A month ago, when we first realized that Elon Musk’s Department of Government Effectiveness (DOGE) was cutting such huge amounts of money from the government money laundering system, we made a (at the time) controversial observation: so much money (laundered by the Deep State) was about to be withdrawn from the economic system that the United States would fall into a recession, first in Washington, DC (later confirmed by Michael Hartnett and others), and then spread throughout the United States.

We were surprised at how much pushback we got, especially from Trump supporters. But this is not to judge a new administration that is only a few weeks old. In fact, we explained long ago that the only reason the U.S. economy didn’t fall into recession sooner rather than later was because of Biden’s unprecedented debt issuance. We first described this in the summer of 2003 ((The Trillion-Dollar “Hidden Stimulus” Behind Bidennomics)), during which time the U.S. debt soared by $1 trillion every 100 days.

But now, that particular debt party appears to be coming to an end.

Understandably, defusing this debt time bomb is exactly what Elon Musk has set out to do, and the process of reversing all of the disastrous trends that have peaked under the Biden administration will inevitably lead to a recession (just as allowing debt to continue to accumulate at record rates was the only way to delay the inevitable economic slowdown).

Still, we made this observation at a time when the hype about “American exceptionalism” was still rife, if only for a few days, so few were willing to accept our view.

Then, gradually, the market turned around, and just a few weeks later, Wall Street was flooded with reports like the one written by Dominik Konstam of Mizuho, ​​"finding" what we had said a few weeks earlier, that the DOGE move would trigger a new recession, starting with the government sector and spreading to every other sector.

Immediately afterwards, Wall Street firms like Goldman Sachs... and Morgan Stanley, which had previously been extremely optimistic and bullish, all lowered their expectations for US gross domestic product (GDP).

Slowly but surely, Wall Street admitted that we were right. But what about the government? Would Trump be surprised to learn that the government efficiency policies promoted by Musk combined with the government's trade policies would lead to a recession? We were curious about this and began to pay close attention to the remarks of Trump and his core staff.

First, Trump’s Treasury Secretary Scott Bessent went on Face the Nation last week to explain (correctly) how the media misled people into thinking the economy was going great under Biden, and how that suddenly changed when Trump took office. His point, of course, was that Trump hadn’t been in office long enough to have screwed up the economy.

A few days later, Bessant also explained why the economy looks “good” in the final years of the Biden administration — essentially echoing the arguments we made two years ago in (The Trillion-Dollar “Hidden Stimulus” Behind Bidennomics). We explained then that the only reason the U.S. economy wasn’t collapsing was because the government was issuing $1 trillion in debt every 100 days, or as Bessant put it: “The markets and the economy have become addicted to excessive government spending and will now enter a ‘detox’ period.”

This also explains why, in an effort to avoid a technical recession, Trump's Commerce Secretary Howard Lutnick told Fox News that the Trump administration is considering separating government spending from GDP reporting. This was in response to a question first raised by us about whether the spending cuts pushed by Elon Musk's Department of Government Effectiveness (DOGE) could lead to a downturn. "You know, historically, governments have been fiddling with GDP. They count government spending as part of GDP. So I'm going to separate the two and be transparent," Lutnick said on Fox News Channel's (Sunday Morning Futures) show.

Lutnick's comments echo Musk's view on X (original Twitter) that government spending does not create value for the economy. Musk wrote on X: "A more accurate way to measure GDP would exclude government spending. Otherwise you can artificially inflate GDP by spending money on things that don't improve people's lives."

Lutnick's statement is more nuanced, but the direction is the same. He said: "If the government buys a tank, it counts in GDP. But if it spends money to get 1,000 people to consider buying a tank, it doesn't count in GDP. It's wasteful, it's inefficient, it's a waste of money. Cutting this part of spending will show up in GDP data, but we need to eliminate this."

Then there was Trump himself, who issued his clearest warning yet in a speech to Congress, saying to expect "a little turbulence" on the tariff front, echoing what he said in February when the president posted on his Truth Social account (in all caps): "This will be a GOLDEN AGE FOR AMERICA! Will there be some PAIN? Yes, maybe (and maybe not!)" and added: "We will Make America Great Again and it will all be worth it."

But the clearest sign that Trump is now eager to throw the U.S. economy into a recession — and that he can legitimately blame Biden’s unbridled spending ways — and that the “Trump put” is now a “call” comes from the president himself. Asked in another interview with Maria Bartiromo last weekend whether he expected a recession this year, the president was surprisingly defensive, saying: “I don’t want to predict anything like that. There’s a transition period right now because what we’re doing is so significant. We’re bringing wealth back to the United States. It’s a big deal. And there’s always a period 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’s going to be great.”

As for the stock market, don't expect Trump to rescue it: "There may be a little bit of volatility. You can't just look at the stock market. Look at China, they have a 100-year plan... and we only look at quarterly performance. What we are doing is laying the foundation for the future."

If that wasn’t clear enough, his Treasury Secretary Scott Bessant predicted as explicitly as possible that the US was heading for a “detox period”, warning: “Is this economy that we’re inheriting going to start to see some volatility? It’s certainly possible.” He also ruled out the possibility of supporting the market through policy adjustments, confirming that, at least for now, the “Trump put option” has completely expired.

Commenting on these pre-recession comments, Rich Privorotsky, head of Delta One trading at Goldman Sachs, said: "While attempts to address long-standing imbalances in debt sustainability and spending (which have accelerated during the COVID-19 pandemic) are laudable, it is hard to imagine that these moves will not have short-term economic consequences. This effectively echoes what we said a month ago.

Rabobank was more blunt, saying: “So far, Trump has not mentioned the stock market, and the message from Washington is that they are focused on the real economy, not Wall Street, and are willing to tolerate ‘turbulence’ for at least the next six to eight months while blaming it on Biden in order to establish a framework to achieve what Trump sees as his GDP growth-based goals…”

But perhaps Nomura’s Charlie McElligott put it best, saying that the US is now going through a clear “phase shift” that will be very painful (the full report is available in the regular feed for professional subscribers):

Don’t just take my word for it – they are already telling you their strategy, and this “phase shift” is going to be the painful part because we are “engineering a recession”:

Treasury Secretary Scott Bessant yesterday spoke more firmly at the Economic Club of New York on the theme of a “reset of US economic growth and wealth inequality from the public sector to the private sector” and “Wall Street giving way to the real economy” (plus some quality insights on everything from sanctions to the role of banks and regulation… but that’s another topic):

The President has embarked on an “aggressive campaign… to rebalance the international economic system.” (Referring, of course, to the tariffs…)

“Access to cheap goods is not the essence of the American Dream… The American Dream is rooted in the idea that any citizen can achieve prosperity, upward mobility, and economic security. For too long, the architects of multilateral trade agreements have ignored this.” (Once growth is weighed down, inflation risks are no longer a priority, or are exaggerated)

On the dramatic shift from reliance on government deficit spending to drive economic growth to a refocus on private sector stimulus (taxes and deregulation): “When I first went to meet President Trump, he looked at me and said, ‘How do we get the debt and deficit down without killing the economy?’ … I’ve been thinking about this for 18 months, and (the solution is) a transition from a public sector-driven economy to a private sector-driven economy … 25% of U.S. GDP is tied to the 202 area code (in Washington, D.C.).”

Bessant further clarified his intentions this morning on CNBC…can we get any clearer, people?!:

Bessant: We may see some volatility in the inherited economy

Bessant: The economy will enter a "detoxification period"

Bessant: There is no more "Trump put", but there is upside from "Trump call"

Here is the problem: when the government’s “fiscal austerity” policies are implemented, and the Department of Government Effectiveness (DOGE) crackdown on the bad “spending” that both parties have been accustomed to for decades is implemented to actually reduce government spending (think about flows rather than stocks, changes or drivers of change… rather than absolute levels) – but at the same time, global trade “rebalancing” means starting a “trade war” with the largest trading partner – there is simply no way to maintain the current level of real GDP growth, let alone achieve it in the short term… that is, GDP will fall.

And this is the key: they understand that this “phase shift” means pain, and they intend to push for it quickly, early in the Trump term, because it is necessary to eliminate the source of excessive economic stimulus through “fiscal austerity”, which will simultaneously reduce real economic demand through a “negative wealth effect” as markets recognize the negative impact on economic growth.

This intentional drag on growth and negative wealth effects – the “engineered recession” theory – will have the effect of holding back inflation, thus facilitating the transition to Phase 2. With inflation held back, easier monetary policy can finally be implemented through Fed rate cuts to stimulate the private sector, “lower the cost of capital”… and then further tax cuts and massive deregulation can be implemented.

Yet in our debt-ridden society, fueled by politicians’ endless deficit spending and central bankers’ entrapment in the “moral hazard” zone of the “quantitative easing trap,” our tolerance for pain is extremely low…

So can voters, politicians and central bankers withstand the consequences of this well-intentioned “rebalancing” or will the urge for more stimulus overwhelm them and force them to capitulate and return to an unsustainable economic model dependent on government deficit spending?

It will depend on how quickly the “growth drag” and “negative wealth effect” of the Trump administration’s deliberate strategy of “controlled destruction” can produce an inflation-reducing effect, thereby creating the conditions for subsequent easing policies… Otherwise, market forces seem happy to “find a balance” while the “Trump put option” remains well out of the money in the stock market.

Putting all of this together, it is becoming increasingly clear that what we said a month ago was absolutely correct. While Trump and Bessant may not be actively pushing the US into a recession, they are certainly happy for it (especially with the midterm elections approaching) because they know they have a few months to blame the Biden administration and its staggering debt accumulation. As we initially explained, it is this debt accumulation that has kept the economy afloat for so long…

…and once the economy and markets have reset, likely thanks to another massive fiscal stimulus from Congress (which will have no choice but to help if a recession hits), they will soar ahead of the November 2026 midterm elections, further solidifying the Republican grip on power even if it means some – quite severe – pain in the near term.

Source: Coin Circle Helmsman