Musk and markets: why Doge is not cutting through
Is Musk helping Treasuries?
Elon Musk’s so-called Department of Government Efficiency, is “blowing up significant parts of the US government”, in the words of Paul Krugman. Oddly, however, this is passing with barely a mention from financial market analysts.
I paraphrase, but “don’t worry about it” was the line from Barclays a week ahead of Donald Trump’s January 20 inauguration.
“Doge likely faces legal, process and political obstacles,” the bank’s analysts wrote at the time. “Doge itself cannot cut government spending, rescind regulations, eliminate departments or agencies, or terminate federal employees. In our view, the change Doge can drive through executive action is likely less (and slower) than many investors anticipate.”
Others had argued Doge won’t be able to do much because of the Republicans’ slim majority in the House of Representatives and the likely legal pushback. But none of that is ageing super well. Tens of thousands of civil servants have already been fired or suspended. The guardrails are buckling here.
Given how important institutional resilience is to the foundation of US reserve assets, you would think investors would be more exercised about all this. Some nerves are creeping in, as I wrote last week, but that’s more about reserve managers seeking to protect their assets from an unpredictable president.
More broadly, though, investors appear to be assuming this is all fine? Maybe that’s the right call. Exorbitant privilege is a powerful force, after all. (Just ask former UK prime minister Liz Truss how markets respond when smaller countries circumvent checks, balances and traditions.) Maybe the hand-wringing over Doge represents sour grapes by those of a more liberal political persuasion who are still smarting from November’s election outcome.
But another possible explanation is that Doge could be actively helping drive demand for US government bonds, in turn sending a warm glow across other asset classes.
Peter Tchir at Academy Securities is focusing on the “headline after headline of waste that is being reduced”. He went on:
Even if a fraction of the headlines are accurate, the ability to cut spending seems high. That is without focusing their attention, yet, on some of the big-ticket items in the budget. Doge alone seems able to help with the goal of reducing the deficit.
So far, I think Doge has been helping support Treasuries. Doge provides some element of hope that bigger chunks of the deficit can be trimmed without major repercussions to the economy or markets, than previously thought. The excitement about what Doge can do to the bigger line items is real.
As Tchir says, Doge has made blunders. But he certainly appears to be right that markets are focusing on the cost cuts and not the US’s institutional resilience, for now at least. And as I’ve written before, the more the markets shrug this stuff off, the further President Donald Trump and his advisers may feel they can go. Stock and bond vigilantes remain supremely relaxed about Trump 2.0 and all it entails.