REUTERS/Fred Prouser
The US economy might confront a fate more challenging than a recession if Donald Trump retakes the White House, famed economist Nouriel Roubini said.
"The combination of trade, currency, monetary, fiscal, immigration and foreign policy of Trump poses much higher risks of stagflationary outcomes than if Kamala Harris is elected," he said at the Greenwich Economic Forum on Wednesday, first reported by Bloomberg.
The famously bearish forecaster is referring to the one scenario central banks hope to avoid at whatever cost. Stagflation occurs when inflation keeps rising but growth slows.
There are no painless solutions for an economy that tumbles into this situation.
Typically, central banks lower interest rates to revive weaker activity, but this option goes away if prices keep rising. Rates must stay high to reduce inflation, leaving authorities between a rock and a hard place.
When stagflation last hit the US in the 1970s, a deep recession was required to finally break out of the crisis.
According to Roubini, Trump's proposals would fuel these two key ingredients: lower growth and higher inflation.
For instance, scores of economists have criticized the former president's pledge to introduce a 10% universal tariff on all US imports. Not only are duties past down to consumers, but these taxes cause producers to pull out their products. When this happens, supply falls and prices rise.
Trump's idea to replace the US income tax with tariffs was similarly called out by former Treasury Secretary Larry Summers, who called it the "mother of all stagflations."
When it comes to currency policy, Barclays highlighted that Trump's plans to devalue the US dollar would likewise spark higher inflation.
Roubini also expressed concern about Trump's stringent immigration policies. If elected, the Republican candidate has vowed to enforce mass deportations, which threatens one of the economy's major engines of growth, Roubini said.
Others have made the same point. In July, JPMorgan's chief global strategist David Kelly called Trump's tariff and immigration policy mix an "elixir for stagflation." Separately, the Peterson Institute think tank warned that removing migrant workers would trigger a labor supply crunch and a manufacturing-based recession.
Roubini said tensions in the Middle East make the threat of stagflation under Trump worse. As conflict escalates between Israel and Iran, rising oil prices increase price pressure. By one estimate, a worst-case scenario in the region could push international crude up to $200 a barrel.
He recommended that investors buy gold, short-term duration bonds, and Treasury inflation-protected securities to hedge against any upcoming risk.
To be sure, not all of Roubini's forecasts have panned out. After correctly predicting the 2008 housing crash, his pessimistic outlooks have earned him the moniker of "Dr. Doom."
According to Bloomberg, he similarly warned of a stagflationary debt crisis in 2022, citing that it would be worse than the 1970s era.
