Wall Street is experiencing a surge as expectations of a Republican victory in the election are leading to hopes of lower taxes and deregulation, making U.S. financial markets more appealing to the world, according to a top economist.
During an interview on Bloomberg TV on Friday, Allianz chief economic advisor Mohamed El-Erian discussed the potential for a positive growth shock and increased inflation for investors.
El-Erian stated, “The direction is clear: More growth, slightly higher inflation, a higher public sector borrowing requirement, and a significant influx of foreign capital into the U.S.”
The impact of these trends will become more evident as the incoming Trump administration’s policies are revealed, and the individuals responsible for executing them are identified, El-Erian mentioned.
In the aftermath of the presidential election, there is already talk of potential Cabinet appointments. According to the Financial Times, Robert Lighthizer, who served as U.S. Trade Representative during Trump’s first term, has been asked to fill the position again.
Additionally, the Treasury secretary role is expected to be offered to a financier, with hedge fund managers Scott Bessent and John Paulson being considered, according to the FT.
El-Erian noted that the rest of the world may struggle to deal with a period of accelerated growth and increased inflation, further enhancing America’s relative advantage.
He explained, “This is a period where U.S. dominance in the global system will grow, both for positive and negative reasons in the short term. Other countries simply cannot match the U.S.’s infrastructure capacity to handle such growth.”
Despite concerns about potential inflation and deficits due to Trump’s policies, bond yields have stabilized after an initial surge following the election.
El-Erian attributed this to U.S. bonds becoming more appealing compared to those of other advanced economies.
The continued demand for Treasuries will aid the federal government in financing the expected surge in debt under another Trump administration.
Prior to the election, the nonpartisan Committee for a Responsible Federal Budget estimated that Trump’s policies could increase the debt by $7.5 trillion, possibly reaching $15.2 trillion.
If investors, particularly “bond vigilantes,” resist the substantial amount of debt being auctioned by the Treasury Department, they could drive yields higher and increase borrowing costs across key sectors like mortgage rates.
In a Wall Street Journal op-ed on Tuesday, BlackRock Chairman and CEO Larry Fink expressed optimism that faster economic growth would help in managing U.S. debt.
He wrote, “If GDP grows at an average of 3% in real terms over the next five years, the country’s debt-to-GDP ratio would remain relatively stable at a high, yet manageable, level.”
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