Times Are A-Changin'

The Credit Strategist - December 2024

Investors are adjusting to the reality of a second Donald Trump presidency. The breakdown of norms that occurred during the Trump era – which I would argue continued without interruption during the Biden presidency – was the erasure of national political and financial borders described above. It is going to be interesting to see whether Mr. Trump’s desire to reduce financial regulation and support cryptocurrencies works alongside his even stronger desire to lock down our borders. The former favors the wealthy while the latter disfavors the poor with the effect (unintended or not) of widening wealth inequality and benefitting the have’s over the have-not’s.

While Mr. Trump’s victory not particularly surprising – the Democrats were behind the eight-ball with respect to their candidate(s) and their policies from the inception of the campaign – the Republican capture of all three branches of government and Mr. Trump’s popular vote were unanticipated. The margins of victory turned out to be relatively tight but a clear message was sent that voters were dissatisfied with the state of the country and want changes in how the government manages their affairs.

In terms of enthusiasm for change, a great deal of attention surrounds efforts led by new Mar Lago resident Elon Musk and Vivek Ramaswamy to reduce waste and inefficiency in the federal government through a new Department of Government Efficiency (DOGE). These two gentlemen speak about cutting $2 trillion from government spending which is an extremely ambitious goal yet unfortunately not nearly ambitious enough. They would have to cut $2 trillion of spending annually to balance the budget and that would still leave a $35+ trillion deficit and $1+ trillion of interest expense to service that debt every year (hopefully that cost would drop with a balanced budget). But of course we know nothing of the kind is going to be achieved (or is even desirable in a fiat currency system – more on this below). Instead, we can realistically hope that DOGE will eliminate a significant amount of wasteful and unnecessary spending and regulations that will then lower the exponential growth of debt and inefficiency plaguing the government. As argued below, even that task will require effecting structural changes that challenge deeply embedded special interests in Congress and the business community. If these two men are serious about their mission, they will launch a political battle for the ages in which we should all support them because they are truly doing God’s work.

DOGE expects to focus on five main areas. First, removing regulations that Congress never expressly authorized based on recent Supreme Court decisions overturning the Chevron doctrine and other administrative agency actions. Second, cutting a significant number of federal employees by bypassing civil service protections (more detail on this below). Third, stopping federal spending that wasn’t authorized by Congress, which it estimates exceeds $500 billion annually. Fourth, improving cost efficiency in government procurement by conducting large-scale audits of old contracts. And fifth, eliminating waste at the Department of Defense which just failed its seventh consecutive audit. DOGE plans to make these changes using presidential powers granted under existing legislation and executive action rather than new Congressional legislation with a goal of completing its work by July 4, 2026 before that year’s mid-term elections heat up. I find nothing objectionable in this plan but would add an explicit goal of auditing Medicare, Medicaid and Social Security that despite allegedly being on autopilot still contain significant amounts of wasteful and fraudulent spending that can be eliminated.

I frankly find it incredible that any American of good faith of either political party would object to this project. Expectations are extremely high for DOGE but the job it set for itself is monumentally difficult. Most voters don’t realize they are voting against their own interests by returning to office year-after-year incumbents who are responsible for the current spending crisis. Voters should be retiring the generation of Congressional leaders who presided over the growth in the deficit over the last twenty years. The consequences of that spending were and will continue to be highly inflationary. The double-digit consumer inflation that exploded after the pandemic finally exposed this and made it a priority for politicians. Despite a drop in reported inflation from its post-pandemic highs, it remains higher than reported by the government (which is why the Fed lowering rates now is a mistake) and reducing spending is an important way to lower it.

In order to truly address the government spending virus, however, DOGE needs to go farther than just cutting spending and regulations: DOGE needs to permanently alter the structure of government. And that is probably something it won’t be able to accomplish. Still, let’s hope it can kick off the effort to do so. There are at least three components to this challenge.