Photo illustration by John Lyman

U.S. News


How a Sovereign Wealth Fund Can Help Solve the U.S. Debt Problem

The single most pressing national security issue for the United States is its addiction to deficit spending and its overwhelming debt. The United States uses deficit spending to pay for the goods and services demanded by the American people and its deficit spending is out of control. As of February 14, 2020, U.S. debt stands at $23.3 trillion. That is more than the annual GDP of its economy.

And despite lip service to the seriousness of debt and its long term consequences for the health of the U.S. economy, the White House has sent to Congress its proposal for the coming fiscal year of $4.8 trillion which would add an additional $1 trillion to U.S. debt obligations. In 2019, the United States paid $393.5 billion in interest payments to its creditors.

The Congressional Budget Office has estimated that unless some means is found by the United States to fund its obligations instead of using deficit spending, the interest payments on the debt of the United States in 2028 will explode to $914 billion. Over this decade alone, the United States will pay some $7 trillion in interest alone.

Yet with the U.S. budget awash in red ink, it refuses to tax itself to pay for the goods and services that the American people demand. The deficit spending by the United States is unsustainable, and if not remedied will lead to the collapse of the United States economy, and to the end of the United States itself.

Sovereign Wealth Funds Throughout the World

The first time the phrase “Sovereign Wealth Funds” was used was in 2005 by Andrew Rozanov in an article with State Street Global Advisors. At that point in time, Mr. Rozanov estimated that the value of sovereign wealth funds was $895 billion. Since then the wealth of sovereign wealth funds has grown to over $8.1 trillion. Some sovereign wealth funds established the corpus of their sovereign wealth fund by using the excess funds held by their central banks such as the Chinese Investment Corporation, though the majority of sovereign wealth funds, like the Norwegian Government Pension Fund, and the Saudi Arabian Public Investment Fund, use a severance tax on oil and gas reserves to establish their sovereign wealth funds.

Typically, sovereign wealth funds will then invest those funds in worldwide equities, bonds and in real estate. The earnings on these investments are then either consumed by the state that owns the sovereign wealth fund or is reinvested in other income-producing properties.

To bring some transparency to this new macroeconomic investment entity, the world’s sovereign wealth funds established a voluntary generally accepted principles and practices. Named for the place where the initial conference took place, in Santiago, Chile in 2008, the Santiago Principles laid out 24 principles for each sovereign wealth fund to follow. Adherence to the Santiago Principles is voluntary and there is no governing or enforcement mechanism.

Sovereign Wealth Funds at the Associate State Level in the United States

In the United States, 20 states have found a different way to meet their state financial obligations by establishing sovereign wealth funds that benefit their citizens of their particular state.

Probably the best-known state sovereign wealth fund in the United States is the Alaska Permanent Fund. The Alaska Permanent Fund was founded in 1976 under the Alaskan Governor Jay Hammond who had been concerned that the citizens of Alaska were not fully realizing the benefits of oil being extracted from Alaska state lands. The initial funding of the Alaska Permanent Fund was $724,000. The current value of the Alaska Permanent Fund is almost $67 billion. Every year, the Alaska Permanent Fund disburses a Permanent Fund Dividend to the citizens of Alaska. The Alaska Permanent Fund Dividend for 2019 was $1,606. Many Alaskans depend on this dividend and incorporate the dividend checks into their yearly living expenses.

New Mexico has a sovereign wealth fund as well. The New Mexico State Investment Council has its origins in the Ferguson Act of 1898. The Land Grant Permanent Fund (LGPF) was created alongside the Ferguson Act. However, it was the state of New Mexico that created the Severance Tax Permanent Fund (STRF) which allows for proceeds from the LGPF to be invested in equities, bonds, and other real estates in order to provide for future generations of New Mexico citizens when the oil and natural gas revenue has run its course. It is estimated that the STRF reduces the tax burden of the citizens of New Mexico by $1,000 per citizen. The fund is managed by the New Mexico State Income Council. The current value of the fund is $24.63 billion for 2020. Recently, New Mexico has unveiled a plan to provide for its citizens free college education regardless of income. The free tuition is to be funded by the STRF.

Mineral resources on federal land as a basis for a federal sovereign wealth fund.

Like the Norwegian Government Pension Fund and the Saudi Arabian Public Investment Fund, the United States has vast mineral resources on federal lands that would be the basis for the establishment of a federal sovereign wealth fund. The United States has more mineral resources on federal land than both Norway and Saudi Arabia combined. On federal land alone, the United States has over 2 trillion barrels of shale oil in the Green River formation in the upper Midwest. Previously, this vast mineral wealth was not considered recoverable. However, Schlumberger, an energy company, has acquired technology from Raytheon that allows Schlumberger to extract shale oil underground without using the current fracking techniques used in other shale oil fields. Using microwave technology, Schlumberger is able to cook the shale oil out of the shale.

In addition to this wealth, the United States has assets of $128 trillion. Combined with the vast oil reserves of the Green River formation that is on federal land, an estimated value of $102 trillion (assuming a price of $51 per barrel of oil), the federal government has mineral assets of $230 trillion. As mentioned above, the current national debt of the United States stands at $23 trillion.

Changes would be necessary to the way the U.S. federal government is compensated by mineral companies extracting wealth from federal lands. Currently, the U.S. receives $0.125 cents for every $1 dollar of wealth extracted. This royalty amount was established by the Mineral Leasing Act of 1920. It has never been changed, even though it has been 100 years since the royalty amount was established. Alaska, Texas, New Mexico and other states who have a severance tax on the extraction of wealth have much higher rates. A proposed blueprint for a more equitable method for a federal sovereign wealth fund can be found at this link.

The average rate of return on investment for the Alaska Permanent Fund for 35 years has been 8.8%. Assuming an investment of $100 trillion by a United States federal sovereign wealth fund by 8.8% would mean an annual return of $8.8 trillion.

The Norwegian Government Pension Fund announced that for 2019, its investments had a return on investment by 19.9 percent, which translates to $180 billion. This investment income came from a sovereign wealth fund that had a balance of $920 billion. Assuming a U.S. sovereign wealth fund with a base of $100 trillion, that would translate into an investment income of $19 trillion. The United States has a population of 327.2 million. $19 trillion divided by 327.2 million would equal $58,000 for each citizen of the United States.

The current deficit estimate as noted above is $1 trillion.

All of this is theoretically possible, all that is lacking is the political will to establish a United States federal sovereign wealth fund.