There are better things for Trump to do with America’s cash – if it had any

Within the seemingly endless stream of executive orders that US President Donald Trump has been signing since taking office just over a fortnight ago is one directing his officials to create a sovereign wealth fund. What he left unanswered though is whether America actually needs a sovereign wealth fund, and how would it finance one.

In his order signed on Monday, Trump said it was in the interests of Americans to establish a fund to “promote fiscal sustainability, lessen the burden of taxes on American families and small businesses, establish economic security for future generations and promote United States’ economic and strategic leadership internationally”.

Donald Trump has ordered the creation of a national sovereign fund. But how will it be funded?Credit: Bloomberg

He directed US Treasury Secretary Scott Bessent and Commerce Secretary Howard Lutnick to develop a plan for the establishment of the fund, its funding mechanisms, investment strategies, structure and governance model, and submit the plan to him within 90 days.

He also said the plan should include an evaluation of the legal considerations for establishing and managing the fund.

That last element of the order is material, given that it would probably require congressional legislation to establish the fund, as it would be employing and deploying funds that would otherwise have to be approved as line items in budgets endorsed by Congress.

A sovereign wealth fund is a state-owned investment fund that typically invests in multiple financial assets such as stocks, bonds and real estate to provide a piggy bank for projects to improve the lives of its citizens. They are – usually – managed separately from the sovereign central bank, ministry of finance and treasuries, and they typically have no explicit liabilities, unlike pension funds.

While there is bipartisan interest in the concept of an American sovereign wealth fund – the Biden administration was investigating the concept well before Trump made any public reference to one in a speech in September – once the discussion gets down to the specifics of such a fund that would divert revenue to an entity that would circumvent Congress’ control of government expenditures, the pathway towards its establishment might get steeper.

It’s not only that issue, or the more basic question of whether the US actually needs a sovereign wealth fund, but there are practical obstacles to its creation that place large question marks over whether one could be established.

The most obvious is where the funding would come from.

The fund could use debt to build an asset base, but the government is awash with debt and congressional opposition to raising more debt within an entity outside its control, with the ability to spend at its own discretion, would be almost guaranteed.

Almost all the sovereign wealth funds that have been created – there are more than 90 of them globally – have been funded by economies that have either current account or budget surpluses.

Generally, it has been countries such as Norway and Saudi Arabia, with natural resource endowments, namely oil reserves, that have been anxious to use their budget surpluses to diversify their economies away from an exposure to a single commodity.

“We might put [TikTok equity] in the sovereign wealth fund, whatever we make. Or if we do a partnership with very wealthy people. A lot of options.”

Donald Trump

Others, such as Australia’s $238 billion Future Fund ($304.5 billion if the other funds it manages are included), tuck away their budget surpluses (when the budget was in surplus) and any one-off windfalls (the residual government shareholding in Telstra) either for a rainy day or to offset unfunded liabilities.

The US doesn’t have a current account surplus – it has a deficit running at an annualised rate of more than $US1 trillion ($1.6 trillion) – and it doesn’t have budget surpluses. Its fiscal deficit is about $US1.9 trillion and growing. The last time it had a surplus was a quarter of a century ago, in 2000.

So how would the US fund its sovereign wealth fund if not from borrowings or surpluses?

Trump, in that speech in September, floated the idea of using revenue from his beloved tariffs and “other intelligent things” to invest in manufacturing hubs, defence, medical research and other “great national endeavours”.

Others in his administration would like to use it to acquire critical minerals and buy copper mines – and the Panama Canal and Greenland! Trump would probably add Canada to the list. Or the Gaza Strip, having just announced he wants the US to take possession of it and redevelop it into the “Riviera of the Middle East”.

When signing the executive order, he also suggested it could be used to help acquire TikTok.

In his first day in office Trump signed an order directing his administration not to enforce a law, passed by Congress, that would have forced TikTok to be sold or shut down in the US the day before his inauguration. He (probably unlawfully) gave TikTok 75 days to find a US buyer, and suggested the US government should be entitled to half the company if he were able to orchestrate a deal.

“If we make the right deal, we’ll do it. Otherwise, we won’t. And we might put that in the sovereign wealth fund, whatever we make. Or if we do a partnership with very wealthy people. A lot of options,” he said on Monday.

Deciphered (those comments need deciphering), what he seems to be saying is that, if a deal on TikTok were done, he’d want the government to be given a slice of TikTok equity that he’d park in the fund.

Whether equity in TikTok is an appropriate asset for a sovereign wealth fund – or whether a significant ownership interest in a major social media platform is appropriate for government – the fund, to do all the things Trump and his advisers want it to do, would still have to be funded, and his tariffs probably aren’t the solution.

Trump has an endless variety of planned uses for his tariff revenues, including to help fund his planned $US4.6 trillion (over a decade) tax cuts for companies and the wealthy.

At best, imposing his tariffs on everyone – which would need to include Canada and Mexico – might raise $US2.5 trillion to $US3 trillion over the same period, albeit less if his targets retaliate and the global economy and global trade shrinks.

What else could he do?

Elon Musk and others are eyeing a relatively small government agency, the US International Development Finance Corp (DFC), as a potential vehicle for the fund.

Credit: Matt Golding

The DFC predominantly makes loans for projects in developing economies. It was touted, when it was established in 2019, as America’s counter to China’s Belt and Road initiative.

The DFC has assets – its loans and loan guarantees – of about $US49 billion. Musk, having just mounted an assault on America’s major foreign aid organisation, USAID, apparently wants to use some of that agency’s resources and potentially some defence department funding, along with private sector funds, to turn the DFC into a sovereign wealth fund that would invest in line with America’s geopolitical interests and ambitions.

In issuing the executive order, Trump’s staff made reference to $US5.7 trillion of federal government assets, as well as other assets held indirectly, including natural resources reserves, presumably an indication of where funding might be found.

The best part of a $US1 trillion of those assets are cash held by US Treasury to fund the government’s operations.

At the moment, the US has butted up against its debt ceiling – federal government debt of $US36.22 trillion is above the $US36.1 trillion ceiling – and Treasury is taking “extraordinary measures” (not making superannuation contributions is the major one) while waiting for Congress to raise that limit. The government will run out of funds and could default on some liabilities as early as next month if the ceiling isn’t raised.

Other major assets are the inventories of ammunition, missiles and commodities held by the military, government properties, software and loans by its agencies, none of which could be described as liquid assets.

The more pertinent point is that, with deficits seemingly locked in for the foreseeable future, the US debt-to-GDP ratio climbing inexorably, and annual interest payment on the debt of $US1 trillion and rising, the priority for the government and Congress ought not to be a sovereign wealth fund but fiscal stability.

Sovereign wealth funds are a “nice to have.” In America’s stretched circumstances, there would be better things to do with its cash – if there was cash available.

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