Economist Nouriel Roubini has warned that if Donald Trump's economic ideas are followed to the letter, America's economy could be hit by "stagflation".
He said the president-elect will face little discipline to his policies from the political institutions in the United States over the next four years because his Republican Party will be in effective control.
That means the only pushback to his economic policies could come from bond traders and others in financial markets.
"There is no political discipline because they control the executive, the Supreme Court, the judges, the Congress," Professor Roubini told the ABC.
"So the only discipline can come from bond vigilantes and markets telling him that some of his policies are not going to be sustainable.
"That's going to be the main constraint to not follow silly policies," he said.
Professor Roubini, a professor emeritus at the Stern School of Business at New York University who predicted the Global Financial Crisis, said Trump's stated policies will impact the US economy in different ways.
"Some of the policies of Trump might increase growth and reduce inflation, being pro-business low tax rates for the corporate sector, deregulation, and more production of fossil fuels," he said.
"But there are other policies that might have the opposite impact, to reduce economic growth and increase inflation."
What are those policies?
"Tariffs and trade wars, significant restrictions to migration, unfunded tax cuts that lead to higher budget deficits that lead to higher interest rates, crowding growth, attempts to try to devalue the value of the dollar, reducing the independence of the US Federal Reserve … and possibly exacerbation of some of the geopolitical conflict, including economic war with China," he said.
"We don't know yet, on net, whether the more positive policy, the increased growth and reduced inflation, are going to be dominant compared to the stagflationary policies that reduce growth and increase inflation.
"I think there are more questions than answers on that," he said.
"Stagflation" is a portmanteau of stagnation and inflation.
It refers to a situation of stagnant economic growth and rising unemployment, with high and rising inflation.
In mid-2022, in the wake of Russia's invasion of Ukraine, which prompted the World Bank to dramatically downgrade its forecasts for global growth, the bank warned at the time of the possibility of "stagflation" hitting the world's developed economies.
Those warnings did not come to pass.
But Professor Roubini said it would be interesting to watch Trump deal with financial markets.
He said if Trump was "really serious" about 60 per cent tariffs on China, and 10 to 20 per cent tariffs on other trading partners, about sharply weakening the value of the US dollar, about "draconian restrictions" on migration and "mass deportation," and about tax cuts that aren't funded by raising other taxes or cutting spending, it could lead to situations Trump doesn't like.
"If he tries to follow these policies that are stagflationary, interest rates are going to be much higher, bond yields are going to be higher, the Fed will have to raise rates rather than cutting them, the stock market is going to correct," he said.
"He cares about the bond market. He cares about the stock market. And therefore market discipline, as opposed to political discipline … [will] be the main constraint [for him]."
Professor Roubini said he also didn't know how effective Trump's new Department of Government Efficiency would be, which will be run by Elon Musk and Vivek Ramaswamy.
"I'm not sure this new department is going to be very successful," he said.
"Most of US government spending is either on defence [which is] going higher, interest payments on the debt … going higher, entitlements spending like pension and health care, that's going higher, so there's not much discretionary spending," he said.
"They said they want to cut [spending] by $US2 trillion, but I'm not sure where those spending [cuts] and those efficiencies are going to come, so that's going to be highly challenging, easier said than done."
What impacts for the world?
Professor Roubini said if Trump still pushed forward with policies that led to stagflation in the US, there would be consequences for the global economy.
"That's dangerous for the rest of the world because higher interest rates … imply that other countries have to follow the US. If they don't follow the US, their currency weakens, so interest rates globally are going to be higher, and that's going to crowd out growth globally," he said.
"Of course, tariffs in the US [will] cause inflation in the US, but cause economic damage like less demand for the exports of other countries, and that's deflationary and leads to less economic growth for the rest of the world as well."
He said Australia wouldn't be immune from the fallout.
"If he were to impose tariffs that reduce economic growth and [cause] inflation, in Australia those [RBA rate cuts] may be coming sooner," he said.
"But if instead his policies lead to higher global interest rates, and then those interest rates go higher in Australia, then you'll have further crowding out of economic growth.
"I would say that most of the challenge for Australia are domestic. Growth is weak, but inflation is sticky because probably the China shock implies lower growth, but most of the growth now is deriving from demand coming from the public sector, and that's leading to inflation to remain higher than otherwise.
"So you need to do economic reform that leads to greater productivity in the private sector, rather than relying on the public sector in order to have strong economic growth," he said.
