 On February 3, 2025, President Trump issued an Executive Order for the creation of a US Sovereign Wealth Fund (SWF). The idea, popularized by nations such as Norway and Saudi Arabia, has seen bipartisan support. However, a US SWF would face unique challenges in relation to the US’s current budget deficit and $36 trillion USD in debt.
An Overview of Sovereign Wealth Funds A Sovereign Wealth Fund is a state owned investment fund. SWFs act very much like investment banks. They have to balance profits, risk, and liquidity, usually based on government policy. These investments allow the government to increase the budget without raising taxes, which can bolster infrastructure, international development, or secure access to natural resources. For some countries, this creates a source of revenue when natural resources, usually oil, run out. This also allows for the prevention of financial shocks when resources are discovered and for the creation of long-term funds. Issues with Debt and US Sovereign Wealth Funds Currently, the Trump administration has not provided sufficient details on a potential US SWF. While this does mean that the discussion on SWF risks is predominantly speculative, it will highlight some issues that may need to be addressed by any proposal. The significance of debt is a highly debated topic among economists. As seen in the 2009 Eurozone crisis, when countries fear that debt is unsustainable or may not be repaid, harsh austerity measures and economic slowdowns will ensue. The amount of debt when that issue occurs is debated. Studies have shown that at high enough levels, there is a threshold for where debt can cause financial crises, but the accuracy and threshold levels are still debated among economists. The main concern with a US SWF is this issue of debt. The US currently has a budget deficit, whereas almost all countries with an SWF have budget surpluses. Since the US does not and probably will not run a budget surplus, the money for an SWF would come from debt. This is inherently risky. It would require that the returns from a US SWF outpace its debt. If a US SWF fails, the US might as well be burning its financial reserves. When taking out money for projects such as infrastructure, there is a more likely chance that this will boost the US’s productivity overall, but there is no long-term benefit from losing money in the stock market. Debt created from physical investment creates tangible benefits (like a bridge or factory) even if the debt defaults. On the other hand, stock is intangible, meaning a default is permanent. Another issue to take into consideration is that interest payments on US debt are only going to grow. In 2024, the US paid $1.2 trillion USD on interest payments on US debt. Since the US is unlikely to create a budget surplus, it will have to dedicate increasingly higher payments to interest on its debt. This will most likely result in one of three outcomes for a US SWF: either there would be less money to invest in the SWF yearly, cuts to other programs (such as education, Social Security, or Medicare) would have to compensate for the SWF, or more debt would have to be taken out. If less money is invested in the SWF, it would likely see slowed growth that would delay any plans to invest SWF funds. It is feasible just to rearrange current funds, but it could spark a political backlash. If more debt is taken out, it would just increase the interest on debt payments, which would lead to a never-ending cycle of increasing debt interest and decreasing funds for an SWF. Potential Funding for a US Sovereign Wealth Fund Many problems could arise from a US SWF created with a budget deficit. The issue now turns to whether an American SWF is economically feasible without causing the US debt and debt payments to skyrocket more than they already have. There have been several methods proposed for funding a US SWF that could possibly sidestep the issue of increasing debt. A common method proposed for large governmental investment bodies, usually somewhat akin to SWFs, is private investors. Under this model, the government would put some of its own money into the fund, but most would come from private groups who would get a cut of the profits. This would allow the government to profit from the investments if they did well with minimal direct governmental investment. It could also leave it vulnerable to major investors pulling out or having to pay back investors at a loss if the fund does poorly. This risk opens up any US SWF to the influence of private capital, even if there is an independent board leading the SWF. The threat of large investors, especially billionaires like Musk, Bezos, or Zuckerberg, would dramatically influence investment decisions. This could lead to poor investment strategies or, worse, the hijacking of an SWF to prioritize its shareholders instead of the public. This would severely violate SEC regulations, turning the SWF into an economic tool used by billionaires with governmental legitimacy. Another method could be raising taxes as a source of revenue. This avoids the issues surrounding private investors by redistributing the costs. Two possible methods could be payroll taxes and wealth taxes. A payroll tax is a tax on salaries and tips that is paid directly by the employer, which is already in use across the US. However, Trump has stated that he wants to eliminate all taxes on tips, including the payroll tax, which has been broadly supported bipartisanly. Furthermore, Americans generally believe that federal taxes are too high and would impose heavy political costs on anyone trying to raise them. Another possible method would be a wealth tax, a tax on the total assets a person holds that usually only comes into effect above a certain threshold. Despite general popular support, this has faced skepticism in the past, including that it causes the rich to leave the country, it could affect more people than originally intended, and it could unfairly hurt people whose assets decrease in value. More likely than not, a wealth tax would not pass through Congress. Tariffs and SWFs Trump has proposed using two different methods for funding a US SWF in the past: tariffs and cryptocurrency. He has proposed that funds could be “taken in through tariffs and other intelligent things,” which would allow the government a new source of revenue to fund an SWF that doesn’t require taking on new debt. However, this would tie the US’s hands to tariffs as a form of investment, and the slowdown in global trade that is associated with tariffs could eat into the profits, given that SWFs traditionally invest primarily in foreign companies to avoid conflicts of interest. Less trade would hurt the stock prices and limit the growth of many export-oriented companies. If the US were to invest internally, there would still be major issues. In terms of tariffs, reciprocal tariffs from countries like Canada, China, and Mexico would hurt domestic profits. However, investing internally would also create conflicts of interest where companies would have major power over American finances, which could either lead to greater corporate control over the government or greater governmental interference in American businesses, both of which would be economically and politically risky. Is a US Sovereign Wealth Fund Beneficial and Feasible? Previous SWFs have been controversial. There have been instances where SWFs have been a way for corrupt politicians to embezzle public funds. A good example is the infamous 1Malaysia Development Berhad (1MDB) scandal, where $4.5 billion was funneled out of 1MDB to senior officials and the Malaysian PM Najib Razak. The scandal was called “kleptocracy at its worst”, and highlights the issue of oversight and SWFs. SWFs without proper management and oversight are prone to corruption and are primarily used as personal banks. However, with proper oversight and management, SWFs can provide critical economic reserves for countries that promote long-term economic and social welfare. They can reduce the need to make drastic cuts by providing funds in lean times and can build reserves in bountiful times for future generations. Although there is always the risk that an SWF may be used for corruption, its essential purpose is to provide long-term economic stability and prosperity. Overall, a US SWF is feasible. Although the sources of funding remain unclear, the US theoretically could fund an SWF without significantly increasing the current US budget deficit. However, this would depend on two factors: the source of the funds and the success of the investments. If a US SWF turns out to be highly profitable or does not require new debt, then it could definitely be economically feasible and beneficial. Nonetheless, all sources of funding have their own unique benefits and drawbacks. If a US SWF is created, the government will need to be careful in how it chooses to fund and manage an SWF for maximum economic success. Henry Dirckx is a first-year undergraduate at the University of Washington studying environmental science.
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