The word “recession” resurfaced last week in the minutes of the Federal Reserve. Economists at the U.S. central bank assign an equal probability to a full-blown economic crisis this year as to their baseline scenario, which is low growth. In just four months, U.S. President Donald Trump has plunged the world’s largest economy into chaos, confusion, and uncertainty with his erratic trade policy and aggressive budget agenda, putting the entire world on edge. The danger is not only recession but also fiscal and even financial crisis, as tensions in the bond and currency markets have made clear.

The slowdown in U.S. growth, the trade war, and financial instability will take a toll on the global economy, although the risk of a global recession has eased somewhat due to Trump’s policy reversals. Economists are calculating which countries will be most affected, but the situation is constantly changing and the outcome remains uncertain.

The U.S. economy has shown tremendous resilience in recent years, but the president is relentlessly testing it. His trade policy caused the gross domestic product (GDP), which had been experiencing strong growth, to contract in the first quarter for the first time in two years — even before most of the tariffs took effect.

His declaration of a trade war on the entire world on April 2, which he dubbed “Liberation Day,” nearly triggered a financial crisis. Trump backed down after witnessing the drop in the dollar and Treasury bonds and partially reversed course, but without abandoning his protectionist rhetoric.

The president also exempted phones, computers, and chips from tariffs due to the risk of skyrocketing prices and eased taxes on the auto industry following warnings from industry executives. He had previously softened his measures against imports from Mexico and Canada. Finally, he also reached an agreement with China to reduce tariffs from 145% to 30% after executives at major distribution companies warned of the risk of sharp price increases and empty shelves.

Trump threatened the European Union with 50% tariffs last Friday, only to back down on Sunday in exchange only for a promise to continue negotiations. Every step forward by Trump has led to chaos in the markets and worsened the economic outlook, while every step back has been celebrated by economists and investors. This dynamic has popularized the TACO strategy on Wall Street, which consists of investing on the premise that, when it comes to tariffs, Trump Always Chickens Out.

On Wednesday, hours after Trump said it was “wrong” to be questioned about the issue, the Court of International Trade — the federal court specializing in the matter — ruled most of the tariffs approved by the president illegal and struck them down, undermining his strategy of using them as a pressure tactic. The following day, the Washington Court of Appeals suspended the enforcement of that ruling while it reviews the case over the next two weeks, meaning the tariffs are still in place for now.

“The courts are playing an increasingly important role in the tariff dispute, increasing the confusion and prolonging the uncertainty that continues to roil financial markets,” says Bob Schwartz, an economist at Oxford Economics. “The legal battle is just beginning, and the fog of uncertainty will continue to cover the economic landscape for the foreseeable future.”

While his team prepares a Plan B, Trump announced he is doubling import duties on foreign steel and aluminum to 50%. He argues that without tariffs, the United States “would be in peril,” he said Friday in the Oval Office of the White House. The tariffs are here to stay.

The uncertainty surrounding tariffs is likely wreaking havoc on household psychology, causing a pessimistic mood when tariffs are imposed and sparking a surge of optimism when they are lifted, according to Schwartz.

This dynamic extends to economists, investors, and companies. “Bond market sentiment and macroeconomic expectations can change in the blink of an eye or in a post on Truth Social [Trump’s social media platform],” says R.J. Gallo, a fixed-income portfolio manager at Federated Hermes.

“With country-specific tariffs changing rapidly and the legality of tariffs under scrutiny, uncertainty will remain high. This will make it difficult for businesses to know when and what products to import and to chart a trade path forward,” said Matthew Martin, an economist at Oxford Economics.

“In the corporate world, the trade war has taken the form of a communications war. American companies are enthusiastically outdoing each other with their offers, announcing domestic investments, and, it’s worth mentioning, sometimes with a great deal of creativity. In reality, management teams are buying time in the face of the uncertainty generated by current U.S. economic policy. Hiring and investment are being cut back,” said Yves Bonzon, chief investment officer at Julius Baer.

Fiscal crisis

The back-and-forth over tariffs has overshadowed what many economists consider a bigger problem: the fiscal crisis in the United States, where the deficit and public debt have skyrocketed, raising the risk of a financial crisis or even a sovereign debt crisis.

One of the latest to sound the alarm was Jamie Dimon, chairman of J.P. Morgan, the largest bank in the U.S. At an event in Simi Valley, California, this past Friday, he warned about the unsustainable trajectory of public debt and said he had warned regulators that a crack in the bond market is “going to happen.” “I just don’t know if it’s going to be a crisis in six months or six years,” Dimon said. “Unfortunately, it may be that we need that to wake us up.”

Benjamin Franklin, one of the Founding Fathers of the United States whose likeness appears on the $100 bill — the highest denomination — believed it was better “to go to bed without dinner than to rise in debt.”

The United States has indulged in one feast after another. It reached its record level of debt at the end of 1945, following the Great Depression and World War II. In 1988, when U.S. debt as a percentage of GDP was less than half of what it is today, then-Federal Reserve chairman Alan Greenspan already warned about the country’s fiscal situation. “The long run is rapidly becoming the short run,” he said.

The last time the budget was balanced and the debt was reduced was during Bill Clinton’s presidency, who boldly predicted in December 2000 that the United States would be debt-free within a decade. Since then, tax cuts, the 2008 financial crisis, and the pandemic have led to high deficits. The so-called debt held by the public — this figure is more relevant than the gross debt due to the large amount of intragovernmental liabilities — closed 2024 at 98% of GDP.

Trump, who raised the deficit to a postwar record of 14.7% of GDP in 2020 during the height of the pandemic, returned to the White House proclaiming fiscal responsibility. In his March address to Congress, he promised: “In the near future, I want to do what has not been done in 24 years: balance the federal budget. We’re going to balance it.”

The president, however, has pushed through legislation — his so-called “big, beautiful bill” — that goes in the opposite direction. “The Trump administration’s good intentions at the start of its term regarding budgetary discipline seem to have been buried,” said Yves Bonzon, chief investment officer at Julius Baer.

Trump’s tax and spending bill extends the tax cuts from his first term — broadly applied but mainly benefiting the wealthy and corporations — and includes some of the cuts he promised during his campaign, such as exemptions on tips and overtime pay. In exchange, it cuts food assistance, scholarships, and healthcare benefits. This past Friday, at an event in Des Moines, Iowa, Republican Senator Joni Ernst tried to defend these cuts but was harshly criticized by the audience, who said that without healthcare, people will die. “People are not… Well, we’re all going to die,” she responded, to the outrage of those present.

The tax and spending bill favors the wealthy and harms the most disadvantaged. Its net effect, however, is to increase the deficit and debt. The Congressional Budget Office estimated a deficit increase of $3.8 trillion over 10 years; the Committee for a Responsible Federal Budget calculated $3.1 trillion, including interest; and the Penn Wharton Budget Model pegged it at $2.8 trillion. However, the law is designed so that the tax cuts are temporary (expiring after Trump’s term), which limits the calculation to 10 years and makes the cost appear smaller. It leaves the hot potato of extending the cuts to the next Congress.

The Yale Budget Lab estimates that if the temporary provisions are made permanent, the cost would be $5 trillion over the 2025-2034 period and $23.7 trillion over the 2025-2055 period. Considering the already large deficit, it estimates that this could push the debt-to-GDP ratio to 200% by 2055, a level surpassed only by Sudan and Japan.

Even Elon Musk, a staunch ally of the president, said he was “disappointed” with a law that “increases the budget deficit, not just decrease it.” Musk stepped down from his government duties last week after failing to meet his goals.

At a large Trump campaign rally at New York’s Madison Square Garden in October, Howard Lutnick, now Treasury Secretary, asked Musk how much he thought could be cut from the $6.5 trillion federal spending. The billionaire initially answered $2 trillion, then said that would be the best-case scenario and lowered the target to $1 trillion. He is leaving the government estimating cuts at $175 billion — though even that figure is highly inflated.

The House of Representatives approved the bill by a single vote, and it is now being debated in the Senate. Those who voted against it were bond market investors, who had just witnessed Moody’s downgrade the U.S. Treasury’s top credit rating, pushing bond yields up to 5.15%, a two-decade high.

“U.S. Treasury Secretary Scott Bessent recently called Moody’s a lagging indicator,” Matt Eagan, a fund manager at Natixis Group, recalled in a report. “He’s right: everyone now knows the U.S. fiscal trajectory is unsustainable. With deficits exceeding 6% of GDP and no solution in sight, it’s no wonder investors are nervous. U.S. Treasuries are the main structural risk in the current market,” he argued.

There is a risk that this could lead to a vicious circle. “Slower economic growth and upward pressure on inflation over the next two quarters could fuel deficit concerns, potentially creating a cycle of fiscal worries that will increase term premiums, pushing up Treasury yields, increasing government borrowing costs, and further exacerbating fiscal concerns,” said John Canavan, an analyst at Oxford Economics.

Republicans maintain that the law will boost the economy and that, along with the revenue from tariffs, will help reduce the deficit. Trump said last Friday that he expects the economy to grow at a rate of between 5% and 9% annually, a projection so absurd that no one repeated the claim.

“If investors lose faith in the government’s plan for handling its budget, it doesn’t matter if brilliant minds in the government are ‘right.’ The annals of major-country inflations and debt problems are littered with debt trajectories that seemed sustainable until they didn’t,” Ken Rogoff, co-author with Carmen Reindhart of This Time Is Different, the seminal book during the European debt crisis, recently wrote in The Wall Street Journal. “Given the chaos caused by his tariff war and the concomitant drop in appetite for U.S. bonds, if the coming tax and spending bill doesn’t look beautiful to investors, it doesn’t matter how it looks in the eyes of the president.”

The United States, however, has great strengths. Its economy is dynamic, productive, and innovative. It has a large domestic market, and although its debt trajectory may be unsustainable, the current level is not. Furthermore, as Axel Botte, strategist at the asset manager Ostrum, part of the Natixis group, points out, “there is no clear alternative to U.S. debt.” “The liquidity and security offered by U.S. Treasury bonds are unparalleled,” he said.

For decades, the U.S., the dollar, and its debt market have served as a refuge or safe haven for capital, but Trump’s chaotic management threatens this status. “The erosion of the safe harbor’s advantages could include greater uncertainty and discontinuous risks, higher bond yields, and ultimately lower growth,” according to Ernie Tedeschi, chief economist at The Budget Lab.

At a time when the United States needs to attract foreign money, the distrust triggered by Trump could prove fatal. Furthermore, the tax bill includes a provision that has set off alarm bells on Wall Street: it allows the U.S. to raise tax rates on individuals and companies from countries with so-called “discriminatory” tax policies. This could mean higher taxes on interest and dividends earned by institutional investors — including investment funds, sovereign wealth funds, or pension funds — as well as by private investors and companies. Thus, the trade war could escalate into a capital war.

All of this points to currencies — and inflation — becoming the adjustment variable. “The erratic U.S. economic policy, the tense fiscal situation, and high external debt, in a context of double deficits, suggest that the easiest path is a weaker dollar,” said David Meier, an economist at Julius Baer, who forecasts the exchange rate will reach $1.24 per euro in 12 months and sees “significant depreciation potential” in the longer term.

A bond market crisis could easily morph into a financial crisis, given the heavy bond holdings by banks. Since the Panic of 1907 — when John Pierpont Morgan, founder of JP Morgan, stepped in to contain the financial crisis — the bank has earned a reputation for profiting from crises. Jamie Dimon recalled this on Friday in California when warning regulators about the risk of a crisis: “I’m telling you it’s going to happen, and you’re going to panic. I’m not going to panic. We’ll be fine. We’ll probably make more money, and then some of my friends will tell me ‘We like crises because it’s good forJPMorgan Chase.’ Not really.”

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