Well what an election it was this past week. Now it is time to prepare for what looks to be a radical new approach to the role of government. I am a libertarian at heart so I am cautiously optimistic, however, we have a President that disguises himself as looking out for the little guy when really he is like any other wealthy elite looking out for himself and other elites. No doubt, every policy move he makes will be to somehow enrich himself and other wealthy individuals/corporations some more. He'll keep giving lip service to trickle down economics, but in reality the money never leaves the hands of the wealthy. It stays there accumulating more and more money.
One thing I will be watching closely is how he seems to want to gut government bureaucracy and oversight. If he starts making massive cuts to departments like the Department of Health, Education, Defense (through stopping the wars we are fighting), the SEC, even lowering interest rates, eventually the cuts will impact the country's GDP. According to this US Treasury website that tracks government spending (https://fiscaldata.treasury.gov/americas-finance-guide/federal-spending/), 2024 US federal government spending comprises 23% of GDP. That is quite significant. Even a 10% reduction in government spending could lead to a 2.3% reduction in GDP. That is the exact definition of a recession unless we see increases in the individual or corporate sectors to make up the difference.
Even take interest on our national debt as an example. With the Fed's recent interest rate increases and higher national deficits under both Trump and Biden, the net interest is now 13% of government spending. That 13% represents 3% of GDP (13% of 23%). If Trump were to force the Fed to lower interest rates, he may think he will spur economic activity, but it may not be enough to offset that kind of reduction in GDP. Higher interest rates are one of the secret, unspoken reasons that the US economy has been so resilient over the last few years, and it may be going away under Trump's watch. Another is the Biden Inflation Reduction Act. This massive spending bill caused such a huge increase in the deficit that it certainly contributed to GDP growth but, ironically, is also likely one of the culprits of inflation and growing wealth inequality.
One of my favorite investors to follow, John Hussman, has proven using real data the accounting identity that a surplus in one sector of the economy is caused by deficits in one or more other sectors (see https://www.hussmanfunds.com/comment/mc240204/). He shows how over the last several years, the ballooning corporate profits are a direct result of government deficits and depressed savings in the household sector. So if Trump goes on a government reduction binge, he ironically may be doing the exact opposite of what he is trying to achieve. He may think it will lead to corporate prosperity but in actuality, he may be triggering a recession leading to lower corporate profits. What may make business sense in terms of reducing government waste, bureaucracy, and inefficiencies actually leads to less government spending that the private sector (corporations and individuals) likely cannot make up in the short term. We shall see how this plays out.
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