Trump to Cut Military Spending in Half?

The U.S. president announced his goal to cut military spending in half and get Russia and China to do the same. This has put some in the military industry in a state of outrage. By proposing that the military’s budget could be halved, he triggered immediate market responses, particularly among leading contractors.

Industry stock prices dropped immediately after his remarks as investors tried to gauge the impact of an unexpected shift in federal expenditures on company profits. While some market watchers believe such declines in prices are a short-term response to political manoeuvring, others are concerned about the long-term implications if the proposal gains traction.

A reduction of this size would be a sharp break with recent years' trend of increasing defence spending. According to experts, such an action would have far-reaching effects, potentially setting a cap on U.S. military involvement abroad and redirecting federal monies to other purposes. Analysts on both sides of the debate are weighing whether federal commitments to ongoing programs and foreign operations would make such a drastic cut impossible.

Its advocates see it as a way to spend more on domestic programs, including infrastructure and social services. Opponents believe it will drain resources away from military preparedness and inhibit the development of new military technologies.

Industry experts are now keenly watching for any other signs of national military priorities. Investors must remain cautious against more policy statements and budget negotiations that may cause additional movements in military-related stocks.

Potential Gold Price Influence

If US$448 billion per year is re-routed to other sectors of the economy, this could have an inflationary effect. It all depends on what is done with the extra funds. If the money is distributed more evenly or not taken in the first place (in the form of tax cuts) this could mean that the velocity of the money could be increased. The concentration of funds into a certain sector typically leads to low-velocity money. That can hold even truer when that sector is extremely well-funded. On the contrary, the highest-velocity spending typically happens with the general public.

This could potentially be one more reason to not be only watching interest rates. The Fed may be correct in seeing this administration’s policies as creating an increased flow of money. Another potential positive is if gold’s price is supported by continued inflation rather than by the shock of a world war.

Watch the Ainslie Insights video discussion of this article here: https://www.youtube.com/watch?v=lb75dqKpxWQ