December 30, 2024
Uncertainty stems from the simple fact that change is hard.
Everything President Trump wants to do in the next four years will face powerful opposing forces – and not always Democrats. That will include fixing our debt problem, which in my view is the source of most other issues.
It’s not just the debt itself, it’s more the attitudes and structures that let it grow.
So, President-elect Trump has an inflation problem. Yes, he inherited it, but after a year or so, it’s his. And in the world we have today, the federal deficit, not the Federal Reserve, is the primary cause of inflation.
Deficits are inflationary. Generally, if the deficit is below the increase in nominal gross domestic product, our leaders have acted as if it doesn’t matter in terms of inflation in the short term. Up until 2020 (i.e., COVID-19) and then massive budget deficits, that has been the rule.
In fact, since Paul Volcker led the Fed, the general trend was deflationary because Fed officials were afraid of deflation. They were trying to create inflation.
Throughout all the quantitative easing cycles, deficits rose, but they weren’t necessarily deadly. The debt kept increasing, and now it’s President-elect Trump’s problem.
His instinct of cutting government spending is correct. But if he is really going to lean into inflation, he’ll need deep, meaningful cuts that put us on a path toward a more-than-balanced budget.
Also, if the Trump administration starts streamlining the government, it will need to get creative. Non-defense discretionary spending, basically the entire executive branch except the Pentagon, will be $928 billion this year.
The elephant in the room is that if deep cuts happen, which they should, we’ll probably see a recession and a stock market correction. But hopefully the Trump administration has the guts to do it because it must be done.