The federal government wants to join the long-standing tradition of sovereign wealth funds, which have been around for a long time. However, there are some drawbacks, for example, that it has never been done in a democracy as difficult as America.
Perhaps the most well-known sovereign wealth fund, an investment portfolio created by a state, is Saudi Arabia’s Public Investment Fund, which manages about$ 925 billion in assets. The money you spend in anything, including real house, system, hedge funds, and firms, with the purpose of benefiting the country’s economy.
China’s sovereign wealth fund, the China Investment Corporation, in part resources the Silk Road Fund, which finances the Belt and Road Initiative, China’s huge foreign equipment purchase.
Norway’s sovereign wealth fund, Government Pension Fund Global, is used as a supply that shields the government’s business from ups and downs.
Singapore’s GIC is also used as a supply and invests in research and development, care, and “international getting power”.
The idea of a bank in the U. S. is not fresh. It was floated during the Biden leadership, but Trump has floated using it to buy TikTok, which is for around$ 100 billion, amid the U. S.’s conviction that Chinese-owned ByteDance sell the system to an American consumer.
However, he will have to address the issues that arise from creating an American sovereign wealth fund before he can address the particular problems of that particular strategy.
Sovereign wealth funds and governments don’t go together.
The majority of sovereign wealth funds are based in authoritarian nations. There is the exclusion of Norway, one of the strongest democracies in the world, but among its neighbors in the list of the top 10 largest SWFs are China, the United Arab Emirates, Kuwait, and Saudi Arabia.
Saudi Arabia’s was created by imperial order, and Prince Mohammed bin Salman is the bank’s president in charge of the long-term plan. Lee Hsien Loong, a former Singaporean prime secretary and present mature secretary, is the GIC’s chair. When a nation holds political elections that alternate every four years, the governing party becomes inextricably linked to sovereign wealth funds, which adds complexity.
” Naturally, there’s that close relationship between the Crown and the]Saudi Arabian ] fund itself”, said Salar Ghahramani, a law professor at Penn State University and founder of a sovereign wealth fund advisory corporation. Although the design can be used in the United States, Congress also retains power over the budget.
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To connect the sovereign wealth fund with the correct checks and balances, Congress, or an object they choose, such as the Treasury Department, would have to established paradigms of governance, which may slow the performance of the bank but increase transparency and accountability.
There are techniques the United States may make it work, and Treasury Secretary Scott Bessent has been given the task of ensuring that Trump will arrive in under 68 weeks. To begin, Ghahramani said, Congress would need to set the procedure out itself, which follows in the footsteps of the Scandinavian design. A model outlining clarity guidelines, what the sources of revenue may become, what the fund’s goals may be, and where investments could be made would be the subject of the congress’s approval. But, they wouldn’t be making the purchase decisions at the end of the day.
Since Congress is now allocate funds for the primary function of a sovereign wealth fund, infrastructure, Ghahramani asked,” Why create this brand new government, a sovereign wealth fund, when we already are spending a trillion dollars on system”?
According to Romina Boccia, director of budget and entitlement policy at Cato Institute,” a sovereign wealth fund seems like a run-around over those checks and balances to give the executive spending power through the separate fund that otherwise would be reserved for congressional decision-making,” the statement read in the Washington Examiner.
Additionally, despite the fact that there are public investments pointing to sovereign wealth funds like LIV Golf, the majority of them are made by money managers or hedge funds and are not public. American taxpayers wouldn’t be able to determine the direction of the majority of the$ 1.2 trillion allocated in the recently passed Bipartisan Infrastructure Law.
The Federal Reserve may also have the option of transferring the fund from Congress’s control to its own. However, this would lessen the Fed’s authority as a regulator because it would own a stake in the businesses it invested in, which some claim is the central bank’s strength.
An American sovereign wealth fund would also “increas]e ] the likelihood of political interference in financial markets”, according to Boccia. That could, in turn, undermine private sector growth and “usurp” capital gains since the profits would flow to the government instead.
Given the current political climate,” Can we really trust a governmental board to invest solely on the grounds that the government will invest in political priorities?” Boccia said. A sovereign wealth fund could obviously throw its weight around to accomplish that because President Trump is currently in office and has priorities, including removing DEI from the corporate world, Boccia said.
On the other hand, it might be politically motivated to invest in businesses that support progressive policies, like the Green New Deal, when the next Democratic administration assumes office. Naturally, quid pro quo concerns arise.
Market implications threaten private investors
Any president’s priorities may be influenced by political platforms rather than the wisest investments. And as the political climate changes, the market will inevitably adapt. An American sovereign wealth fund, which is the kind of money Trump is talking about, raises the risk of the market going into disarray by upwards of$ 900 billion.
Put the U.S. government in a position where it has the potential to become a majority shareholder in some businesses, influence corporate governance decisions, causing distortions in market outcomes and interfering with a process that is largely influenced by private investors and individuals, Boccia said.
If the government participates in the free market, it is less free as well, and the profits are also taken from the private sector. Boccia believes that this would essentially be a capital gains tax.
Both North Dakota and Alaska have state-level sovereign wealth funds where they put their money’s profits from natural resources. Though a comparison to a federal level might be tempting, the funds are much smaller than a nationwide scale ( Alaska’s is worth$ 54 billion ), and the purpose is different.
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When its scarce resources run out, Alaska uses the profits from the Alaska Permanent Fund to save for future generations. Instead of paying property taxes, North Dakota has chosen to use the profits from its Legacy Fund to replace those taxes. A federal fund would be used to create infrastructure and industry at the moment.
These state funds have a different impact on the market. The federal government would have to rely on new borrowing, likely from the Fed, thus affecting interest rates and inflation.
” Even if Alaska makes bad investment decisions with]their sovereign wealth fund ] or politically motivated decisions, that affects mostly Alaska taxpayers, right”? Boccia said. ” And the size of the fund isn’t so big that it will have global implications, but a U. S., federal government, sovereign wealth fund that would eventually … be in the trillions of dollars of impact would have much, much more far-reaching consequences based on how it was used”.
The US doesn’t have a budget surplus
Beyond the governance implications, the logistics also pose a problem. When the government runs a surplus, sovereign wealth funds are created. Oil revenue funds Norway’s and the Gulf’s funds. Singapore and China use their advantageous trade dynamics to finance theirs. Due to its enormous deficit, the United States doesn’t have those options, though perhaps the winds may change if Trump ever imposes the tariffs he’s threatened. The US has only run a surplus once since 1970.
Trump has stated that his tariffs could be used to create a sovereign wealth fund, despite the presence of the most severe 25 % tariffs on Canada and Mexico. The Committee for a Responsible Budget projects that they will raise$ 1.3 trillion through 2035 if or when they do. Trump wants to use the tariffs revenue to pass his Tax Cuts and Jobs Act, which according to the Congressional Budget Office will cost$ 4.6 trillion over the next ten years.
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Trump blasted the idea of starting the fund with natural resources, saying,” The Federal government directly has$ 5.7 trillion in assets.” Indirectly, including through natural resource reserves, the Federal government holds a far larger sum of asset value”.
Only 11 % of the nation’s oil and 9 % of its gas are on federal lands, garnering the country on average$ 10 billion a year. $ 10 billion is insufficient to establish an American fund in comparison to other sovereign wealth funds. Add to that selling all the gold reserves for about$ 13 billion, and you’re still a far shot away from$ 900 billion.
A sovereign wealth fund is typically proportional to its economy, which would make it sound that the United States would be quite impressive given that it is the largest economy in the world, and that it doesn’t need to start out with one at its full size.
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TikTok’s uncertain return on investment
Trump suggested that buying TikTok, a social media platform, might be a good use while signing the executive order, which calls for a plan for a sovereign wealth fund.
” We’re going to be doing something, perhaps with TikTok, and perhaps not”, Trump said. ” If we make the right deal, we’ll do it. Otherwise, we won’t … we might put that in the sovereign wealth fund”.
TikTok has been facing a ban from the U. S. over its Chinese ownership. The Biden administration claimed they wouldn’t put the ban into effect, but the Supreme Court in January determined that it was legal for the nation to do so. The app appealed to Trump’s ego after a temporary blackout, and he paused while the company looked for American ownership. It’s unknown how seriously TikTok is looking for new ownership.
TikTok is worth between$ 100-200 billion. The fund’s intention to purchase it would be significant, and it is not known how the fund would recover the money.
What does the phrase” so what does that mean when I first read that section of the proposal for the sovereign wealth fund” mean? Where will the profits come from, the U. S. government getting ad revenue? Maybe. I’m not sure if that’s a wise investment”, Ghahramani said.
Additionally, it would be a previously untapped source of income for the government. The federal government currently spends money on advertisements, to the tune of$ 1.8 billion, but it doesn’t make any money off of direct advertisements.
Since TikTok is not a publicly traded company, Ghahramani offered another option, which could be purchased by the fund and then profitably sold. However, that may have its own market complications.
Generally, sovereign wealth funds are used to invest in industries that will benefit the nation, such as energy or infrastructure projects. With the ban deadline set for March, buying TikTok would be an unusual move, and it would depend on a lot of components to come together in a short amount of time.
A more typical portfolio includes diversified projects, including real estate like college dormitories and hotels, if Bessent and Commerce Secretary Howard Lutnick are able to come up with a solution to the variety of issues the United States faces in its bid to create a sovereign wealth fund.
” Not every sovereign wealth fund investment is liquid”, Ghahramani said. ” They have investments in real estate … hospitals, airports, college dorms … They may have long term value based on the judgment of the sovereign wealth fund’s decision makers”.
