Nouriel Roubini is known as “Dr. Doom” for his eternal pessimism about the global economy, but when it comes to the United States, he is reasonably confident that Donald Trump will decide to moderate his policies at the time of his inauguration on January 20.

This could have positive implications for the US economy, which could allow the expansion to continue.

If Trump reverses his goals on trade and immigration, Roubini believes the United States will experience less inflation and continued economic growth, avoiding a period of damaging stagflation.

This comes as global markets rush to prepare for Trump’s policies. Even though the U.S. president-elect appears committed to lowering the corporate tax rate from 21 percent to 15 percent, he may decide not to add so much stimulus that it causes inflation and an explosion of the debt.

That would raise the risk that bond market vigilantes would apply “market discipline” to the new administration via a rise in U.S. Treasury yields that could affect the stock market, according to Roubini, managing director of Roubini Macro Associates.

Of course, Trump now has a strong mandate for change, but the outlook for the economy and financial markets will depend on the extent and timing of his policy sequencing.

But Roubini is much less optimistic about the global economy. While he hopes China’s response to protectionism will include much-needed structural reforms, he sees medium-term risks associated with the “10 megatrends” since the pandemic that have put the world on a path to stagflation.

Speaking at the UBS Australasia conference on Tuesday, the former Clinton administration adviser, professor emeritus at New York University’s Stern School of Business, described an “extremely benign scenario” in which Trump would not give not as a result of its trade, immigration and tax policies. policies.

He said this would boost business confidence and investment spending, leading to robust economic growth, and inflation could remain under control amid deregulation, favoring a soft landing.

In this scenario, the Fed would continue to cut rates and everything would be “Goldilocks”.

At the other extreme, if all of Trump’s policies were implemented, the United States would face stagflation and recession. The Fed would have to raise rates to prevent inflation from spiraling out of control, and financial markets would react negatively, said Roubini, who has worked for the IMF and the World Bank.

“So there are these two extremes, but I think the reality is somewhere in between,” he said. “He believes in tariffs and he must finance his deficits with something and a little with his tariffs.

But he will defuse the situation after he threatens, especially if there are trade concessions… he will reduce migration, but not to the point where it will choke off the labor supply.

“He might want to weaken the dollar, but tariffs imply a stronger dollar, and if you try to weaken the dollar, then there is a risk of further dedollarization, of disorderly movements in bond yields.

“So maybe he’s going to give up on that, and he’s going to realize that making all these tax cuts permanent without funding them is going to buy (cause) high bond yields…he’s going to do them, but not to the point where debts explode.

“So it’s going to generate revenue through tariffs, some of which by phasing out IRA (Inflation Reduction Act) subsidies… so debts are going to be slightly larger, but without completely exploding.”

In this scenario, Roubini says U.S. bond yields would rise above current levels, inflation would stop falling, and the Fed would cut rates by just 50 basis points in 2025. The U.S. dollar would remain strong and the U.S. stock market would reach the midpoint. multi-digit percentage returns rather than the double-digit returns seen this year.

“So I think everything will be fine for the United States,” he said.

“The rest of the world is different, because the United States is growing above potential, it’s probably going to continue to grow above potential, and the Fed is going to accept inflation slightly above 2 percent because she does not want to kill the recovery economy.

“But Trump’s policy is going to represent a risk for Europe, a risk for Asia, a risk for Australia, a risk for China, and so high tariffs mean a loss of demand in the rest of the world, and this inflation which is increasing to force the ECB and other central banks to further relax their monetary policy.

“So the Fed will ease less, while other countries will ease more… and Europe also faces structural challenges, economic growth – it needs economic reforms, otherwise its economy will stagnate .”

According to Roubini, the big question mark concerns China’s prospects. He fears that a “real radical regime change” in China, which “would involve dealing with excess savings and trying to get rid of excess capacity in the rest of the world”, will not happen, even whether extreme US protectionism could leave China with little choice.

But the risk is that inflation will be higher than expected due to supply and demand problems caused by 10 “megatrends” that reduce potential growth and increase inflation.

He also warns of the deglobalization of trade, the aging of the population, curbs on migration, “geopolitical depression,” climate change, pandemics, a backlash against liberal democracy that leads to “favorable policies to workers and wages,” a potential dedollarization that devalues ​​the dollar, increases friction in the international payment system and increases production costs.

“These are all supply-side factors that lead to lower growth and higher inflation,” he said.

Technological innovation will increase growth and “ultimately” reduce production costs, but structural forces are expected to dominate in the coming years, according to Roubini.

On the demand side, he warns that fiscal benefits are “structurally high” and “they will most likely increase because we have to fight what I call five wars.”

“They will try to increase public spending as a percentage of GDP. Geopolitical depression requires more defense spending in the United States, Europe, Russia, Ukraine, China, Japan, Korea, Australia and Israel – either to fight hot wars or to prevent cold wars to become hot wars. he said.

He also says the cost of tackling global climate change will be “extremely high”. Global pandemic preparedness will also come at a significant cost, and deglobalization, robotics, and automation will eliminate many jobs, requiring a “broader social safety net.”

“The risk of income inequality means spending more on those left behind, otherwise social unrest and a populist government coming to power and a backlash against liberal democracy, etc. ., will become more extreme,” warned Roubini.

“Spending as a percentage of GDP will therefore have to increase.

“Already high taxes. They could increase slightly as structural budget deficits widen.”

This article was first published in The Australian.

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