A senior economist said that Wall Street is flying high in light of the expected Republican victory in the elections, which raises hopes for tax cuts and deregulation, which makes American financial markets more attractive to the rest of the world.
in Interview on Bloomberg Channel Mohamed El-Erian, Allianz’s chief economic adviser, was asked on Friday whether investors should expect a positive growth shock accompanied by more inflation.
“The direction of travel is clear: more growth, a little higher inflation, higher public sector borrowing requirements, and a big absorption sound as a lot of foreign capital will end up in the US,” he replied.
Al-Erian added that the scale of these trends will become clearer when the policies of the incoming Trump administration become clearer, and when the people who will implement them become known.
A few days after the presidential election, talk of potential cabinet appointments has already increased. Friday, Financial Times It reported that Robert Lighthizer, who was the US Trade Representative during Trump’s first term, has been asked to fill the position again.
Meanwhile, the job of Treasury Secretary is likely to be offered to the financier foot He added, with hedge fund managers Scott Besent and John Paulson considered as possibilities.
Meanwhile, El-Erian said the rest of the world may have more trouble adjusting to a period of faster growth and hotter inflation, increasing America’s comparative advantage.
He explained, “This is the period in which the United States’ dominance over the global system will increase, for positive and negative reasons in the short term.” “The rest of the world simply cannot build enough pipes around the United States. They try and they do, but these pipes are very small compared to the size of the United States.”
In fact, despite fears that Trump’s tax cuts, tariffs, and immigration crackdown will lead to inflation and worsen the deficit, bond yields are back down after rising in the immediate aftermath of the election.
El-Erian said that the reason for this is that US bonds have become more attractive compared to the bonds of other advanced economies.
Continued demand for Treasuries would help the federal government finance what is expected to be a debt explosion under another Trump presidency.
Before the election, the nonpartisan Committee for a Responsible Federal Budget estimated that his policies could add $7.5 trillion to the debt and perhaps as much as $15.2 trillion.
But if investors, especially “bond vigilantes,” reject the massive amounts of debt the Treasury is selling at its auctions, it could push up yields and increase borrowing costs across key sectors of the economy, such as mortgage rates.
In a Wall Street Journal Editorial However, Larry Fink, chairman and chief executive of BlackRock, said on Tuesday that faster economic growth would help make US debt more manageable.
“If GDP rises at a rate of 3% in real terms over the next five years, the country’s debt-to-GDP ratio will remain roughly stable at a high, but reasonable, level,” he wrote.
A newsletter for the boldest and brightest leaders:
CEO Daily is your weekday morning wrapper on the news, trends and conversations business leaders need to know.
Register here.
Comments are closed, but trackbacks and pingbacks are open.