The Quiet Erosion

A scenario-based exploration of how today’s trade shocks might shape tomorrow’s global economy.

Weekly return of the US dollar vs major currencies. 4 weeks rolling sum.

Following the sweeping changes to U.S. trade policy announced in April, global markets have responded with significant volatility. Recent market moves, although not catastrophic, reflect a growing unease noted by top macroeconomic and asset allocation experts, as well as specialized media. Doubts are surfacing not just about global repercussions, but critically about the potential domestic consequences of the United States’ repositioning on the global trade chessboard. The recent performance of the US dollar vis a vis other currencies, and in particular vs the Eur and the Swiss Franc (see chart on top of the article), is remarkable. Such dynamics are unusual, and as such, they provide a fertile ground for hypothetical scenario building.

In an environment marked by widespread uncertainty, we explore several hypothetical scenarios, not forecasts, but thought experiments, based on historical analogies to major macroeconomic shocks. These frameworks aim to stimulate debate and reflection on how the next phase of the global economy might unfold.

The current context is largely unprecedented over the past seventy years. While history never repeats itself exactly, it consistently provides valuable lessons. Reflecting on the underlying causes of the major crises that have shaken the developed world in recent decades can help us better navigate the uncertainties of the present moment.

i) So fa so good (Trump’s first term-style)

A more benign outcome could mirror Trump’s first term: fiscal stimulus (via tariffs, deregulation, or targeted tax breaks) supports economic growth despite heightened international tensions. Trade reordering benefits domestic manufacturing and resource extraction sectors. Inflation remains contained, unemployment stays low, and equity markets rally on pro-growth policy expectations. Geopolitical risks remain elevated, and longer-term fiscal sustainability is further eroded under this path.

ii) Goldilocks economy

The most optimistic scenario envisions an economic environment where growth is strong enough to support employment and earnings but not so strong as to trigger runaway inflation. Productivity gains, technological innovation, and prudent fiscal-monetary management allow the U.S. to navigate the trade realignment with minimal disruption. Markets remain resilient, risk premiums stay low, and asset prices continue a steady upward trajectory. The dollar stabilizes, Treasury yields stay contained, and fears of debt instability fade into the background. Policy mistakes are avoided, and investor confidence remains robust

iii) Debt crisis (EM-style)

In this scenario, high debt levels, both public and private, become unsustainable. Investors lose confidence in the U.S. government's ability to service its obligations without significant inflation or financial repression. Treasury yields spike, bond markets become volatile, and fiscal deficits spiral. Credit spreads widen across the economy, tightening financial conditions sharply. Economic activity slows down as government spending is forced into painful adjustments. The banking sector faces stress as asset values decline. Although still a low-probability event in the short term, the buildup of structural debt vulnerabilities could turn a temporary dislocation into a self-reinforcing crisis over time.

iv) Sovereign and currency crisis (Euro debt crisis- style)

Here, the debt problem is compounded by a loss of confidence in the currency itself. Capital outflows accelerate, the dollar weakens markedly, and inflation expectations rise. Unlike the Eurozone, where individual countries could not print their own currency, the U.S. has monetary sovereignty, but political divisions could undermine effective policy responses. If markets perceive political deadlock, risks of "soft default" via inflation or financial repression increase. Moreover, higher borrowing costs, a weaker dollar, and sustained inflationary pressures could push the economy into stagflation. The Federal Reserve faces an impossible balancing act between stabilizing prices and supporting the economy.

v) Stagflation

A darker alternative envisions stagflation sooner than later; a toxic combination of weak growth and high inflation. Supply chain disruptions, tariff-induced cost increases, and tight labor markets feed persistent price pressures. Meanwhile, consumer spending and business investment falter. The Federal Reserve faces a brutal dilemma: raising rates to curb inflation would deepen the slowdown, while easing would worsen inflation expectations. Markets become whipsawed by conflicting forces, and living standards come under pressure. Stagflation would be particularly damaging because it erodes both real incomes and asset valuations simultaneously, limiting the options for policy and investors alike.

vi) Lost decade (Japan style)

Instead of a sharp crisis, the U.S. could enter a long period of low growth, low inflation, and suppressed asset returns, similar to Japan after the 1990s. Massive debt levels would be managed through ultra-low interest rates and aggressive fiscal policy, but without strong private sector dynamism, productivity, or demographic support, growth remains sluggish. Asset prices stagnate, real estate sees minimal appreciation, and equity markets remain volatile but trendless. Risk aversion dominates both households and corporations. Wealth preservation becomes more important than wealth creation, reshaping investment strategies and business models.

vii) Financial Crisis (GFC style)

The situation could deteriorate into a full-blown financial crisis similar to 2008. Leverage in hidden corners of the financial system (e.g., private credit, shadow banking) could unravel if confidence collapses. Liquidity dries up, counterparty risks explode, and panic grips markets. Major bankruptcies or bailouts become necessary. The Federal Reserve and Treasury would be forced to coordinate massive interventions to stabilize the system. Unlike 2008, the political environment today is far more polarized, potentially delaying or complicating emergency responses. Economic contraction would be deep and painful, requiring years of recovery.

Conclusions

The scenarios outlined above are low-probability events. The central case remains a "business as usual" scenario, where the crisis gradually dissipates and the global economy continues at its usual pace. The U.S. dollar remains at the core of global finance, and the United States continues to benefit from its dominant role.

Perhaps, on deeper reflection, the most likely scenario is still a boring one, but entailing invisible, but powerful consequences. Global investors, irritated by uncertainty, will adjust their positioning, but they won’t abandon the dollar. They can’t, at least not in the short term. They’ll search for alternatives to diversify their portfolios, but the dollar will remain the cornerstone for now. The United States will continue to benefit from an extraordinary privilege, though one that will steadily erode over time, until it eventually fades.

According to the most recent historical interpretations, even the Roman Empire didn’t collapse with a bang; its decline was a slow, inevitable process. The Romans themselves hardly noticed it was happening.