- - Thursday, August 21, 2014

Fifth in a series.

New York-In America, the cradle of capitalism, we need to have a sovereign wealth fund. Capitalized with at least $1 trillion in the beginning, our fund should be the largest, most forward-looking and most successful one in the world.

If run independently (without partisan influence) by credentialed managers who might contribute their service gratis, America’s Sovereign Wealth Fund would produce consistent and outsized rates of return on invested capital.

Under exceptional management, our fund could grow in size to levels that might help reassure our foreign creditors, as these must already be more than worried given the size of America’s total debt, and our demonstrated pattern of bipartisan profligacy.

Why America needs a sovereign wealth fund

Americans as a group are addicted to borrowing and to maintaining extraordinarily high debt balances.

Because the Federal Reserve System has intervened in credit markets by purchasing U.S. government debt at unrealistically low rates of interest since 2008, Americans (rich, middle class, and poor alike) have built up these high debt balances without feeling the kind of pain they soon will feel, when interest rates on U.S. dollar debts inevitably rise.

If America wants to reduce our towering total debt, we must create wealth, sell extraneous assets, and find ways to save more out of our annual incomes.

Since private incomes remain under great pressure from foreign competition and from machines which simultaneously grow more adept and less costly, and since America’s unecumbered assets may not have meaningful total value, we are left with the enormous task of building up substantial wealth during future periods when U.S. dollar interest rates may rise, creating persistent headwinds.

How Big is America’s Debt Problem in 2014?

The first stage in kicking any addiction is recognizing that you are addicted—since 1945, when America assumed the priviledge of issuing the reserve currency for the world (the U.S. dollar),, all sectors within the American economy have become “debt-aholics”.

To see this, you need to look at simple statistics that are available for the American economy as a whole here and here.

In 1945, at the conclusion of the last costly World War, America’s total debt (amounts borrowed by all of our households, corporations, government entities, and financial institutions) stood at $349 billion. In that year, when many able-bodied Americans served in our armed forces, private sector incomes were $113 billion, so the ratio of total debt to private sector income was 3.1x.

At year-end 1982, total debt stood at $5.6 trillion, private sector incomes were $1.5 trillion, and the debt/private income ratio climbed to 3.8x.

By 1999, the debt/private income ratio rose to 5.0x; at year-end 2008, it jumped further to 8.0x; and at year-end 2013 it dropped slightly to 7.7x. Even so, America’s total debt remained at the staggeringly high level of $56.0 trillion, while private labor incomes were only $7.3 trillion.

To bring our total debt down to 1999 levels in relation to private incomes, we would have to find $19.5 trillion. To reduce our debt to 1982 levels, we would need $28.2 trillon. If we wanted to get back to 1945 levels, we would require $33.5 trillion.

America has a mammoth task ahead, reducing our accumulated debts to more realistic levels—we need proven wealth builders to work for our common benefit.

A sovereign wealth fund for the 21st century

In addition to having a fortress Central Bank, America should have a politically independent sovereign wealth fund whose mission is to realize financial returns on wise investments. (See Part 2 in series.)

To guard against cronyism, the charter of this new investment fund should set new and much higher operating standards. For example, the fund could not invest in a project to which a manager or any family member had connection. Record-keeping would be prompt and transparent, while valuation techniques would be prudent and conservative.

To lessen the potential that this fund would simply end up distorting market prices inside America for securities traded here, the new fund should be proscribed from investing in American securities of any kind (especially U.S. government and/or agency debt securities). Instead, the fund would target investments outside our borders.

We need to build wealth to manage America’s excess debt problem.

If we are successful, a portion of returns on our new fund could also be deployed to help turn our “pay-as-you-go” social welfare net into a more prudently funded enterprise that can help make transfer payments and provide financial support to the neediest American families.

Next: Tort and Health Care Reform

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