As US President Donald Trump advances a more nationalist economic agenda, a provocative new proposal has entered the policy spotlight: the creation of a US sovereign wealth fund.
Touted by the Trump administration as a potential tool to reduce US debt and enhance financial independence from foreign capital, the so-called “MAGA SWF” is a test case for how far America is willing to extend state involvement in the market economy.
Mr Trump has portrayed the proposed fund as a patriotic initiative and a potential fiscal innovation – a vehicle to generate a “gigantic profit” that, in theory, could help ease the federal debt burden, currently about $36 trillion.
But behind the slogans, the financial mechanics and governance realities are far less straightforward.
In theory, borrowing at current Treasury rates – around 4.7 per cent on 30-year bonds – to invest in equities could generate positive returns for a MAGA SWF, leveraging the so-called equity risk premium. Historical data supports the premise: US stocks have averaged just over 10 per cent annually since 1928, compared with 5.2 per cent for 10-year Treasury bonds.
But applying that logic to public debt reduction is far from straightforward. Markets are volatile, returns are not guaranteed and the US – unlike Norway or Singapore – lacks a stable surplus to fund such a venture.
Borrowing may be the most financially viable option – but also the most politically fraught. While Republicans have long warned about deficits, recent administrations, including Mr Trump’s first, have added to the national debt. Issuing new bonds to buy equities would mark a clear break from that rhetoric.
Some in Mr Trump’s orbit have floated the idea of funding the sovereign wealth fund through the sale of federal land and natural resources. On paper, the federal government owns some 259 million hectares – a potentially valuable source of capital.
But the proposal raises sharp concerns: whether assets would be sold at fair market value, whether politically connected buyers might benefit, and whether the long-term environmental costs – particularly if fossil fuel or mining companies, historically the most active buyers of public land, were involved – would outweigh the fiscal gains.
A sovereign wealth fund of the scale under discussion – potentially reaching or exceeding $2 trillion – would also represent a substantial new force in capital markets. The sheer volume of buying could lift asset prices and, in doing so, erode the very returns the fund aims to generate.
Geographic allocation presents a deeper structural dilemma. While the fund’s investment strategy remains undefined, there is political pressure to prioritise US assets – a move that could inflate domestic valuations and tether performance to an economy already burdened by high debt and a projected $1.9 trillion deficit in 2025.
The added uncertainty of Mr Trump’s tariff policies – despite a 90-day pause on new levies – has revived fears of recession, inflation and rising unemployment, further complicating any bet on the domestic outlook.
Diversifying internationally may ease concentration risk but introduces currency exposure – a major vulnerability when the dollar is strong. The US Dollar Index, which tracks the greenback against a basket of major currencies, is currently around 102, above its 10-year average. That strength means foreign gains can shrink when converted back.
The world’s largest and most successful sovereign wealth funds – such as Norway’s Government Pension Fund Global, the Abu Dhabi Investment Authority and Singapore’s Temasek and GIC – all share one defining trait: a stable and consistent source of capital. Norway and Abu Dhabi draw from oil revenues; Singapore relies on long-term surpluses and returns from state-owned enterprises.
The US, by contrast, runs persistent budget deficits and lacks a comparable stream of surplus revenue. That leaves a fundamental question unanswered: where would the money come from?
Even if funding were secured, governance remains a central concern. Sovereign wealth funds tend to perform best when shielded from political cycles and short-term policymaking – something codified in the Santiago Principles, which set global best practices, and reflected in the governance of funds like Norway’s GPFG.
Where that insulation breaks down, the risks – financial, reputational and legal – can be severe. Without clearly defined rules and institutional independence, a US sovereign wealth fund could face pressure to align with political priorities, particularly in an environment where partisan objectives increasingly shape industrial and trade strategy – like Mr Trump’s recent tariff blitz.
The dangers are not hypothetical: Malaysia’s 1MDB fund, launched in 2009, collapsed under allegations of large-scale misappropriation – a case that highlighted the consequences of weak oversight and political interference. For the MAGA SWF to deliver credible returns, independence may matter as much as capital.
For institutional investors, a large government buyer in equity markets is a double-edged proposition: it may boost liquidity and lift prices in the short term, but the longer-term risk is distortion – particularly if investment decisions are guided by policy goals rather than financial merit.
Capital funnelled into favoured sectors or regions could crowd out private investors and undermine confidence.
Structured with discipline, transparency and a clear mandate, the fund could, in theory, become a durable source of national wealth. Without those protections, it risks becoming a lever of political influence, dressed in the language of finance.
Karl Schmedders is professor of finance at IMD
