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.