Interesting article. However, I don't entirely agree with your assertion that a monetary sovereign investing in a SWF is pointless since it can just print new currency. Printing new currency causes inflation, but investing existing government revenues does not. These two things are not equivalent, assuming that the SWF is not funded by money printing.
Thanks for the comment! There are some important points here I want to dig into a bit.
"Printing new currency causes inflation..." This is the straightforward monetarist view of inflation, and I think it's wrong. Empirically, there is not an inherent link between money printing and inflation. The most compelling counterargument is Japan, where the central bank spent years dramatically expanding the monetary base to try and push up inflation without much success.
It is not the printing of money per se that drives inflation, but the spending of money (at least in the case of demand-driven inflation). Whether printing money or spending money drives inflation might sound like a distinction without a difference, but it actually has an important implication for the next point.
"...but investing existing government revenues does not." Again, I don't think this is quite right. In fact, this is exactly what the example of Norway's SWF is all about. The oil fund is seeded with 'genuine' government revenue, not just newly printed currency - and yet that revenue needs to be parked internationally to prevent excess domestic spending driving inflation (aka Dutch Disease). (This point also highlights the importance of taxation as a deflationary tool, but this comment is long enough as it is.)
With all that said, your comment gets at a fundamental point that I strongly agree with: The amount of spending on domestic investments by a monetary sovereign SWF will be limited by inflation. In fact, this is a core idea of the American SWF proposal I'm sketching out - that the proper amount of investment spending in a given period should be set by the Fed in view of current economic conditions (which might mean zero in a hot economy with above-target inflation).
Interesting article. However, I don't entirely agree with your assertion that a monetary sovereign investing in a SWF is pointless since it can just print new currency. Printing new currency causes inflation, but investing existing government revenues does not. These two things are not equivalent, assuming that the SWF is not funded by money printing.
Thanks for the comment! There are some important points here I want to dig into a bit.
"Printing new currency causes inflation..." This is the straightforward monetarist view of inflation, and I think it's wrong. Empirically, there is not an inherent link between money printing and inflation. The most compelling counterargument is Japan, where the central bank spent years dramatically expanding the monetary base to try and push up inflation without much success.
It is not the printing of money per se that drives inflation, but the spending of money (at least in the case of demand-driven inflation). Whether printing money or spending money drives inflation might sound like a distinction without a difference, but it actually has an important implication for the next point.
"...but investing existing government revenues does not." Again, I don't think this is quite right. In fact, this is exactly what the example of Norway's SWF is all about. The oil fund is seeded with 'genuine' government revenue, not just newly printed currency - and yet that revenue needs to be parked internationally to prevent excess domestic spending driving inflation (aka Dutch Disease). (This point also highlights the importance of taxation as a deflationary tool, but this comment is long enough as it is.)
With all that said, your comment gets at a fundamental point that I strongly agree with: The amount of spending on domestic investments by a monetary sovereign SWF will be limited by inflation. In fact, this is a core idea of the American SWF proposal I'm sketching out - that the proper amount of investment spending in a given period should be set by the Fed in view of current economic conditions (which might mean zero in a hot economy with above-target inflation).