What is a sovereign wealth fund?

The federal government is going into business. President Donald Trump on Feb. 3 signed an executive order establishing a sovereign wealth fund to, as he stated, "promote the long-term financial health and international leadership" of the U.S.

America's new sovereign wealth fund is either a "feasible idea to invest strategically" or a "giant opportunity for waste," said Tufts University's Patrick J. Schena at The Conversation. Such funds are usually associated with "great wealth," especially in oil-rich countries like Norway and Saudi Arabia — which created LIV Golf using its fund — and are generally used by those countries to invest in projects of "strategic interest." But how those funds are built and how they are used varies from country to country.

How do sovereign wealth funds work?

A sovereign wealth fund is a "state-owned investment fund that manages a country's financial assets," said Kiplinger (a sister site of The Week). Countries can take "surplus revenues" — from exports, taxes or other sources — and invest them, either to "achieve long-term economic stability" or (more controversially) to "finance political or diplomatic priorities" that can work as a form of soft power when the country is trying to grow its global influence. And the funds can buy "just about anything." For example, China uses one sovereign fund to finance power and transportation projects in Africa.

The Week

Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.

SUBSCRIBE & SAVE

Sign up for The Week's Free Newsletters

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

Sign up

How would the US fund be financed?

America isn't exactly running budget surpluses these days. Indeed, "it's unclear" how the United States might come up with money for a fund, said The New York Times. In addition to longstanding budget deficits, the federal government also "doesn't have any significant natural resource revenue" to provide the cash.

Trump's team pointed to $5.7 trillion in assets held by the government — a mix of cash, defense stockpiles and other property — as a possible source, but it's also unclear "how those trillions of dollars could flow into a sovereign wealth fund," said the Times.

What will Trump use the fund for?

The president has suggested using the fund to buy TikTok, said CNN. "If we make the right deal, we'll do it," Trump said while signing the executive order. (TikTok did not meet a legal deadline to sell the company from its Chinese owners by January, putting the social media company's future in limbo.) Otherwise, he said, there are a "lot of options."

What are the downsides?

There are "plenty" of things that could go wrong, said The Wall Street Journal. An American sovereign wealth fund might divert capital from the private-sector economy, as well as "fund political boondoggles, and mess with the business decisions of private companies." The funds of other countries tend to "enrich a country's rulers and their friends far more than citizens." Malaysia's fund has "channeled billions of dollars" to the prime minister and his cronies. "Corruption is a constant temptation."

What next?

Trump's order gave the Treasury and Commerce Departments 90 days to submit recommendations for "funding mechanisms, investment strategies, fund structure and a governance model," for the fund, said Reuters. Any plan will "likely require approval from Congress."