The Iran War Could Wreck the Global Economy.

We are at war with no clear exit.

The Iranians officially hold the cards, no matter what Donald Trump says.

As John Mearsheimer points out, Iran’s objective is brutally simple: survive and remain an independent pole of power in the region, not a pawn of Washington and Tel Aviv. They are not going to pack up their missiles and drones and call it a day without either iron‑clad assurances they won’t be attacked again, or meaningful relief from sanctions. That kind of grand bargain is nowhere on the table.So we’re dug in for the foreseeable future, whether Trump declares the war “over” as quickly and unilaterally as he launched it or not. It might be weeks, it could be months. If he commits to boots on the ground, if he lets mission creep do what it always does, it could be years.

Not a soul on this planet knows what comes next in the war theater. Because that’s war. But we can anticipate what comes next for the U.S. and global economy, or at least game out certain scenarios. Because this is not just another discretionary “police action” on the other side of the world. This one is wired directly into the global energy, food, and financial systems. But a proper analysis must acknowledge how the circumstances of the U.S. economy and our monetary and fiscal policies have changed. There is no direct antecedent to the situation in which we find ourselves, which makes the folly of this war all the more absurd.

We didn’t just launch a war. We may have just pulled the fire alarm on the entire world economy.

Congratulations, It’s Already a World War

Let’s start with time horizons. At this point, “weeks” is off the table. Iran has already shown it can sustain missile and drone strikes, harassment at sea, and proxy attacks on U.S. economic and military assets through Arab states. You don’t unwind that kind of distributed warfare with a Truth Social post.

“Years” is unlikely too, and not because we suddenly discovered restraint. It’s because too many other major powers have skin in this particular game.

Either ignorance or obstinance precluded certain realities from entering into the calculus to start an unprovoked war with a country that poses no direct threat to the United States. For example, roughly one‑fifth of the world’s seaborne crude oil passes through the Strait of Hormuz. Around 16% of global refined products trade and a big chunk of liquefied petroleum gas (LPG) and petrochemical feedstocks transit this same narrow choke point. And close to 90% of all crude that moves through Hormuz goes to Asian buyers, with China taking roughly 38% of those flows, India about 15%, South Korea 12%, Japan about 11%.

Our two top Asian allies have the most exposure. Japan, for example, sources about 95% of its oil from the Middle East, with roughly 70% of that moving through the Strait of Hormuz. The same holds for South Korea. These are advanced industrial economies that do not function without cheap, reliable oil and liquefied natural gas (LNG). Nor do they have cheap and easy access to replace these products.

Europe is already reeling from the fossil‑fuel shock triggered by Russia’s invasion of Ukraine and the subsequent divorce from Russian pipeline gas. They can’t easily stomach another, simultaneous disruption in the Gulf. Add in fertilizer and petrochemical flows, and you’re talking about ripples into global food prices and industrial supply chains, not just what comes out of a gas pump.

So the takeaway from this utterly foolish endeavor is that it’s already a world war.

Correction: we started a world war.

Months of War, Years of Damage

So let’s be “optimistic” and assume the war posture lasts months, not years. Why? Because anything longer than that takes the global economy to its knees, and even we’re not that reckless. Right?

Likewise, a scenario where this only lasts a few weeks is off the table because of how Iran is fighting. They’re not obliging us with a neat, conventional battlefield where we topple a statue and fly home. They’re dispersing the pain with missile and drone strikes aimed at Gulf infrastructure and shipping. It has launched proxy attacks on U.S. bases and assets in Iraq, Syria, Lebanon, and the Red Sea lanes. And save for Iranian vessels continuing to traverse the Strait of Hormuz, all other trade has been choked off.

This strategy pins us in a corner. Either we escalate dramatically—up to regime‑change fantasies and boots on the ground—or we accept a grinding, asymmetric conflict that keeps risk premia and energy prices elevated for months.

So the question for our audience is: what does this do to the economy? Are there historical corollaries? What does the past actually tell us about the future?

The infuriating answer: there’s overlap, but this is mostly uncharted territory.

We could look to Vietnam and the Great Inflation: big war spending plus Great Society programs pushed demand‑pull inflation higher in the late 1960s; then the 1973 OPEC embargo stacked cost‑push oil inflation on top, producing almost 16 years of elevated prices and the eventual “Volcker shock” to break it.

We could look to the Gulf War when oil prices nearly doubled from about $20 to $40 a barrel, inflation ticked up, and the U.S. slid into a short recession. Or the Iraq war when the oil spike was short-lived but the effort resulted in higher deficits but not a 1970s-style shock.

In each case, war plus oil meant higher inflation, weaker growth, and policy dilemmas. But here’s the catch: none of those conflicts played out in a world where the U.S. was this indebted, this fiscally boxed‑in, and this entangled in a quasi‑MMT, quasi‑fiscal‑dominance regime.

It might be tempting to evaluate the next stages through the historical lens of World War II or Korea, but the monetary and fiscal architecture was fundamentally different. Bretton Woods, fixed exchange rates, capital controls, different tax regimes, and much lower peacetime debt all made for a very different war economy.

The relevant era for our purposes is post‑Nixon, when the U.S. embraced a floating fiat, credit-driven system and forced the world to ultimately comply with this arrangement.

The tail end of Vietnam and the 1973–79 oil shocks elevated war and social spending which fueled demand‑pull inflation; then OPEC and Iran blow a hole in the supply side resulting in stagflation that set the stage for the neoliberal era. After the Gulf War there was a shallow recession because the blowback was relatively contained to Iraq, and the Fed and Treasury were still operating under a monetary dominance framework. The protracted and costly Iraq War caused deficits to widen but inflation remained manageable, allowing the Fed to influence the economy through interest rate policy without triggering a sovereign debt panic.

After decade-long conflicts, the Global Financial Crisis and COVID, we are facing an entirely different set of circumstances. Our debt to GDP is much higher. We’re in the process of rolling over a massive amount of expensive long-term debt into short-term instruments. And close to one out of every five dollars goes toward debt service. Before we started a war with one of the most central and geostrategic nations on the planet.

That’s fiscal dominance: the point where the fiscal position—debt, deficits, and politics—effectively constrains the central bank’s ability to run whatever interest‑rate policy it wants. The Fed can talk tough, it can hike, but if it keeps rates high for long, the interest bill explodes, rollover risk increases, and the Treasury starts to wobble. At that point, the pressure flows the other way: from Treasury and markets onto the Fed.

This is where Modern Monetary Theory was supposed to be comforting. MMT tells us that a sovereign that issues its own fiat currency can never “run out of money.” Under an MMT framework the true economic constraint isn’t the debt-to-GDP ratio, it’s inflation. Deficits are manageable as long as you’re not pushing the economy beyond its capacity to produce. And should inflation eventually show up, you can use taxes and regulation to cool things off.

Trump’s deregulatory and tax cut regime serves to starve this solution and the biggest inflation driver is oil.

Even MMT economists are crystal clear on one thing: printing money or running deficits becomes inflationary once you hit real resource constraints—when there are no more skilled workers, no more spare capacity, no more barrels of oil to allocate. In that world, extra spending just bids up prices.

Well, welcome to that world. Not even MMT can save us now.

To stay inside the MMT guardrails, the U.S. would have to offset war spending with big tax hikes or spending cuts elsewhere, and clamp down on private demand with rationing, price controls, or forced saving, like explicit war bonds that soak up purchasing power.

In other words, we’d have to act like a serious wartime state with a mobilization economy and shared sacrifice. Instead, we’re a fiscally dominant, politically fractured empire that spent the past decade convincing itself deficits don’t matter and that every war can be put on the credit card forever.

Gaming This Out

Let’s get more concrete about how this plays out. The obvious risk is an oil shock with immediate inflation at the pump, and eventually it works its way into the goods economy. And this kind of shock shows up literally everywhere. This scenario can be found in all post-Bretton era conflicts. The difference here is that it’s more than a disruption with time limits because Iran is going hard after core oil and natural gas infrastructure. We murdered their Supreme Leader and a building full of school children, so a scorched earth economic response shouldn’t necessarily come as a surprise.

Under normal circumstances the Fed could jack rates to crush inflation, a la Volcker, or slash them to cushion a recession as it was under Greenspan. But in a period of fiscal dominance we’re kind of damned if we do or don’t. Keeping rates high would make borrowing costs explode, precisely at a time when the private credit market trouble is beginning to boil over into the real economy. Many of these shadow banking deals are variable rates tied to market rates so this would force seismic defaults throughout the economy.

On the other hand, cutting rates as Trump has been pushing for since day one further anchors inflation above target, which in turn crushes consumer demand. And there’s no guarantee that it positively impacts the borrowing and financing activity given the amount of uncertainty and volatility surrounding this administration’s actions.

What you end up with is a hesitant, whipsawed central bank with no clear path forward. Meanwhile the Treasury is stuck with an expanding deficit financing issue with higher rates on the short end of the yield curve. Without meaningful tax hikes, which is anathema to every administration in the past 50 years—Trump isn’t special in this regard, he’s just extreme—it means a flood of new treasury issuances into debt markets that are already beginning to question U.S. economic hegemony.

So if we game this out, the administration will likely have to incentivize (pressure) banks to hold more U.S. Treasuries and perhaps engage in yield-curve control to keep the long end of the yield curve from running away. The Fed will have to expand use of its repo facilities to backstop liquidity in the market. These responses are all well and good in terms of providing market stability in the banking sector, but it does nothing to address concerns in the real and consumer economy because it leads to inflation and a tight credit environment.

The immediate scenario is a solvent but tight financial banking environment, and a consumer plunged into recession. The balance sheet of the United States is in a completely different position than it was during prior wartime periods and the fiscal and regulatory stance of this administration means the consumer is the one who will be on the hook. And no amount of energy independent supply and increased stockpiles of oil at home will matter to global crude and natural gas prices because oil is fungible and traded globally.

War is stupid under nearly every circumstance. In fact, Trump from one year ago would tell you the same thing. In the past, and in theory, we had the top minds in the military and administration to help us navigate war efforts that still resulted in inflation, recessions and financial crises. What chances do you think we have with this collection of miscreants, fools and sycophants? They’re not even wearing shoes that fit.

As it was, those cycles played out in a world where U.S. hegemony was unquestioned, and the debt‑interest dynamic wasn’t yet on a knife’s edge. Today’s circumstances are totally different. Any recessionary plunge triggered by this conflict will likely be deeper and harder to climb out of because of fiscal dominance, diminished faith in the U.S. dollar and a desire to break ties with a country that elected a madman, not once but twice.

This could go down as the single biggest self‑inflicted wound of a sitting U.S. president: the moment when Washington, in defense of an already‑fragile hegemony, triggers the very chain of events that ends it.

Because the world is not going to sit by while the United States toys with shutting off one‑fifth of global oil trade. China is building a blue‑water navy and deepening economic ties across the Global South. Russia, despite its own disasters, is still at the grown‑ups’ table with nukes, energy, and diplomatic leverage. Europe is finally learning that the U.S. is a rogue, undependable partner—willing to weaponize everything from payment systems to shipping lanes.

The end state is easy to sketch: the U.S. is reduced from globe‑spanning hegemon to a regional, hemispheric power, first among equals in the Americas, while new and old players—China, a bruised but resilient Russia, an increasingly autonomous Europe, and a more assertive Global South—cobble together a more multipolar order. Not because they beat us on some imaginary battlefield. But because we blew a hole in our own economic hull and theirs at the same time—and they finally decided they’d had enough.