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How a United States Federal Sovereign Wealth Fund Could Solve the United States Debt Problem

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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 January 2023 , the United States debt was $31.4 trillion.  That is more than the annual GDP of its economy.

And despite lip service to the seriousness of the debt, and it’s long term consequences for the health of the United States economy, The Office of the President has sent to the Congress its proposal for the coming fiscal year of $5.8 trillion.  The Budget was approved and is currently in force.  The deficit for this years budget is $1.2 trillion.  In 2022, the United States paid $399 billion in interest payments to its creditors.  The Peter G. Peterson Foundation published an analysis of the projected increase in the amount of  interest payments in the coming decade:

“In late May, the Congressional Budget Office (CBO) projected that annual net interest costs would total $399 billion in 2022 and nearly triple over the upcoming decade, soaring from $442 billion to $1.2 trillion and summing to $8.1 trillion over that period. However, if inflation is higher than CBO’s projections and if the Fed raises interest rates by larger amounts than the agency projected, such costs may rise even faster than anticipated.”

Yet with the United States budget awash in red ink, the US 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 Republic of the United States.

A fuller analysis of this study can be found at this link.

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 the 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 had grown to over $10.3 trillion.

Some sovereign wealth funds established the corpus of their sovereign wealth fund was by using the excess funds held by their central bank 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 fund.  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 investments.

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

At the associate state level of the union of 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 more than $75.3 billion

Every year, the Alaska Permanent Fund disburses a Permanent Fund Dividend to the citizens of Alaska.  The Alaskan Permanent Fund Dividend for 2022 was $3,284

Many Alaskan citizens 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 sovereign wealth fund has its origins in the Ferguson Act of 1898.  The Land Grant Permanent Fund (LGPF) was created alongside of 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 estate 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 $34.4 billion for 2022.  New Mexico also uses it’s Fund to provide a college education at a New Mexico public institution of higher learning. 

Mineral Resources on Federal Land of the United States 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 that both Norway and Saudi Arabia combined. 

On federal land alone, the United States has over 4.2 trillion barrels of shale oil in the Green River formation in the upper Mid-West.  Some 74 percent of this shale oil is on federal land, owned by the people of the United States.

Previously this vast mineral wealth was not considered recoverable, however the energy company Schlumberger has acquired technology from the Raytheon company that allows Schlumberger to extract shale oil underground and without using the current fracking procedures used in other shale oil fields.  Using microwave technology, Schlumberger is able to cook the shale oil out of the shale oil with a minimum use of water.

With the vast oil reserves of the Green River formation, and an estimated 3.182 trillion barrels of oil that is on federal land, and with a current value of $254 trillion (assuming a price of $79.86 per barrel of oil), the federal government has mineral assets of $254 trillion in the Green River Formation alone. 

As mentioned above, the current national debt of the United States stands at $31.4 trillion.

Changes would be necessary to the way the US federal government is compensated by mineral companies extracting wealth from federal lands.  Currently the United States 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 the 35 years has been 8.8%

Assuming an investment of $100 trillion by a United States federal sovereign wealth fund with a return on investment of 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 of 19.9 percent, which translate to $180 billion.  This investment income came from a sovereign wealth fund that had a balance of $920 billion.  Assuming a US sovereign wealth fund with a base of $100 trillion, that would translate into an investment income of $19 trillion

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

I am a retired economist, and a retired soldier. I have a degree in Economics and a degree in Liberal Arts. While in the military my specialty was in Intelligence and Administration.

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Economy

The suffocating economy of Iran

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Iran’s economy is on a roller coaster. The past year saw a dramatic rise in inflation rates and a historic fall in the value of the rial. The protests which followed the death of a 22-yar old Kurdish woman Mahsa Amini have magnified the creaks in the country’s economy.

On  January 22, The Iranian rial was selling at an exchange rate of 450,000 against the greenback, an all-time low. The rial has lost 29% of its value since the time the protest started. Iran’s statistical agency reported an inflation rate of 48.5% in December 2022, the highest level since 1995. November data recorded food inflation of above 70% in 12 provinces of the country.

Reports from the country suggest that more than half of the population is living below the poverty line due to spiraling prices. As per the latest forecast, the World Bank predicts a GDP growth of 2.9% for Iran in 2022 which will slow down to 2.2% in 2023 and 1.9% in 2024 owing to “slower growth in key trading partners and new export competition from discounted Russian oil”. However, the government’s response to the bleak economic indicators so far had been subtle and unperturbed.

Causes

The unilateral withdrawal of the US from the nuclear deal in 2018 and the sanctions that followed on oil exports and international banking has put heavy stress on the country’s economy.

 The country’s government debt-to-GDP ratio rose to 45% in 2020. According to World Bank, Iran’s unemployment rate reached 12.2% in 2020 before narrowly dipping to 11.5% in 2021. Iranian daily Etemad had reported that at least 23 workers have committed suicide since March 2022 in the country due to reasons like dismissal, punishment, or threats.

The government lifted import subsidies for essential goods in April 2022, to ease the pressure off the strained government budget, which subsequently triggered rapid spikes in food prices during May-June.

The Federal Reserve in November tightened its control over Iraqi commercial banks to restrict the illegal siphoning of dollars to Iran and other Middle-East countries. The new regulations blocked a huge chunk of daily dollar wire transfers to Iran. The Taliban takeover in 2021 had previously blocked access to hard currency to Iran via the Afghan route.

Amid the uprising, European Parliament approved a resolution designating the Iranian militia, Islamic Revolutionary Guard Corps (IRGC) a ‘terrorist’ organization. It also called for sanctions on Supreme Leader Ayatollah Ali Khamenei, President Ebrahim Raisi, and others. The US and UK too imposed fresh sanctions on Iran.

Response

Iran retaliated on January 25th by imposing sanctions on 34 British and European individuals and entities.

Former Central Bank of Iran governor Ali Salehabai had been sacked in December due to failure to control the rapid depreciation of the rial. According to analysts in the region, the Central Bank is injecting dollars into the market to thwart further depreciation.

In late January, the Central Bank decided to raise the maximum amount of currency that can be sold to individuals annually from 2000 euros to 5000 euros, to instill confidence and ward off fears about the availability of currency. The cap was initially introduced to stabilize the currency after the US pull-out of the nuclear deal in 2018.

Iran has not resorted to austerity to tide over the crisis. Instead, President Ebrahim Raisi presented a noticeably enlarged national budget in January to boost growth. Valuing 21,640 trillion rials, the budget is 40% larger than the previous one. The Islamic Revolutionary Guards Corps (IRGC) was allocated $3 billion registering a 28% rise over the last year, in a taunting message to the west.

Recently, Iran introduced gold coin certificates in the stock market to raise cash and mitigate inflation. The government is desperate to raise cash as the government budget is posting a deficit of $9.75 billion. Critics point out unrealistic revenue estimates riding on oil sales and over-optimistic tax collection figures.

To raise revenue, Iran has increased its oil exports to China to more than 1.2 million barrels per day over the past three months. The sanctions have in effect caused Iran to warm up to western rivals like China and Russia. Iran and Russia are reportedly in talks over the introduction of a stablecoin, backed by gold, to bypass western sanctions in cross-border transactions.

Iran’s response to the looming economic crisis was devoid of any extreme desperation. The government took all necessary steps to keep the dread within bounds. The present security situation in the country could go haywire if the economy collapses.

It remains to be seen how fast the government can ensure reliable alternate arrangements in place to sustain the economy. If not immediately, chances are high that the country may drift to panic mode.

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Prospects of Vietnam’s Economic Growth in 2023

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The ongoing  war in Ukraine and increasing commodity prices across the world have impacted the developing countries. Countries in Asia which were recovering from the COVID-19 impact on their economies have to rework their recovery process by looking for alternate supply chains and reducing their financial responsibilities towards social sector through budgetary management. Among the developing economies in Asia , Vietnam showed an economic growth of nearly 3 per cent  even when many of the countries were witnessing  recession and reduced production because of adverse impact of COVID-19 .The stimulus packages that the governments across the world have to give to the manufacturing sector to accelerate production and meet the demands of the people. In a report released by World Bank in August last year it was stated that the Vietnamese economy is likely to grow by nearly 7.2 per cent in 2023 and it is going to sustain itself in 2024 with a likely growth projection of 6.7 per cent. These are encouraging signs .Few of the sectors which might be accelerating the growth process would be in the field of footwear and electronics. Vietnam itself has been undertaking strong anti corruption measures so as to facilitate stronger economic fundamentals and recovery from the COVID-19 impact.

The economic growth of Vietnam has been accelerating and the agricultural sector has been productive in ensuring food security for Vietnamese citizens. As per one of the estimates this sector contributed more than 14 per cent in national gross domestic product and has engaged more than 35 per cent of youth in the year 2020. This sector also earned valuable foreign exchange of more than U.S. dollar 48 billion. One of the interesting achievements of Vietnam has been increasing life expectancy, and its universal health coverage which covers more than 87 per cent of the population.

As per the plan of action which has been envisaged  for Vietnamese economy by its leadership it aspires to become a high income country by the year 2045. It is expected that with the sound economic fundamentals and more than 5.5 annual average per capita growth for the next 2 and a half decades it can reach that milestone. Vietnamese population is also young and is adapting itself for digital economy and building core fundamentals for its membership in different regional economic organisations such as RCEP and CPTPP.The bilateral free trade agreement with EU is also facilitating its growth in several sectors.

There have been significant structural improvements ushered through policy documents in terms of improving financial architecture, accepting global norms related to climate and environment, comprehensive security for population against poverty , and extensive investment in infrastructure development both in rural and urban areas.

In one of the articles written  in Bloomberg it has acknowledged that Vietnam is  now is one of the Asia’s  fastest growing economies which has grown to 8.02% last year and it even surpassed  government assessment of 6 to 6.5 per cent growth. The article also acknowledged the fact that manufacturing has been growing to near 10 per cent mark in comparison to last year and there is strong development in the services sector as well. Among the economies Vietnam’s  inward foreign direct investment has also been doing quite well and it has received nearly US  $27.72 billion last year .Asian Development Bank has forecasted that Vietnam is going to grow at the rate of 6.3% in the year 2023. Also the unemployment rate has reduced and with inflation clearly under 5 per cent , showcases that the long term decisions which we have taken with the initiation of Doi Moi(economic liberalisation process )  in 1986 has been bearing fruits.

In terms of sectoral assessment, the real estate as well as construction  sector ,the growth was about 7.78 per cent last year and the services sector growth was closer to 10 per cent. There have  been increase in exports last year as well and an increase of 10.6% was noticed. One of the core arguments which have been given with regard to Vietnam’s impressive growth has been related to trade liberalization, increased deregulation and improvement in the ease of doing business, investment in human resources and stable government were seen as critical attributes for this impressive growth in Vietnamese economy.

Major companies in footwear, electronics, and mobile production have invested in Vietnamese economy and few of the companies have shifted base from China to Vietnam. Improved  congenial economic environment has been appreciated by companies such as Adidas, Nike and Samsung to list few.

Owing to the development of new kind of digital technologies and better consumer awareness Vietnam is preparing itself for a major impetus in the E- commerce sector and therefore has been making extensive changes in digital based economy and more stress on science and technology development. Vietnam has acknowledged the fact that with the changes in sectoral composition of the economy, it is pertinent to develop necessary skill power and human resources which can seamlessly integrate Vietnam into global value chains and also help the services sector in exploring new markets.

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The Crippled Economy

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Lack of money is the root of all evils. Facts do not seize to exist because they’re ignored.

Lack of money is what Pakistan is experiencing and dealing with every now and then for the major part, since it came into existence either due to incompetence of our political leaders, their corruption, fighting wars of someone else or due to lack of long-term vision. Pakistan is currently in the middle of a turmoil trying to recover from devastating floods of 2022, facing the after effects of the withdrawal of USA from Afghanistan in the form of resurgence of terrorism, dealing with the political chaos created by the politicians who claim to be leaders of the state. Another yet most important, severe and devastating challenge that Pakistan is facing is its economic downfall. In one sense the lack of money is the root cause of all the problems mentioned above except the political chaos.

The economy of Pakistan, like a battle-hardened warrior has built resilience battling several challenges over the course of seventy years and is trained to survive but the recent political turmoil and the difficulty caused by nature (Floods), the burden of debts repayment, the threat of resurgence of terrorism and international indicators pointing towards an economic recession in 2023 has almost crushed the backbone of Pakistan’s economy.  

World bank has recently released its latest report forecasting Pakistan’s Gross domestic product (GDP) to grow at only 1.7% for the fiscal year (FY) 2023 that is less than the half of what it predicted to during last June (4%). It has also predicted a near to recession economic situation of the world economy characterized with high inflation, increasing interest rates and the circumstances caused by the Russian Invasion of Ukraine.

Pakistan must reportedly payback 73$ Billion in the next three years till the end of FY2025 and central bank of the country also known as State Bank of Pakistan currently has Foreign exchange reserves of about only 5.6$ billion. This debt repayment is the key challenge for Pakistan’s economic survival and other challenges such as ever-increasing inflation, high interest rate, the growing unemployment, the decrease in imports are all byproducts of the main challenge. The threat of a possible default is becoming evident and is looming over fiscal horizon.

Monsoon on Steroids, a phenomenon directly linked with climate change played havoc with Pakistan. These floods added a profound risk to the country’s economic outlook. The country lost infrastructure worth of billions of dollars and floods effected 33$ million people and 1700 people lost their lives. According to Ministry of Planning and development of Pakistan, Pakistan has faed the loses of more than an estimation of 10$ billion. The catastrophe of floods also played with agroeconomics as crops were destroyed causing destruction of agriculture sector which makes up to 24% of country’s GDP. A comprehensive recovery policy is needed and with the helped promised by international community at Geneva, government has passed one hurdle but to make the sustainable recovery abundance of resources, capacity and transparency is needed.

The policy uncertainty has been a major cause in creating a mistrust among investors and has almost ceased foreign direct investment in Pakistan. This policy uncertainty is due to lack of will of national leaders to take tough decisions. For Example, former prime minister of Pakistan rolled out of International Monetary Fund’s (IMF) program fearing his ousting and to gain public support he reduced prices of commodities such as Petrol & Gas and took country almost on the verge of default.

The policy uncertainty is caused by Political uncertainty which in turn lead towards economic uncertainty. Economic stability can only be achieved by political stability and there’s no other way around. Political stability can be achieved through free and fair elections and elimination of the role of establishment in political process of Pakistan. And if a government takes long-term policy goals into account while formulating a policy rather than short-term goals to gain public support and trying to keep hold on the reins of Government. The selfish politicians have to play selfless and put Pakistan’s benefit before their own benefit to get Pakistan out of this political and economic turmoil.

The only solution in sight for Pakistan is to carry on with the 6$ billion IMF program and to try for rescheduling of depts repayment as it owes more than 70$ billion to be paid by the end of 2025 that is currently not possible. Another step from international community can also help Pakistan that is if a country makes an investment of 10-20$ billion directly rather than in the form of loans as happened in CPEC. Moreover, help from rich friendly Muslim countries can also provide an array of hope for Pakistan.

But these steps won’t address the clear underlying malaise of the economy and the fact that something fundamentally will need to change, in terms of how much the economy produces versus how much it spends, to avoid default down the road. But none of Pakistan’s political parties seem to have the political will or ability to bring about such change. Priorities needs to be shifted from personal interest of political elite to national interest. They must be ready to sacrifice their political image and interest for the greater good and to save the country from default down the road.

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