The shift in U.S. policy is no longer just another episode of financial turbulence: the world’s largest economy is now behaving like an emerging market—imposing tariffs arbitrarily, ballooning its deficit, and undermining the Fed’s independence.
For the global system—already under pressure from wars, intensifying U.S.-China rivalry, and accelerating technological disruption—this means the loss of its last anchor of predictability. Inflation expectations have surged to early 1980s levels, and traditional safe havens no longer feel safe. What are the roots of this new American turbulence? Which scenarios—from a Reagan-style reset to a 1970s-style recession—are being priced in? And how can governments, corporations, and investors navigate a world increasingly shaped by fragmentation? This article takes a closer look.
The global economy is entering a volatile phase. Even before the U.S. election, it was shaken by geopolitical shocks and looming technological shifts. Now political turbulence in the world’s largest economy has added a new layer of uncertainty. It’s a challenge not only for markets but also for policymakers and forecasters.
Recent developments have shaken the idea of the U.S. as a pillar of global order. The reference points that once guided corporate, investor, and household decisions no longer apply. Trust has eroded sharply, while inflation expectations have climbed to levels not seen since 1981.
The future of the U.S. economy is deeply uncertain. Scenarios range from a painful but constructive reset in the mold of Reagan or Thatcher to a drawn-out period of stagflation and recession reminiscent of the 1970s. Either way, the consequences will not be confined to America. The U.S. remains a key engine of global growth and technological innovation, and the dollar is still the world’s primary reserve currency. If the country slips into stagflation, the fallout will be global.
Many governments are already adapting in an effort to shield themselves from the turbulence, strengthening ties with other regions. China is trying to position itself as an alternative economic leader—but no country has yet matched the scale of the United States.
Decision-makers must remain flexible and ready to revise their strategies. Those who adapt may emerge from the crisis stronger. Those who don’t risk consequences that will be felt by both current and future generations.
The U.S. Is Acting Like an Emerging Market—With Erratic Tax Measures, Rising Deficits, and Market Red Flags
Despite its institutional maturity, U.S. economic policy is increasingly echoing the behavior of developing economies. Like countries with chronic budget deficits and fragile tax systems, Washington has imposed sweeping import tariffs—only to introduce arbitrary exemptions shortly thereafter. All this has unfolded against the backdrop of a widening fiscal gap.
Continuing down this path increases the risk that the U.S. will face problems typically associated with emerging markets. Capital outflows and growing investor caution are already evident, along with mounting concerns over the Federal Reserve’s independence. In early 2025, U.S. markets posted their worst performance in decades, the dollar weakened despite high yields, and inbound tourism declined sharply.
Instability appears likely to deepen. Donald Trump has set a course to overhaul both domestic and global economic structures. He is scaling back America’s international commitments and reassessing its role in funding global public goods. The key question now is how far—and how fast—he is willing to go.
The world is hoping Washington’s current policy will result in only moderate disruption. But a new wave of tariffs, a weakening dollar, and talk of extending Treasury bond maturities for foreign holders are raising alarms. The U.S. has shaken the foundations of the global order, and today there is no trusted coordinator to guide other countries through the uncertainty.
The list of unresolved questions is long. Can the U.S. rewrite the rules of global trade without triggering a massive reallocation of capital? Will tariffs translate into persistent inflation? Can the Fed stabilize the economy without undermining confidence in itself? The rift between Donald Trump and Jerome Powell only adds to the risk. Uncertainty also looms over supply chains, geopolitics, and the mounting pressure to choose between the U.S. and China.
For governments, businesses, and investors, familiar reference points have vanished. Asset correlations have broken down, traditional "safe havens" no longer feel secure, and core investment parameters—volatility, returns, valuations—have become unstable. Strategic approaches must change, but what direction they should take remains unclear.
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Two Scenarios: Transformation or Recession. From a 'Reagan Reset' to a Repeat of the 1970s
In an environment of uncertainty, economists outline two opposing scenarios. The optimistic one envisions the current crisis as a starting point for sweeping reforms. The Trump administration cuts bureaucracy, curbs spending, and deregulates key sectors. Freed from constraints, the private sector boosts U.S. technological leadership in AI, biomedicine, robotics, and potentially quantum computing. Trade policy remains aggressive, but according to its advocates, helps create a fairer global system in which other nations lower barriers and share the fiscal burden.
This path resembles the Reagan-Thatcher reforms—but goes further, including an international reset. However, it depends on several factors: accelerated growth, market patience, continued confidence in the dollar, and the ability of partners to navigate between the U.S. and China. The behavior of the Federal Reserve remains crucial. If growth stabilizes and inflation falls, the Fed could start cutting rates—but only if political tensions between Trump and Powell do not escalate. Two possible outcomes are being considered: Powell’s resignation or the natural end of his term in May.
The alternative scenario is a downturn. The U.S. fails to control its deficit, and doubts grow over the rule of law and institutional independence. Washington disengages from international norms, and other countries begin to distance themselves. At best, they move toward self-insurance. At worst, they form new alliances that the U.S. may perceive as threats.
This would echo the dynamics of the 1970s: rising commodity prices, policy missteps, demand contraction, and loss of confidence. Bonds and equities lose appeal, companies edge toward insolvency, and households face declining purchasing power. The risk of a global recession looms—one that would hit an already vulnerable generation and saddle the next with an even heavier legacy, from debt to climate disruption.
Both scenarios remain on the table. In early 2025, markets placed an 80% probability on the optimistic path. But following the tariff announcements in April, sentiment shifted sharply—pessimists outnumbered optimists for the first time. A temporary recovery followed the 90-day delay, but the balance remains fragile and will continue to depend on signals from the White House.
Adapting in a Fragmented World: How Governments, Companies, and Investors Can Survive Instability
No actor—neither state nor corporation—can fully shield itself from today’s volatility. Yet there are strategies for adaptation.
One approach is to bet on the persistence of the global order. Despite Trump’s rhetoric, equity markets have hit new highs, and negotiations with partners could soften the administration’s trade posture. The U.S. is likely to retain its leadership in technology, innovation, and entrepreneurship. Some analysts argue that volatility in the Treasury market does not necessarily undermine corporate America—the U.S. may still be "the best house in a bad neighborhood."
For others, America’s retreat from its guarantor role could serve as a reform trigger. Europe could streamline regulation, accelerate innovation, and boost productivity—completing the EU’s institutional architecture with fiscal and banking integration. In Asia, China might adopt voluntary export restraints (as Japan once did) and reorient its growth model toward domestic consumption and private investment.
Yet neither governments nor businesses are willing to rely on optimism alone. Amid chaos, unstable supply chains, and stressed debt markets, countries are accelerating economic decoupling. The rivalry between the U.S. and China is set to intensify, forcing most nations to pick a side. Brazil, India, Saudi Arabia, and the UAE will try to remain non-aligned, but that will become increasingly difficult.
To navigate this shift, governments will need to assert control over their economic futures. Germany could lead Europe toward joint defense and infrastructure initiatives, expanding Brussels’ authority and advocating for common debt instruments. China may have to sacrifice growth in favor of structural reform. India and Brazil will need to escape the middle-income trap through domestic transformation.
Paradoxically, it is Washington that could help trigger these shifts. Europe may use the current instability as cover to implement Mario Draghi’s agenda—closing gaps in innovation, productivity, and investment. In parallel, the EU could develop internal capital markets to reduce its dependency on the U.S.
Still, the reform path is not without risk. Policymakers may opt for a middle course—quietly reducing reliance on the U.S. without provoking a sharp reaction. Each actor—from governments to investors—will have to define its own strategy for adaptation. But as instability grows, preserving the status quo will no longer be an option.
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The world is entering an era in which the universal rules once relied upon by policymakers and investors no longer hold. The U.S. economy is losing its footing, and Washington is retreating from its role as a global coordinator. After eighty years of integration, the very structure of the international trading system is under threat. The future is unpredictable.
That is not necessarily a bad thing. But today’s uncertainty demands maximum focus from global leaders. The decisions made in the coming months will shape the path of the world economy and the lives of billions. Clear judgment remains essential—but passivity is no longer an option. What is required now is boldness, creativity, and a willingness to build alternative futures and rethink outdated assumptions.
The challenges ahead are formidable. They call for a fundamental rethinking of how economies, companies, and investments are managed. But leaders still have the tools to respond—including the promise of new technologies. If used wisely, these tools could help the world emerge from today’s turmoil more resilient and adaptable than before.