American introduced global fiat currency system nominated with US dollar to avoid Gold Run by global communities, and enable the nation to buy more with debt currency. The influx of Dollar printed out of nothing to enable US to fund the purchases of commodities and goods from US trade partner. This provided surplus of budget to US trading partner at the unprecedented scales. This make number of countries who received the dollar able to accumulated the surplus reserved faster. As central banks are not formed to handle enormous unprecedented wealth at such scale with no historical references, for the first time, central bank required to figure out how and where to invest this surplus reserve to counter inflation. The immediate option to such enormous funded SWFs was low risk low return and high liquidity instruments. US Treasury bills and bonds become the only options. Such implication in fact is good for US, since the fiat currency system nominated in US dollar make SWFs has no other option but to put back printed dollar back to US, with minimal interest. It make all SWFs could not afford to devalue the Dollar. This had since make US trading partner such as Japan and China as the continue to buy US Treasury bills and bonds at its budget surpluses. This enable Us continue to buy commodities and goods with cheap dollar, then selling low interest bonds (normally below annual nominal inflation rate) to fund government activities, then paying back by simply printing more money.
However, after years 2000s, with exponentially growth of monetary supply in the market, SWFs could not afford to continue only invest into low risk low return instruments such as treasury bills and bonds because they keep losing the underlying value of the invested bills and bonds, as long as US print more money faster every years. Since most of central banks aware that US policies on fiat currency system was a no win proposition to them, and they could unlikely to change the system without getting them-self hurt, they now looking for alternative investment scheme which could provide high return at shorter time. The gained now is not only focus on monetary but as well as geopolitical interest and technological know how acquisition.
Global public listed corporation are known to own most of the proprietary of cutting edge technological know how especially US corporation. As those company share are often publicly listed, SWFs can access to the technological know how simply by employ buy out strategy. By acquiring such corporation through SWFs, nation of less developed condition can have direct ownership to cutting edge technological know-how which provide advantage oftenly to military therefore geopolitical interests.
With introduction of financial derivatives, now the SWFs can manipulate the underlying commodities prices simply by speculating the derivatives instruments. Today, most of the commodities export countries are heavily rely on high commodities price for survival, if one nation are hostile against other, they simply could use the enormous scale of SWFs to manipulate the underlying commodities derivative therefore causing volatility of the commodities, which could create huge impact to the stability and sovereignty of a nations. This enable huge countries with huge SWFs to always be on the upper-hand of global financial control. And the small countries will have negative implication behind such global financial games.
With time, SWFs had evolved from pure governmental reserved management fund into a formidable and practical financial war instruments. The SWFs has since made the global financial market become more complex and more volatile. SWFs now is an official economical nuclear forces that could cause global financial melt down, that will give huge impact to global social stability. Such institutions if not properly regulated, could very much become the beacon of WWIII.
