Trump's policies could usher in stagflation and send stock prices plummeting, 'Dr. Doom' economist says

• Trump's win has upped the risk of a dire economic scenario, Nouriel Roubini says.
• His policies could lead to stagflation, a fate experts have said is worse than recession.
• Such a scenario would entail higher inflation, higher rates, and falling stock prices, Roubini predicted.

Donald Trump's proposed economic agenda raises the risk of one of the worst-case scenarios for the US economy, according to Wall Street's "Dr. Doom" economist.

Nouriel Roubini, the top economist known for his bombastic and frequently bearish prognostications, said he foresaw a challenging environment for the economy once Trump begins his second term as president.

That's because Trump's proposed policies could spark a period of stagflation for the economy, Roubini said, a situation some economic experts have described as even worse than a recession. In such a scenario, the economy would see a period of sluggish growth, soaring prices, high interest rates, and rising unemployment.

Roubini pointed to Trump's plans to levy steep tariffs on Chinese goods, cut taxes, implement "draconian" restrictions on immigration, and potentially erode some of the Fed's independence.

"If they were to follow those latter types of stagflationary policies, inflation will be higher, growth will be lower, bond yields will be higher because there is more inflation and more real rates with unsustainable deficits," Roubini said in an interview with Bloomberg on Monday.

"That's going to crowd economic growth, and bond yields above 5% would imply a correction of stock prices and negative impacts on the economy."

Other experts have warned some of Trump's policies could lead to higher inflation and interest rates, with his tariff plan attracting significant criticism from economists. Trump implemented tariffs during his first term without a significant increase in inflation, but forecasts are different this time around given that his proposals are much more sweeping, with tariffs targeting not just China but the rest of the world as well.

Trump has pushed back on the idea that his policies will stoke higher prices. In August, the president-elect swore his policies would lower inflation. In the week leading up to the election, Taylor Rogers, a Republican National Committee spokesperson, told BI in a statement that Trump would "once again cut taxes and unleash American energy to lower prices on groceries and other goods."

But Roubini, who has warned of a stagflationary crisis in recent years, has insisted stagflation risks will rise during Trump's presidency. Prior to Trump's election win, Roubini said the cost of tariffs could be passed onto consumers, and that restricting immigration could chip away one of the economy's main catalysts for growth.

Trump following through with all of his proposals would also likely increase the federal debt balance by nearly $10 trillion over the next decade, Roubini estimated.

"The Fed will have to cut less, maybe eventually stop sooner," Roubini said of interest rates, adding that the Fed could potentially even raise interest rates if stagflation sets in. "And then the Fed and Trump will be on a collision course."

Still, Roubini acknowledged uncertainties with the economic outlook. Some of Trump's policies — like his plans to loosen regulation — could prop up business activity and fuel growth, Roubini noted.

Markets also may be optimistic that they'll be able to reign in the future president by staging a selloff in bonds and equities, Roubini said. Other commentators have noted Trump is likely to appease stock and bond investors to avoid upsetting a booming market.

"I think markets are still in a wait-and-see to figure out whether the policies are going to be hurting the economy," Roubini said. "Maybe the markets believe that the market discipline is going to discipline hin in advance, knowing that policies are not sustainable, are going to lead to bond market vigilantes and the stock market punishing him."

Stocks took off in a record-setting rally last week after Trump secured his election victory. US stocks saw around $20 billion in inflows on Wednesday, according to Bank of America, the largest single-day stock purchasing boom in five months.

The Dow Jones Industrial Average and the S&P 500 closed at records on Monday.