NEW YORK — Mohamed El-Erian warned in a Financial Times op-ed that a decades-old 'policy put' supporting financial markets is vanishing. He attributed the decline in this implicit safety net to high inflation, elevated interest rates, and soaring government debt that constrain policymakers’ ability to respond to downturns.

For years, central banks and governments intervened during market crashes, conditioning investors to treat volatility as a buying opportunity rather than a signal of deeper economic trouble. “This has deeply conditioned market psychology, with many investors viewing volatility not as a signal of fundamental developments, but as a virtually automatic buying opportunity,” El-Erian wrote.

However, El-Erian argues that while the willingness of officials to shield markets may remain, their capacity to do so has diminished. “While the willingness to shield markets may endure, the capacity to do so is less,” he said. “The higher borrowing costs feed directly into larger government interest expenditures, while simultaneously threatening tax revenues as growth is hampered,” El-Erian explained.

Recent U.S. bond auctions drew weak demand as investors balked at exploding deficits, surging debt interest costs, and plans to boost defense spending by nearly 50%. The reemergence of 'bond vigilantes' reflects growing fiscal vulnerability. In a recession, the U.S. may have to issue greater volumes of fresh debt at higher yields, worsening deficits and interest expenses.

Emerging markets face an even more dire situation as governments have depleted fiscal resources and currency reserves, raising fears of capital flight and more financial instability. El-Erian described the global economy as undergoing a “bumpy, structural recalibration” as the traditional policy safety net fades. He urged policymakers to pursue AI-driven productivity gains, deepen capital markets, and adopt smarter fiscal strategies.