Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 609

Should America follow Australia with a sovereign wealth fund?

If reports are correct that former Morgan Stanley technology banker Michael Grimes is set to lead President Trump’s planned U.S. sovereign wealth fund, or SWF, the administration has chosen a highly credentialled and qualified candidate. But that doesn’t make an SWF a good idea. On the contrary, such a fund would pose significant economic risks to American taxpayers and voters and would give future presidents - Democratic and Republican - unprecedented control over the U.S. economy and federal budget.

The US as an atypical candidate

America is about as far from the prototypical SWF nation as a country can be. Most countries with SWFs are smaller nations with substantial fiscal reserves such as Norway, Singapore and the United Arab Emirates. The U.S. has the world’s largest economy with large annual federal deficits and a national debt approaching $40 trillion - about $100,000 a person.

It’s always difficult to fund an SWF and generate consistent returns, but all the more so for a nation burdened by such large budgetary issues. An SWF will be effectively debt-financed so long as the U.S. is running large deficits. All money is fungible. Even if Washington ostensibly funds an SWF with revenue from taxes or tariffs, it comes at the cost of more debt because the U.S. government doesn’t have a budget surplus to invest. This would make an SWF the economic equivalent of a leveraged hedge fund. To generate positive returns for Americans, it would have to achieve sustained risk-adjusted returns exceeding the government’s borrowing rate. That would be exceptionally difficult, especially over the medium and long term.

An American SWF would distort markets and invite political interference. Governments have a poor record of picking economic winners, as seen in failed investments like Solyndra and Fisker Automotive. Government investment funds also tend to drift beyond their original mandates due to misaligned incentives. A prime example is Australia’s Future Fund.

Australia is a red flag

Established in 2006 to finance the country’s unfunded public pension liabilities by 2020, the Future Fund has yet to allocate a single dollar for this purpose and is unlikely to do so any time soon. The fund either reinvests its returns or spends it on remarkable administrative costs. The fund’s staff includes four people who in fiscal 2023-24 made more than a million Australian dollars a year. Meanwhile, government pension liabilities continue to burden taxpayers, costing billions annually while Australia’s government debt keeps rising.

Although the Future Fund’s returns have generally exceeded borrowing costs, they have lagged behind private counterparts; more so when accounting for the fact that being government-owned exempts the Future Fund from taxes other funds have to pay. Australian taxpayers would have been better off with lower taxes and the freedom to invest or consume as they saw fit.

The flawed justification for keeping the Future Fund even as debt continues to accrue is the mistaken belief that it generates 'free money'. Proponents argue that as long as returns exceed borrowing costs, the fund should continue indefinitely. By that logic, the U.S. government could simply borrow trillions, invest the money, and eliminate taxation altogether. But money is never free and past performance is no guarantee of future performance. If returns are insufficient, taxpayers will be significantly worse off.

The greatest danger of an SWF is political interference and cronyism. The Future Fund is Australia’s third-largest investment fund when measured in total assets. This affects asset prices and distorts markets. An American SWF would be even more distortive, potentially becoming the world’s largest institutional investor. This would give the federal government enormous leverage over domestic and global markets, enabling it to manipulate markets, businesses and investments.

Politicians have already attempted this in Australia. The Labor government recently attempted to alter the Future Fund’s investment mandate to ensure that it 'must' have regard for government priorities. Such changes would affect investment decisions and influence the corporate governance and strategic direction of private companies in which the fund has invested.

A political plaything?

If BlackRock’s ESG focus is controversial, imagine the potential for politicians to use an American SWF as a political tool. Even if this now appeals to some Republicans, they should picture what it would mean under a Democratic administration. The rapid fluctuations in mandates alone would cause dangerous market instability and uncertainty. Every four years could bring new demands, leaving investors and businesses with limited ability to make medium- or long-term plans.

A president who can leverage the government’s balance sheet strategically to influence private businesses would circumvent congressional authority and further expand executive power. And it would undermine the constitutional separation of powers by weakening Congress’s exclusive control over federal spending.

In Federalist No. 69, Alexander Hamilton stressed that the president shouldn’t have unilateral control over commerce or the economy. Establishing a U.S. sovereign wealth fund would represent a dramatic shift from this principle, granting the president a previously unimagined authority more akin to that of a monarch - an outcome America’s Founding Fathers never intended.

 

Dimitri Burshtein is a principal at Eminence Advisory.

 

RELATED ARTICLES

The 2020 US presidential elections

Credit cuts, rising risks, and the case for gold

Tariffs are a smokescreen to Trump's real endgame

banner

Most viewed in recent weeks

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

7 examples of how the new super tax will be calculated

You've no doubt heard about Division 296. These case studies show what people at various levels above the $3 million threshold might need to pay the ATO, with examples ranging from under $500 to more than $35,000.

The revolt against Baby Boomer wealth

The $3m super tax could be put down to the Government needing money and the wealthy being easy targets. It’s deeper than that though and this looks at the factors behind the policy and why more taxes on the wealthy are coming.

Are franking credits hurting Australia’s economy?

Business investment and per capita GDP have languished over the past decade and the Labor Government is conducting inquiries to find out why. Franking credits should be part of the debate about our stalling economy.

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

The rubbery numbers behind super tax concessions

In selling the super tax, Labor has repeated Treasury claims of there being $50 billion in super tax concessions annually, mostly flowing to high-income earners. This figure is vastly overstated.

Latest Updates

Investment strategies

Trump's US dollar assault is fuelling CBA's rise

Australian-based investors have been perplexed by the steep rise in CBA's share price. But it's becoming clear that US funds are buying into our largest bank as a hedge against potential QE and further falls in the US dollar.

Investment strategies

With markets near record highs, here's what you should do with your portfolio

Markets have weathered geopolitical turmoil, hitting near record highs. Investors face tough decisions on valuations, asset concentration, and strategic portfolio rebalancing for risk control and future returns.

Property

Soaring house prices may be locking people into marriages

Soaring house prices are deepening Australia's cost of living crisis - and possibly distorting marriage decisions. New research links unexpected price changes to whether couples separate, stay, or silently struggle together.

Investment strategies

Google is facing 'the innovator's dilemma'

Artificial intelligence is forcing Google to rethink search - and its future. As usage shifts and rivals close in, will it adapt in time, or become a cautionary tale of disrupted disruptors?

Investment strategies

Study supports what many suspected about passive investing

The surge in passive investing doesn’t just mirror the market—it shapes it, often amplifying the rise of the largest firms and creating new risks and opportunities. For investors, understanding these effects is essential.

Property

Should we dump stamp duties for land taxes?

Economists have long flagged the idea of swapping property taxes for land taxes for fairness and equity reasons. This looks at why what seems fairer may not deliver the outcomes that we expect.

Investing

Being human means being a bad investor

Many of the behaviours that have made humans such a successful species also make it difficult for us to be good, long-term investors. The key to better decision making is to understand what makes us human and adapt.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.