A speech given at the House of Literaturhus, Oslo,
recently
I have been invited to visit Oslo to provide an international
perspective on the management philosophy guiding Norway’s $500+
billion Oil Fund. In particular, I’ve been asked to compare it to
other sovereign wealth funds. With
regard to the nation’s economic development over the long run, how
does Norway’s approach compare with those of China, Singapore and
other countries that have accumulated enormous amounts in financial
form?
Despite the large size of Norway’s fund (second only to that of
Abu Dhabi), its managers treat it in much the same way that a
Norwegian family would treat its own personal savings account. The
money is consigned to fund managers to invest in a wide array of
stocks and bonds so as to minimize risk. In effect, Norway has a
big set of mutual funds. The aim is to avoid converting oil export
proceeds into domestic currency and thus pushing up the exchange
rate (the Dutch Disease), while using the revenue for future
generations to use as best they can.
To my mind, the problem is the limited scope of how to go about
doing this. Mutual funds invest in minority shares of companies.
Spreading their money around is a widespread strategy for families
and small investors to avoid risk. Their basic question is simply
one of which stocks and bonds will yield the highest rate of return
or rise most quickly in price. This is basically a short-term
decision, given the ebb and flow of financial markets. And because
stock pickers own only marginal amounts, their actions have no
effect on the existing economic and political environment,
productivity, employment and economic structures.
China and Singapore pursue a different
strategy. Being concerned mainly with their
national development, they start by asking what their economies
will need to import over the next half-century, and how foreign
investment can best serve their long-term diplomatic aims.
Singapore invests heavily in Australia, partly to
help political as well as economic reciprocity. China has bought up
majority shares of mineral resources (including silica mines in
Norway and Iceland) and bought into the partnerships of major U.S.
hedge funds. Both countries use their sovereign wealth funds to
upgrade their long-term economic productivity, living standards,
technology and educational levels.
So here is quite a contrast. Norway is using its savings to buy
minority stock ownership abroad, without linking its purchases to
its own future development – except by receiving foreign exchange
returns. It also is selling off ownership of its minerals and other
natural resources, bringing in more foreign exchange on top of its
oil exports. Most notably, it is selling these resources to nations
that are seeking to dispose of their surplus dollars like a hot
potato.
I do not mean this figure of speech as a joke. The financial
climate has changed radically from when Norway’s Oil Fund was
established in 1990. Norway has built up its savings since then by
selling enormous quantities of oil and gas, and employing many
thousands of workers. By coincidence, an even larger sum of $600
billion recently has been created overnight – electronically on
computer keyboards, by the U.S. Federal Reserve Board as part of
Chairman Ben Bernanke’s Quantitative Easing policy (QE2). This
money has been provided to spur bank liquidity, in hope that they
can earn their way out of the losses they suffer from their bad
mortgage loans and other gambles.
The aim of these banks is the same as that of Norway’s Oil Fund:
to make money. As the financial press has noticed, nearly the
entire $600 billion has been sent abroad – to the BRIC countries
and raw materials exporters in strong balance-of-payments
positions, whose economies are not as “loaned up” as those of the
United States and Europe, where Norway invests most of its money.
So while Norway is putting its money into these countries, their
financial managers are jumping ship – sending electronic dollars
and euros to the economies that use their own sovereign wealth
funds in the opposite way from what Norway is doing.
Here is the real problem: Money is not what it used to be back
when it was backed by gold bullion or anything tangible, earned by
labor and enterprise. Banks create credit almost freely on computer
keyboards, and entail little cost in making huge gambles on
derivatives based on which way foreign exchange rates, interest
rates, bond prices and even defaults will move. This cost-free
credit is flooding the global economy. This makes Norway’s foreign
exchange savings (i.e., the Oil Fund) much less valuable in terms
of how much it actually costs to buy $600 billion worth of stocks
and bonds. The cost is almost zero for the U.S. banking system. And
that is what Norway’s Oil Fund is competing with when it puts its
money into the U.S. and European financial markets.
Matters also have changed radically in another respect. The
stock market no longer serves mainly as a vehicle to raise funds
for tangible capital investment. Since the 1980s it has become a
vehicle for debt-leveraged buyouts (LBOs), financed by corporate
raiders or ambitious financial empire-builders using high-interest
“junk” bonds to “take companies private” by debt-for-equity swaps.
Corporate managers at the remaining companies have gone into debt
increasingly to finance stock buy-backs simply to bid up their
price (and hence, the value of stock options that managers and
venture capitalists give themselves), and even just to pay out as
dividends.
This is not how textbooks describe stock markets as working. It
was not what was expected half a century ago when Peter Drucker
coined the term “pension-fund socialism.” He expected the stock
market to mediate these inflows to finance new investment and
hiring, so the economy would expand. But instead, the stock market
has been loading companies down with debt for the past thirty
years. Many are threatening bankruptcy – ironically, as a way to
wipe out their pension obligations, so as to leave more for the
large financial backers of the debt leveraging largely responsible
for their insolvency.
Asian economists view the West as entering a dead
end – one of corporate as well as individual debt
peonage. They see Iceland, Ireland and
Greece as a normal result of current policies, not as anomalies.
From their perspective – and from that of many of my economic
colleagues at UMKC – the world has entered an era of “debt
pollution.” Tax reform has favored debt leveraging and speculation
(e.g., low capital gains taxes, and a tax shift off finance and
property onto labor). The upshot is that savings and credit have
not been invested in expanding the means of production or to
alleviate the global economy’s debt overhead, but simply to bid up
real estate and stock prices on credit.
This is not a formula for long-term growth. It is a financial
distortion of real development. I believe that it is as serious as
that of the environmental pollution associated with global warming
and other problems. I have
spoken to Asian officials and can attest to the fact that this is
their perspective. They do not see stock or
bond markets offering the same promise that existed back in 1990,
when the most recent takeoff got underway – and coincidentally,
when Norway’s Oil Fund took its present form.
The long stock market rise may be over. Markets are shrinking as
economies buckle under their debt overhead. Families and companies,
cities and states, and even national governments now find
themselves obliged to divert their spending away from the purchase
of goods and services to pay down debts, effectively reducing
investment and growth.
Governments of mixed economies such as China and
Singapore are engaged in long-term planning to improve economic
well-being. Toward this end they are
investing in themselves, specifically in core resources that future
generations will need to control and import in decades to come.
They therefore are converting their holdings of currency and
financial securities into long-term control over natural resources
and technology.
Norway’s best choice also is to invest in its own economy. That
means improving domestic infrastructure such as roads,
communications, health, research and education. And to elevate its
international position and destiny, this calls for direct
investment in Norway’s neighbors, starting with the closest,
Iceland and Scandinavia.
http://michael-hudson.com/2011/03/norway%E2%80%99s-oil-fund-is-it-realizing-its-full-potential/