The fairy tale of the boy who cried wolf dates back more than 2,500 years. It is a story taught to children about the values of honesty and trust. Also, the concept of, “if you say something you better mean it.”
The U.S. Government has been existing in the first portion of this fable for many decades (dating back to at least post-World War II). It’s the idea that the country is on an unsustainable fiscal path from excessive debt use. Both political parties over the years have argued for fiscal restraint and that, if elected, they would do something to address the problem (the wolf). However, the proverbial can continues to get kicked down the road. Depending on how you view the US Government’s debt, as a percentage of GDP or in absolute terms, there has been an accelerated use over the last fifteen years (the absolute amount has doubled). Total debt was around $3 trillion in the aftermath of World War II (112% of GDP) and stands at over $35 trillion today. Surprisingly, the debt has grown below the pace of inflation.
NOTE: The author is not supporting any political position with the following comments. This is simply an analytical look at the intent of DOGE, not the methods used, the specific cuts recommended, or any particular agenda. It is hoped that the reader may gain perspective on debt, government spending, and the impact on our economy and markets.
Is the wolf finally being acknowledged with the arrival of the Department of Government Efficiency (DOGE)? The official purpose of DOGE is, “to implement the President’s agenda by modernizing Federal technology and software to maximize governmental efficiency and productivity.” DOGE already existed as the United States Digital Service and was renamed and reorganized to carry out the President’s agenda. Ultimately, DOGE is looking to do what private business is constantly doing: look for areas to improve efficiency, cut costs, and be open to different problem-solving ideas on existing issues. One difference between private business and the US Government is that private business looks to maximize profits, while the US Government is there to provide services to the American people. There is no “profit” to maximize. On the surface, after many decades of political leaders from both parties claiming that the US Government is spending too much (crying wolf), DOGE could be viewed as the first step toward addressing our fiscal problems (the wolf). As with most policies or initiatives, success or failure may not be immediately apparent but the initiative of doing something is what both parties have been arguing for over fifty years.
The next step after DOGE toward addressing “the wolf”, is to cut government spending. Federal receipts (tax revenue) have never been higher, but the US government continues to spend as if we are in an ongoing crisis. In the most recent fiscal year, the US Government spent 52% more than they did in the fiscal year prior to the onset of COVID, while federal revenue is up 42% over the same period. The majority of that 52% increase occurred in the first two years following the pandemic. Time will tell if this initiative created a new fork in the road or if we are on the same beaten path.
The US stock market has been swift to price in DOGE impacts, tariffs, and GDP slowdown concerns. Narratives change constantly, with headlines trying to point to this problem/success that led to this drop/gain in the markets. The S&P 500 went from an all-time high to down 10% in a matter of sixteen trading days. All-time highs did occur two and a half weeks after the first official tariff announcement. Drawing conclusions from headlines or single data points is difficult, and often unwise. Remember, the US stock market bottomed on an 8.2% CPI number for October 2022 after seven consecutive months of greater than 8% inflation numbers and 100% of Bloomberg surveyed economists calling for recession in 2023. As of now, that unanimously predicted recession still hasn’t occurred!
We previously highlighted that stocks were slightly overvalued heading into 2025, pricing in too much optimism, and that it’s wise to review whether you should rebalance your portfolio. We continue to believe your financial goals should remain the most important factor to consider when looking at your investments. If you are just beginning to invest or are in your prime earning years, you should embrace the opportunity to buy stocks at lower prices when volatility presents itself. If you are in retirement, your bonds continue to offer attractive yields.
Andrew Messerschmidt, CFA, is an Investment Officer at Cedar Rapids Bank & Trust. His direct line is (319) 743-7136.
Not insured by FDIC or any other government agency | Not bank guaranteed | Not bank deposit or obligations | May lose value
