Sovereign wealth funds have been around for generations, and President Donald Trump wants the federal government to join in on the trend. But there are a few problems — namely, it’s never been done in a democracy as complex as the United States.
Perhaps the most well-known sovereign wealth fund, an investment fund created by a government, is Saudi Arabia’s Public Investment Fund, which manages about $925 billion in assets. The funds can invest in anything, including real estate, infrastructure, hedge funds, and corporations, with the purpose of benefiting the country’s economy.
China’s sovereign wealth fund, the China Investment Corporation, in part funds the Silk Road Fund, which finances the Belt and Road Initiative, China’s massive foreign infrastructure investment.
Norway’s sovereign wealth fund, Government Pension Fund Global, is used as a reserve that shields the country’s economy from ups and downs.
Singapore’s GIC is similarly used as a reserve and invests in research and development, healthcare, and “international purchasing power.”
The idea of a fund in the U.S. is not new. It was floated during the Biden administration, but Trump has floated using it to purchase TikTok, which is worth around $100 billion, amid the U.S.’s insistence that Chinese-owned ByteDance sell the platform to an American buyer.
However, before he can tackle the unique challenges of that specific plan, he will have to address the problems that arise from creating an American sovereign wealth fund at all.
Democracies and sovereign wealth funds don’t mesh
Most sovereign wealth funds operate in autocratic countries. There is the exception 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 royal decree, and Prince Mohammed bin Salman is the fund’s chairman in charge of the long-term strategy. Singaporean former Prime Minister and current senior minister Lee Hsien Loong is the chairman of the GIC. Sovereign wealth funds are inextricably tied to the governing party, which creates complications when a country has democratic elections that can swing back and forth every four years.
“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. “The model can be used in the U.S., but Congress still has the power of the purse.”
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To merge the sovereign wealth fund with the appropriate checks and balances, Congress, or an entity they choose, such as the Treasury Department, would have to set paradigms of governance, which would slow the efficiency of the fund but increase transparency and accountability.
There are ways the U.S. could make it work, which is what Treasury Secretary Scott Bessent has been tasked with preparing for Trump in under 68 days. To start, Ghahramani said, Congress would need to set the process out itself, which follows in the footsteps of the Norwegian model. Congress would be tasked with agreeing to a framework outlining transparency guidelines, what the sources of revenue would be, what the objectives of the fund would be, and where investments can be made. However, they wouldn’t be making the investment decisions at the end of the day.
Since Congress can already allocate money for the main purpose of a sovereign wealth fund, infrastructure, Ghahramani asked, “Why create this brand new bureaucracy, a sovereign wealth fund, when we already are spending a trillion dollars on infrastructure?”
“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,” Romina Boccia, director of budget and entitlement policy at Cato Institute, told the Washington Examiner.
Further, though there are public investments to point to from sovereign wealth funds, such as LIV Golf, the majority of the investments are done through money managers or hedge funds and are not public. Whereas you can track the $1.2 trillion allocated in the democratically passed Bipartisan Infrastructure Law, American taxpayers wouldn’t know where most of the money in the fund was going.
Another option is to take the fund out of Congress’s hands and put it under the umbrella of the Federal Reserve. However, this would lower the Fed’s independence as a regulator since it would have a stake in the companies it invested in, which some say 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.
“Can we really trust a governmental board, given the current political environment, to invest solely on the grounds of creating maximum returns for taxpayers, or should we be more concerned that the government would be investing in political priorities?” Boccia said. “You have President Trump in office now, and he has certain priorities, including getting DEI out of the corporate world … so a sovereign wealth fund could obviously throw its weight around to accomplish that,” Boccia said.
On the other hand, when the next Democratic administration wins office, it could be politically incentivized to invest in companies committed to progressive policies, such as the Green New Deal. Naturally, quid pro quo concerns arise.
Market implications threaten private investors
The priorities of any president may be inspired by political platforms rather than the most prudent investments. And as the political winds change, the market will necessarily follow suit. With the kind of money Trump is talking about, upward of $900 billion, an American sovereign wealth fund increases the risk of the market being thrown into turmoil.
“Put the U.S. government in a position where it becomes potentially a majority shareholder in some companies, and then influence governance decisions at the corporate level, distorting market outcomes and interfering in a process that is largely determined by private investors and individuals,” Boccia said.
If the government gets involved in the free market, not only is it less free but the profits are siphoned away from the private sector as well. This would essentially be a capital gains tax, according to Boccia.
North Dakota and Alaska both have state-level sovereign wealth funds, in which they invest their 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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Alaska invests profits from the Alaska Permanent Fund for the purpose of saving for future generations, when its limited resources run out. North Dakota has decided to phase out property taxes and replace that revenue with profits from its Legacy Fund. A federal fund would have an entirely different purpose: to build industry and infrastructure now.
The impact on the market is also different for these state funds. 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. Sovereign wealth funds are created when the government runs a surplus. Oil revenue funds Norway’s and the Gulf’s funds. Singapore and China use their advantageous trade dynamics to fund theirs. The U.S. doesn’t have those options – though maybe the winds will change if Trump ever enforces the tariffs he’s threatened – due to its massive deficit. Since 1970, the US has only run a surplus a single time.
Trump has said his tariffs could be used to create a sovereign wealth fund, though the heftiest 25% tariffs on Canada and Mexico have not gone into effect. If or when they do, the Committee for a Responsible Budget estimates that they will raise $1.3 trillion through 2035. However, Trump also wants to use the tariffs revenue for his Tax Cuts and Jobs Act, which the Congressional Budget Office estimates will cost $4.6 trillion over the next decade.
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Another option Trump floated is using natural resources to start the fund, saying, “The Federal government directly holds $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. Compared to other sovereign wealth funds, $10 billion is not enough to put an American fund on the map. Add to that selling all the gold reserves for about $13 billion, and you’re still a far shot away from $900 billion.
While the U.S. doesn’t have to start out with a fund at its full size, and there’s no minimum amount you can use to kick start a fund, typically a sovereign wealth fund is proportional to its economy – meaning the U.S.’s would have to be quite impressive, being the largest economy in the world.
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TikTok’s uncertain return on investment
While signing the executive order demanding a plan for a sovereign wealth fund, Trump suggested that buying social media platform TikTok might be a good use.
“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. In January, the Supreme Court ruled that it was legal for the country to ban it, but the Biden administration said they wouldn’t enforce the ban. After a temporary black-out, the app appealed to Trump’s ego and he extended the pause while the company continued to look for American ownership. It’s unknown how seriously TikTok is looking for new ownership.
TikTok is worth between $100-200 billion. To buy it would be a significant use of the fund, and how the fund would make the money back is unknown.
“When I first read that piece of the proposal for the sovereign wealth fund, I thought to myself, so what does that 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.
It would also be an unprecedented way for the government to make money. The federal government doesn’t make any money off of direct advertisements as it stands, though they spend money on advertisements – to the tune of $1.8 billion.
The other option Ghahramani floated was, since TikTok is not a publicly traded company, it could be bought by the fund and then sold at a profit. 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. Buying TikTok to allow it to continue operating in the U.S. would be an unusual move, and with the ban deadline coming up in March, would rely on a lot of parts coming together in a short time.
If Bessent and Commerce Secretary Howard Lutnick are able to propose a solution for the variety of issues the U.S. faces in its bid to create a sovereign wealth fund, more typical portfolio includes diversified projects, including real estate like college dorms and hotels.
“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.”
This article was originally published at www.washingtonexaminer.com
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