In recent weeks, both candidate Donald Trump and President Biden—via his staff—have expressed support for the idea of a US sovereign wealth fund (“SWF”). An SWF is simply an investment fund run by a national government. Ostensibly, the goals of such a venture are twofold—to increase the wealth of America and its citizens, and to spur innovation in “critical” areas like infrastructure, technology, and medicine.
An American SWF is bound to fail on at least these two counts, as the idea of investing funds stolen from Americans in order to increase their prosperity is incoherent, and the federal government is incapable of innovation or excellence in any productive matter.
Structural Incompatibility
I was employed by an SWF in the Persian Gulf for several years, overseeing their hotel investment portfolio in the Middle East, Southeast Asia, Africa, continental Europe, and the UK. In the Gulf, hereditary monarchies comprise most of the national ruling structures. Governments there earn hefty revenues from state-owned resources, typically connected to oil and gas, but increasingly from more diverse assets. SWFs naturally arise from these two factors.
Monarchies of the Gulf variety are examples of private ownership of government assets, and hereditary monarchies in particular tend to entail a long-term outlook vis-à-vis their property and its capital value. This contrasts with governments based on stewardship—like the existing social democracy in the US—where the ruling class has no ownership of public assets, only the power and incentive to extract current income from those assets for their own purposes and at the expense of long-term value.
Two other countries that maintain prominent SWFs are Norway and Singapore. Each country contains roughly 5 million people, the former a constitutional monarchy, rich in resources, while the latter is a parliamentary republic that runs a consistently balanced budget and claims to have zero net debt (financial assets owned by the government minus gross sovereign debt).
In contrast to other countries with well-known SWFs, the structural infirmities in the US system render it unable to do much more than desperately flail at its overspending and debt problems. The flexibility and structural integrity to pursue an SWF, to the extent it was ever plausible, is simply not there.
Uncle Sam’s Margin Loan
Proponents of the US SWF idea argue that the US could improve its financial situation and begin to pay down national debt with the returns generated by an SWF. These feisty but dimwitted advocates insist that the government can earn a spread on their interest cost by borrowing, through the sale of government bonds, at a lower rate than they could earn on investments. Minimal investigation reveals this to be a pipe dream, as SWFs generally earn long-term returns of 5-7% on capital. Considering the current US borrowing cost of roughly 4%, the invested capital required to cover the current budget deficit with such a small net margin is enormous, even by federal spending standards.
The federal government has no resources to invest. It runs a multi-trillion-dollar deficit each year and carries over $30 trillion in debt to outside entities. Raising funds to invest through an SWF would entail further borrowing, which is at cross purposes with the ostensible, though absurd, goal of the SWF to enrich Americans. Adding leverage to a system that badly needs deleveraging in order to chase returns in volatile capital markets is a recipe for disaster.
Government Innovation is a Contradiction in Terms
Aside from making some money with a federal government side hustle, SWF proponents believe increased investment will spur innovation in “key areas” like infrastructure, technology, and medicine. But, like the recently-discussed US Government Efficiency Commission, government innovation is a contradiction in terms.
One issue with this approach is that these opportunities are already being pursued by private sector participants, most of them still awash in cash facilitated by cheap debt during the recent ZIRP era. There is no shortage of investment capital in the private market, and therefore, no need for investment capital to be shunted to the federal government.
Related to this observation is the fact that the federal government is woefully incapable of running an investment fund designed to produce outsized returns over a long period. Recent years of loose money and raging asset bubbles have apparently convinced bureaucrats that they, too, can be hedge fund managers. Nevertheless, serious investment management is not for the faint of heart, and certainly not for the bumbling apparatchiks in either the Biden-Harris administration or those on the Trump team. Federal employees and entities are ill-suited for serious, consequential work, and generally fail at even the most mundane tasks.
Consider the US government’s performance running a mail service—the USPS—which runs perennial losses, typically around $5 billion per year. Its two main private counterparts, UPS and FedEx, make combined annual profits of roughly $15 billion per year operating a business of precisely the same nature.
Better yet—since we’re talking about investment management—consider the old-age retirement fund known as “Social Security,” which will see its reserve fund depleted by 2035. Recall that the reserve fund contains prior payroll tax contributions. The idea was that these contributions would be invested over decades and ready to disburse in appropriate amounts once their respective contributors retired. Instead, those reserves are long gone. They’ve been used to fund the system’s operating losses in the meantime, making current payroll taxes the primary source of payments to currently retired recipients. In short, Social Security has become an insolvent Ponzi scheme.
Dangerous Consensus
An SWF is nothing more than a shiny new toy for both parties to play with as they spend and splurge the US treasury into financial oblivion. It is not a serious concept, and deserves no serious consideration. It would be far more productive for federal bureaucrats to simply cut wasteful spending and call it a day, but even that modest outcome seems more unlikely with every election cycle.
When both Republicans and Democrats agree on an idea—as they do with the need for a sovereign wealth fund—woe betide the American people if it’s ever put into practice.
