Congress and Her Purse, Q1 2025

We finish our tour of Washington DC where it began: at the awe inspiring Capitol building. From my childhood memories of being in the city, one of the most memorable sights was standing under that soaring rotunda. I would also say it was the monument I least understood. As a child I understood very little of what Congress did, or even what it was. I remember being surprised and a little confused by the disparity between the enormous space under the dome and the almost cramped chambers where the important people met. Beyond that, it was all rather a mystery. As an adult, I understand why I understood so little. Congress, by orders of magnitude, represents the most complex branch of the vast federal government. This is, of course, mostly due to the number of elected officials that comprise it. We can wrap our mind around a nine member Supreme Court without needing to visualize the layers and layers of courts and judges that make up the Judicial branch. We easily understand the concept of an executive leading the Executive branch, without needing to comprehend the far reaching apparatus that supports him. But how does a branch function that has 535 members, divided into two semi-autonomous bodies? The correct answer is no one knows! For our purposes here, we want to look briefly at Congress and her “purse,” the colloquial term for the fiscal policy of the federal government, and how that affects the U.S. economy.

The Size of the Purse

In short, Congress is the gatekeeper for almost all the money the federal government receives, spends, and borrows. It goes without saying, that’s a big deal to the economy, but I will say it anyway. Let me try to put it into perspective. The budget for 2025 is 7 trillion dollars. If you happened to be the sole recipient of that tidy sum of cash you would have a large dump truck, packed tightly with $100 bills, showing up at your house every one hour and fifteen minutes, twenty four hours a day for the entire year. Among other complications, I would make a guess that by the end of that year, you’d have a lot more friends. Which, in part, explains why the Congressional budget process is so complicated. Everyone on the planet wants their piece of that pie. The bigger and juicier, the better.

The Creation of the Purse

The process actually begins in the Executive branch, months in advance of Congress getting involved. The President, in conjunction with his Office of Management and Budget (OMB), the Treasury, and every single Federal agency (there are over 2000 of them) must collectively come up with a budget recommendation to present to Congress by the first Monday in February. This is a monumental task which seems somewhat wasted considering how little of it is usually passed into law. However, this budget proposal has traditionally been considered the springboard from which Congress launches its own budgeting process, and for good reason. Every congressman is well aware of the platform the sitting president ran on and does not want to alienate the voters who put him there, even if he is from the opposing party. After all, the midterm election cometh.

Once Congress has the President’s proposal, it is essentially split into bite size pieces for the appropriate committees to digest. Every federal spending program has its own congressional oversight, times two. One in each chamber. This makes for dozens if not hundreds of committees, some of which are further divided into sub committees. Congressmen are elected by their fellow members to serve on these committees and are often asked to serve on multiple committees. Since both chambers of congress must independently pass the eventual final budget, there is a great deal of haggling and negotiation between every committee and its counterpart in the other wing of the Capitol. Every part must pass or be rejected by every committee before the final product, which sometimes barely resembles the original, is sent to the respective chamber floors for a final vote. Sometimes the House and the Senate end up passing different versions. In this case, there is a formal process called “reconciliation”, which is a nice sounding term for a sometimes fierce negotiation, with the goal of finally settling on something a majority can live with and that the President will sign. Add to this complexity the scores of special interest lobby groups all pressing every congressman for favors regarding their pet project and you have a recipe for miracles. As in, it is a miracle every time a budget actually gets passed. Often only the threat of total government shutdown is motivating enough to bring the acrimonious process to a conclusion. Even then it often happens deep in the night on the last possible extension of the deadline. Occasionally a shutdown and the ensuing finger pointing provides for some political theater for those who find such things morbidly entertaining.

The Power of the Purse

An interesting sideshow has developed in the second Trump administration. He has set out to overhaul trade relations with every country on earth, friend or foe. While the tariffs themselves have major implications in the economy, underlying the whole discussion is a power struggle between the Executive branch and Congress. Congress controls both spending and taxation, i.e. both expenses and income. This “power of the purse” is their main check on the Executive branch’s power in a system designed specifically for checks and balances. However, the Executive branch under current law controls tariffs as part of its overall foreign policy toolbox. Trump has come along and proposed replacing most of the income side of the equation with tariffs. Imagine the repercussions if the Presidency suddenly controlled half of the main check on his power. Coupled with his open assertion that he plans to run for a third term, he has even his allies in Congress considering changing the law to include congressional approval in tariff policy.

The Macro Effects of the Purse

Few businessmen have the time or inclination to observe such political brinkmanship closely. Nevertheless, the appropriations finally signed into law have far reaching effects in the economy, both domestically and globally. Farm bills can change the fortunes of farmers and all their associated industries. Infrastructure bills pump cash into construction and manufacturing jobs that can be ongoing for years. Incentive programs can create whole industries out of thin air, such as the green industry. And of course, tax policy has universal effects for everyone.

Short of becoming politically active or being “too big to fail”, most businesses have little to say about the outcome of these decisions. However, they keep an eye on what transpires to take advantage of changing policy or to at least minimize its negative effects.

For example, we believe the realignment of trade policy will coincide with a scramble by congress to incentivize the reshoring of manufacturing. As the relationship with China continues to deteriorate, manufacturing domestically or sourcing from allies will become an existential necessity. This, along with the necessary service industry to support these products, will likely result in a massive boom in blue collar jobs. The middle class is coming back to town. Attending this will be a shift in focus toward higher quality in goods. People will become accustomed to paying more, focusing on durability and longevity in favor of the decades old trend toward the one-time-use, throw-away mentality. Craftsmanship might become a thing again. For those already making their living working with their hands, a new golden age may yet dawn.

Sectors we think will be directly and noticeably affected will be steel, electronics, and of course, the auto industry. Alongside all of that will be a huge shift in focus toward energy. All of these could very well see a great deal of volatility, even if they are benefited in the long term. Legacy players could be replaced by new companies with better ideas and fresh capital. Much of that fresh capital is likely to be supplied by a Congress eager to take credit for ideas only the private sector conceived. Such is politics.

The energy question is one of particular interest and deserves an article of its own. Stay tuned as the saying goes.

Funding the Purse

Perhaps the most nuanced area of fiscal policy needing addressed here is the effect it has on credit and the dollar. Because Congress controls both the income and outflow of government funds, by default, it also dictates the deficit, or the difference between the two. Deficits are funded by borrowing money. The government borrows money by issuing an instrument called Treasuries. Because the government has such massive debts and (so far) has a reputation for servicing that debt, U.S. Treasuries have become the backbone of the global economy. Basically, every foreign trade partner on the globe sells its products for dollars. Since dollars tend to depreciate over time, everyone wants to exchange those dollars for something safe and interest bearing. U.S. Treasuries are the obvious answer and have become the benchmark investment by which all other investments are measured worldwide. Countries hold treasuries. Corporations hold them. Banks hold them. Hedge funds hold them. Individuals hold them. They are ubiquitous. Treasuries of various duration are sold at auction by the Treasury department as needed to fund government debt. Because they are sold at auction, the price is variable and set by global supply and demand. Treasuries can also be resold by the entity who bought them, creating a giant secondary market where the instruments are bought and sold through exchanges just like stocks. Although the market supply and demand for Treasuries is the largest marketplace on the planet, both are still finite, which means that price shocks can and do ripple through the system from time to time. Economists spend a great deal of time wringing their hands over the stability of the Treasury market, also known as the Bond market. But why does the Treasury market matter and how does it relate to Main Street?

The main indicator the Treasury market gives us is a proxy of overall economic stability. At all levels of investment, from the individual to the largest of corporations, or even countries, Treasuries are considered the safest form of investment against which all others are measured. A portion of most portfolios includes Treasuries. When the broader equities market becomes volatile, everyone moves out of whatever risk asset they have been plying and into Treasuries. Treasuries have been so stable for so long that they are often labeled as “cash equivalent.” But nothing is completely risk free. When things get out of kelter bad enough, the Treasury market itself becomes shaky. This can be driven by a variety of factors, but is mostly a function of a need for liquidity when large Hedge funds are sustaining significant losses in equities markets. This, however, is the indicator, not the effect on Main Street. The effect is what we care most about.

The Main Street Effects of the Purse

The main effect of Treasury markets on the average business man is on credit. Remember all those institutions listed above who own Treasuries? The most important one to us is banks. Banks hold Treasuries as assets, then loan money to individuals and businesses against the value of those assets. If the value of those normally stable assets begins to veer toward instability, banks are forced to recalculate the formula for how much money they can lend and at what rate. Not only that, but banks are legally mandated to buy up all left-over Treasuries at auction. When everyone else walks out of the room, banks are required to buy whatever everyone else doesn’t want. In short, if Congress runs an irresponsible fiscal deficit, the global Treasury market is flooded, and banks are left holding the bag on a depreciating asset they don’t want. This can quickly lead to bank insolvency, which is obviously not good for the economy. What normally happens in such a scenario is that the Federal Reserve will step in and start buying Treasuries to support the market. Since they can print money, they basically have unlimited ability to support the price, but with consequences. Remember that creation of dollars without a corresponding increase in productivity is always inflationary. When the Fed is forced by a drunken Congress to buy up Treasuries, inflation in one form or another will always follow. Which means when Congress is spending more than it receives, the average business man faces two possible outcomes. Either bank credit will dry up or inflation will accelerate. Often both happen. For anyone involved in an export or import market, this effect is compounded by fluctuations in the dollar itself. As Treasury markets go, so goes the dollar, meaning that volatility in the bond market reduces overall confidence in the dollar as the world reserve currency and results in a weaker dollar. This by itself tends to help exports and hurt imports. However, with the Trump administration attempting to realign all trade relationships through tariffs, even those norms can be upended.

Influence on the Purse

Congress is currently under Republican control, although by razor thin margins in the House. In addition, Republicans have historically put a lower premium on party loyalty than their counterparts across the aisle. But, since the party is dominated by one person, Congress has given at least lip service to tidying up its balance sheet. To hear them tell it, DOGE was their idea all along. But the proof will be, as they say, in the pudding. Real reform will not be enabled until the electorate who put the party in charge embraces the idea of short term pain for a long term improved outcome. It remains to be seen whether that electorate understands the relationship between our gluttonous desire to have the Federal government wear a Santa suit and the fact that we’ve gotten ourselves into quite a pickle. The party as a whole seems to be biding their time on it. Trump has consistently signaled his willingness to go along with any budget that Congress can pass. He has also openly advocated for looser monetary policy at the Federal Reserve. One might argue that his long term strategy is a return to fiscal sanity, but his short term strategy is to get through the midterms without a bloodbath. In the reasoning of even a well intended politician, no long term outcome may be achieved without maintaining a short term grip on power.

From a kingdom perspective on politicians’ strategies, we understand that God sets up and puts down “whom he will.” Ultimately what they achieve is not in their own control. For us as stewards, keeping an eye on the inner workings of the government is useful for positioning our businesses for the best possible advantage. Still, at the end of the day, the Lord determines the outcomes, and we are called to faith. God bless your faith journey. 

The Arrow Team