Washington Breaking The Global Economy? Economist Mohamed El-Erian Warns The US Now 'Resembles A Developing Nation'

Prominent economist Mohamed El-Erian warns that the United States’ recent economic behavior is creating instability, not just at home, but across global markets.

What Happened: In a column published in the Foreign Affairs magazine on Monday, El-Erian states unequivocally that “the United States now sometimes resembles a developing nation,” pointing to the use of abrupt tariffs, soaring deficits, and inconsistent policy execution as signs of dysfunction.

The former CEO of Pimco, El-Erian, believes that the U.S. is drifting from the norms expected of the world’s economic anchor, raising the risk of financial contagion for the global economy.

See Also: June Inflation May Be Hiding A Nasty Surprise For Wall Street

El-Erian traces the shift to what he describes as “unusually high policy volatility” coming out of Washington. The global economy, already strained by geopolitical shocks and technological disruption, now faces unpredictable shifts in U.S. trade policy, dollar weakness, and concerns about the independence of institutions like the Federal Reserve.

“Washington has shaken the very foundations of the global order,” he warns, noting that traditional investment principles, such as the correlations between stocks and bonds, have since become unreliable due to recent U.S. actions.

The dollar's role as the global reserve currency is similarly under pressure amid capital outflows and weakening global confidence, leading El-Erian to lay out two diverging futures for the country.

The first being one where the U.S. uses this period to reset economically, as it did during the Reagan-Thatcher era, and the other where it descends into deeper stagflation and recession, like it did during the 1970s. Both futures, he says, carry massive ramifications for global markets.

As countries scramble to insulate themselves from U.S. shocks, El-Erian argues that agility, capital resilience, and strategic rethinking will be essential. “Decision-makers must avoid falling into behavioral traps,” he cautions, warning that denial, delay, or half-measures could worsen the global economic fallout already in motion.

Why It Matters: El-Erian has been warning about the stagflationary risks to the U.S. economy for the past several months, something that was recently corroborated by the Federal Reserve.

“The Federal Reserve left interest rates unchanged and signaled the higher probability of a stagflationary wind,” El-Erian said in May.

He’s also repeatedly warned that President Donald Trump’s trade and tariff regime could lead the nation towards one of two extremes, a “Thatcher‑Reagan era on steroids,” or “Jimmy Carter’s stagflation all over again.”

The former involves an “unleashed private sector that takes advantage of innovations,” and a “slimmed down government” that reduces the deficit, while the latter comes with a period of high inflation and low economic growth, similar to the U.S. experienced during the 1970s.

With the U.S. Dollar having experienced its worst start to the year since 1991, the impact is already being seen globally, with the favorite travel destinations of Americans, such as Paris and Cancun, feeling the squeeze.

Price Action: The U.S. Dollar Index (DXY) currently trades at 97.986 against a basket of global currencies, down 0.09% on Tuesday. The currency is down 9.87% since the beginning of this year.

Photo Courtesy: Denis Anikin V on Shutterstock.com

Read More:

• Chamath Palihapitiya Shrugs Off Dollar’s 11% Slide In Worst Half-Century Drop, Says ‘Decay Continues’ Without Total Collapse