I think the primary reason the market was up big on Friday was Senate Democrats caved and agreed to the Republican spending bill. This avoided a pending government shutdown. Even though Democrats wanted more spending, the stated reason for agreeing to the bill was that if Democrats didn’t, they feared that during the ensuing government shutdown, President Trump and Elon Musk would have latitude to determine what services and employees were essential. Doing so would enable DOGE to cut spending faster and with less Democratic oversight. I believe all of the above is true and that most of what’s being reported is misleading.
First, let’s examine spending levels. DKI has been on record for the past year saying that we can’t vote our way out of a coming financial crisis due to excessive spending and debt. Both parties in Congress overspend and have decided to fund the government with inflation while claiming they are the champions of the poor despite the terrible effects of inflation on the poor. President Trump was a big spender in his first term and whether the alternative was Biden or Harris, their spending plans would have been even higher.
Recently, President Trump has talked about the importance of reducing government spending and has focused his remarks on wasteful spending. DKI is strongly in support of both of those goals. This used to be a stated priority of the Democratic party (see Al Gore), but they’re fighting it this time. Unfortunately, the new spending plan trims around the edges and reduces planned spending by about $7 billion. The budget is almost $7 trillion, or $7,000 billion. This “horrible gutting” of government expenditures is the equivalent of going to McDonalds, ordering the super-size meal, having your doctor tell you that you need to lose weight to survive, and responding by eliminating one french fry from your meal. Unfortunately, we were correct: no one in Washington DC is going to fix the problem, and at this point, it may be too late to do so.
Second, there is always hysteria and stock market uncertainty surrounding any potential government shutdown. I’ve lived through many of these and the media headlines are always worse than the reality. These looming shutdowns are almost always resolved with a few hours to go before the deadline. In the instances where the government does “shut down”, we just get a smaller number of people working and they get back pay later. Some are complaining about the zero-based budgeting plans of DOGE, but without that, the government just grows indefinitely until the dollar is worthless, waste is crippling, and we need a government license to cross the street.
There is also a lot of concern being expressed about the coming recession which will be caused by DOGE. Technically, that’s true, but again, this is misleading. The way the US government accounts for GDP means that waste, theft, fraud, and money laundering are treated like production. If we reduce the theft and fraud, it’s true that GDP would go down, but does anyone really believe that would harm the economy? Do we really need people stealing from us to have “growing” GDP? When I write that we have a Potemkin economy, I mean that wasteful government spending is giving the illusion that we have economic growth when the productive private sector is shrinking.
Either way, we have a real recession right now and any cut to government spending will make that clear. The resulting reduction in stimulus spending and demand is likely to cause inflation to fall. That will be temporary. The Fed will respond with lower rates and another round of QE (quantitative easing). That path leads to more inflation.
Finally, the new spending bill indicates that we’re going to keep running multi-trillion-dollar deficits for at least the first year of President Trump’s term. (Despite literal screaming by Democrats in Congress.) If he wants to cut spending, he’d have to risk doing so in an election year where the incumbent usually loses seats in Congress. Losing a few seats in either the House or Senate would be enough to ensure no significant spending cuts take place during his entire second term.
Could DOGE end up bailing out the President? Possibly, and I hope so. Without that, it’s clear that no one is serious about balancing the budget. The end result will be long-term inflation, something the DKI portfolio is designed to turn into profits.
IR@DeepKnowledgeInvesting.com if you have any questions.
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