Depending on your point of view, the first several weeks of the second Trump administration have been either invigorating or infuriating. They certainly haven’t been boring. However, will all of the upset apple carts ultimately be good for the country? Will slashing the Federal bureaucracy and eliminating what the administration views as wasteful or inefficient produce beneficial results?
What is the old expression? Show me the money? Yeah, I think that fits.
All other things being equal, people tend to like having more in their wallet than less. I have yet to meet the person who has told me they are unhappy about having too large of a bank account. No one has ever complained to me about their job paying too much. Nor have they moaned about have too many goods, services and tasty things to eat.
Essentially, while a lot of people will never like Donald Trump and his methods, they won’t bemoan being in a better financial position if what he is doing actually works.
But will it?
In the short-term, I am sorry to say, it won’t. There is no way you can eliminate potentially hundreds of thousands of jobs and not have a negative result. Further, all, or most, of that so-called inefficient spending is going to someone, somewhere. Someone is spending it, and that generates economic activity.
So, the more you cut, the less money there will be sloshing about in the economy. Ordinarily, more money in the system is better than the alternative.
Now, longer-term? Yes, getting Washington’s deficits under control should be good for the U.S. economy. If for no other reason than the Federal government seems to use leverage very poorly.
You don’t have to take my word for it. The data is incontrovertible.
- At the end of 2014, according to the Bureau of Economic Analysis (BEA), U.S. Gross Domestic Product (GDP) was $17.912 trillion.
- At the end of 2024, the BEA estimated it was $29.701 trillion.
Obviously, that is an increase of $11.789 trillion, which isn’t too shabby.
Unfortunately, over that same time, the Federal government’s public debt mushroomed from $18.141 trillion to, get this, $36.219 trillion. That is almost double, and equal to roughly $18.078 trillion.
Um… Where did the $6.289 trillion— the difference between the explosion in debt and economic output— disappear to? Great question.
Clearly, Washington can’t keep spending more money than the economy generates in activity. Governments are like individuals in that regard. At some point, investors will stop extending credit at reasonable terms.
That is if they extend credit at all.
Imagine you make, say, $100K/year. Now imagine, for whatever reason, be it good or bad, you borrow $120K at 5% in Year 1. While that might not be ideal, you generate more than enough income to pay the $6,000 in annual interest. No worries. That one painful year shouldn’t wreck your entire life.
But what if you make and borrow the same amount every year for a decade? At the end of which you have accumulated $1.2 million in debt and are paying $60,000/year in interest. What happens to your lifestyle when an increased amount of your money is going to pay the debt service? Further, do you honestly think the lender is going to continue to fork money over to you, and your upside-down balance sheet, at 5% forever?
If so, what is the name of your bank so I can short the stock?
While that example might sound overly simplistic, the previous administration’s last budget projected the U.S. would amass an additional $19 trillion in debt, roughly, over the next decade. Of course, that prediction makes all sort of assumptions which likely won’t come to pass as planned. However, given the experience of the last 10 years, there is no reason why Washington wouldn’t be up to the challenge of running up a shockingly high bill.
Further, if past is prologue, our GDP probably won’t grow as fast as our collective debt. This means the economy will have to work that much harder to generate the tax revenue for the Treasury to meet its debt payments.
Obviously, that leaves less money for just about everything else.
Now, you could argue Washington would be borrowing from the public and any interest payments would eventually find their way back into the economy. In a perfect world, maybe this would be the case.
- However, at the end of 2024, “major foreign holders” owned an estimated $8.513 trillion of U.S. Treasury debt.
- Further, the Federal Reserve held an additional $6.886 trillion in government-backed securities.
- Then, you have to account for state & local governments which own a slug of the stuff.
- So do insurance companies and banks.
Actually, individual holders own a smaller percentage of the $36 trillion pile of debt than you might imagine. As such, all of those debt payments would NOT be going into the wallets of U.S. consumers. At least not directly.
Further, what happens to the rest of the Federal budget as the debt service continues to grow at an alarming rate? Intuitively, that would mean less money for everything else. Less for defense spending, Social Security, Medicare, Medicaid, our nation’s highways and, well, you name it.
As a result, as nice as it might be to have all of that largesse sloshing about the economy in the present, at the current and projected rate of spending, the Treasury’s financing costs will slowly squeeze out the remainder of the budget. Obviously, this will inhibit the Federal government’s ability to deliver the same level of services in the future.
This isn’t a question of if. It is a question of when.
It is just math.
$55 trillion at 4% is $2.20 trillion in annual interest payments. At 5%, it is $2.75 trillion. Shoot, what would happen if interest rates shot up to 6%? How does $3.30 trillion strike you? Just to service the public debt?
This takes me back to the original question: “Will slashing the Federal bureaucracy and eliminating what the administration views as wasteful or inefficient produce beneficial results?”
Again, in the short-term, the answer is a pretty and emphatic no. A lot of people depend or rely on governmental inefficiency. Eliminating waste in, and from, Washington will result in the loss of a large number of jobs, as well as the jobs that depend on those jobs. Of course, there will be jobs that depend on THOSE jobs.
Trust me, a lot of bar and restaurant owners in “The District,” Arlington, Alexandria, Frederick, Gaithersburg, Rockville, Bethesda, Silver Spring and Reston are extremely worried right now. What happens to their business when their clientele loses their job or is scared of losing them?
And that is just the tip of the iceberg.
Longer-term, however, I can’t think of any downside to getting our nation’s finances back in some semblance of order. This would allow the Federal government to continue to provide the necessary services it does without significant disruption. Further, with less debt in the system, the Treasury should be able to borrow at more advantageous rates.
Obviously, this will have a beneficial impact on the debt service.
Finally, at least for today, Treasury rates indirectly set the cost of capital in the entire U.S. economy. As a result, the less money Washington borrows, the less expensive money will be for the average American consumer and business. Intuitively, that would be good for household balance sheets, economic activity, corporate profitability and wealth creation.
As a result, getting control of inefficient Federal spending in the present will produce beneficial results in the future. I don’t see how it couldn’t.
In conclusion, a lot of people dislike the President, and strongly disapprove of his tactics and just about everything he does. I get it. However, getting the deficit under control should be a matter of national, bipartisan importance.
We can either have some pain today or have a lot of it in the future.
Have a great weekend.
Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows on this and every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.
John Norris
Chief Economist
Please note, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as well as those of our Investment Committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.