Trumponomics: the effects of severely cutting Government spending
Billionaire Elon Musk predicts economic “hardship” and a market downturn, and warns Americans and the world of looming austerity under this Donald Trump presidency. Musk’s warning was one of many signs that Trump’s proposed policies could trigger significant economic distress before delivering what he calls “long-term prosperity.”
With Donald Trump securing a second term promising mass-deportations, to decimate and dismantle government departments, and to “drain the swamp” by sacking bureaucrats, Elon Musk is poised to play an influential role in reshaping the U.S. government. Musk, the world’s wealthiest man with a net worth of $269.3 billion, bankrolled Trump election campaign with a massive $130 million in contributions. South Africa-born Musk can’t become President, so he bought one.
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“Department of Government Efficiency” D.O.G.E.
Known for his bold ambitions, Musk has endorsed Trump’s economic plans and looks set to lead an advisory effort to slash $2 trillion from the $6.75 trillion federal budget.
Comedians have nick-named Musk’s proposed role as the “Department of Government Efficiency” (D.O.G.E.), tipping their hat to Musk’s love of cryptocurrency. Dogecoin itself was created as joke, making fun of the wild speculation in cryptocurrencies at the time.
Eccentric Musk is known for making jokes about serious issues, but given the seriousness of cutting the US Government by a third, and wiping billions of dollars from the stock market, it seems wise not to dismiss his warnings of crashing the economy as a joke.
On the “Joe Rogan Experience” podcast, Musk outlined his vision for minimizing federal influence, stating he wants to “curtail [federal] agencies to be much smaller” and focus only on tasks “authorized by Congress.” His goal, he claims, is to “clear the decks” of unnecessary regulations and departments.
Musk maintained that federal spending cuts are feasible, attributing inefficiencies to government waste. He called for a simpler tax code and advocated “living within our means” to achieve long-term gains.
Musk’s words are a stark warning of the economic risks ahead, with potential turmoil in the pursuit of a reshaped economy under Trump’s leadership. Trump’s presidency is set to be chaotic which doesn’t sit well with many long term investors.
“Markets will tumble” … Elon Musk: “Sounds about right”
Musk took to his social media platform, X (formerly Twitter), a week before the election to suggest that Trump’s plans—including drastic government cuts and mass deportations—would likely shake global markets.
Musk responded with “sounds about right” to a post foreseeing economic “overreaction” under Trump, leading to a market crash. The post cited potential sweeping layoffs within federal agencies, Musk’s hypothetical guidance on slashing government budgets, and mass deportations as key contributors to an impending financial storm.
X (formerly Twitter)
During a virtual town hall just before the election, Musk voiced a similar stance, saying that “temporary hardship” would be necessary for a “healthier economy” in the years ahead.
Effects of Cutting the Government by a Third
Experts paint a bleak picture of the potential outcomes of cutting government spending by one-third would significantly affect the economy. Economic analyses warn that Trump’s plans could accelerate Social Security’s insolvency, heighten unemployment, and exacerbate inflation.
Entire departments, such as the Department of Education with 4,400 employees, are slated for closure. Trump’s transition team America First stated policy says “… reforms included modernizing the National Environmental Policy Act (NEPA), the Endangered Species Act (ESA), and Section 401 of the Clean Water Act, and clarifying the definition of “Waters of the United States” (WOTUS).”
Far from benefiting everyday Americans, the proposals could lead to decreased GDP, increased national debt, and higher taxes for most households. Lower-income families, in particular, might face intensified costs as tariffs push up prices for essentials like food and clothing.
Government spending is a major component of a country’s gross domestic product (GDP) and plays a crucial role in driving economic activity.
Here’s how such a substantial reduction could impact the economy:
Decrease in Aggregate Demand: Government spending contributes to aggregate demand. A one-third cut would reduce overall demand in the economy, potentially leading to slower economic growth or potentially a recession if not offset by increased private sector spending or exports.
Increase in Unemployment: Trump’s promise of draining the swamp with sackings, mass deportations and reduced government budgets may lead to layoffs of public sector employees and contractors. This increase in unemployment would further reduce consumer spending, amplifying the economic downturn.
Impact on Public Services: Essential services like education, healthcare, infrastructure maintenance, and social welfare programs are facing significant cuts. This reduction can have long-term negative effects on human capital development and the economy’s productive capacity.
Business Confidence and Investment: The sudden decrease in government spending might lead to uncertainty in the private sector. Businesses may delay or reduce investment due to decreased demand for their products or services, further slowing economic growth.
Financial Markets Volatility: Investors might react negatively to such drastic fiscal policy changes, leading to increased volatility in stock and bond markets. Concerns about economic stability could result in higher borrowing costs for both the government and private sector.
Monetary Policy Challenges: The central bank may face difficulties in responding to the rapid fiscal contraction. While it might lower interest rates or implement quantitative easing to stimulate the economy, these measures may not fully offset the negative impacts.
Long-term Fiscal Health vs. Short-term Pain: While reducing government spending could lower budget deficits and slow the accumulation of national debt in the long run, the immediate contractionary effects might outweigh potential long-term benefits. The timing and manner of the cuts are crucial to mitigating negative outcomes.
Inequality and Social Impact: Cuts to social programs often disproportionately affect low-income and vulnerable populations, potentially increasing income inequality and social unrest, which can have further adverse effects on economic stability.
While the goal of cutting government spending is often to reduce deficits and promote fiscal responsibility, doing so by as much as one-third in a short period can lead to significant negative short-term economic consequences. The overall impact would depend on various factors, including which areas of spending are cut, how quickly the cuts are implemented, and whether other economic policies are introduced to mitigate adverse effects.
For Musk, it’s personal
Musk’s skepticism toward government oversight is longstanding. He has clashed frequently with federal agencies, especially under the Biden administration, facing several high-profile investigations that may face a more lenient regulatory environment under Trump.
Musk’s influence under Trump may allow him to temper the regulatory landscape where he’s faced numerous legal challenges. His complex relationship with regulators includes a well-documented feud with the FTC, which fined X (formerly Twitter) $150 million in 2022 over data privacy issues, and the SEC, which tangled with Musk over his infamous 2018 tweet claiming he had “secured” funding to take Tesla private.
The SEC continues to probe Musk’s social media posts concerning Tesla, particularly in light of Tesla’s self-driving software claims and potential misuse of funds.
Beyond Musk’s media platform, X (formerly Twitter) and electric vehicle empire, Tesla, his legal hurdles extend to his American political action committee, America PAC, which has faced a Justice Department warning regarding $1 million rewards reportedly aimed at swing-state voters.
Other outstanding cases include Musk’s appeal to reinstate his $50 billion Tesla stock bonus after a Delaware court decision and an ongoing investigation into Tesla’s autonomous driving technology by the National Highway Traffic Safety Administration.
Notable government probes into Musk-owned companies include:
Tesla Self-Driving: The Justice Department and Securities and Exchange Commission (SEC) began investigating Tesla’s claims about self-driving technology in 2021, raising concerns that the company may have misled consumers and investors. Regulatory actions or even criminal charges could emerge if the probes conclude Tesla exaggerated its vehicle capabilities.
Glass House: The SEC and Justice Department also looked into allegations that Tesla improperly allocated funds to build a luxury glass house in Texas, possibly for Musk’s use. This investigation centers on potential misuse of company assets, which could result in serious legal penalties.
Twitter Stock Purchases: Musk’s acquisition of Twitter stock in 2022, ahead of his $44 billion takeover, has drawn scrutiny from the SEC. Statements he made during the purchase raised concerns about potential securities law violations, and this probe may lead to hefty fines.
X Privacy: The Federal Trade Commission (FTC) has maintained close watch on X (formerly Twitter) regarding compliance with a 2022 data privacy settlement. Further violations could bring significant fines or criminal consequences.
Trump’s economic policies could further boost Tesla by disadvantaging its competitors, contributing to Tesla stock’s recent rally. Musk’s net worth now approaches $280 billion, widening his lead over Amazon founder Jeff Bezos by $60 billion. With Trump’s support and a possible regulatory windfall, Musk stands to expand both his influence in government and his fortune.
Trump Trades and the Market Bounce
US stock markets responded to Trump’s election with a surge. Some of the biggest stock gains were private prison operators, GEO Group (GEO) surged 42% and CoreCivic (CXW), was up 29% confirming that we’re in for some chaotic times ahead.
Younger investors are less cautious to risk and might go all in on the Trump Trades – but older investors are more inclined to protect their capital in more stable investments, even if they offer a lower return. For investors, Trump’s victory and the resulting “Trump trades” bring a mix of potential opportunities and risks. We discuss that further in part two of this article.
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