Earlier this month, President Donald Trump signed an executive order to create a national sovereign wealth fund, a first in U.S. history. The move raised questions about how such a plan would take shape. A sovereign wealth fund often serves as a vehicle to invest a government’s budget surplus. However, the U.S. federal government has financed its operations using debt raised from Treasury bonds for more than 20 years and has accumulated $36.5 trillion in debt. It would need to borrow even more money to finance a sovereign wealth fund. Under the executive order, the secretaries of the Treasury and Commerce have 90 days to develop a plan to create the fund.
How the titans of sovereign wealth funds work
Many sovereign wealth funds are funded by a country’s natural resources reserve. Norway, for example, found itself on heaps of oil and decided to store the revenue in a wealth fund, which it founded in 1990. It is the largest sovereign wealth fund in the world today, managing $1.7 trillion, about 3.5 times the Scandinavian nation’s annual economic output. Abu Dhabi’s $1 trillion wealth fund is more than three times its GDP, while Kuwait’s wealth fund, also $1 trillion, is around five times its GDP.
China, on the other hand, funds its wealth fund using debt. The country operates the world’s second and third largest sovereign wealth funds, the Chinese Investment Corporation (CIC) and the State Administration of Foreign Exchange (SAFE), managing $1.3 trillion and $1.1 trillion, respectively. The former was largely funded through the issuance of government bonds and invests across international markets, while the latter manages China’s foreign reserves.
How a U.S. sovereign wealth fund would work
A U.S. sovereign wealth fund would have to be funded by debt, similar to China’s CIC. However, unlike China, the U.S. would face a cohort of unique issues. For example, if it wanted to invest in the world’s favorite asset, U.S. Treasury bonds, the government would essentially be issuing new debt to buy its own debt. At best, this unnecessarily expands the government’s debt. And at worst, it could be interpreted as debt monetization—a highly inflationary practice where central banks print money to buy the government’s bonds.
Moreover, if a U.S. wealth fund were to invest in a publicly traded company, its stock price could rise significantly simply because the government is investing capital in it. If the fund invests in U.S. equities broadly—buying index funds, for example—it will constantly run into insider trading issues since the federal government is also responsible for regulating companies trading in U.S. stock markets, a risk that wealth funds operated by Norway and Abu Dhabi don’t face. The U.S. stock market represents 60 percent of global publicly traded equities by market cap.
Alternatively, if a U.S. wealth fund were to invest in strategic projects, like real estate or infrastructure, it would essentially be doing what the government is already doing through government expenditure.
There are a few state-level sovereign wealth funds in the U.S. For example, Texas operates the Texas Permanent School Fund, funded by oil revenue. It invests $52 billion in U.S. equities, bonds, real estate, private equity and other assets. But it’s not large enough to distort markets and is funded by Texas’ oil revenue, not debt, making it a non-replicable model for a federal-level wealth fund.
