Wall Street is booming as an expected Republican victory in the election boosts hopes for lower taxes and deregulation, making U.S. financial markets more attractive to the rest of the world, a top economist said.
In an interview on Bloomberg TV on Friday, Mohamed El-Erian, chief economic adviser at Allianz, was asked whether investors should expect a positive growth shock accompanied by more inflation.
“The path is clear: more growth, slightly higher inflation, a higher financing requirement of the public sector and a huge sucking sound that will bring a lot of foreign capital into the US,” he replied.
The extent of these trends will become clearer when the new Trump administration’s policies become clearer — and when the people who will implement them become known, El-Erian added.
Just days after the presidential elections, discussions about possible cabinet appointments are already increasing. Friday has the Financial times reported that Robert Lighthizer, who served as U.S. trade representative during Trump’s first term, was asked to refill the post.
Meanwhile, the job of finance minister will likely be offered to a financier, the FT added, citing hedge fund managers Scott Bessent and John Paulson as possibilities.
Meanwhile, the rest of the world may have more difficulty coping with a period of faster growth and higher inflation, adding to America’s relative lead, El-Erian said.
“This is a period in which American dominance in the global system will increase, both for positive reasons and for negative reasons in the short term,” he explained. “The rest of the world simply cannot build enough pipelines in the US. They are trying and they have done it, but these pipelines are very small compared to the size of the US”
Despite fears that Trump’s tax cuts, tariffs and immigration measures will be inflationary and worsen deficits, bond yields have fallen again after surging in the immediate aftermath of the election.
El-Erian argued that this is because US bonds have become more attractive compared to those from other advanced economies.
Sustained demand for government bonds would help the federal government finance what is expected to be a debt explosion under a new Trump presidency.
Before the election, the nonpartisan Committee for a Responsible Federal Budget estimated that his policies could increase the debt by $7.5 trillion, and possibly as much as $15.2 trillion.
But if investors, especially bond vigilantes, resist the massive amounts of debt the Treasury Department is auctioning, they could push yields higher and raise borrowing costs in key segments of the economy, such as mortgage rates.
