Nouriel Roubini, the famously gloomy economist who earned his Dr. Doom moniker for foreseeing the 2008 global financial crisis, shared his thoughts recently in the Financial Times. It was an insightful evaluation worth sharing.
First, market discipline, reasonable advisers and Fed independence provided guardrails on the worst policies after “liberation day.” As markets corrected sharply in response, the US government was forced to negotiate more reasonable trade deals.
Thus, the US is experiencing a few quarters of a growth recession (GDP expansion below potential) and a modest rise in inflation rather than a serious stagflationary recession. By next year, growth will recover as monetary easing and fiscal stimulus continue, along with the tailwinds from AI-related capital expenditure.
Second, American exceptionalism will continue as the US (along with China) is ahead in the most important industries of the future including AI and machine learning, robotics, quantum computing, space commercialization and defense technology. Roubini estimates that annual US potential growth could rise from 2 to 4% by the end of this decade while stagflationary policies could reduce it by 0.5 percentage points. Thus, "tech trumps tariffs." If American exceptionalism was ruling when potential growth was 2%, it would strengthen as growth rises towards 4%.
Ditto for stock returns: when annual growth was 2% for the last two decades, US equity returns were around double digits, well above those of other advanced economies and emerging markets. Price-earnings valuation ratios can remain elevated if faster earnings growth is driven by increased economic growth. Of course, temporary market corrections will occur and tech disruptions will lead to winners and losers. However, the now common view that the US stock market is in a massive bubble and bound to crash is incorrect over the medium term.
As far as debt sustainability is concerned, the public debt to GDP is estimated by the Congressional Budget Office to rise sharply under the assumption that real economic growth will average 1.6% per year from 2025 to 2055. However, if potential growth is slightly higher at 2.3%, the ratio is stabilized over time. With growth at 3% or above, the ratio drops over time and is sustainable, assuming that the growth dividend is not wasted with even more spending. Increased GDP growth, while generally inflationary, may be offset by falling costs of production and increased productivity growth.
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