Sovereign wealth fund may make little sense for US
Donald Trump’s proposal for a US sovereign wealth fund may be a solution waiting for a problem.
The capital in sovereign wealth funds generally comes from assets that generate income for governments, such as oil in Saudi Arabia and Norway, and various commodities in Malaysia.
But the US has a huge budget deficit — $1.8 trillion – so it doesn’t have surplus cash to put in a fund. That means the government would have to borrow money to supply the sovereign wealth fund.
Saudi Arabia’s sovereign wealth fund is the Public Investment Fund, Norway’s is the Norway Government Pension Fund, and Malaysia’s is the Khazanah Nasional Berhad (National Treasure Ltd). China has a fund called China Investment Corp.
As for the US, the idea of a government engaging in leveraged investing, which is what a US fund would be doing, seems quite dubious. It may not end well. Indeed, leveraged investing in the private sector often goes awry. That’s largely what led to the Great Financial Crisis of 2007-09.
If a US sovereign wealth fund made investments that flopped, it could well have to default on the loans taken to supply the fund with its capital. Government defaults on debt generally aren’t a good thing for a nation’s economy and financial system.
Saudi and Malaysian examples
Some sovereign wealth funds engage in cronyism, investing in allies of the country’s leaders, or make loans for political purposes. Malaysia’s prime minister and his friends looted that country’s sovereign wealth fund (then called 1MDB) about 15 years ago to the tune of billions of dollars.
Meanwhile, Saudi Arabia has invested billions of dollars in sports, including the LIV Golf league. Critics say the investments are “sports washing” — an effort by the Saudi government to focus global attention on the sports rather than the country’s human rights record.
So a US sovereign wealth fund could easily get itself into trouble if it borrowed money and then invested for purposes other than financial gain.
A White House executive order proposing the fund (Congress must approve it) said it would “promote fiscal sustainability, establish economic security for future generations, and promote United States economic and strategic leadership internationally.”
But according to a Wall Street Journal editorial, “more likely, it would take resources from the private economy, fund political boondoggles, and mess with the business decisions of private companies.”
