The Treasury and Commerce Departments have 90 days to come up with a plan to create a sovereign wealth fund (SWF).
“We’re going to create a lot of wealth for the fund”, Trump told reporters. And I believe a sovereign wealth fund is in order for this nation to exist.
He also suggested TikTok could be purchased using the money.
Trump stated that “we’re going to be doing something with TikTok,” “perhaps not at all.” “If we make the right deal, we’ll do it. Otherwise, we won’t … We might put that in the sovereign wealth fund”.
Here’s a look at what we know about Trump’s SWF plan.
A sovereign wealth fund is what?
To invest in global assets for long-term growth, governments own sovereign wealth funds and make those investments.
An SWF is defined as having three components, according to the official definition created by the International Forum of Sovereign Wealth Funds (IFSWF).
- The country’s government, including federal and state governments, owns it.
- Foreign financial assets are included in the fund’s investments.
- The fund makes investments with in-depth financial analysis, including those relating to economic development and infrastructure.
The main components of SWFs, according to the IFSWF, are not public pension funds, which are ultimately owned by the people who are entitled to receive benefits from them, nor foreign currency reserves held by the nation’s central bank, which are primarily used for monetary stability rather than investment.
An SWF can serve as an investment account for the nation’s long-term goals, a stabilization tool, which allows funding to be withdrawn when necessary from budgetary constraints, a development tool to support economic policy, or a combination of the two.
Ultimately, they are designed to be a nest egg, allowing current surplus funds to be invested to benefit future generations. Countries with a high level of commodity wealth have historically used them to leverage profits from the sale of oil, natural gas, metals, and minerals. According to the IFSWF, some 60 percent of funds come from natural resources revenues.
SWFs are supposed to invest for the common good of a country, not pension funds, from which people can withdraw money to support themselves in retirement.
That might include funding projects for infrastructure projects like airports or schools. SWFs frequently make purchases in financial products and acquire shares in businesses that can support long-term economic security and fund social or government programs.
Where will the funds for setting up a US fund come from?
Trump hasn’t stated how much or how much of a US sovereign wealth fund will be administered.
The president’s executive order directs the Commerce and Treasury Departments to include in the plan recommendations for funding mechanisms, investment strategies, fund structure and a governance model.
The fund would be established within the next 12 months, according to Treasury Secretary Scott Bessent, who did not specify where the money would go.
Bessent stated that “we’re going to monetize the US balance sheet’s asset side” for the benefit of Americans. There will be a mix of liquid assets and assets that we will have to market to Americans.
Stan Veuger, a senior fellow at the American Enterprise Institute, said that the assets Bessent was referring to could include property and even the government’s Bitcoin holdings.
According to an analysis by the crypto firm 21. co. Trump suggested last year that he might have plans for a crypto reserve similar to oil reserves, the US has seized at least 215,000 Bitcoins since 2020, valued at almost $ 21 billion at current prices.
Bitcoin holdings “could be the basis of sovereign wealth fund, though, of course, their value is relatively modest”, Veuger told Al Jazeera.
Which other nations have established SWFs?
According to the IFSWF, more than 90 such funds manage more than $8 trillion in assets worldwide.
The largest fund is Norway’s Government Pension Fund Global, which has $1.74 trillion in assets, followed by the China Investment Corporation, with $1.33 trillion in assets, according to the Sovereign Wealth Fund Institute, a data provider.
Abu Dhabi, Kuwait, Saudi Arabia and Singapore are among other countries with prominent sovereign wealth funds, with assets of between $801bn and $1.06 trillion, the institute said.
Is it a good idea for the US to establish a SWF?
Trump is not the first to think about creating a SWF for the US.
According to The New York Times and Financial Times, Joe Biden’s administration also considered starting a fund for this purpose prior to Trump’s victory in November.
Trump has also praised the concept of creating the fund, claiming that it could support “great national endeavors” like highway and airport infrastructure projects, manufacturing, and medical research.
Some Wall Street investors questioned whether the news was a good idea, but others claimed it was a surprise.
Typically, a SWF is funded from a country’s surplus funds – be that from the sale of natural resources or from under-spending a budget. Since 2001, the United States has consistently had budget deficits. It ran a deficit of $1.8 trillion in the fiscal year for 2024, which was $138bn – 8 percent – more than in the previous year. The Congress would likely need to approve the creation of a sovereign wealth fund.
According to Colin Graham, head of multi-asset strategies at Robeco in London, “establishing a sovereign wealth fund suggests that a country has savings that will go up and can be allocated to this.” “The economic rules of thumb don’t add up”.
Veuger, from the American Enterprise Institute, said there is also the risk that the fund’s manager could make bad investments with it.
There is no reason to believe a US SWF could consistently outperform the market if it didn’t exercise its political will, he claimed. It is not a good idea for the US, I don’t believe.
There is also criticism of SWFs in general. Many SWFs lack transparency, according to a report released by the Carnegie Endowment for International Peace, raising concerns about corruption and political interference.
The report Sovereign Wealth Funds: Corruption and Other Governance Risks states that “the door is wide open for rapacious managers and political elites to misappropriate investment earnings without thorough financial and operational information.”
“At the macroeconomic level, this lack of transparency raises the possibility of real destabilization risks if funds were to fail, be mismanaged, or quickly withdraw funding from target markets,” it added.
Could the SWF be used to buy TikTok?
No firm plans to purchase TikTok have been made, despite Trump’s suggestion that the wealth fund might. The company’s fate in the US has been uncertain since January 19, when a law requiring its Chinese owner, ByteDance, to sell it on national security grounds or face a ban took effect.
Trump signed an executive order requesting a 75-day delay in the enforcement of the law after taking office on January 20.
Trump has stated that he is in discussions with a number of people regarding the purchase of TikTok and that this month he will likely make a decision regarding the app’s future. About 170 million Americans use the well-known app.
Source: Aljazeera
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