Wall Street has been flying high as an expected Republican sweep in the election drives hopes for lower taxes and deregulation, and that makes U.S. financial markets more attractive to the rest of the world, a top economist said.
In an interview on Bloomberg TV on Friday, Allianz chief economic advisor Mohamed El-Erian was asked if investors should expect a positive growth shock that's accompanied by more inflation.
"The direction of travel is clear: More growth, slightly higher inflation, a higher public sector borrowing requirement, and a huge sucking sound where a lot of foreign capital will end up in the U.S.," he replied.
The magnitudes of those trends will become more apparent when policies from the incoming Trump administration become clearer—and when the people who will carry them out become known, El-Erian added.
Just days after the presidential election, talk of potential Cabinet appointments is already ramping up. On Friday, the Financial Times reported that Robert Lighthizer, who was U.S. Trade Representative during Trump's first term, was asked to fill the post again.
The job of Treasury secretary will likely be offered to a financier, the FT added, with hedge fund managers Scott Bessent and John Paulson seen as possibilities.
Meanwhile, the rest of the world may have more trouble coping with a period of faster growth and hotter inflation, adding to America's relative edge, El-Erian said.
"This is a period in which U.S. dominance of the global system is going to increase, both for positive reasons and for negative reasons in the short term," he explained. "The rest of the world simply cannot build enough pipes around the U.S. They're trying and they've been doing it, but these pipes are very small compared to the size of the U.S."
Indeed, despite fears that Trump's tax cuts, tariffs, and immigration crackdown will be inflationary and worsen deficits, bonds yields have come back down after soaring in the immediate aftermath of the election.
El-Erian argued that's because U.S. bonds have become more attractive relative to those from other advanced economies.
Continued demand for Treasuries would help the federal government finance what's expected to be an explosion of debt under another Trump presidency.
Ahead of the election, the nonpartisan Committee for a Responsible Federal Budget estimated that his policies could add $7.5 trillion to the debt and possibly as much as $15.2 trillion.
But if investors, especially "bond vigilantes," balk at the enormous volumes of debt the Treasury Department auctions, they could send yields higher and raise borrowing costs across key segments of the economy, like mortgage rates.
In a Wall Street Journal op-ed on Tuesday, however, BlackRock Chairman and CEO Larry Fink said faster economic growth would help make U.S. debt more manageable.
"If GDP rises at an average of 3% in real terms over the next five years, the country’s debt-to-GDP ratio would stay roughly stable at a high, but reasonable, level," he wrote.
