How to Think Ahead Amid An Unprecedented Global Transition

The U.S. dollar has fallen 9% this year as uncertainty about U.S. leadership, tariff rates, and the federal deficit have risen. (Andrew Harrer/Bloomberg)

About the author: Christopher Smart is managing partner of the Arbroath Group, an investment strategy consultancy, and was a senior economic policy advisor in the Obama administration.

Like most investors, I see the world mainly through cycles: Stocks rise and correct, inflation surges and then cools, sooner or later, booms follow busts. Politics work mostly that way, too: Republicans replace Democrats, peace comes after war, and so on. This isn’t a great analytical method, but some sense that the past informs the future is all we’ve got when we put money at risk.

But in the days following a Middle East war that sent stocks higher and oil prices lower, that may be changing. Every new headline suggests that familiar geopolitical rhythms have been knocked off kilter.

The war in Ukraine has melted into a continental tragedy rather than a geopolitical crisis. Tariffs are now standard diplomatic tools rather than the economic poison our textbooks once described. No one even blinks now when the president denounces the Supreme Court or the Federal Reserve or Harvard. And have you heard about the Democratic mayoral primary in New York City?

I am now wondering whether my more excitable friends are right about a world order unraveling into anarchy and a rise of fascism (or socialism) in the U.S. What if markets don’t correct the same way anymore? What if the past no longer informs the future?

But I am not sure it is that dire. I still believe that after a mild slowdown from tariff uncertainty, U.S. economic growth will pick up next year. I still believe the U.S. will remain the most dynamic and creative economy in the world, even after the Trump administration’s efforts to undermine venerable American institutions. While I hope the Iran-Israel ceasefire announced this week proves durable, I suspect the region will face more waves of violence and cruelty.

But it is worth playing out the Cassandras’ most extreme views.

David Brooks of the New York Times, while hardly a worrier, has recently argued the U.S. is in the midst of a historic political and economic transition. He puts the current period on a par with a handful of turning points over the last century: the totalitarian movement that fomented communist revolutions and fascist coups; the welfare state movement that produced the New Deal; liberation movements that fueled anti-colonialism and civil rights protests; the market liberalism movement that empowered former British Prime Minister Margaret Thatcher, and President Ronald Reagan, but also the Chinese communist leader Deng Xiaoping and former Soviet Union head Mikhail Gorbachev.

Brooks describes the current moment as a “global populist movement,” that has given rise to President Donald Trump and Brexit, but also Narendra Modi, Xi Jinping, and Vladimir Putin. How much worse will it get?

In the U.S., we see a freely elected president assault domestic institutions that are meant to restrict his power—from judges and reporters to governors and mayors. The Federal Reserve has long been politicians’ favorite target, but will an incoming politically compliant Fed chair turn back the clock to a surge of 1970s inflation? Will the “One, Big Beautiful” bill undermine all confidence in America’s debt trajectory and permanently raise borrowing costs?

More relevant is the grand reordering of traditional divisions between Republicans and Democrats. It is becoming hard to identify which of the two backs free trade, fiscal discipline, or active diplomacy. There are even deeper splits within each party on Israel, states’ rights, and immigration. These seem like simply questions of party politics. But identifying “who is for what” will determine what kind of America emerges from the current transition.

Abroad, the breakdown of the global order looks more apparent every day, from Ukraine to Iran to Sudan. There is more talk of spheres of influence than rules-based orders. Large numbers of Americans are reluctant to play a leading role in shaping global events. Will that encourage Xi Jinping to accelerate plans to reclaim Taiwan? Will nonstate actors elsewhere seize this moment—just as drones are demonstrating they can overwhelm the world’s largest militaries?

Russia’s militarism and isolation will remain features of European politics for some time. And in the absence of Western cooperation, China’s excess manufacturing capacity will increasingly distort global markets. Artificial intelligence will likely evolve on its own terms with little more than symbolic efforts to contain its excesses.

If the path ahead entails more dramatic change and less reversion to the mean, then investors have to ask where they can reliably put their money over the next decade. Near-term market fluctuations will always move with growth prospects and rate expectations. But there will be rising uncertainty about U.S. investment returns as traditional institutions bow to political pressures. Tariffs and export controls look like lasting features that will make for more expensive and less reliable supply chains.

I believe most of the foundations of the global economy are still in place. My standard test for the endurance of America’s strength is to ask where I would put all my money if it had to be in a single currency for the next 25 years. Even now, amid what is likely to be a historic global transition, it is hard to find a better bet than the dollar.

But that is no longer an automatic choice. I find myself revisiting the question more often than usual.

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