What is a Sovereign Wealth Fund and Why is Trump Creating It?

What is a Sovereign Wealth Fund and Why is Trump Creating It?

By: Donny Simcha Guttman

President Donald Trump this past Monday signed an executive order to establish a sovereign wealth fund (SWF) to “promote fiscal sustainability, lessen the burden of taxes on American families and small businesses, establish economic security for future generations, and promote United States economic and strategic leadership internationally.” Known for his outsider instincts, Trump wants to establish a fund used by some countries worldwide, but unheard of to many people.

A sovereign wealth fund is when a country has a surplus of revenue from different sectors in their economy, including trade, as reported by Reuters. Governments can then invest in stocks, bonds, etc., and then pour profits into projects for their countries. One of the main requirements to establish a SWF is having a budget with a surplus, but in the US, the government faces a $36 trillion deficit that it owes. Zeeshan Ahmedani, a partner at law firm A&O Shearman told news site, Pensions & Investments, “Unlike the beginnings of many SWFs, the US federal government is not starting with a budget surplus and that may create some pushback in Congress and across other stakeholders.” However, an initial analysis done by the Financial Times found that many countries that have a SWF, don’t have balanced budgets, but have a surplus of exports.

Trump appointed Treasury Secretary Scott Bessent and incoming Commerce Secretary Howard Lutnick to lead the effort.  The order will allow them to establish a strategy on how the US will set up such a fund. Commenting on the order, Lutnick said as reported by Reuters, “The extraordinary size and scale of the U.S. government and the business it does with companies … should create value for American citizens. If we are going to buy 2 billion Covid vaccines, maybe we should have some warrants and some equity in these companies and have that grow for the help of the American people.” Bessent commented, “We’re going to monetize the asset side of the U.S. balance sheet for the American people. We’re going to put the assets to work, and I think it’s going to be very exciting. We’re going to study best practices done around the world.”

Some question as to whether an official act of Congress will be required, due to no budget surplus being available to the Trump administration. On this, Ahmedani thinks, “We’re at [a] moment where a lot of government agencies are proposed to be shut down and the number of employees within the federal government are intended to be downsized, the intent is to downsize, [but] at the same time we’re talking about creating is effectively a new arm of the federal government. How does that work? What government agency does it sit under? Is it an independent government agency? Who does it report to? How does it interact with the Fed? These are the types of things that will generate commentary within the halls of government.” Even if possible to set up a SWF for the US, some are concerned with potential corruption and ethical concerns that could result. NBC News recently reported on a Carnegie Endowment for International Peace study which concluded that such funds could be “conduits of corruption, money laundering, and other illicit activities.”

Part of the process of setting up a SWF requires the government to hire investors, to strategize on how funds will be set up, and where potential investments could lead. Salar Ghahramani the founder and managing director of Global Policy Advisors, a firm that advises financial managers on government regulation told Pensions & Investments, “Every single large economy has a sovereign wealth fund and they’ve been strategic tools for decades. So it would make absolute sense for the U.S. to have at least one sovereign wealth fund given the size of the U.S. economy.” Having a SWF however, wouldn’t be unconventional for the US, as some states including Alaska have billions of dollars of funds which they invest in different state projects. Countries like the UK established one last year, and reportedly Germany is considering setting one up.

Trump has also suggested that a future American SWF could buy TikTok. In recent weeks, a law passed last year took effect, which cited national security concerns that Chinese Communist Party aligned-TikTok posed unless sold by to an American company or investor. Trump, in recent weeks, has suggested that some US billionaires might be interested in buying TikTok, but the possible SWF also could help solve the TikTok dilemma.