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Compass

Brad Fluetsch
6/17/11

As Alaska records unprecedented revenue, are we hurting future Alaskans by saving as much as we do? Why do you or anyone save money? A simple answer is to preserve purchasing power or wealth for the future. Individuals save to prepare for rainy days, emergencies, and retirement with the idea of maintaining their standard of living. Alaska saves for similar reasons: Oil prices are volatile creating short-term financial problems for state government. Oil will eventually run out and Alaska wants to maintain a level of government service after that day without needing to increase taxes on the public.

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 saving 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 who 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 5.40 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 Susitna Dam, Southeast Intertie, hydro projects, and a gas line—as opposed to investing in its current portfolio? Frankly, as an owners 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 CBR, because our long-term savings account 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.

Brad Fluetsch, managing director of Fluetsch Financial Services, LLC, is an enrolled Tribal member of the Central Council Tlingit and Haida Indian Tribes of Alaska and a Delegate to the Tribal Assembly.

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bfluetsch's picture
I wrote this because of my concerns for the State of Alaska, but when you think about it, the Indian Trust Funds are 100 percent exposed to United States credit. Since this editorial was first run April 29, 2011 in the Anchorage Daily News, both Moodys Investor Service and Fitch have put the United States on credit watch negative along with Standard and Poors. Not only is the Indian Trust Funds 100 percent exposed to United States credit, but the dollar printing policies of the United States Federal Reserve. Combine these two investment realities with the recent Supreme Court ruling on what fiduciary duties the United States owes the Indian Trustees, you might what to consider an alternative investment or savings policy, Indian Country.... sooner the better!
bfluetsch