies, and therefore banks and therefore governments, then have trillions of US dollars that are worthless as is. So they invest it. US treasury bills are issued by our government to pay for the things we can't/won't afford. They are secure and have various interest rates. Not high, but high enough that interest on a few trillion dollars worth will fund your own government quite nicely.
Sovereign-wealth funds, however, are using their monetary reserves to buy shares of foreign companies. Kurlantzick notes that they have an estimated worth of two times that of every hedge fund put together. The government used funds of Norway have transparency. The government used funds of Russia do not. Imagine China having its own hedge fund, investing trillions of dollars and euros without any international regulatory control, accountability, or transparency. The world markets suddenly look three sheets to the wind in unpredictability.
- "If a fund backed by the Chinese government invests in an oil deal in Africa or Asia, is it making the same profit/loss calculations as, say, ExxonMobil, or is it investing because Beijing's leaders desire that asset, making it impossible for another company to compete for the deal? Did Russia buy into Airbus because it thinks the aerospace firm is a good deal or because the Kremlin wants to have more power over Western Europe through this company? If the fund owned by the United Arab Emirates invests in a defense company, is it trying to gain military technology for the UAE, potentially upsetting the balance of power in the Middle East?"
We should all be thankful that the US government has no room in its budget to do the same.