It’s Past Time for a U.S. Federal Sovereign Wealth Fund
Given the U.S. penchant for deficit spending, it is necessary to find other sources of revenue for the government of the United States.
The United States currently has a debt of $27.4 trillion on its books. The debt payments on the national debt of the United States for fiscal year 2020 was $522.77 billion. The budget for the United States in fiscal year 2020 was $4.829 trillion. This would have produced a budget deficit of $966 billion, but with the Covid-19 pandemic, the budget deficit ballooned to an estimated $3.7 trillion deficit for 2020.
The Congressional Budget Office in November of 2019 estimated that the interest on the U.S. National Debt in 2028 would be $914 billion. These estimates on the interest payment on the national debt were done before the Covid-19 pandemic. The Congressional Budget Office has not yet published any changes to this estimation due to the Covid-19 pandemic.
Even if the Covid-19 pandemic had not happened, the price tag on interest payments for 2028 would not have been sustainable without massive tax increases in the U.S. economy. With the American public demanding the services and public goods from their government, and their refusal to tax themselves to support such an expenditure, it is necessary to find other sources of revenue for the government of the United States. A way forward in this line of thinking can be found in the Open Market Operation functions of the United States Federal Reserve which remits billions of dollars to the U.S. Treasury on a yearly basis, and the establishment of a federal Sovereign Wealth Fund for the United States.
Sovereign Wealth Funds
Sovereign Wealth Funds is a phrase that was coined by Andrew Rozanov in an article he wrote for the State Street Global Advisors in 2005. At the time of his article, Rozanov estimated the wealth of sovereign wealth funds to be $875 billion. Since then, the value of sovereign wealth funds has exploded to $8.1 trillion (as of November of 2019).
The largest sovereign wealth fund in the world is the Norwegian Government Pension Fund with a value of $1.27 trillion. Norway’s sovereign wealth fund is composed of two parts. There is the Government Pension Fund Global (GPFG), which invests in foreign countries. The other part of the Norwegian sovereign wealth fund is the Government Pension Fund Norway (GPFN), which only invests in Scandinavian countries, and businesses listed on the Oslo stock exchange.
The new Saudi Arabian Fund, the Public Investment Fund, known as the PIF, has a value of $350 billion. The United Arab Emirates (UAE) has two sovereign wealth funds.
The Emirates Investment Authority was founded in 2008 and now has a value of $45 billion. The other UAE fund, Abu Dhabi Investment Authority, has an estimated value of $579.6 billion.
Sovereign Wealth Funds are becoming ubiquitous worldwide. From Singapore, which has the sovereign wealth fund Temasek, to China with its sovereign wealth fund, the Chinese Investment Corporation, nation-states worldwide are establishing sovereign wealth funds to improve their economic and political position on the world stage.
Sovereign Wealth Funds are Evolving
In the past, sovereign wealth funds have been passive investors. Today, more and more sovereign wealth funds are evolving to become more active investors. The recent choice by the Norwegian Government Pension Fund to make Nicolai Tangen its investment chief signals a fundamental change in the fund’s investment policy. Tangen, with an estimated personal wealth of $700 million, is intent on having the GPFG and the GPFN be more pro-active in making financial investments. One of his first acts as the Investment Chief of the Fund was to create “safe zones” where people in the fund can take more risks and generate more revenue. Considering that the Fund now owns, on average, 1.4 percent of every listed company in the world, and 2.5 percent of every listed European stock, increasing the Fund’s revenue has the potential to create a financial colossus.
The Saudi Arabian sovereign wealth fund PIF in 2020 abandoned traditional sovereign wealth fund passive investment and has been behaving more as an active trading firm. In the first quarter of 2020, the PIF poured $7.7 billion into blue chip stocks such as Citigroup, Facebook, and the oil firm Total, but sold these stocks in the second quarter to take advantage of the higher prices of these company’s stocks and bonds. PIF invested $4.7 billion into exchange-traded funds. In July of 2020, the PIF boosted its Public Markets team by hiring Maziar Alamouti, a former head of trading at advisory and wealth management firm Quilter Investors. According to a senior Gulf Banking manager, executives at the PIF are engaging in more equity analysts calls and are using global brokers to execute trades at their direction.
While there is only a minority of sovereign wealth funds changing their investment strategies, it is only a matter of time until other sovereign wealth funds change their strategies as well, as the nations who own these funds claw for wealth and influence in a rapidly evolving multi-polar world.
The National Security Implications for the United States
While the United States is still one of the richest countries in the world, the continuing expansion of the national debt, and the continuous deficit spending in the United States, works against the creditworthiness of the United States. With a debt of over $27 trillion, and with the incoming Biden administration rumored to be willing to add more trillions to the debt of the United States, the constant adding to the national debt is not sustainable. With other countries becoming concerned about the financial health of the United States, a hostile foreign country could mount a sustained and determined attack to undermine the U.S. economy. The U.S. credit rating has declined from AAA, with some agencies rating the credit as Aaa and a negative rating.
The royalties the United States receives from private companies extracting wealth from federal lands is 12.5 percent. The royalty rate of extracting has been 12.5 percent from 1920 when the royalty act was authorized by Congress. In terms of inflation, $1 in 1920 is worth $13.21 in 2020 terms. In 2020 the United States Treasury Department received $4.2 billion from royalty leases. Accounting for inflation, that is over $55.5 billion in 2020 dollars. An increase from 12.5 percent to a more equitable 40 percent would yield for the American taxpayer a total of $77.7 billion. The United States Treasury also received from the Federal Reserve in 2020 $88.5 billion from its Open Market Committee. If you add $88.5 billion to $77.7 billion, you have a sum of $166.2 billion.
Instead of depositing this sum into the U.S. Treasury, deposit the funds into a U.S. sovereign wealth fund, which would then invest the funds in equities, bonds, and real estate worldwide. A blueprint for a U.S. sovereign wealth fund can be found at this link.
The Norwegian sovereign wealth fund earned a 19.9 percent return on investment for 2019. Statistics for the full year of 2020 are not yet available. If you took this return on investment for an example for our figure of $166.2 billion, a hypothetical U.S. sovereign wealth fund would have earned $3.1578 billion in revenue. If remittances from the Open Market Committee were defaulted into a U.S. sovereign wealth fund, and the royalty rate was increased to 40 percent, a large sum of investment money would soon be accumulated for investment and eventually consumption.
It is significant to note that there are currently twenty-one U.S. domestic sovereign wealth funds at the state level. Surprisingly, these wealth funds are concentrated in Republican-controlled states.
The technology to accomplish this is now available. What is lacking is the political will to do so.
Richard E. Caroll is a retired economist and has been published in RealClearDefense, International Policy Digest, and Foreign Policy News.
Image: A general view of the Norwegian central bank, where Norway's sovereign wealth fund is situated, in Oslo, Norway, March 6, 2018. Reuters/Gwladys Fouche.