WEBVTT
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Hi everyone, Sabrina is off today, and we're releasing a mini episode with producer Meredith Martin filling in on sovereign wealth funds, what they are, how they work, and why Prime Minister Mark Carney thinks they are a good idea for Canada.
00:00:14.160 --> 00:00:24.640
Also, for those in the Toronto area, we're recording a Missing Metal podcast episode in front of a live audience with all three of the hosts, plus Ron Butler at the National Club on June 1st.
00:00:24.800 --> 00:00:27.679
Please check out our Substack for more information.
00:00:28.559 --> 00:00:33.200
Classonomics, hosted by Sabrina Mado and Mike Moffat.
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A few weeks ago, just before the spring economic update, it was announced that Canada would be creating a sovereign wealth fund called the Canada Strong Fund, and it will be used to invest in infrastructure and other domestic projects.
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I've occasionally covered the oil and gas sector.
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So when I heard of this, I immediately thought of Norway, which is similarly to Canada, rich in oil and gas.
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And it's the only other nation I knew of that had a sovereign wealth fund.
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Mike, what is a sovereign wealth fund?
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Well, it's time to uh play Professor Mike here.
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So there's actually hundreds of sovereign wealth funds around the world, with some like the Alberta Heritage Savings Trust Fund at the subsovereign or provincial level.
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Norway's is the most famous with uh roughly$2 trillion in assets.
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Sovereign wealth funds tend to spread their money across a mix of assets.
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So we're talking public stocks, bonds, real estate, infrastructure, private equity, credit, sometimes hedge funds or direct stakes in non-publicly traded companies.
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Before we get into what Canada is doing, I think we should talk about Norway for a bit because it's the largest, and I think the one that's most widely known in Canada.
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What's the purpose of Norway's sovereign wealth fund?
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Sovereign wealth funds differ on a number of dimensions.
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Uh, two of the most important ones being, you know, where does the money come from?
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And second, how is it used?
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Like what is it trying to accomplish?
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So if we look at that second question around how the money is used, what is trying to accomplish, Norway has two separate funds with two separate purposes.
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So we'll start with the bigger of the two.
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The Government Pension Fund Global was established in the 1990s and is used to invest the surplus revenue of Norway's petroleum sector into all kinds of international investments, the same way most pension funds do.
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So it's typically called the oil fund, and you know, it owns stocks and things globally around the world.
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The other fund is much smaller.
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It was created in 1967.
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It's more kind of a national insurance fund, and it is managed separately from the much larger oil fund.
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Unlike the oil fund, uh, which invests around the world, owns you know a lot of uh companies on U.S.
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stock markets, this fund mainly invests in Norway and the Nordic region.
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So it's more focused on local and regional economic development, you know, investing in local companies, you know, infrastructure like roads and ports, you know, that kind of thing.
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So my understanding is that the older, smaller fund was set up to diversify the economy.
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Norway is a very small country.
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It only has 5.5 million citizens today.
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Back when the fund was created, it had less than 4 million people.
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The country was generating a lot of revenue per person.
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And it could have just paid dividends back to its citizens, but instead they pooled the profits, created the fund, which then helped invest in other industries.
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Why do you think they created the second fund in the 1990s?
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Well, so the the first fund was basically designed to kind of grow the economy again, uh, develop infrastructure so they could build up the manufacturing sector, the tourism sector, and so on.
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But, you know, there's only so many kind of investments you can make like that locally before you're just kind of throwing money, you know, towards anything and everything.
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So the second fund, the larger one they set up was, you know, what do we do with this big pot of money that's probably not gonna last forever, right?
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Just because the oil in Norway may eventually run out.
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And you're right, they could have just, you know, written checks to uh existing residents, uh, but that you know doesn't really help the future.
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And if you start writing massive checks to citizens, you're gonna get a lot of inflation, right?
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Everybody's gonna go out and spend that money.
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So by taking a lot of the cash, pooling it into a second fund, you can buy up stocks and bonds from around the world.
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You're not gonna get that huge surge of inflation.
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And it creates this fund where you know we can pay dividends to the citizens for like hundreds and hundreds of years, uh, so we can kind of ensure the ongoing prosperity of the country.
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This seems like a really, really prudent thing to do and very reasonable, but somehow I wonder how many citizens in the world would have been okay.
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Like how many of them were not just like, hey, give me the money.
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I wonder how they actually got the consensus to do this.
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Anyway, on to the next question.
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So is the Canada Strong Fund more like the older Norway fund or the newer, bigger one, or something else entirely?
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Yeah, so it's designed more like the smaller fund, uh, that is designed more for economic development rather than being a fund that's buying uh, you know, Google stock or or something like that.
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So, and it's really designed uh to fund large infrastructure projects.
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So the prime minister used the Canadian Pacific Railway in the 1870s as an example of a nation-building uh infrastructure that this thing could fund.
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It's going to operate as an independent crown corporation.
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Uh so it's supposed to be arm's length from the government, but it invests alongside uh the private sector.
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And the federal government is providing an initial endowment of about$25 billion over three years.
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So, in sovereign wealth fund terms, you know, this is very small.
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It's, you know, we're not talking about the$2 trillion or so of Norway's big fund.
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The plan is over time that they kind of uh build a bunch of assets, um, you know, infrastructure and so on, sell those things off, and then use the proceeds to build uh more assets, uh, a term that uh liberal governments love uh called asset recycling.
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But we don't know a lot of the details yet.
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Uh the announcement was pretty nebulous.
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I've been hearing a bunch of criticism about it, especially about the fact that the Canada Strong Fund is being debt financed instead of created with surplus revenues.
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And I've heard a few people say it shouldn't be called a sovereign wealth fund because it isn't one.
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What do you make of that criticism?
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Yeah, I've heard that too, of people saying, well, this should be a sovereign debt fund.
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And okay, fine, you can use that terminology.
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But this really is that kind of second dimension I talked about earlier around where the money comes from.
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It's not uncommon to have a sovereign wealth fund from a government that has government debt.
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Um, that's actually the norm.
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It's not the exception.
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Like Norway is kind of the exception here.
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And it can make sense that, you know, if you are a government that can borrow for 30 years at 3% to 4%, and you can use that money to build infrastructure which will generate returns of 8%, 9%, 10%, kind of makes sense to do that, you know, because that spread between earning, you know, 10% versus having to pay 4%, you know, makes a whole thing uh profitable.
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So, you know, I I kind of agree with the people pointing out the the terminology uh that maybe it should be a debt fund rather than a wealth fund.
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But I still think there can be logic to this.
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Now, there's this other kind of component to this fund, which is really not hasn't been well explained, but they're also talking about allowing Canadians to invest directly into the fund.
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So just the same way you might invest in a mutual fund or an ETF, an exchange traded fund, that, you know, if you are a high wealth investor and go, hey, I like what the government's doing here, you know, I'll buy in at, I don't know,$100,000 or whatever, but it's really not clear at this moment how that's going to work.
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When the fund was announced, Carney said that, and this is a quote: over time, the fund will grow through asset recycling and reinvestment, creating even greater opportunities for future generations.
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How do you think it will benefit future generations?
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And do you agree that having a sovereign wealth fund is a good idea?
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Yeah, I think it can be a good idea.
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Like, like in most things, the the devil's in the details, but you know, I at a high level, I like what they're doing.
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And it it can really help with a lot of things.
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Uh, you know, we uh here talk a lot about housing and the housing theory of everything.
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You know, if this helps uh Canada build uh water and wastewater treatment plants, uh which are needed to be able to build more homes, you know, grow uh grow our subdivisions and things like that, that's that's a good thing.
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I do think there are some open questions around, you know, how is this going to fit in with other government programs?
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Like we already have a Canada infrastructure bank, we already have a lot of agencies out there building infrastructure.
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So, you know, where does this fit in the mix?
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So, you know, I worry about duplication.
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I don't really understand the model here around Canadians buying in.
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But I think, you know, overall, Canada needs a lot of infrastructure.
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I do think there are a lot of opportunities there to build infrastructure that will both be profitable and help the country.
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So at a at a high level, I like the idea, but uh, you know, I've got a lot of uh questions when it comes to implementation and details and so on.
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I think the thing that I found most surprising about the announcement was that A, I don't think many people know what a sovereign wealth fund is.
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I thought they didn't outline it very well, which is always a complaint with government.
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They're not great communicators in general.
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And then the few people I did see talking about it online reacted so strongly to it.
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And I think most citizens were just like, what are you even talking about?
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Like, why why are you why is this a thing?
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Do you have any thoughts on like the reaction to it and how strong it was?
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Yeah, well, I I think some of the folks who were reacting to it uh, you know, are going to react strongly against you know anything that that the government does.
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Though again, I think though they had some really good points around the fact that this is this is debt financed.
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I think they had a lot of good points around that this isn't particularly detailed.
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You know, I don't think like 95% of Canadians care uh around the announcement.
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I think what they'll care about is, you know, hey, if we're able to build uh a death port or expand the port of Vancouver, you know, get more uh goods or get more natural gas to Asia, grow the economy, create a bunch of jobs.
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I think Canadians will will be happy with that.
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And the government needs to understand that, that the people don't really care about the announcements.
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They they care about the outcome.
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So we'll have to see three, four, five, 10 years down the line, whether or not this actually created uh opportunity.
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Uh, you know, I did find it a little strange that it it did seem to be the government's headline in the spring economic update on a thing that like 95% of the of the population won't really care about or or won't understand.
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Yeah, that was exactly my point.
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Like it felt weird to me that this was your headline.
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It was a really odd type of thing to focus on when so few people would even understand what they were talking about.
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Anyway, I too am really interested in results, and that's all I really care about.
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And I think most of the missing middle team, like I think we all agree with that.
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Just show me the money.
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Show me the money.
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Or show me the infrastructure project, you know?
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Let's see the high speed rail.
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Thank you so much for watching and listening.
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Sabrina will be back next week.
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Our producer today is Kara Stern and our editor is Sean Foreman.
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And if you have any thoughts or questions about regional economic development policies in Scandinavia, please send us an email to missing middle podcast at gmail.com.
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And we'll see you next time.
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Hi everyone, Sabrina is off today, and we're releasing a mini episode with producer Meredith Martin filling in on sovereign wealth funds, what they are, how they work, and why Prime Minister Mark Carney thinks they are a good idea for Canada.
00:00:14.160 --> 00:00:24.640
Also, for those in the Toronto area, we're recording a Missing Metal podcast episode in front of a live audience with all three of the hosts, plus Ron Butler at the National Club on June 1st.
00:00:24.800 --> 00:00:27.679
Please check out our Substack for more information.
00:00:28.559 --> 00:00:33.200
Classonomics, hosted by Sabrina Mado and Mike Moffat.
00:00:34.399 --> 00:00:47.200
A few weeks ago, just before the spring economic update, it was announced that Canada would be creating a sovereign wealth fund called the Canada Strong Fund, and it will be used to invest in infrastructure and other domestic projects.
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I've occasionally covered the oil and gas sector.
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So when I heard of this, I immediately thought of Norway, which is similarly to Canada, rich in oil and gas.
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And it's the only other nation I knew of that had a sovereign wealth fund.
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Mike, what is a sovereign wealth fund?
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Well, it's time to uh play Professor Mike here.
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So there's actually hundreds of sovereign wealth funds around the world, with some like the Alberta Heritage Savings Trust Fund at the subsovereign or provincial level.
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Norway's is the most famous with uh roughly$2 trillion in assets.
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Sovereign wealth funds tend to spread their money across a mix of assets.
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So we're talking public stocks, bonds, real estate, infrastructure, private equity, credit, sometimes hedge funds or direct stakes in non-publicly traded companies.
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Before we get into what Canada is doing, I think we should talk about Norway for a bit because it's the largest, and I think the one that's most widely known in Canada.
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What's the purpose of Norway's sovereign wealth fund?
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Sovereign wealth funds differ on a number of dimensions.
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Uh, two of the most important ones being, you know, where does the money come from?
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And second, how is it used?
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Like what is it trying to accomplish?
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So if we look at that second question around how the money is used, what is trying to accomplish, Norway has two separate funds with two separate purposes.
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So we'll start with the bigger of the two.
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The Government Pension Fund Global was established in the 1990s and is used to invest the surplus revenue of Norway's petroleum sector into all kinds of international investments, the same way most pension funds do.
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So it's typically called the oil fund, and you know, it owns stocks and things globally around the world.
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The other fund is much smaller.
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It was created in 1967.
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It's more kind of a national insurance fund, and it is managed separately from the much larger oil fund.
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Unlike the oil fund, uh, which invests around the world, owns you know a lot of uh companies on U.S.
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stock markets, this fund mainly invests in Norway and the Nordic region.
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So it's more focused on local and regional economic development, you know, investing in local companies, you know, infrastructure like roads and ports, you know, that kind of thing.
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So my understanding is that the older, smaller fund was set up to diversify the economy.
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Norway is a very small country.
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It only has 5.5 million citizens today.
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Back when the fund was created, it had less than 4 million people.
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The country was generating a lot of revenue per person.
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And it could have just paid dividends back to its citizens, but instead they pooled the profits, created the fund, which then helped invest in other industries.
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Why do you think they created the second fund in the 1990s?
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Well, so the the first fund was basically designed to kind of grow the economy again, uh, develop infrastructure so they could build up the manufacturing sector, the tourism sector, and so on.
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But, you know, there's only so many kind of investments you can make like that locally before you're just kind of throwing money, you know, towards anything and everything.
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So the second fund, the larger one they set up was, you know, what do we do with this big pot of money that's probably not gonna last forever, right?
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Just because the oil in Norway may eventually run out.
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And you're right, they could have just, you know, written checks to uh existing residents, uh, but that you know doesn't really help the future.
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And if you start writing massive checks to citizens, you're gonna get a lot of inflation, right?
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Everybody's gonna go out and spend that money.
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So by taking a lot of the cash, pooling it into a second fund, you can buy up stocks and bonds from around the world.
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You're not gonna get that huge surge of inflation.
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And it creates this fund where you know we can pay dividends to the citizens for like hundreds and hundreds of years, uh, so we can kind of ensure the ongoing prosperity of the country.
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This seems like a really, really prudent thing to do and very reasonable, but somehow I wonder how many citizens in the world would have been okay.
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Like how many of them were not just like, hey, give me the money.
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I wonder how they actually got the consensus to do this.
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Anyway, on to the next question.
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So is the Canada Strong Fund more like the older Norway fund or the newer, bigger one, or something else entirely?
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Yeah, so it's designed more like the smaller fund, uh, that is designed more for economic development rather than being a fund that's buying uh, you know, Google stock or or something like that.
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So, and it's really designed uh to fund large infrastructure projects.
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So the prime minister used the Canadian Pacific Railway in the 1870s as an example of a nation-building uh infrastructure that this thing could fund.
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It's going to operate as an independent crown corporation.
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Uh so it's supposed to be arm's length from the government, but it invests alongside uh the private sector.
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And the federal government is providing an initial endowment of about$25 billion over three years.
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So, in sovereign wealth fund terms, you know, this is very small.
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It's, you know, we're not talking about the$2 trillion or so of Norway's big fund.
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The plan is over time that they kind of uh build a bunch of assets, um, you know, infrastructure and so on, sell those things off, and then use the proceeds to build uh more assets, uh, a term that uh liberal governments love uh called asset recycling.
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But we don't know a lot of the details yet.
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Uh the announcement was pretty nebulous.
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I've been hearing a bunch of criticism about it, especially about the fact that the Canada Strong Fund is being debt financed instead of created with surplus revenues.
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And I've heard a few people say it shouldn't be called a sovereign wealth fund because it isn't one.
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What do you make of that criticism?
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Yeah, I've heard that too, of people saying, well, this should be a sovereign debt fund.
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And okay, fine, you can use that terminology.
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But this really is that kind of second dimension I talked about earlier around where the money comes from.
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It's not uncommon to have a sovereign wealth fund from a government that has government debt.
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Um, that's actually the norm.
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It's not the exception.
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Like Norway is kind of the exception here.
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And it can make sense that, you know, if you are a government that can borrow for 30 years at 3% to 4%, and you can use that money to build infrastructure which will generate returns of 8%, 9%, 10%, kind of makes sense to do that, you know, because that spread between earning, you know, 10% versus having to pay 4%, you know, makes a whole thing uh profitable.
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So, you know, I I kind of agree with the people pointing out the the terminology uh that maybe it should be a debt fund rather than a wealth fund.
00:07:53.759 --> 00:07:56.399
But I still think there can be logic to this.
00:07:56.639 --> 00:08:07.680
Now, there's this other kind of component to this fund, which is really not hasn't been well explained, but they're also talking about allowing Canadians to invest directly into the fund.
00:08:07.839 --> 00:08:28.399
So just the same way you might invest in a mutual fund or an ETF, an exchange traded fund, that, you know, if you are a high wealth investor and go, hey, I like what the government's doing here, you know, I'll buy in at, I don't know,$100,000 or whatever, but it's really not clear at this moment how that's going to work.
00:08:28.720 --> 00:08:40.159
When the fund was announced, Carney said that, and this is a quote: over time, the fund will grow through asset recycling and reinvestment, creating even greater opportunities for future generations.
00:08:40.639 --> 00:08:43.360
How do you think it will benefit future generations?
00:08:43.440 --> 00:08:47.200
And do you agree that having a sovereign wealth fund is a good idea?
00:08:47.600 --> 00:08:49.600
Yeah, I think it can be a good idea.
00:08:49.679 --> 00:08:55.200
Like, like in most things, the the devil's in the details, but you know, I at a high level, I like what they're doing.
00:08:55.360 --> 00:08:57.759
And it it can really help with a lot of things.
00:08:57.919 --> 00:09:02.559
Uh, you know, we uh here talk a lot about housing and the housing theory of everything.
00:09:02.799 --> 00:09:16.799
You know, if this helps uh Canada build uh water and wastewater treatment plants, uh which are needed to be able to build more homes, you know, grow uh grow our subdivisions and things like that, that's that's a good thing.
00:09:17.039 --> 00:09:24.320
I do think there are some open questions around, you know, how is this going to fit in with other government programs?
00:09:24.399 --> 00:09:30.639
Like we already have a Canada infrastructure bank, we already have a lot of agencies out there building infrastructure.
00:09:30.879 --> 00:09:33.279
So, you know, where does this fit in the mix?
00:09:33.440 --> 00:09:35.600
So, you know, I worry about duplication.
00:09:35.840 --> 00:09:41.279
I don't really understand the model here around Canadians buying in.
00:09:41.440 --> 00:09:45.759
But I think, you know, overall, Canada needs a lot of infrastructure.
00:09:45.919 --> 00:09:53.679
I do think there are a lot of opportunities there to build infrastructure that will both be profitable and help the country.
00:09:53.840 --> 00:10:03.679
So at a at a high level, I like the idea, but uh, you know, I've got a lot of uh questions when it comes to implementation and details and so on.
00:10:04.320 --> 00:10:12.240
I think the thing that I found most surprising about the announcement was that A, I don't think many people know what a sovereign wealth fund is.
00:10:12.399 --> 00:10:17.279
I thought they didn't outline it very well, which is always a complaint with government.
00:10:17.360 --> 00:10:19.679
They're not great communicators in general.
00:10:19.919 --> 00:10:25.919
And then the few people I did see talking about it online reacted so strongly to it.
00:10:26.000 --> 00:10:29.279
And I think most citizens were just like, what are you even talking about?
00:10:29.440 --> 00:10:32.159
Like, why why are you why is this a thing?
00:10:32.480 --> 00:10:36.960
Do you have any thoughts on like the reaction to it and how strong it was?
00:10:38.080 --> 00:10:46.320
Yeah, well, I I think some of the folks who were reacting to it uh, you know, are going to react strongly against you know anything that that the government does.
00:10:46.480 --> 00:10:51.919
Though again, I think though they had some really good points around the fact that this is this is debt financed.
00:10:52.000 --> 00:10:55.679
I think they had a lot of good points around that this isn't particularly detailed.
00:10:55.840 --> 00:11:01.120
You know, I don't think like 95% of Canadians care uh around the announcement.
00:11:01.279 --> 00:11:15.840
I think what they'll care about is, you know, hey, if we're able to build uh a death port or expand the port of Vancouver, you know, get more uh goods or get more natural gas to Asia, grow the economy, create a bunch of jobs.
00:11:15.919 --> 00:11:18.000
I think Canadians will will be happy with that.
00:11:18.159 --> 00:11:22.159
And the government needs to understand that, that the people don't really care about the announcements.
00:11:22.320 --> 00:11:23.600
They they care about the outcome.
00:11:23.679 --> 00:11:32.000
So we'll have to see three, four, five, 10 years down the line, whether or not this actually created uh opportunity.
00:11:32.159 --> 00:11:45.919
Uh, you know, I did find it a little strange that it it did seem to be the government's headline in the spring economic update on a thing that like 95% of the of the population won't really care about or or won't understand.
00:11:46.320 --> 00:11:48.159
Yeah, that was exactly my point.
00:11:48.320 --> 00:11:51.600
Like it felt weird to me that this was your headline.
00:11:51.759 --> 00:11:57.919
It was a really odd type of thing to focus on when so few people would even understand what they were talking about.
00:11:58.399 --> 00:12:02.879
Anyway, I too am really interested in results, and that's all I really care about.
00:12:02.960 --> 00:12:06.559
And I think most of the missing middle team, like I think we all agree with that.
00:12:06.720 --> 00:12:07.759
Just show me the money.
00:12:08.000 --> 00:12:08.720
Show me the money.
00:12:08.879 --> 00:12:11.440
Or show me the infrastructure project, you know?
00:12:11.519 --> 00:12:13.360
Let's see the high speed rail.
00:12:13.600 --> 00:12:15.279
Thank you so much for watching and listening.
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Sabrina will be back next week.
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Our producer today is Kara Stern and our editor is Sean Foreman.
00:12:21.519 --> 00:12:30.080
And if you have any thoughts or questions about regional economic development policies in Scandinavia, please send us an email to missing middle podcast at gmail.com.
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And we'll see you next time.
