Is America Breaking the Global Economy?

The global economy is, to put it mildly, in a state of flux. Before the most recent U.S. elections, it was already being buffeted by geopolitical shocks and the prospect of transformative technological innovations. But now, it also has to endure an unusually high amount of policy volatility from the world’s most powerful country. The result has been a roller coaster not just for bonds and equities but also for economic forecasters and policymakers.

At a deeper level, this turmoil has called into question consensus narratives about the United States. Long-standing assumptions that underpin the choices households, companies, and investors make have gone away. Rules of thumb have become far less helpful. Measures of consumer and producer confidence fell off a cliff. Expectations of inflation, meanwhile, surged to levels last seen in 1981.

Amid this deep uncertainty, forecasters have struggled to predict where the U.S. economy will ultimately end up. But two main visions bookend a dispersed and unstable set of individual projections. In the first, the United States is on a bumpy journey that will culminate in an economic restructuring resembling the ones that took place under U.S. President Ronald Reagan and British Prime Minister Margaret Thatcher, where it will emerge with less debt and a more efficient private sector and where it will trade in a fairer international system. In the second scenario, the country is slowly slipping into the stagflation and, as happened under U.S. President Jimmy Carter, could end up in a deep recession, perhaps with pronounced financial instability.

Whatever the outcome proves to be, it will have international ramifications. Since the end of World War II, the U.S. economy and financial system have been at the center of global markets. Washington carries great influence in multilateral institutions. The United States has long been the only reliable driver of world economic growth, and it leads in the development and adoption of most productivity-enhancing innovations, such as artificial intelligence, life sciences, and robotics. Many foreign investors have outsourced the management of their savings and wealth to American financial markets, thanks to their deep liquidity and strong architecture. The dollar is the world’s reserve currency. If the United States slips into stagflation, other parts of the planet are at risk of doing so as well.

Most governments seem to know this. That is why countries around the world are seeking to insulate themselves from the policy volatility emanating from Washington. Europe, for example, is striving to improve its regional standing while forging new and more robust economic relationships with Africa, Asia, and Latin America. China, meanwhile, sees an opportunity to position itself as the more reliable economic superpower. Yet so far, these efforts are running into headwinds. There is simply no other country that is as wealthy or powerful enough to step into the United States’ shoes.

With little prospect for stability, governments, companies, and investors will need to do more to insure themselves against potential damage. They must be agile and flexible. They need capital and human resilience, so they can absorb setbacks and fund new initiatives. And they need to be open to fresh ways of thinking and behaving. If these actors can become more nimble, they will survive the volatility—and perhaps emerge better for it. But if they freeze up, they will undermine the wellbeing of both the world’s current generations and its future ones.

A PAUSE ON EXEPTIONALISM

The United States is still the most powerful and prosperous country in the world, and it has mature institutions. But in economic and financial terms, the country now sometimes resembles a developing nation. Like countries with immature tax systems that desperately need revenue, Washington erected sudden, high tariffs on most external goods. It then slipped into a swiss cheese approach to concessions—exempting products and sectors in a seemingly arbitrary manner. It did all this as its deficit continued to increase. Indeed, at times, it looks as if U.S. officials have adopted an approach to policymaking more akin to what happened in parts of Latin America than to what one would expect from the most powerful economy in the world.

The longer this behavior continues, the greater the risk that the American economy will be beset by problems more common to developing countries. Already, there are signs of capital outflows and more hesitance from external investors, and there is concern about central bank independence. U.S. markets, after decades of dominance, underperformed at the beginning of 2025. The once-mighty dollar is losing its value, even as the yields earned by holding it go up. There has even been a sharp reduction in tourist visits.

And the turbulence is unlikely to dissipate. U.S. President Donald Trump ran for office in 2024 on a promise to upend both the U.S. and global economy, to pull back Washington’s security umbrella, and to distribute more evenly the cost of supplying key global public goods such as aid and defense. He is making good on these pledges, and there is no reason to think he will stop anytime soon. In fact, the question is how far he will go, and how quickly he will move.

The United States now sometimes resembles a developing nation.

Other countries might hope that, when all is said and done, Washington’s current policy approach will only modestly unsettle the economic order. But the tariffs, the weakening of the dollar, the risk of financial instability, and suggestions that the United States may try to force some of its external creditors to extend the maturity of their US Treasury bond holdings have left the world on edge, with even seasoned observers struggling to make sense of what the future will bring. Simply put, Washington has shaken the very foundations of the global order, and there is no trusted conductor to guide countries and companies through the complicated transition to whatever is coming next.

The list of uncertainties is long and daunting. It is unclear, for example, if Washington can upend global trade without upending global capital flows. Experts do not know whether the price effect of tariffs will prove to be a one-off affair or fuel an inflationary cycle. It is uncertain how central banks, especially the U.S. Federal Reserve, will handle the delicate balance between taming prices and avoiding a sharp, economic contraction. (The tension between Trump and Jerome Powell, the chair of the Federal Reserve, only adds to the uncertainty—and risks the bank’s independence, effectiveness, and credibility.) No one can predict the long-term consequences of the pandemic’s supply chain disruptions, which geopolitical tensions have exacerbated. And several countries are still waiting to find out if they will be forced to choose between China and the United States as tensions in the Pacific mount.

These open questions obviously make life difficult for governments. But they also complicate things for businesses and investors. Long-standing historical correlations between asset classes, most importantly the prices of stocks and bonds, were once a bedrock of investment strategy. Now, these relationships are both unusual and unstable. Traditional safe havens, meanwhile, are no longer actually secure. The basic building blocks of any investment approach—expected returns, volatility, and correlation—are as uncertain as they have been in decades. As a result, investors are struggling with how to allocate assets and how to mitigate risk. They know they need to evolve their approach, but it is far from clear what they should be evolving to.

OF TWO MINDS

In trying to predict what will happen, economic forecasters have generally been pulled in one of two extreme directions. The first is optimistic about where the current bumpy journey will lead. According to this vision, the Trump administration would succeed in shrinking the bureaucracy, eliminating unnecessary regulations, and curtailing spending—thus creating a more efficient government that is less encumbered by debt as growth picks up. The economy would emerge from the present turmoil with an unleashed private sector that can better seize exciting productivity-enhancing innovations in areas where the United States already leads, such as artificial intelligence, the life sciences, robotics, and (down the road) quantum computing. Washington may still have higher tariffs than it did before Trump came into office. But those tariffs would have produced a fairer trading system, where other countries have dismantled their higher tariffs and onerous nontariff barriers, while also assuming more of the cost for providing global public goods. This scenario is not just reminiscent of the early 1980s reforms pursued by Reagan and Thatcher. It goes beyond. It would entail a reset of not only the domestic economic order but the global one, as well.

To achieve this outcome, of course, many things would have to go right. Most importantly, higher growth would need to materialize quickly to alleviate the forming debt overhang. Financial markets would need to show patience, absorbing uncertainties about the dollar and U.S. government bonds. Internationally, countries would need to trust that Washington would stick to whatever it agreed to on trade and tariffs. They would need to become more comfortable with their still sizable holdings of dollars and treasuries. And they would need to navigate what are likely to be persistent tensions between China and the United States, the world’s two economic superpowers.

Then there is the Federal Reserve. In a world of higher productivity, lower inflation, and less threatening deficits and debt, the central bank should feel more willing and be more able to significantly cut rates. But to get there, Trump and Powell would have to resolve their differences, with either Powell stepping down or Trump showing greater patience until May, when Powell’s term is scheduled to end.

This is a world in which volatility remains high.

Trump might also get a rate cut in a more pessimistic scenario—but not in the way he wants. In this world, Washington does not get a handle on its swelling deficits. Trust in institutions continues to erode, as worries increase about the rule of law and executive overreach. The United States displays ever less interest in both setting and abiding by global standards and regulations. Other countries reconsider their role in the global order. At a minimum, they are forced into greater self-insurance, seeking more domestic resilience in the face of a changing world. They could even end up forming multicountry alliances that would worry the United States not just economically but also with respect to national security.

This scenario would effectively repeat much of what the world experienced in the 1970s, when the global economy also grappled with supply shocks, rising commodity prices, and policy missteps. It would be grim for everyone involved. Companies would have to juggle rising costs with weakening demand. Investors would struggle to eke out returns in an environment where both bonds and equities were vulnerable. And households would have less purchasing power and job security. The whole world might then tip into a recession, scarring a generation that already has less financial and human resilience. Future generations, already due to inherit a world of high debt, inequality, and climate crises, would suffer as well.

Right now, both the good and bad scenarios are plausible, as are many points on the range bookended by them. In fact, at the beginning of 2025, various market price indicators suggested that there was a roughly 80 percent chance of change for the better and a 20 percent chance of change for the worse. The outlook for the good scenario fell to below 50 percent in early April, as Trump announced much higher tariffs than markets had anticipated. It became more favorable by the end of the month, as traders and investors grew more confident that his subsequent 90-day delay would result in manageable tariffs and no major shock to the global trading system. But this mix is inherently fluid and is likely to keep on shifting, at least for the near future.

BRACE FOR IMPACT

As much as they would like to, there are very few, if any, public or private actors that can fully protect themselves from the ongoing economic volatility. But there are strategies they can take to steer themselves through.

One approach is to simply stay the course and bet that, when all is said and done, the world will not look tremendously different than it did in January. The markets, after all, have already recovered from Trump’s sweeping trade pronouncements, with the major stock indices establishing new record highs. As the president talks and negotiates with different countries, deescalation might prevail. And no matter what happens, the United States will end up retaining its private-sector dynamism, innovation, and entrepreneurial spirit. It will lead the world in tech and biological development. Some economists go as far as to argue that an unsteady and volatile U.S. Treasury market need not contaminate a strong corporate sector. To them, one can be a good house in a volatile neighborhood.

Other countries, meanwhile, might fix their own economic troubles, forced to do so by the withdrawal of the U.S. security blanket. Europe could spur more growth by rationalizing its complex regulatory system, encouraging innovation and diffusion, and thus promoting productivity. This would be supported by better regionwide efforts to complete the EU’s architecture, which relies too heavily on its monetary union and desperately needs progress on its fiscal and banking unions.

Meanwhile, in Asia, Beijing might limit its exports so that countries do not fret about Chinese products being dumped into their markets—much as Japan did a few decades ago with its voluntary export restraints. China could also fundamentally revamp its growth model, replacing the traditional engines of exports and state investment with the unleashing of private domestic consumption and private investment.

Yet given the uncertainties, neither companies nor governments may wish to bet the farm on such a happy outcome. If the United States’ role in the global economic and financial systems has become inherently more uncertain and chaotic, then decision-makers need to prepare for a more fragmented world with more frequent and violent risks. This is a world in which policy-induced volatility remains high, global supply chains unstable, and financial debt markets nervous. Countries could attempt to de-risk more, initiating a deeper decoupling. Competition between Beijing and Washington would grow more intense. A handful of important swing states, namely Brazil, India, Saudi Arabia, and the United Arab Emirates, could maintain good relations with both governments. But most countries would have to choose.

In this case, decisionmakers will need to do a whole lot more to regain control of their economic and financial destinies. Led by a Germany more interested in defense and infrastructure, Europe would have to overcome its long-standing hesitancy to issue joint debt, delegate more authority to Brussels, and undertake many more regional initiatives, including in defense. China would have to be less hesitant to sacrifice short-term growth in pursuit of a fundamental revamp of its economy. Major developing countries, such as Brazil and India, would also become more reform oriented and drive their economies through the stubborn middle-income trap.

Fortunately for them, Washington’s behavior could provide exactly the impetus needed to make such changes. Europe, in particular, can use today’s instability as air cover to pursue the reforms proposed by former Italian Prime Minister Mario Draghi, which seek to address the region’s lack of innovation, productivity growth, and internal financing. Europe might also create more homogeneous capital markets that can absorb the continent’s excessive investment in U.S. assets.

But dramatic change, like staying the course, has risks as well. If the future remains uncertain, then policymakers may not want to make big, irreversible shifts. Instead, they may want to walk a kind of middle path. They could, for example, reduce their exposure to the United States but at the margins, in an alterable fashion. They might do so quietly, in order to avoid triggering Washington’s ire.

Decision-makers must avoid falling into behavioral traps.

Choosing between these different courses will not be easy. Each actor will have to decide what makes the most sense for them. But in an increasingly chaotic planet, every player will have to learn to quickly adapt, including those thinking the world will change little. That means actors should try to build up considerable financial, human, and operational resilience.

Companies and investors, for example, should hold more cash and strengthen their balance sheets, diversify their supply chains and portfolios, invest more in employee development using innovative tools, and communicate more effectively. Decision-makers must also do a better job of gaming out future scenarios, stress testing their strategies, and identifying potential vulnerabilities. That means empowering local units, officials, and individuals to game plan and stress test policies.

Finally, decision-makers must avoid falling into behavioral traps. In times of uncertainty, people are more prone than usual to cognitive biases that lead to poor decisions. This tendency goes beyond denying that change is happening. Often, it entails what behavioral scientists call “active inertia”: when actors recognize that they need to do behave differently but end up sticking to familiar patterns and approaches regardless.

The fate of the once-great IBM provides a case in point. In the early 1980s, the company’s unique focus on mainframe computing was increasingly threatened by the rise of the personal computer. In response, both the board and management signed off on what was, fundamentally, the correct strategic decision: reallocating human, financial, and innovation resources to personal computer production. Yet the company’s attempt to shift was derailed when executives struggled to move workers and finances away from the familiar. As a result, the corporation was soon eclipsed by newer companies, and it had to remake itself, essentially, into a service company in order to survive. It has never recovered its dominant position in the industry.

BE SO BOLD

The world is facing a great deal of insecurity. There are few principles, rules, or institutions that officials and investors can rely on. The U.S. economy is becoming less stable, and Washington is less engaged in global policy coordination. After nearly 80 years, the global trading system is at risk of fragmentation. There are no sure bets on the future.

That fact is not, by itself, bad. But it does mean decision makers need to be hypervigilant. The choices people make in the coming months will have profound consequences for the future of the global economy and the well-being of billions. Government officials must be humble, but now is also not the time for timidity. It is, instead, the time for boldness, for creativity, for imaginative scenario planning, and for challenging the conventional wisdom.

The tasks ahead are difficult. They require a fundamental rethinking of how to manage economies, businesses, and investments. But if leaders are capable rise to the challenge—and they should be, bolstered by the coming diffusion of exciting innovations—the world can do more than just navigate the storm. It can emerge stronger and more prosperous than it was before.

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