Here’s an interesting read from the New Yorker a friend sent me, about the rising influence of “sovereign wealth funds” in the international markets. These are investment funds controlled by foreign governments, a trend originating with Arab states reinvesting their oil funds back in the 1970s.

Now they’re back in a bigger way, again due to rising oil prices and China’s economic boom. You might have seen the news that Citigroup just took a big investment from an Abu Dabi-based sovereign wealth fund, for example. This Associated Press story gives the scoop and mentions a pretty eye-opening statistic: Merrill Lynch estimates the total assets managed by sovereign funds already may exceed $2 trillion -- more than all the world's hedge funds combined -- and could grow to $7.9 trillion by 2011.

The implications of mixing free-market trade with government-sponsorship are pretty fascinating. It opens the door to some fairly grim national security questions – what if a hostile foreign government was able to buy out an American company controlling, say, sensitive security software? Beyond security questions, free-market fans (including yours truly) have to wonder if governmental investors will behave in the same bottom-line fashion in the markets as non-government investors – if this movement couldn’t conceivably make free trade less free. Reporter James Surowiecki (author of one of my favorite books of the last few years, The Wisdom of Crowds) does a great job in this piece of both explaining the concept, outlining the concerns, and then putting most of those concerns to bed – not without reminding us that the U.S.’s huge trade deficit can’t be sustained indefinitely: as he puts it, “The reason that sovereign wealth funds are so flush with cash is all the dollars we spend on oil and Asian consumer goods. If we want to consume far beyond our means, then, one way or another we’re going to end up selling off assets to pay for it. Passing laws barring foreign states from acquiring American companies may help treat the symptom. But it’s not going to do much to cure the disease.”

[image: from the New Yorker article]

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