Since President Donald Trump’s reelection in 2024, his administration has embarked on a transformative journey in U.S. economic policy that has left the world in a state of apprehension.
The focus on abrupt tariffs, a weakening dollar, and pressure on the Federal Reserve has spread ripples of uncertainty beyond America’s borders.
Economist Mohamed El-Erian, in a recent piece for Foreign Affairs, highlights that the global community can no longer rely on Washington as a bastion of stability.
Instead, nations must prepare for a new era marked by volatility, fragmentation, and unpredictability in U.S. policies.
This shift represents a significant departure from decades of established continuity.
With the traditional “golden rules” that once guided governments, companies, and investors losing relevance, decision-making has become marked by erraticism and arbitrary tariff exemption practices that erode trust in institutions.
The ramifications have been immediate, with consumer and business confidence nosediving, financial markets entering unstable territories, and economic forecasts oscillating between starkly contrasting scenarios.
Some analysts point to a potential economic restructuring akin to the Reagan-Thatcher era, while others express fears of a return to stagflation and financial instability, reminiscent of past economic crises.
El-Erian draws attention to a troubling comparison: the U.S. economy is beginning to mirror the characteristics of developing nations.
There are signs of a weak tax system, escalating deficits, sudden shifts in trade policies, capital outflows, and growing concerns regarding the independence of the central bank—all within the heart of the world’s most powerful economy.
This presents a dual dilemma for the international community.
Foreign investors, who have long trusted U.S. markets, are becoming increasingly cautious in the face of volatility.
Simultaneously, allied nations are seeking ways to insulate themselves from the unpredictability inherent in Washington’s decisions.
In response, Europe is exploring new avenues for agreements with African, Asian, and Latin American nations, while China is striving to establish itself as a more reliable economic partner.
Nevertheless, despite these efforts, no other entity currently possesses the strength to replace U.S. leadership in the global economy.
El-Erian contemplates two potential futures arising from this moment of uncertainty.
In the first scenario, President Trump successfully implements reforms within the state apparatus, curtails national debt, and establishes a flourishing private sector capable of leveraging innovations in fields like artificial intelligence, robotics, and life sciences.
While tariffs may persist, a fairer trading system could emerge, characterized by clearer rules and a more equitable allocation of global costs.
The second scenario paints a more pessimistic picture: escalating deficits would lead to an erosion of institutional trust and heightened international tensions.
In such a context, countries might resort to prioritizing self-sufficiency, potentially plunging the world into a recession resembling the economic malaise of the 1970s, marked by high prices, low growth, and a general decline in societal well-being.
Both potential paths seem plausible, with early 2025 market estimates suggesting an 80% probability of a positive development, before this optimism sharply fell to 50% in April following the announcement of new tariffs.
As of now, uncertainty lingers in the air.
El-Erian stresses that one undeniable reality is the persistence of uncertainty, and governments along with companies can no longer afford to remain inactive.
To navigate these turbulent times, a strategy of resilience is essential—this entails fortifying balance sheets, diversifying risks, investing in human capital, and preparing for an array of possible outcomes.
The need to liberate oneself from rigid mental frameworks is crucial, as is the avoidance of what psychologists label as “active inertia,” which refers to the tendency to recognize the need for change yet continue operating in familiar ways.
An illustrative case is that of IBM in the 1980s.
Although it recognized the necessity to transition from mainframes to personal computers, the company struggled to realign its resources effectively, ultimately allowing competitors to surpass it.
A similar fate may await nations and institutions that underestimate the urgency to adapt.
Among the most concerning aspects of El-Erian’s analysis is the perceived lack of leadership navigating the global economic landscape.
The post-World War II economic architecture is facing dismantlement, with no clear alternative emergence on the horizon.
Multilateral coordination is waning, supply chains are fraught with instability, and financial markets are under significant stress.
In this context, leaders face a critical choice: either accept passivity and luxuriate in hope for a return to pre-crisis norms or seize this opportunity to reform institutions, diversify dependencies, and cultivate autonomy in their own economic systems.
Each route carries inherent risks, yet one thing is undoubtedly clear: inaction is no longer a feasible option.
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