On February 3, Trump signed an executive order that directs the Secretary of the Treasury and the Secretary of Commerce to create a plan for an American sovereign wealth fund (SWF).
Trump cited inspiration from Saudi Arabia’s Public Investment Fund (PIF), which is worth $925 billion in assets.
Such plan shall include recommendations for funding mechanisms, investment strategies, fund structure, and a governance model. The plan shall also include an evaluation of the legal considerations for establishing and managing such a fund, including any need for legislation.
The White House
The executive order provided few specific details.
What is a SWF and why?
Sovereign wealth funds are usually established by resource-rich countries that are seeking to secure wealth for future generations and diversify their economies. What makes Trump’s interest in a SWF strange is that the United States has a highly, if not the most, diverse and sophisticated economy in the world.
Trump’s intention behind the push for a SWF is unknown, but his admiration for the PIF is telling.
SWFs usually reflect the quality of governance of the states that sponsor them. When they are well governed and well managed, like Norway’s SWF, they can be a boon. But in countries with poor governance, regulatory capture, or weak rule of law, SWFs can be founts of corruption and incentivize malfeasance. Saudi Arabia’s fund is a good case in point. With nearly $1 trillion worth of assets under its management, the PIF stands as one of the largest sovereign wealth funds in the world. It is formally overseen by Governor Yasir Al-Rumayyan, but the real power behind the money lies with Crown Prince Mohammed bin Salman (known as MBS). Under MBS’s direction, the fund has taken many big swings: putting $40 billion into an AI fund, allocating $100 billion for electronics manufacturing, and ploughing billions more into infrastructure projects across the country. Some of these investments reflect sound financial decisions with the goal of generating robust returns. But other transactions provoke questions about financial impropriety and influence peddling.
Carnegie Endowment for International Peace
Even beyond influence peddling, PIF has been involved in brazen corruption. It gave Trump son-in-law Jared Kushner $2 billion worth of investments despite its own advisors expressing fears that it was a bad idea (and it was). Though, for the de facto leader of Saudi Arabia, MBS, it was a sound political decision, as it bought him favor with the Trump administration.
Trump, who has styled himself as an autocrat, or at least as a president without traditional constraints, is more likely to emulate MBS’s approach to a SWF than Norway, which has a SWF that is subject to transparency and its strong democratic tradition- significant constraints that largely prevent corruption and political influence campaigns. Trump’s battering of institutions that promote transparency open the door to severe mishandling of an American SWF.
MBS demonstrated how Trump might recklessly utilize a SWF. MBS has used the PIF to construct Neom, which is intended to be a megalopolis. Construction of this city has met several delays and skyrocketing costs. Trump, who is psychologically prone to grandiose gestures and sweeping plans, may very well attempt to do the same with his SWF.
However, Trump has a small window to achieve his SWF dreams.
While Trump’s team has floated creative ideas for financing the SWF, he still needs to enact it in law. In this regard, Trump has two main options: create an entity from scratch (requiring new legislative authorization) or repurpose an existing vehicle, such as the U.S. International Development Finance Corporation, to house the SWF (the Development Finance Corporation is up for congressional reauthorization later this year, creating a window of opportunity for the SWF).
Carnegie Endowment for International Peace
While the risks of an SWF that Trump has almost full control over are clear, the exact nature of his SWF, its funding, structure, and whether or not it will even be established, are for time to tell.
