A difficult precedent for Trump's sovereign wealth fund
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A sovereign wealth fund of the kind proposed by President Trump, likely funded by debt and primarily investing in domestic assets, violates nearly all of the principles that usually undergird the asset class.
Why it matters: Dani Rodrik, a Harvard economist known for his support for industrial policy and government involvement in markets, tells Axios that this particular proposal "makes no sense at all."
Flashback: The most prominent such fund, 1MDB, ended up collapsing in scandalous ignominy.
- Malaysia wanted a sovereign wealth fund, but it had no sovereign wealth to invest. It therefore created a vehicle, 1MDB, that borrowed money on the international bond markets.
- Most of that money, which was ostensibly invested in domestic development projects, ended up being stolen by government cronies.
Where it stands: 1MDB is the only real precedent for a debt-funded sovereign wealth fund, per Berkeley economist Barry Eichengreen.
- While a U.S. version would not necessarily need to fund itself directly by issuing bonds like 1MDB, ultimately any money flowing into it could alternatively be used to decrease the deficit, therefore it makes sense to think of the fund as directly increasing the deficit and the national debt.
- It exacerbates, rather than addresses, the country's fiscal imbalances, notwithstanding Trump's claim that the fund will "promote fiscal sustainability." The White House did not return requests for comment.
Between the lines: As Axios' Neil Irwin notes, sovereign wealth funds are by their nature prone to suggestions of cronyism, even if the behavior is entirely legal.
- Trump's son-in-law Jared Kushner secured a $2 billion investment from the Saudi Public Investment Fund within a year of leaving the White House and starting out in private equity, leading to accusations that he leveraged his ties to Saudi royalty as a U.S. official into a private sector payday.
- Kushner has not been accused of violating any laws, and rejects the idea he has crossed any ethical lines.
The big picture: The archetypal sovereign wealth fund — think Norway — exists to solve a luxury problem: What should the country do with its windfall oil wealth, given the knowledge that those revenues won't last forever?
- The answer: Instead of spending the money today, it's better to invest it in a diversified set of international assets, so the country's future citizens can share in the wealth even after the oil money runs out.
- The United States, by contrast, doesn't have windfall wealth. Rather, it has a $36 trillion national debt.
- Trump's executive order is extremely vague on where the money might get invested. The president even said, "We're going to be doing something perhaps with TikTok, and perhaps not."
The bottom line: Eichengreen sums it up for Axios this way:
- "Can you say 'recipe for disaster?' Which is the appropriate thing to say even in the absence of cronyism. Of which there is bound to be plenty."
