Part III: The Economic Fallout – When Unpredictability Becomes Policy
Series Title: The Collapse of Moral Authority: How Cruelty Became Currency in Global Power Politics
By Johan
Professor of Behavioral Economics & Applied Cognitive Theory
Former Foreign Service Officer
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The Paradox of American Power
For decades, the United States offered the global economy something more valuable than military might or technological dominance: predictability. Allied nations could plan investments, negotiate treaties, and build supply chains around a relatively stable set of expectations about American behavior. The U.S. was predictable to its friends and unpredictable to its adversaries—-a strategic asymmetry that formed the bedrock of the liberal international order.
Today, that formula has inverted. America has become unpredictable to its allies and predictably irrational to its enemies. This isn’t merely a diplomatic inconvenience, it’s an economic catastrophe in slow motion.
The Mechanics of Trust Erosion
Anne Applebaum has documented how authoritarian drift (particularly the populist variant that blends demagoguery with state capitalism) corrodes economic foundations. The pattern is consistent across contexts: as governments abandon rule-based governance for transactional politics, they create the kind of uncertainty that markets cannot price and investors cannot tolerate.
The current American trajectory exemplifies this decay. Consider the mechanics:
Tariff Whiplash: Trade policy oscillates between protectionism and negotiation, creating planning nightmares for manufacturers. Companies cannot commit to multi-year investments when tariff structures might reverse quarterly.
State Capitalism Creep: When the federal government demands equity stakes in private tech companies or threatens retribution against firms that displease political leadership, the boundary between market economy and managed economy dissolves. This isn’t industrial policy, it’s arbitrary extraction.
Regulatory Capture in Reverse: Rather than interest groups capturing regulators, we’re witnessing the executive branch capturing entire regulatory frameworks, dismantling oversight in areas from AI safety to financial stability not through legislative process but through norm-breaking and institutional intimidation.
This creates what economists call “regime uncertainty” and is a condition where businesses cannot confidently predict the rules under which they’ll operate. Investment freezes. Innovation migrates. Capital seeks more stable environments.
The Narrow Corridor Closes
Daron Acemoglu and James Robinson’s concept of the “narrow corridor” offers a useful framework here. Functional democracies exist in a delicate balance: state capacity must be strong enough to provide public goods and enforce contracts, but constrained enough to prevent tyranny. The corridor is narrow because deviations in either direction, toward weakness or toward authoritarianism, undermine the institutional foundations that make sustained economic growth possible.
The United States is exiting that corridor. As the executive branch breaks norms, the judiciary appears to capitulate, and the legislative branch proves unable or unwilling to check executive overreach, we’re witnessing the collapse of the separation of powers that once made America a reliable economic partner.
This institutional breakdown creates tangible economic barriers:
Immigration Disruption: Visa unpredictability and workplace raids don’t just affect the undocumented; they signal to global talent that America is no longer a welcoming destination. Over one million people have already left, and net migration has turned negative for the first time in modern history. The labor force implications are profound.
Research Degradation: When universities face political litmus tests for funding, when international students cannot rely on visa stability, and when scientific institutions become partisan targets, America’s innovation engine sputters. China has already overtaken the United States in key technological metrics—-not just in manufacturing capacity but in research output and patent filings.
Debt Dynamics: With $36.2 trillion in national debt and $9.2 trillion maturing in 2025 alone, the U.S. faces refinancing pressure that would challenge any nation. Interest payments now exceed $1 trillion annually. In a stable political environment, this would be manageable. In an environment where political dysfunction threatens debt ceiling crises and default risks, it becomes existential.
Welcome to the G-Zero
Ian Bremmer’s “G-Zero” concept perfectly captures our moment: we’ve transitioned from a world with a single hegemon to one with no global leadership at all. Regional powers dominate their spheres, but there’s no overarching architecture for managing global challenges.
This fragmentation accelerates because American unreliability makes the old system unworkable. When the anchor economy becomes a source of volatility rather than stability, other nations rationally hedge.
We’re seeing this across multiple dimensions:
Trade Realignment: Countries are diversifying away from dollar-denominated transactions. BRICS+ expansion, ASEAN integration, and bilateral currency arrangements all reflect a systematic effort to build resilience against American unpredictability.
Technology Decoupling: The U.S. leads in AI development but pairs this advantage with regulatory abdication. Europe responds by setting global standards for AI ethics and digital privacy. China builds parallel technological ecosystems. India positions itself as a friend-shoring destination. The global technology landscape is fragmenting into incompatible blocs.
Security Architecture Fraying: Defense commitments lose credibility when transactional politics replace alliance solidarity. European nations are accelerating defense integration not as a complement to NATO but as insurance against its potential collapse.
The Market Consequences
Financial markets operate on information and trust. Both are deteriorating.
Volatility Premiums: When policy becomes unpredictable, investors demand higher returns to compensate for increased risk. This raises capital costs for American firms, putting them at a competitive disadvantage against rivals in more stable environments.
Foreign Investment Flight: Why commit long-term capital to a jurisdiction where the rules might change arbitrarily? Foreign direct investment flows are already shifting toward jurisdictions with stronger institutional predictability. Paradoxically, this now includes parts of Europe and Asia that were once considered riskier than the U.S.
Supply Chain Restructuring: The pandemic exposed supply chain vulnerabilities, but political instability compounds them. Firms are shortening supply chains and choosing resilience over efficiency. This is often at the expense of American suppliers who once benefited from being embedded in global production networks. Think about this as going from just-in-time to just-in-case.
Dollar Dominance Under Question: The dollar’s reserve currency status has been called “America’s exorbitant privilege.” That privilege rests on trust in American institutions and the predictability of American policy. As both erode, so does the structural advantage that allows the U.S. to run persistent deficits without facing the consequences smaller nations would endure.
Incentive Structures in Collapse
From a behavioral economics perspective, what we’re witnessing is the systematic destruction of incentive alignment that made international cooperation possible.
The post-war order worked because it created positive-sum incentives: countries benefited from following rules, maintaining alliances, and investing in shared institutions. Defection was costly because it meant exclusion from valuable networks.
That structure is dissolving. When the United States itself defects from the norms it established (violating trade agreements, abandoning allies, weaponizing economic relationships) it signals that rule-following is for suckers. Other actors rationally adjust their strategies.
This isn’t a temporary disruption. Behavioral systems under this kind of stress don’t bounce back to equilibrium…they mutate into new configurations. The institutions adapting now are building for a post-American world order, even if they don’t explicitly frame it that way.
Three Trajectories
The economic fallout could follow several paths:
Path 1: Managed Decline The U.S. remains important but loses its central role. Economic power diffuses across regions. Europe anchors democratic capitalism, China leads an authoritarian alternative, and India, Brazil, and other emerging economies carve out autonomous positions. Global growth continues but at slower pace due to coordination problems and fragmentation.
Path 2: Catastrophic Rupture A debt crisis, major conflict, or cascading institutional failure triggers a disorderly collapse of dollar-based systems. The resulting economic chaos resembles the 1930s: protectionism spirals, trade collapses, and political extremism feeds on economic desperation. This is the low-probability, high-impact scenario that keeps geopolitical risk analysts awake.
Path 3: American Renewal Domestic reform restores institutional integrity, rebuilds international credibility, and reestablishes the U.S. as a reliable partner. This would require profound political change; essentially, a new New Deal that addresses economic inequality, democratic dysfunction, and geopolitical overextension simultaneously. Possible, but increasingly improbable given current trajectories.
What Comes Next
The economic fallout from America’s moral collapse isn’t speculative, it’s already underway. Markets are repricing risk, alliances are hedging, and alternative structures are emerging. The question isn’t whether the U.S.-centric economic order will persist; it won’t. The question is what replaces it and whether that transition can occur without devastating economic disruption.
Europe, for all its imperfections, offers a model: stable institutions, strong social cohesion, regulatory capacity that balances innovation with protection, and commitment to multilateral cooperation. It’s not hegemonic leadership, but it might be something more durable…leadership by example rather than imposition.
Meanwhile, China demonstrates that authoritarian capitalism can deliver growth but struggles with the innovation and resilience that require open societies. The Global South is building new networks that reduce dependence on any single power center.
The emerging order will be multipolar and more fragmented. It will also be less prosperous at first. That’s the cost of losing the trust that made global coordination possible.
The Behavioral Reality
From a behavioral perspective, this moment is clarifying. Systems under stress reveal their true incentive structures. What we’re learning is that the liberal international order was never as robust as it appeared. It depended on American willingness to bear disproportionate costs for systemic stability, and on the belief that America would remain predictably committed to that role.
Both assumptions have failed.
The reconfiguration will be painful, expensive, and prolonged. But it’s also irreversible. The trust that’s been squandered cannot be quickly rebuilt. The institutions that are fracturing cannot be easily repaired. The alternatives that are emerging will not simply dissolve when American leadership is restored…if it ever is.
We’re not experiencing a crisis that will pass. We’re living through a phase transition in the global economic order. How we navigate it will determine not just American prosperity but global stability for decades to come.
The collapse of moral authority isn’t just a diplomatic problem or a values crisis. It’s an economic catastrophe whose costs are only beginning to be calculated.
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Why the Snail
It carries its home.
It moves with intention.
It leaves a trail.
So do I.
— Johan
Professor of Behavioral Economics & Applied Cognitive Theory
Former Foreign Service Officer