So, Elon Musk wants to cut the U.S. federal budget by $2 trillion or approximately 29.85%. If we transferred that percentage cut to annualized 2024 3Q federal government consumption expenditures and gross investment of $1893.4 billion, accounting for 6.5% of gross domestic product, government consumption expenditures and gross investment would fall to approximately $1,328.2 billion. Total annualized gross domestic product, holding all other components equal, would fall from $29,354.3 billion to $$28,789.1 billion.
My first question is how would spending cuts affect the currency markets? Would a reduction in gross domestic product without a reduction in debt signal a strong economy, one strong enough to maintain demand for the dollar?
Or would a weakened dollar provide Mr. Trump with a monetary platform for increasing exports? A weaker dollar, as perceived by an initial decline in GDP due to reduced government expenditures, might attract foreign buyers to American goods and services.
The second question is, how would Mr. Trump get his reductions pass Congress? Trump and Company say that they wish to cut government waste of resources, reduce spending, and eliminate a number of agencies with a report on progress of its cost-cutting initiatives by 4 July 2026.
Getting Congress, even one controlled by the Republicans, to eliminate agencies or popular programs may lead to an internal political war the GOP can ill afford. Their control of the House is razor thin and a year and a half from now they will be ramping up for the 2026 midterm elections. The Republicans cannot put the optics of a divided party into the minds of voters who only tangentially support them.
In addition, a number of analysts expect inflation to ramp up through 2025, even if the Federal Open Market Committee is expected to cut the federal funds rate at least three times.
On the stage that DOGE is setting, the Congressional Republicans and presumptive president-elect will have to conjure up some theatrics. Mr. Trump is a lame duck and any tactics employed by the GOP will have to give the Congressional Republicans leverage for 2026 and 2028.
I do not see Republicans passing a budget bill that cuts $2 trillion in a year or two. Even if cuts take place over, say, a four-year period, the GOP could likely recommend the President use provisions with 2 USC Chapter 17B, the Impoundment Control Act, to provide him political cover with his base.
Upon proper notice to Congress, the President can either rescind or defer budget authority for making expenditures. This includes:
“[W]ithholding or delaying the obligation or expenditure of budget authority (whether by establishing reserves or otherwise) provided for projects or activities; or any other type of Executive action or inaction which effectively precludes the obligation or expenditure of budget authority, including authority to obligate by contract in advance of appropriations as specifically authorized by law.” See Impoundment Control Act.
I expect the Democrats, who are already milking DOGE as an attempt to reduce or eliminate Medicare, Medicaid, food stamps, and social security, to create as much theater around this issue as possible. The theatrics won’t be enough to move currency markets, in my estimation.
Alton Drew
17 December 2024
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