Alaska converts its natural resource wealth to cash in order to fund government, and when revenue exceeds expenditures it saves. For the past several years Alaska has had record revenues with record contributions to our savings accounts like the Alaska Permanent Fund (APF) and Constitutional Budget Reserve (CBR).
Many savers and investment professionals recognize the current economic climate is extremely tough on individual and institutional savers. It is the stated policy of the U.S. Federal Reserve to force Americans to consume and not save. Two policies demonstrate this point clearly: record low interest rates, and printing U.S. dollars ( QE1 and QE2).
The old investment saying is "Don't fight the Fed," and those that are saving in short-term, U.S.-dollar-denominated savings are fighting the Fed and losing big time as they watch their purchasing power shrink. While the APF is a long-term, diversified portfolio and best able to protect the purchasing power of Alaska's wealth, my concern is with the CBR and its short-term, liquid, U.S.-dollar-dominated portfolio.
The more cash Alaska puts in the CBR, the more global purchasing power Alaska loses!
For example:
Alaska had $1 billion in cash from last year's budget, and according to the 2010 Fall Revenue Source book, the CBR was expected to earn 5.4 percent. Therefore, Alaska should have $1.054 billion in the bank one year later.
Even though Alaska made a normal return, America's policy of currency devaluation negatively impacted the amount of Swiss chocolate Alaska could import one year later, about 13 percent,
Well, Alaska may not import that much Swiss chocolate, but what about steel for pipelines and copper for transmission grids? Alaska exports natural resources but must import finished, usable goods from around the world to build needed community infrastructure. Why save a dollar today if, by doing so, you can only spend 95 cents tomorrow?
The Legislature faces two choices, save or consume. Given the way Alaska is saving its money, would it be better off consuming by building the Susitna dam, the Southeast intertie, other hydro projects or a gas line, as opposed to investing in its current portfolio? Frankly, as an owner state, would Alaska be better off making a distribution to the public than putting it into the CBR?
By saving in a short-term U.S.-dollar-dominated portfolio, Alaska is losing future global purchasing power.
For several generations no one has ever questioned the stability of the U.S. dollar or the creditworthiness of the U.S. Treasury. Sadly, both are in question now and Alaska needs to take heed.
The difficult question to ask is, "Should Alaska store its natural resource wealth in a broader, more globally diversified portfolio that has significantly less exposure to the U.S. dollar and Treasury?"
Hopefully the financial minds of Alaska will be able to assist the Legislature in preserving the global purchasing power of our short-term savings account, the CBR, because our long-term savings account, the APF, is able to invest in ways that protect it.
It is not different this time. It is just a first for the United States.
Bradley J. Fluetsch is a certified public accountant and registered investment adviser who has been investing other people's money for nearly 25 years, including four years as an investment officer at the Alaska Permanent Fund Corp. He lives in Juneau.
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