We should expect the United States to do well during this decade, not thanks to Trump, but despite himself.
Since the “Liberation Day” proclaimed by Trump on April 2, the date on which the President of the United States has announced the taxation of customs duties very high against his opponents as well as his allies, general opinion is pessimistic about the prospects of the American economy in the short, medium and long term: these disproportionate customs rights will cause a recession in the United States and through the world, Budget deficit and that of the country’s current balance will become unbearable, the status of the US dollar as a global reserve currency will disappear, and the greenback will weaken considerably over time, it is currently heard.
This pessimism is certainly justified by several of the policies announced by Trump. Customs rights, protectionism and trade war are indeed likely to cause stagflation (increase in inflation and slowdown in growth), as well as draconian restrictions on immigration, massive expulsions of undocumented workers, important unlikely budgetary deficits, or even approaches to the independence of the United States Federal Reserve. Likewise, the US economy would not benefit from a Mar-A-Lago agreement consisting in weakening the dollar, new damage to the rule of law in the country and around the world, or more severe restrictions on foreign talent-scientists and students-welcomed in the United States.
I maintain (since last winter) that the American economy will continue to be well-not thanks to Trump policies, but despite them. To start, I expected the market discipline, Trump’s more reasonable advisers as well as the independence of the Fed prevail, and that is precisely what happened. Trump systematically fell back, and he preferred to conclude trade agreements rather than applying customs duties announced on the day of the liberation.
It is unlikely that the role of the dollar as a global reserve currency will be significantly called into question, even in the event of slight diversification of the assets labeled in dollars.
If Trump has the lack of always getting carried away (“Talo”, “Trump Always Lashes Out”), bond vigilantes and financial markets have led him more to end up deflating (“Taco”, “Trump Always Chickens Out”). Its most prejudicial economic policies softening, the American economy will certainly experience difficulties, but the most likely scenario for the end of the year lies more in what is called a growth recession (rate lower than potential growth) than in a recession itself (generally defined as two consecutive quarters of negative growth).
Second, since the positive effects of technology will always prevail over the negative effects of customs duties, it is wrong to speak of the end of American economic exceptionalism. The United States remains ahead of all the countries of the world-China included-with regard to most revolutionary innovations that will shape the future. The potential annual growth of the United States should therefore increase at a rate of 2 to 4% until the end of this decade, before displaying a much higher rate in the 2030s. Suppose that new technologies led its potential growth to be increased by 200 basic points, and that trade policies and other bad decisions reduce it by 50 base points; America would keep its exceptionalism. It is the singularly dynamic private sector of the United States that will determine future growth prospects of the country, not Trump’s policies.
Third, if the potential growth accelerates over time until reaching 4%, public debt and external debt of the United States in part of the GDP will remain viable, and will stabilize and then gradually decrease (except even more substantial budgetary imprudence). If the congress budget office provides for an increase in the public debt/GDP ratio, it is because it presumes that potential American growth will cap at 1.8%.
Fourth, as long as American economic exceptionalism persists, we should not expect to see the “exorbitant privilege” conferred by the world dollar primacy disappear. Despite the increase in customs duties, US external deficits will probably remain high, investment in share of GDP increasing thanks to a prolonged technological boom, and the savings rate remaining relatively stable. The digging that will result on the side of the current balance deficit will be funded by incoming capital flows (portfolio investments and foreign direct investments).
In this context, it is unlikely that the role of the dollar as a global reserve currency will be significantly called into question, even in the event of slight diversification of the assets lengled in dollars. Likewise, these structural incoming flows will limit the risk of lower exchange rates, and could even strengthen the dollar in the medium term.
In summary, we must expect the United States to do well during this decade, not thanks to Trump, but despite himself. There is no doubt that many of its policies are potentially stagflationist. However, the United States is part of some of the most important technological innovations in the history of humanity, which will produce an important positive shock on the overall supply, which will result in time an increase in growth and a reduction in inflation. This effect will certainly be without common measure with the damage likely to result from Trump’s stagflationist policies.
It is not a question of being satisfied with prejudicial policies, the impact of which could be serious. But as long as the markets and vigilant actors in the bond market do their work, Trump’s worst instincts remain under control.
Copyright: Project Syndicate, 2025.
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