Summary
1. Souvereign funds based on the undue accumulation of unproductive foreign reserves can only exist in a mercantilist system of fixed or pegged exchange rates. 2. By moving towards a complete floating exchange rate system, foreign reserve accumulations will be driven to zero and, ergo, also the souvereign funds. 3. So, instead of regulating souveraeign funds, create free-working futures markets on the pegged exchange rates in Chicago and London and the "invisible hand" of goods and services arbitrage will force the pegged currencies to become floating and the souvereign funds will disappear like snow before the sun.
Analysis
1. Souvereign funds are formed, because the foreign reserves accumulated under a fixed or pegged exchage rate regime are unproductively invested in foreign gouvernment paper. For example the FX reserves accumulated by the Chinese, the Russian and Saudi governments are currently invested in low-earning Euro and US dollar Treasury paper.
2. The Chinese, Russian and Saudi Arabian governments want now to see higher earnings on these accumulated reserves and have formed souvereign funds, to be invested productively, i.e. at higher-earning rates in the morte productive well-regulated capitalist free-market countries, benefitting from technological innovations not created by their regimes.
3. In other words, the Chinese (Communist Party), the Russians (United National Party) and the Saudis (Monarchy) can only earn higher rates of return if they buy the more productive means of production in the free-market capitalist countries, an irony that cannot esccape any student of comparative economic systems.
4. There is an easy way to get rid of such nuisance souvereign funds (and the nuisance regimnes that use those funds for patronage control of their populations: make the Renminbi, the Ruble and the Riyal floating!
5. To unilaterallyu create floating exchange exchange rate regimes is easy: start trading futures on these currencies on the futures markets in Chicago and London and force an artificial arbitrage on those currencies. That has been succesfully accomplished with, for example, the Singapore dollar (on the NY Cocoa Exchange in the 1990s, nota bene).
6. Anybody interested in demolishing anti-capitalist systems, such as the still existent mercantilist communism, national socialism or monarchies, would be very interested in participating in such futures trades, since the eventuial outcome is inevitable: a convergence between the implied spotexchange price (implied in the futures) and the administratively controlled spot exchange price by simple arbitrage via the godds and services markets.
7. The move towards floating exchange rate regimes would also free these countries domestic monetary policies and allow them better control of their domestic inflation rates. That would be, again, of great benefit to their populations, since inflation leads to undue wealth transfer from the lenders to the borrowers.
8. Lower inflation rates has induced and will induce higher levels of productive investments in the countries that have adopted floating exchange rate regimes.
