Nonetheless, I have maintained (since last winter) that the US economy will be fine, not because of Trump’s policies, but in spite of them. For starters, I expected a combination of market discipline, Trump’s more sensible advisers, and Fed independence to prevail, and that is what has happened. Trump has consistently chickened out and pursued trade deals, rather than following through with his Liberation Day tariffs.
Trump’s default may be “Talo” (Trump Always Lashes Out), but bond vigilantes and financial markets have pushed him into Taco (Trump Always Chickens Out) mode. As his most damaging economic policies take a milder form, the US economy will still endure some pain, but the likely end-of-year scenario is a growth recession (meaning below-potential growth), not an outright recession (typically defined as two consecutive quarters of negative growth).
Second, because the positive effects of technology will always trump the negative effects of tariffs, the era of US economic exceptionalism is not over. The US is ahead of everyone, including China, in most of the revolutionary innovations that will define the future. Accordingly, its potential annual growth is likely to increase from 2% to 4% by the end of the decade, before rising much higher in the 2030s. Suppose that new technologies increase its potential growth by 200 basis points (bps) while trade and other bad policies reduce it by 50 bps; America would remain exceptional. It is America’s uniquely dynamic private sector, not Trump’s policies, that will determine the future growth outlook.
Third, if potential growth does accelerate toward 4% over time, US public and external debts as a share of GDP will prove sustainable, stabilising and then falling over time (unless there is even greater fiscal recklessness). While the Congressional Budget Office projects a rising public debt-to-GDP ratio, that is because it assumes that the US’s potential growth will peak at 1.8%.
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Fourth, as long as American economic exceptionalism obtains, the “exorbitant privilege” conferred by the dollar’s global primacy is unlikely to erode. Despite higher tariffs, US external deficits will probably remain high, since investment as a share of GDP will rise on the back of a secular tech-driven boom, while the savings rate remains relatively stable. The resulting increase in the current-account deficit will be financed by equity inflows (both portfolio investment and foreign direct investment).
In this context, the dollar’s role as global reserve currency is unlikely to be significantly challenged, even if there is some modest diversification out of dollar-denominated assets. Likewise, these structural inflows will limit downside exchange-rate risks, and they could even strengthen the dollar over the medium term.
In short, the US is likely to do well over the rest of this decade, not thanks to Trump but in spite of him. There is no question that many of his policies are potentially stagflationary. But the US happens to be at the centre of some of the most important technological innovations in human history. These will deliver a large positive aggregate supply shock that will increase growth and reduce inflation over time. This effect should be an order of magnitude larger than the damage that stagflationary policies can induce.
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Of course, one should not be complacent about damaging policies; their negative impact could be serious. But as long as markets and bond vigilantes do their job, Trump’s worst impulses will be constrained. — © Project Syndicate, 2025
Nouriel Roubini, a senior adviser at Hudson Bay Capital Management LP and Professor Emeritus at New York University’s Stern School of Business, is the author, most recently, of Megathreats: Ten Dangerous Trends That Imperil Our Future, and How to Survive Them (Little, Brown and Company, 2022)
