. June 21, 2008 SouthAmerica: Yesterday when I was reading The Financial Times I came across the following article âReject sovereign wealth funds at your perilâ by Stephen Schwarzman â Chairman and Chief Executive of The Blackstone Group. When I was reading his article a thought came to mind: â This guy would sell his mother to make a quick buck, never mind his own country.â ******** âReject sovereign wealth funds at your perilâ By Stephen Schwarzman Published: June 20 2008 The Financial Times (UK) Gao Xiqing, the president of China Investment Corporation, China's sovereign wealth fund, spoke last week of his frustration that CIC's attempts at investing outside China sometimes run into political opposition. He went on to add, in words that should act as a chilling wake-up call to many politicians and bankers: "Fortunately there are more than 200 countries in the world. And fortunately there are many countries who are happy with us." I have known CIC since it bought a 9.4 per cent non-voting interest in Blackstone when we went public last year. The fact that its president publicly suggests that CIC may invest only where it feels welcome - a view I know many other SWFs share - has serious implications for the economic wellbeing of the US and other western countries where political opposition to SWF investments has mounted. From the point of view of a rational economist, this is frightening. It is difficult to think of how much worse off we would be in the current financial crisis without SWFs. Many of our commercial and investment banks have taken large hits to their balance sheets because of bad investments. The capital infusions from SWFs have enabled them to strengthen their balance sheets. Since the fourth quarter of last year, SWFs have poured about $55bn (â¬35bn, Â£28bn) into US and European financial institutions to the great benefit of their shareholders. That is a very good thing. Using SWFs to recycle the holdings of countries with large surpluses in the west, which needs the capital, rather than keeping that money at home, is a huge benefit to us. CIC is not alone in its frustration with political grandstanding on SWF investments in the west. When I talk to some of the SWFs (and I have been dealing with them for more than 20 years), they are both amazed and annoyed that their actions, which are such a positive for the US economy, have been met with such hostility and anger in some quarters. They have not done anything wrong; they are acting the same as any domestic pension plan or university endowment in a search for an acceptable return on investment. This hostility is dangerous because we are reaching a stage in the global economy where, as CIC says, SWFs have other options. They could sell US equities or bonds, for example, and buy from other nations. This is not a threat but simply the SWFs following their own self-interest in search of the most hospitable investment environment. The US is the world's largest debtor nation and we are now in an uneasy relationship with our creditors. We cannot afford to get this wrong. The current account deficit is 7 per cent of gross domestic product - double that of the Reagan years. This makes a significant number of countries big holders of dollar reserves. They invest those reserves in part through financing a significant portion of the federal debt. Because foreigners are willing to buy Treasury debt in quantity, the Federal Reserve is able to keep interest rates low. If we were forced to rely mostly on domestic borrowing, we would have to pay very high interest rates. The consequences would be increased inflation, a dollar falling even faster and very slow (or negative) economic growth. If the investment climate for SWFs is poor in the US, the countries with large dollar reserves (which are the owners of most of the SWFs) could also look for alternatives. The euro already is proving increasingly attractive as a reserve currency instead of the dollar and that alone should be of deep concern. To alienate the managers of these SWFs could have severe consequences if they and their owners seek friendlier alternatives outside the US. Even the current talk of disclosure requirements is seen by some SWFs as problematical since it often fails to take into account the political realities in some of the countries managing SWFs, where their ties to the west are best left unstated lest they arouse domestic political opposition. When capital withdraws, it does so without notice or fanfare. Imagine a private meeting in a room far from the US; a decision is quietly made and billions of dollars that were invested here find a new and more hospitable home. Or billions of dollars that could have been invested here are reallocated to other more benign markets. Sixty years ago, we conducted a painful, expensive and accidental experiment called the Great Depression, with the Smoot Hawley tariffs to teach us the value of free trade. Let us not subject ourselves to another painful lesson in the value of direct investment and the free flow of capital by driving SWFs away. Source: http://www.ft.com/cms/s/0/b34657e8-3e62-11dd-b16d-0000779fd2ac.html?nclick_check=1 .