Blog

One month ago, when we first  realized just how much fat Elon Musk's DOGE was slashing from the government money laundering apparatus, we made an observation: so much (deep state laundered) money was about to come out of the economy (one way or another), the US would enter a recession, first in Washington DC (something which others such as Michael Hartnett have since confirmed) and then across the US.

We were surprised at how much pushback we got, especially from supporters of Trump. But this wasn't meant to be a judgment call against the new administration which had only been in power for a few weeks. If anything, we had explained long ago that the only reason the US economy hadn't collapsed into a recession long ago is because of Biden's unprecedented debt issuance spree which we first described in the summer of 2003 (see "Here Is The $1 Trillion "Stealth Stimulus" Behind Bidenomics"), and which had sent US debt soaring by $1 trillion every 100 days.

But now that particular debt party appears to be ending.

Understandably, defusing this debt time-bomb is precisely what Elon Musk has undertaken, and the process of undoing all the catastrophic trends that culminated under the Biden administration would inevitably result in a recession (just as allowing the debt pile up to continue is the only thing that delayed the inevitable economic slowdown).

Still, our observation came a time when the "US exceptionalism" trade was still all the rage if only for a few more days, and thus few were willing to accept it. 

Then little by little sentiment turned, and just a few weeks later, Wall Street was full of reports such as this one from Mizuho's Dominik Konstam "discovering" what we had said weeks earlier, namely that the efforts of DOGE would spark a new recession, first in the government and then everywhere else.

This was quickly followed by formerly euphorically bullish Wall Street firms such as Goldman (full report here)…

… and Morgan Stanley (full report here), both slashing their GDP outlooks.

So slowly but surely, Wall Street admits that we were right. But what about the administration: would Trump be surprised to learn that Musk's austerity push plus the admin's tariff policies would lead to a recession? We wondered and then we start paying closer attention to what Trump and his closest lieutenants were saying.

First, there was Trump's Treasury Secretary Scott Bessent who (correctly) explained last week on Face the Nation how the media was misleading people that the economy was doing just great under Biden, and how the mood suddenly changed when Trump came in power. His point, of course, is that Trump has not been nowhere near long enough in power to slam the economy.

Some days later Bessent also explained why the economy had been doing so "great" during Biden's last years – he basically echoed what we said two years ago in "Here Is The $1 Trillion "Stealth Stimulus" Behind Bidenomics", in which we explained that the only reason the US economy hadn't collapsed is because the government was issuing $1 trillion in debt every 100 days, or as Bessent put it, "the market and the economy have become hooked, become addicted, to excessive government spending and there’s going to be a detox period.”

That also explains why, to avoid a technical recession, Trump's Commerce Secretary Howard Lutnick told Fox News the Trump admin was considering separating government spending from GDP reports, in response to questions – first posed here – about whether the spending cuts pushed by Elon Musk’s DOGE could possibly cause an economic downturn.

“You know that governments historically have messed with GDP,” Lutnick said on Fox News Channel’s Sunday Morning Futures. “They count government spending as part of GDP. So I’m going to separate those two and make it transparent.”

Lutnick's remarks echoed Musk’s arguments on X that government spending doesn’t create value for the economy: "A more accurate measure of GDP would exclude government spending,” Musk wrote on his social media platform. “Otherwise, you can scale GDP artificially high by spending money on things that don’t make people’s lives better."

Lutnick's take was a bit more nuanced, but leaned in the same direction: “if the government buys a tank, that’s GDP. But paying 1,000 people to think about buying a tank is not GDP. That is wasted inefficiency, wasted money. And cutting that, while it shows in GDP, we’re going to get rid of that.”

And then there was Trump himself who during his speech to Congress, issued the most explicit warning yet, saying to expect "a little disturbance" on tariffs, echoing what he said back in February when the president posted (in all caps) on his Truth Social account that "THIS WILL BE THE GOLDEN AGE OF AMERICA! WILL THERE BE SOME PAIN? YES, MAYBE (AND MAYBE NOT!)” adding “WE WILL MAKE AMERICA GREAT AGAIN, AND IT WILL ALL BE WORTH THE PRICE THAT MUST BE PAID.” 

But the clearest indication that Trump is now eager to push the US economy into a recession – one which he can correctly blame on Biden's drunken-sailor spending ways – came from the president himself when in another interview over the weekend with Maria Bartiromo, the president was oddly defensive, and saying “I hate to predict things like that,” when asked if he expected a recession this year. “There is a period of transition, because what we’re doing is very big. We’re bringing wealth back to America. That’s a big thing. And there are always periods of — it takes a little time. It takes a little time. But I think it should be great for us. I mean, I think it should be great.”

And if that wasn't clear enough, his Treasury Secretary Scott Bessent was about as explicit as possible predicting that the US is headed for a "detox period” and warning ”could we be seeing that this economy that we inherited starting to roll a bit? Sure." 

Commenting on these pre-recessionary soundbites, Goldman's head of Delta One trading Rich Privorotsky said that "while commendable to attempt to address the long term imbalances of debt sustainability and spending (which accelerated during covid) it’s hard to see how these won’t have short term economic implications" effectively echoing what we said a month ago.

Rabobank was even more explicit when it said that "Trump hasn’t mentioned stocks so far, and the word from D.C. is their focus is on Main Street, not Wall Street, with willingness to tolerate “disturbance” for at least the next six to eight months, while blaming it on Biden, in order to get a framework in place that allows for growth based on what Trump thinks GDP is for…"

But it was perhaps Nomura's Charlie McElligott who laid it out best saying the US is now underoing a clear "Phase Shift", one which will be very painful (full note available to pro subs in the usual place):

Putting it all together, the emerging picture is clear: what we said a month ago was spot on, and while perhaps not actively pushing the US into a recession, Trump and Bessent certainly would welcome it (especially with the midterm elections fast approaching), knowing they still have the benefit of a few months in which to blame the Biden regime and its staggering debt incurrence, which as we first explained had kept the economy afloat for so long…

…. and once the economy and markets have had their reset, most likely with the benefit of another huge fiscal stimulus from Congress which will have no choice but to step in once there is a recession, the economy and markets will levitate straight into the Nov 2026 midterms, which will cements the Republican grip on power even more, even if it means some (perhaps acute) pain in the immediate future.