image credit: Getty Images
Following Donald J. Trump’s election victory last week, the President-elect and his transition team have announced multiple cabinet-level and other appointments, outline both domestic and foreign policies, and set the stage for a return to the White House. While some of the country (and the world) appear shocked by the outcome, financial markets, which serve both as a voting and as a weighing machine, have responded highly favorably in anticipation. The markets’ positive reaction indicates that the long-term impact of a Trump White House is expected to be very beneficial for the economy, for entrepreneurship, and for capital investment. But it may not be without pain along the way.
First, the bad news
The economy President-elect Trump is inheriting is in much worse shape that we have been led to believe by the Biden Administration and the mainstream media. Bidenomics took a terrible toll on our industries (particularly energy) and on the financial condition of the American household (from inflation). The U.S. government acknowledges that the overall price level (as measured by the Consumer Price Index, or CPI) is over twenty percent higher than it was three years ago. That is bad enough. Yet there is abundant evidence that the official CPI statistics substantially underrepresent actual inflation. The inflation that Americans have experienced in their daily lives has been much higher that the manipulated CPI data indicate. Higher actual inflation means that Real GDP—gross domestic product less inflation—is lower than reported. If actual inflation is merely two or three percent higher than reported CPI, then actual Real GDP has been negative for some time. This implies we have already been in a recession in 2024.
We have ample evidence that government employment data has also been fudged. We have seen multiple downward revisions to the jobs data, most notably with the 818 thousand jobs (that never actually existed) removed from later revisions to the March 2024 estimate. This was the second largest downward revision in history, which denigrated the credibility of the Bureau of Labor Statistics (which also puts out the CPI data). There will be more downward statistical revisions in coming months as accountability and transparency is brought to government. All this implies that the Trump administration will have its work cut out in digging the Main Street economy out of a deep hole.
The effects of Federal government belt tightening will be recessionary, at least in the short-term (think 2025). The U.S. Federal government spends some $6.7 trillion annually, but only brings in $4.5 trillion of revenue. The result is a greater than $2 trillion federal deficit, which can only be funded by government-issued debt, an inherently inflationary process. President-elect Trump has committed to drastically cut government spending, eliminate the deficit, and reduce the debt. To this end, Trump has named businessmen and entrepreneurs Elon Musk and Vivek Ramaswamy to co-head the newly-formed Department of Government Efficiency (DOGE). According to a press release from the Trump-Vance transition team, they will “slash excess regulations, cut wasteful expenditures, and restructure Federal Agencies.” This is a necessary if painful treatment for a very ill patient, and the medicine will be bitter. Musk has confirmed that this project, described as potentially the “Manhattan Project of our time,” will inevitably cause “some temporary hardship” as “everyone is going to have to take a haircut,” but that it will lead to “long-term prosperity.”
Everyone taking a “haircut” implies that all government must reduce spending meaningfully. Cutting $2 trillion from the budget implies a hefty 30 percent reduction in total spending. The challenge is that very little of government spending is discretionary. The U.S. has over $1 trillion of debt service (i.e., interest) costs alone. Social Security is nearly $1.5 trillion, defense nearly $1 trillion. The question is how these costs will be cut at a time when debt is growing rapidly, Social Security outlays are increasing from cost of living adjustments and an aging population, and the military branches are uniformly clamoring for increases in spending to counter challenges from China, Iran, Russia, and elsewhere.
A substantial part of cost reduction is focused on drastically reducing the size, complexity, and function of the Federal government. For life-long bureaucrats, it will not be easy to reprogram, retrain, and find jobs that are actually economically productive rather than a drain on the economy.
Now for the good news
President-elect Trump has already announced a wide platform of economic-related policies intended to strengthen U.S. competitiveness. The overall impact of these will be highly beneficial and substantially enhance economic productivity.
By unlocking American domestic energy productive capacity, which has been in regulatory jail for four years, U.S. firms will create jobs, invest new capital, deploy new technology, and make domestically-sourced energy more abundance and less expensive. By ending the regulatory war on crypto and digital assets, Trump will stimulate an environment that encourages creativity and invention in blockchain, artificial intelligence, and related technologies. If DOGE is successful in meaningfully reducing regulatory red tape and bureaucracy generally, innovation and entrepreneurship will be unleashed, productivity will flourish. The U.S. could see a new economic miracle akin to the post-war 1950s.
Fixing U.S. trade policy by insisting on fair trade, and through onshoring, friendshoring, and shifting part of the income tax burden to tariffs, will create high-paying manufacturing jobs. Supply chains will shift to better benefit U.S. companies and the national interest. Closing the southern border and addressing the challenges created by a four-year-long mass wave of millions of illegal immigrants will ultimately benefit American citizens and communities which are today overburdened and overwhelmed.
With the good and the bad, some ugly
On balance, these policies and actions will be inflationary. Despite claims to the contrary, inflation is not going away any time soon. While a significant government restructuring would have a deflationary effect, the overall rise in prices has been driven by massive money supply expansion which resulted from trillions of dollars of debt issuance to support government deficits during the global financial crisis (2008-2009) and the Covid-19 pandemic (2020-2021). There is little doubt that Trump’s policies will stimulate substantial economic growth, and this too will put upward pressure on prices.
Fears of persistent inflation may partially explain why we have seen Bitcoin (BTC) skyrocket in recent weeks, up by one-third to over $90,000 since Election Day. Gold, a traditional inflation hedge, is also up substantially, gaining nearly 40 percent over the past year.
An additional “ugly” risk on the economic horizon is war. Despite his best intentions to end “forever wars” and curtail the military-industrial complex that benefits from them, it appears likely that Trump will be a wartime president. While the Russia – Ukraine conflict may be brought to a negotiated close, war in the Middle East (i.e., between Iran and Israel and their neighbors) appears to be escalating. China’s belligerence, and direct threat to Taiwan, is unabated. While in wartime jobs abound, and wages benefit from low labor supply, war is always inflationary, and invested capital is forever destroyed. Governments and nations are left weaker and more in debt.
The incoming administration faces an enormous challenge, and is moving at breakneck speed to confront it. There is likely to be some upfront pain, but long-term, the U.S. economy has the greatest opportunity in a lifetime. Eventually, President Trump may be forced to choose between two ills: austerity-induced recession and high unemployment, on one hand, or persistently high inflation on the other. Always and everywhere, governments ultimately choose inflation as the lesser of two evils.