neighbour ’ s house. for one thing, the distinction between ethics and politics may be different in other countries. for another, when we say that a company ’ s activities are in conflict with the ethical guidelines, we are not only pointing a finger at the company. we are also pointing a finger, albeit indirectly, at the laws and regulations in the country that permits those activities to continue – and we are pointing that finger as a representative of another state. consequently, the guidelines for the exercise of ownership rights must be based, not on a specifically norwegian world view, but on internationally recognised norms. and we are open about our principles and practices without losing sight of the limits of transparency. declarations and resolutions may have their place, but in our day - to - day work we aim for real dialogue and results. the list of global issues that require urgent attention seems never - ending, and there have been calls for the fund to address many of these. but priorities always have to be made to avoid the risk of spreading resources too thinly. norway has chosen its goals for the pension fund based on a long - term perspective, and we do not want to be ruled by the tyranny of the impulsive and changing priorities that beleaguer many public programmes and sectors. there is another important ethical principle behind the fund, which should not be forgotten : namely, our obligation to future generations. for the prosperity we are enjoying now, incurs obligations. our oil and gas reserves are limited. justice would not be served if all our petroleum wealth was allocated only to the generation lucky enough to experience our “ oil age ”. we perceive it as an ethical obligation to invest our wealth also for the benefit of future generations. international capital markets play a crucial role in allowing us to fulfil this obligation. allow me the pleasure for a moment to look back on our less illustrious history as a borrower. twice in the past 40 years we have succumbed to the temptation of living above our means. the first time was in the late 1970s, when the norwegian state borrowed substantial amounts abroad. our current account deficit in 1977, at 15 per cent of gdp, set an oecd record and we were probably on the brink of having to ask for an imf program. we were investing heavily in the welfare state and in north sea projects at the same time, and these investments could not be fully financed on the basis of economic growth. the second time was during the years of economic crisis before

volatility. for a given equity allocation, portfolio volatility will be smaller the lower the correlation between equities and bonds is, as illustrated by the dashed curves in the chart. the blue curve assumes a degree of positive correlation between equity and bond returns. this means that although bond and equity price often covary, this is not always the case. for the purple curve, we have assumed that the correlation is negative. with this correlation, the tendency in the data is for bonds to rise in value when equity prices fall. chart : correlation between equities and bonds there has been a marked change in the correlation between equity and bond returns in recent years. in the period from the early 1960s to the end of the 1990s, the correlation between equities and bonds was positive. this trend has reversed. since the beginning of the 2000s, the correlation between equities and bonds has generally been negative. this shift is clearly reflected in the chart, which is based on the correlations between us equities and bonds. the same shift is evident in the financial markets of a number of other countries. the decline in the correlation has received considerable attention in the financial literature. 3 it has been suggested that this change may be the result of a shift in monetary policy in many countries 4 / 7 bis central bankers'speeches towards giving greater weight to stabilisation of the real economy in the face of supply side shocks. this means that there is now some divergence in response between equity and bond markets to this type of macroeconomic shock. this type of shock has also occurred less frequently in the past couple of decades. a lower correlation means that bonds reduce the risk associated with equity investments more effectively than earlier. investors may thereby be willing to accept lower expected returns on bonds with long maturities. there may therefore be a relationship between the decline in the correlation between equities and bonds and the low term premiums now observed in the bond market. the previous decision to change the equity share was based on the assumption of a correlation between equity and bond returns of about 0. 4. over the past decade, this correlation has averaged – 0. 3. in norges bank ’ s opinion, it is not unreasonable to base our advice on a lower correlation than the last time we issued advice. with a lower correlation, the fund will need a lower bond allocation than previously assumed in order to maintain return volatility at about the same level. risk of substantial and persistent declines in