Honest Money

In defense of SWFs

1.
The politicians of the west are afraid of the Sovereign Wealth Funds (SWFs) that today dominate global finance.

An SWF is a state-owned investment fund composed of financial assets such as stocks, bonds, property or other financial instruments, says Wikipedia. As I understand it, it is the wealth, not the Fund, which is sovereign.

We are told by the western politicians that SWFs, especially those in oil producing countries such as the United Arab Emirates, and those in China and Russia, could take politically motivated investment decisions, thereby serving interests that go beyond purely financial ones.

Germany, whose President, Horst Koehler, is a former International Monetary Fund (IMF) boss, is therefore finalising a draft law aimed at protecting companies from foreign takeovers, a press report said on Monday. Under terms of the bill, the government would be able to scrutinise acquisitions by foreign SWFs of more than 25 percent in a German company. If such a purchase was deemed to pose a threat to German public security or order, Berlin could prevent it from going through. Until now, the government held this kind of veto only over deals that involved the arms industry. (1)

The USA, on the other hand, is fully realising that SWFs may lack confidence in its beleaguered dollar (also for reasons of fierce ideological hostility). This lack of confidence could make SWFs bet against the USA, her economy and/or her currency.
Acting through ‘its’ Secretary of the Treasury, Henry M. Paulson, Jr., the USA nevertheless proposed on Monday 02 June 2008 in Abu Dhabi, United Arab Emirates, that the IMF develop “best practices” for SWFs to ensure they do not use their huge government investment funds to further their political goals. (2)

2.
In order to take over foreign companies, SWFs need to pay with money.

A reserve currency (or anchor currency) is a currency which is held in significant quantities by many governments and institutions as part of their foreign exchange reserves. It also tends to be the international pricing currency for products traded on a global market, such as oil, gold, etc.
This permits the issuing country to purchase the commodities at a marginally cheaper rate than other nations, which must exchange their currency with each purchase and pay a transaction cost. (For major currencies, this transaction cost is negligible with respect to the price of the commodity.) It also permits the government issuing the currency to borrow money at a better rate, as there will always be a larger market for that currency than others, says Wikipedia.

On 09 November 2007, Paulson said that
the dollar has been the world’s reserve currency since World War II and it’s been that for a reason. We are the biggest economy in the world, we are as open as any economy to investment, to trade, and we’ve had stable economic policies … we’ve had good productivity. (3)

On 02 June 2008, he said that
the US dollar has been the world’s reserve currency since World War Two and there is a good reason for that. The United States has the largest, most open economy in the world, and our capital markets are the deepest and most liquid. (4)

3.
Paulson’s statements of 09 November 2007 and of 02 June 2008 both argue that there is a good reason for the dollar being the world’s reserve currency since the Second World War.

Both forget that the Bretton Woods system, which was instituted in July 1944 and which made of the dollar a Gold derivative, was repealed by US president Richard Nixon on 15 August 1971.

Since that date, Gold is a dollar derivative and the US dollar is no longer convertible Gold directly, except on the open market.

Since that date, the USA is in the possession of a blank check to print as much green paper, also known as the US dollar, as it wants.

Since that date, the IMF, which was instituted precisely to maintain the Bretton Woods system, has no more reason for existence, except in order to bail out the bankrupt dollar regime.

Nixon did ‘never’ explicitly say that he severed the link of the US dollar with Gold.

He only repealed its ‘redeemability’, thinking that from the moment you have a claim to Gold, you possess that Gold, even though there is no way in which that debt could be settled by the debtor through a physical transfer of Gold.

In his 09 May 2002 Acceptance speech of the International Charlemagne Prize of Aachen, Germany, for 2002, the European Central Bank (ECB)’s first President, the late Dr. Willem F. Duisenberg, did however say that the euro is the first currency that has not only severed its link to Gold, but also its link to the nation-state. (5)

Paulson does not seem to be aware of these facts of 1971 and 2002. (Nixon repealing the convertibility of the dollar to gold, Duisenberg saying that the euro has severed the link between euro and gold).

By the same token, Paulson does not seem to be aware of the fact that on Sunday, 26 September 1999, on the sidelines of an IMF-meeting in Washington D.C., the ECB and the central banks of Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, Switzerland, and England jointly announced, in what has since then become known as the ‘Washington Agreement’, that Gold will remain an important element of global monetary reserves. The Agreement, which covered the five years from 27 September 1999 and was renewed for five years on 8 March 2004, went on to limit Gold sales by the signatories. (6) (7)

4.
The difference between Paulson’s two statements seems to be that
whereas seven months ago, Paulson said that the USA has had stable economic policies and good productivity,
now he’s saying that the capital markets of the USA are the deepest and most liquid capital markets.

Paulson is thus no longer interested in economic policies and production of tangible wealth, but only in the depth and liquidity of capital markets where the financial instruments, of which the SWFs are composed, are being traded.

Could the reason be that, fully realising that SWFs may lack confidence in its beleaguered dollar, Paulson nevertheless wants to attract SWFs to the capital markets of the USA, hoping that the IMF, which was previously headed by Germany’s present president, Horst Koehler, could continue to bail out the USA if the policies of the USA, not of the SWFs, cause problems in the USA?

5.
Germany, of which Horst Koehler is thus president, cannot expect to be bailed out by the IMF if the policies of Germany or of the European Union, of which Germany forms part, cause problems in Germany.

Germany has thus found it necessary to draft a bill whereby the German government would be able to scrutinise acquisitions by foreign SWFs of more than 25 percent in a German company.

SWFs do however not invest in order to exercise power or control.
SWFs invest in order to make money.

At the World Economic Forum held from 18 to 20 May 2008 in Sharm El Sheikh, Egypt, the Duke of York therefore said that there is no reason for countries to restrict investment by SWFs and, on Saturday 24 May 2008, the United Arab Emirates therefore agreed to establish a joint economic committee with the Kingdom of Spain, during a state visit by His Majesty King Juan Carlos to the Gulf state. (8) (9)

Germany is a member of the European Union (EU).
Spain, Yorkshire, England, Great Britain and the United Kingdom also.

Koehler’s government does not seem to know economics or economic theory.

As I said earlier, Paulson does not seem to know economic history.

In order to fight off the attempts by Koehler’s government, by Paulson and by the IMF, to destroy not only the Gulf economy and the economies China and Russia, but also the economies of the west,
the Duke of York has slammed the protectionism toward SWFs and His Majesty King Juan Carlos has agreed to establish a joint economic committee with the United Arab Emirates.

The issues are clear.

The parties also – European Royalty versus western politicians and western bureaucrats.

Ivo Cerckel

NOTES

(1)
Germany finalises draft law on sovereign wealth funds: report
02/06/2008 08h05

http://www.afp.com/english/news/stories/newsmlmmd.22f0376cebcd7c2596233a8a35685ff5.291.html

(2)
Thomson Financial News
US’ Paulson says foreign direct investment is welcome in United States
06.02.08, 5:21 AM ET

http://www.forbes.com/afxnewslimited/feeds/afx/2008/06/02/afx5068429.html

(3)
UPDATE 2-Paulson: Dollar is world currency “for a reason”
Fri Nov 9, 2007 6:10pm EST
By David Lawder and Mark Felsenthal

http://www.reuters.com/article/bondsNews/idUSN0930678420071109

(4)
Paulson committed to dollar as reserve currency
Mon Jun 2, 2008 6:46am EDT
By David Lawder

http://www.reuters.com/article/newsOne/idUSL0244883920080602

(5)
International Charlemagne Prize of Aachen for 2002
Acceptance speech
by Dr. Willem F. Duisenberg, President of the European Central Bank, Aachen, 9 May 2002

http://www.ecb.eu/press/key/date/2002/html/sp020509.en.html

(6)
1999 – The European central banks declare their confidence in Gold
Press release – joint statement on Gold, 26th September 1999

http://www.reserveasset.Gold.org/central_bank_agreements/

(7)
ECB PRESS RELEASE
8 March 2004 Joint Statement on Gold

http://www.ecb.int/press/pr/date/2004/html/pr040308.en.html

(8)
Duke of York slams protectionism toward wealth funds
by Andrew White at the WEF and Dylan Bowman in Dubai on Tuesday, 20 May 2008

http://www.arabianbusiness.com/519858-duke-of-york-slams-protectionist-response-to-wealth-funds

(9)
UAE, Spain forge economic, military ties
by Lynne Roberts on Sunday, 25 May 2008

http://www.arabianbusiness.com/520121-uae-spain-forge-economic-military-ties

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