The Elephant in the DOGE Room: Without Entitlement Cuts, It’s Just A Media Circus

“Cutting the fiscal deficit is not popular. That is the experience of all governments in all countries. Expenditure cuts hurt certain vested interests, and they don’t like it.”

– Manmohan Singh, Prime Minister of India, 2004-2014

March 26, 2025 — Over the past few weeks, a new narrative has been building in markets.

It’s the idea that the government cuts, proposed by the Department of Government Efficiency (DOGE) and implemented by President Trump’s cabinet, will crash the economy.

And that’s helped fuel some massive market fears – with markets hitting full correction mode in March.

Yet, it’s an action worth taking, despite all the flack.

That’s because there’s a big elephant in the room: The U.S. government runs a massive spending gap.

That gap has been widening. And until it gets closed, or close to it, we’ll continue to run up the national credit card at an unsustainable rate.

This year alone, the government’s deficit will amount to $1.6 to $1.9 trillion, per the Congressional Budget Office.

The data behind this gap comes from two points. Let’s tackle each in turn…

Currently, all federal, state, and local spending amounts to about 20% of U.S. gross domestic product (GDP).

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The data going back to the 1930s indicates that the New Deal era was still far below today’s average. The spike in World War II represented a total war effort.

But for the most part, except for recent spikes from the financial crisis and COVID-19, you can expect that about $1 out of every $5 in the economy comes from the government.

In fiscal year 2023, the U.S. government spent about $6.1 trillion. Elon Musk thinks that DOGE can save taxpayers about $1 trillion.

So call it $5 trillion. If that’s true, it would mean shrinking the government by about 17%. So, $0.83 out of every $5 in the economy would come from the government.

That may not sound like much. But here’s where it gets interesting…

Ever since World War II, no matter how high marginal income tax rates have been (including as high as 90% on high earners like Hollywood stars), the U.S. government has really only managed to capture about 17.5% of GDP via taxes.

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In other words, it doesn’t matter if you soak the rich, or make corporations pay their “fair share” (a nebulous concept that will somehow never be enough), or adjust tariff rates by the day to bring more income to government coffers. It also doesn’t matter if you follow supply-side economics and cut rates… you’re going to end up with about 17.5%.

So, if the tax side of the equation trades in a narrow band, the real way to fix the spending gap is to cut spending. And the only way to do that meaningfully is to make tougher cuts than what DOGE can deliver.

The Real Elephant in the Budget Room

In short, structurally, the government currently overspends by about 17% (20% divided by 17%). That’s what needs to be cut to keep a balance between taxes in and spending out.

Sure, on paper, that 3% gap in GDP may not sound like much… but it’s more than what DOGE can identify and cut.

Plus, remember that GDP measures output for the entire U.S. economy. It’s not a perfect measure. (I outlined the problem with GDP in a special video for Grey Swan Investment Fraternity members earlier this month.)

However, over the last five decades, the government’s spending gap has created a massive deficit.

For fiscal year 2025, the deficit totals nearly $1.9 trillion, or 6.2% of GDP. On top of that new deficit spending, there are also about $3 trillion in U.S. Treasuries maturing that will be rolled over.

Worse, it’s still rising. And DOGE thinks they can only cut it in half.

Overall, that’s the real bad news. Our debt problem will get worse before it gets better. But in the short term, laying off government employees and trying to right-size it to GDP will make GDP look worse and raise unemployment. That’s the short-term pain, which is also being reflected in markets and amplified by the mainstream media’s histrionics about tariffs.

On the jobs front, for all the fear of soaring unemployment, the U.S. government’s numbers state that just 1.9% of all workers are federal government workers, about 3 million.

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As DOGE makes its cuts, and as those workers find their way to the private sector, we can see a gradual reduction in government spending on employee salaries, and a commensurate rise in private sector payrolls.

It’s not a win-win situation. Looking at the back-of-the-envelope numbers this way, you can see why politicians have generally preferred to kick the can down the road. It’s less of a hassle that way.

Change is necessary. As in, not optional. And it’s not pleasant. The market is finding ways to kick and scream against the government budget cuts. And it’s likely just the beginning.

After all, every budget cut affects real people who spend money in the real economy, even if that spending distorts what would occur in the markets.

But it’s part of Trump’s playbook to unleash a Golden Age. We may be in for some more short-term market pain now, but the long-term winners will be American workers and taxpayers. And anyone who invests in the right plays for today’s MAGA economy.

Time will tell how successful DOGE will be in cutting government spending, especially with all the pushback it’s getting. Some big cuts from the Department of Defense could add to the DOGE savings and hit the $1 trillion mark, although it will be a grind to get there.

Meanwhile, the math points out that to right-size government spending relative to what taxes can bring in, the DOGE cuts still won’t be enough. DOGE will just be window dressing until we can get bigger spending problems under control.

That includes rethinking transfer payment programs like Social Security and Medicare, which are still considered the “third rail” of politics.

Never mind that the number of contributors to these programs used to exceed beneficiaries, but now the numbers are evening up. Or that the debts for these programs are usually excluded from the government’s total debt figures.

Demographics is destiny, as the saying goes, and the slowdown in population growth needs to be addressed with the government’s “pay as you go” programs that work best for a growing population.

That means we can’t even address the most fundamental issue facing our economy: our soaring debt, which will eventually spiral into a crisis.

And that’s another reason why we still like investments like gold as a safe haven. Because getting America’s fiscal finances in order is an uphill battle. And the elephant in the room is the fact that DOGE alone can’t get ‘er done.

Regards,

Andrew Packer,
Grey Swan

P.S. from Addison: The inbox is hot.

“Love it!” begins one response from Joan D. “What I really like about your writing is that you present different perspectives at different times/occasions. I love that I can’t tell if you are ‘for’ or ‘against’ anything.”

Joan, then, goes on to poke the bear a little:

That’s just stupidity in the first place —why do we have to be for or against or democratic or liberal or conservative?

Why can’t we all just be good thinkers?

I am always happy to consume good thinking~~! And since I don’t have an automatic hate response to the president who is presiding…..I can think a little more clearly about what is going on.

Too much pre-thinking is happening, and there is not enough real thinking.

This, again, is why I appreciate how you share what you share and why.

I appreciate that you don’t hold back. When it comes to good thinking, that’s a dollop of whipped cream and sprinkles.

Love it, and thank you.

A happy subscriber – who learns a lot because you think things that I don’t!

Indeed.

More to share tomorrow. If you like to add to the conversation, send your thoughts to addison@greyswanfraternity.com.

“Cutting the fiscal deficit is not popular. That is the experience of all governments in all countries. Expenditure cuts hurt certain vested interests, and they don’t like it.”

– Manmohan Singh, Prime Minister of India, 2004-2014

March 26, 2025 — Over the past few weeks, a new narrative has been building in markets.

It’s the idea that the government cuts, proposed by the Department of Government Efficiency (DOGE) and implemented by President Trump’s cabinet, will crash the economy.

And that’s helped fuel some massive market fears – with markets hitting full correction mode in March.

Yet, it’s an action worth taking, despite all the flack.

That’s because there’s a big elephant in the room: The U.S. government runs a massive spending gap.

That gap has been widening. And until it gets closed, or close to it, we’ll continue to run up the national credit card at an unsustainable rate.

This year alone, the government’s deficit will amount to $1.6 to $1.9 trillion, per the Congressional Budget Office.

The data behind this gap comes from two points. Let’s tackle each in turn…

Currently, all federal, state, and local spending amounts to about 20% of U.S. gross domestic product (GDP).

Turn Your Images On

The data going back to the 1930s indicates that the New Deal era was still far below today’s average. The spike in World War II represented a total war effort.

But for the most part, except for recent spikes from the financial crisis and COVID-19, you can expect that about $1 out of every $5 in the economy comes from the government.

In fiscal year 2023, the U.S. government spent about $6.1 trillion. Elon Musk thinks that DOGE can save taxpayers about $1 trillion.

So call it $5 trillion. If that’s true, it would mean shrinking the government by about 17%. So, $0.83 out of every $5 in the economy would come from the government.

That may not sound like much. But here’s where it gets interesting…

Turn Your Images On

The Real Elephant in the Budget Room

In short, structurally, the government currently overspends by about 17% (20% divided by 17%). That’s what needs to be cut to keep a balance between taxes in and spending out.

Sure, on paper, that 3% gap in GDP may not sound like much… but it’s more than what DOGE can identify and cut.

However, over the last five decades, the government’s spending gap has created a massive deficit.

Worse, it’s still rising. And DOGE thinks they can only cut it in half.

On the jobs front, for all the fear of soaring unemployment, the U.S. government’s numbers state that just 1.9% of all workers are federal government workers, about 3 million.

Turn Your Images On

Change is necessary. As in, not optional. And it’s not pleasant. The market is finding ways to kick and scream against the government budget cuts. And it’s likely just the beginning.

After all, every budget cut affects real people who spend money in the real economy, even if that spending distorts what would occur in the markets.

That includes rethinking transfer payment programs like Social Security and Medicare, which are still considered the “third rail” of politics.

Demographics is destiny, as the saying goes, and the slowdown in population growth needs to be addressed with the government’s “pay as you go” programs that work best for a growing population.

That means we can’t even address the most fundamental issue facing our economy: our soaring debt, which will eventually spiral into a crisis.

Regards,

Andrew Packer,
Grey Swan

P.S. from Addison: The inbox is hot.

Joan, then, goes on to poke the bear a little:

That’s just stupidity in the first place —why do we have to be for or against or democratic or liberal or conservative?

Why can’t we all just be good thinkers?

I am always happy to consume good thinking~~! And since I don’t have an automatic hate response to the president who is presiding…..I can think a little more clearly about what is going on.

Too much pre-thinking is happening, and there is not enough real thinking.

This, again, is why I appreciate how you share what you share and why.

I appreciate that you don’t hold back. When it comes to good thinking, that’s a dollop of whipped cream and sprinkles.

Love it, and thank you.

A happy subscriber – who learns a lot because you think things that I don’t!

Indeed.

More to share tomorrow. If you like to add to the conversation, send your thoughts to addison@greyswanfraternity.com.

For 30 years, Japan was the land where interest rates went to die.

The Bank of Japan used yield-curve control to keep long-term rates sedated. Traders joked that shorting Japanese bonds was the “widow-maker trade.”

Not anymore.

On November 20, 2025, everything changed. Quietly, but decisively.

The Bank of Japan finally pulled the plug on decades of easy money. Negative rates were removed. Yield-curve control was abandoned. The policy rate was lifted to a 17-year high.

Suddenly, global markets had to reprice something they had ignored for years.

What happens when the world’s largest creditor nation stops exporting cheap capital and starts pulling it back home?

The answer came fast. Bond yields in Europe and the United States began climbing. The Japanese yen strengthened sharply. Wall Street faltered.

The rate cut narrative is calcifying into gospel: the Fed must cut to save the consumer.

Bankrate reports that 59% of Americans cannot cover a $1,000 emergency without debt or selling something. And yet stocks are roaring, liquidity junkies are celebrating, and the top 10% now account for half of all consumer spending.

Here’s the plot twist: before 2020, consumer confidence faithfully tracked equity markets. After 2020, that relationship broke. As one analyst put it, “The poor don’t hate stocks going up. They just don’t feel it anymore.”

So when the Fed cuts rates in one of the hottest stock markets in history, who exactly benefits? Not the 59%. Not the middle. Certainly not anyone renting and watching shelter inflation devour their paycheck.

Only the late-stage dot-com fever dreams did better in recent memory — back when analysts were valuing companies by the number of mammals breathing inside the office.

For the moment, stocks appear unsinkable, unslappable, and perhaps uninsurable. But this is what generational technology shifts do: they take a kernel of genuine innovation and inflate a decade of growth into a 36-month highlight reel. We’ve seen this movie. It premiered in 1999 and closed with adults crying into their PalmPilots.

And just as the internet continued reshaping the world long after Pets.com curled up and died, AI will keep marching on whether or not today’s multiples survive a stiff breeze. The technology is real. The valuations, however, will eventually need to stop hyperventilating and sit down with a glass of water.

Wheelbarrows are not chickens. A chicken is a biological production unit. A wheelbarrow is a capital good. A wheelbarrow doesn’t produce work. But it CAN be a productivity multiplier.

And that’s how we have to think of all those GPUs the hyperscalers are spending money on. If their thesis is right, trillion in AI and data center spending now, will translate into a massive burst in productivity and new technologies in the next two decades. That is the only justification for the current valuations/multiples at which these stocks trade now.

The American poet William Carlos Williams wrote, “So much depends, upon a red wheelbarrow, glazed with rainwater, beside the white chickens.”

Today the wheelbarrow is Nvidia Green. And so much of the stock market depends on that wheelbarrow being a big enough productivity multiplier to offset $340 trillion in debt.