Essential Guidelines for Establishing a Sovereign Wealth Fund in the U.S.
In recent times, the concept of sovereign wealth funds (SWFs) has gained popularity among nations as a means to secure financial stability and steer clear of political favoritism. President Donald Trump's recent executive order marks the beginning of the development of a U.S. SWF, promising to alleviate the reliance on taxes and debt to finance government operations.
SWFs have transformed into major global financial institutions in recent decades, with Norway's Government Pension Fund Global, built on oil revenues, amassing over $1.7 trillion in assets and generating $222 billion in annual profits. States like Alaska, Texas, and North Dakota have also successfully established SWFs of their own, utilizing natural resource revenues to generate investment income.
The next 90 days will be decisive, as the Treasury and Commerce Departments draft a plan for the U.S. SWF, addressing key issues like the use of assets, investment selection, and legal protection against political favoritism.
To ensure the fund's success and long-term fiscal stability, five guiding principles could be considered:
- Monetize underutilized federal assets: To finance the SWF without relying on taxes or government borrowing, the federal government should leverage substantial reserves of underutilized land, mineral rights, and infrastructure assets.
- Invest globally: To sidestep domestic distortions and political favoritism, the U.S. SWF should focus on making global investments, including developing economies, which could offer higher returns and lower political risks.
- Adopt a passive investment approach: To avoid political influence, the SWF should operate as a passive investor, similar to Norway's model, avoiding majority ownership stakes and corporate governance decisions.
- Set clear investment goals: A defined purpose and performance benchmarks will support disciplined decision-making, helping the SWF to maximize returns for U.S. taxpayers while maintaining a diverse and stable portfolio.
- Use returns to reduce national debt: By dedicating a portion of earnings towards national debt reduction, the SWF could contribute towards the long-term fiscal health of the nation, as some states have demonstrated through their investment funds.
Implementing these principles, along with legal protections and transparency measures, could ensure that a U.S. SWF not only achieves financial sustainability but propels the nation further towards innovation and economic growth. However, to be truly successful, it is critical that politicians resist the temptation of turning the SWF into a short-term spending mechanism, instead focusing on financial discipline and long-term benefits.
The executive order issuance by President Trump aims to establish an American SWF, similar to Norway's, which has amassed over $1.7 trillion in oil and gas revenue-based assets. To avoid relying on taxes and debt, consider monetizing underutilized federal resources like land, mineral rights, and infrastructure for the SWF.