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Bessent’s Plan: Flying High or Crash Landing?

FORECASTS & TRENDS E-LETTER
by Henry Rohlfs

December 3, 2024

IN THIS ISSUE:

Bessent’s 3-3-3 Policy
Budget Deficit 3% of GDP
Annual 3% GDP Growth
Oil Boosted By 3 Million Barrels Per Day
A Final Thought

Scott BessentIn something of a surprise move, President-elect Donald Trump nominated Scott Bessent, CEO and Chief Investment Officer of Key Square Capital Management, as U.S. Treasury Secretary. Part of the surprise lies in Bessent’s time spent with billionaire George Soros at Soros Fund Management, a large contributor to the Democratic Party. In recent years, Bessent has been a vocal supporter of the former president’s policies, including tariffs and deep spending cuts.

Bessent has urged President-elect Trump to adopt what he calls a “3-3-3” policy. Today we’ll take a look at this policy and whether it is feasible in this economy. It is a bold, hawkish move that some observers believe will reshape the U.S. economy.

Bessent’s 3-3-3 Policy

Bessent has suggested that the incoming administration immediately adopt a “3-3-3” policy, which includes these goals:

  • Reduce the federal budget deficit to 3% of GDP
  • Achieve 3% annual GDP growth
  • Increase domestic oil production by 3 million barrels per day

These goals could result in a more fiscally sustainable picture for the federal government. Let’s take a look at how obtainable each of these goals are.

Budget Deficit 3% of GDP

In the report Budget and Economic Outlook, the Congressional Budget Office gives their projections of both the U.S. gross domestic product (GDP) and the estimated budget deficits over the next 10 years. The 2024 budget deficit totals $1.6 trillion (5.6% of GDP), is estimated to grow to $1.8 trillion in 2025 (6.1% of GDP) and shrinks to $1.6 trillion by 2027 (5.2% of GDP).

If Elon Musk and Vivek Ramaswamy and their Department of Government Efficiency (DOGE) can successfully cut federal spending by half of their $2 trillion goal, a deficit of 3% of GDP is obtainable. The Dynamic Duo of spending cuts plans to meet with House Republicans this week to discuss reductions to federal government spending. A keystone proposal is to oversee a massive reduction in the federal workforce.

In a Wall Street Journal op-ed, the pair wrote, “DOGE intends to work with embedded appointees in agencies to identify the minimum number of employees required at an agency for it to perform its constitutionally permissible and statutorily mandated functions.”

A bold reduction in the size of government has been promised by Republicans for decades. Perhaps DOGE can actually move down that path. If so, goal one could be achieved.

Annual 3% GDP Growth

A growth rate of 3% has been successfully attained the last couple of years. In the second quarter of 2024, real GDP increased 3.0% as reported by the U.S. Bureau of Economic Analysis. The “second estimate” of third quarter real GDP slipped slightly to 2.8%. The advance estimate of fourth quarter growth will not be available until January 30, 2025.

Bessent’s 3% long-term growth is attainable. Personal income increased 0.6% in October with consumer spending showing a 0.4% increase the same month. Consumer spending accounts for nearly 70 percent of total GDP, so we could see further increases in GDP.

Chart showing growth in U.S. GDP

But to balance that view, the St. Louis Fed predicts a mere 2.1% real GDP growth rate through 2026.  They project growth to slow as the labor market softens and consumer savings decline. The next jobs report will be released Friday December 6 and could give some clarity on the Fed’s next interest rate move. A rate cut would definitely help fuel GDP growth in 2025. Goal number two could be an uphill climb.

Oil Boosted By 3 Million Barrels Per Day

The United States is the biggest oil producing country in the world, accounting for over 15% of overall global crude production. Average oil production reached a record 13.2 million barrels per day in 2024. With vast crude reserves in 15 states, the U.S. has the largest total proved oil reserves in the world.

Donald Trump has promised to increase oil drilling off the U.S. coast and on federal lands. Trump would likely seek to approve the Keystone Pipeline, a project that was scuttled when President Joe Biden canceled a key permit on his first day in office. The president-elect has also promised to declare an energy emergency that could allow him to accelerate these changes through the use of executive orders.

Bessent’s thought is increased oil production will lower oil prices. Since energy costs have been a sticky component of inflation measures, this would theoretically help to lower the cost of gasoline, heating oil and other products from crude.

However, my friend Patrick Watson with Mauldin Economics brings up two interesting points in the oil production discussion. First, Biden’s Strategic Petroleum Reserve purchases effectively set a floor on the crude oil price at around $67 per barrel. Second and more importantly, the oil industry’s market is shrinking. Here are a few points to consider:

  • The International Energy Agency projects a 1 million barrel per day global surplus in 2025.
  • Chinese refinery output dropped 4.6% in October compared to a year earlier.
  • Morgan Stanley recently cut its oil price forecast, citing a likely “sizable surplus” next year thanks to reduced consumption.

We have to ask why oil demand growth has been slowing. Much of the growth in crude demand has come from China, but this may not continue as the Chinese economy slows. In an attempt to reverse this trend, the Chinese government has begun economic stimulus efforts through increased government spending, interest rate cuts, support for the real estate sector and enacting policies to bolster their stock market.

Oil pump against the evening sky

It's difficult to say if and when these measures will cause a measurable difference in the Chinese economy and a renewed increase in oil consumption. Add to that Trump’s promise to levy additional tariffs on all Chinese goods and the Chinese government could retaliate by sanctioning oil imports from the United States.

Also consider that our own domestic use of crude has decreased in recent years. Equipment that uses power has become much more energy efficient. Gasoline powered cars that get 40 mpg or better are replacing older, less efficient models. Alternative sources of electricity like solar and wind helping to bridge the gap left by coal- and oil-fired electric plants that have been shut down. The world is moving away from oil and gas to renewal energy. Goal number three looks difficult at best.

A Final Thought

Scott Bessent has said that the federal government’s "high deficits are going to create a national defense problem" because the elevated levels of spending and debt reduce its ability to leverage an increase in spending during times of crisis and war.

"U.S. Treasury was able to save the country during the Civil War by expanding the deficit… They saved the economic well-being of the country during the Great Depression by spending. And then we were able to save the world during World War II. So we have to get this down, or we have no room for maneuver," Bessent said.

Bessent has a tough road ahead to meet the goals of his 3-3-3 plan. If he is successful, this could reverse the disastrous tendency to overspend that both Democratic and Republican administrations have set as a fiscal norm. Let’s see if Congress has the will to actually enact these policies.

All the best,

 


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