“We’re going to create a sovereign wealth fund for the United States, to invest in major national projects for the benefit of all Americans. Why don’t we have a sovereign wealth fund? Other countries have them. We have nothing.” Donald Trump made these statements in the first week of September, at the New York Economics Club, a message that confirms the former American president’s interest in promote the creation of a sovereign investment fund. And he is not the only one: according to what he has published Bloomberg In the first week of September, the current Biden administration would already be working on this possibility, considering different ways to implement it. The creation of a sovereign wealth fund is the only common project that the two main political parties in the United States seem to have, and it is striking that, as many experts explain, it is a meaningless effort for a country in the situation in which the United States finds itself, an economy with a budget deficit and whose revenues from the sale of raw materials are already managed in the sovereign wealth funds of the states.
The creation of a US federal sovereign wealth fund would face several problems that make its ineffectiveness evident. The first is that these funds already exist in the United States. A sovereign wealth fund is a public investment fund that countries normally use to profit from the revenues generated by the production and sale of a country’s natural resources. Norway or Saudi Arabia are the best examples, two countries that have created gigantic public funds to efficiently channel the revenues they get from the sale of oil. Norway directs its fund as a “financial reserve and a long-term savings plan”; and also to “protect the economy from fluctuations in oil prices”, the same objective of Saudi Arabia.
In the United States, there are already sovereign wealth funds that use this same approach, but they have a difference with the new federal project proposed by the two main political parties in the country: they are managed by the state. The Alaska Permanent Fund is the largest in the United States, according to data collected by Global SWF, an analysis and research company on these products, and the vehicle manages the revenues from oil extraction in the state, which would be under its control. Thus, the federal fund that is currently being considered would have to look for alternative forms of financing, which is problematic.
A sovereign fund in a deficit country?
One of the common characteristics of countries that manage large sovereign wealth funds is that they have enough money to do so. The most normal thing is that these funds are built on the basis of a budget surplus, which allows the fund to be capitalized in the early years, before it begins to be a vehicle capable of living autonomously, using the income it generates with its investments. The problem for the United States is that the economy is now experiencing a large budget and trade deficit. In other words: There is not enough money, so other sources of funding would have to be sought, or the project would have to be launched at a time when the United States again has a surplus.which, if we analyze the trend that the country is following and the figures that it has known in the past, seems very unlikely in the medium term.
The broad outlines of the plan that Trump has presented with his statements show serious cracks in this regard. The Republican candidate has said that the fund would be set up with money that would be generated by the new tariffs that he proposes to impose on countries like China, but he also reportedly planned for this money to be used to finance tax cuts. And you can’t blow and sip at the same time.
Another option that US lawmakers could have would be to finance the creation of the fund through debt issues, which poses an obvious problem. Tyler Cowen, analyst Bloombergexplains. “It’s true that the potential return on the U.S. stock market is greater than the cost of issuing the debt, but what matters is the increase in the social value of the project, not the returns the government’s portfolio would get.” If the fund, for example, had invested through other private equity funds, “the sovereign wealth fund might appear to be a great success, but it would have simply issued more debt and redistributed the stock returns, from the pockets of the citizen, to itself,” he says. ” explains Cowen, who also outlines the difficulties that exist if you create your own management team to choose which stocks to invest in.
The political issues it raises: management, investment and size
The political peculiarities of the United States make the design of a federal sovereign wealth fund very complicated. Cowen points out that “a common characteristic of successful sovereign wealth funds is that they have a high degree of political discipline.” Countries like the United Arab Emirates or Saudi Arabia are not Western democracies, like the United States, and the fund’s investment decisions are made without having to conform to a political consensus. Cowen acknowledges that “Singapore is a democracy,” but qualifies “the fact that it has a single, very dominant political party, and its investment decisions are opaque.”
The case of Norway would be similar, a “well-governed democracy, relatively little corruption and a high degree of political consensus,” he emphasizes. Moreover, the Norwegian sovereign fund meets a characteristic that, a priori, the American fund would not have: it invests outside its borders without causing problems for voters. Trump’s proposed plan involves investing in “roads, airports, health care and food production.”and did not comment on the possibility of using the fund to invest outside U.S. borders, a project that could face opposition from nationalist voters.
Another political problem with the creation of the American fund is that, if it were to invest in domestic companies, it would extend the government’s control over the country’s economy, which has always been a problem in one of the most favorable countries for the country’s economy. economic liberalism and separation of powers. “The size of the sovereign wealth fund proposed by Trump could have negative political implications,” Cowen believes, in addition to the obstacles that would arise in managing a giant of the size that an American fund with these characteristics could acquire. The larger a fund, the more limited its ability to find value and manage the product.
