Iran War and Treasury Debt: Is a “Trump Shock” Coming?

The United States is confronting two pressures at once: an Iran war that is draining weapons stocks and a debt burden that is pushing Treasury financing costs higher. The combination recalls the dollar crisis of the early 1970s, but the article argues that today’s Washington lacks the leadership and vision that helped the country overcome that earlier crisis.

In the 1970s, the United States faced trade deficits, rising spending from the Vietnam War, inflation and a falling dollar. President Richard Nixon suspended the dollar’s convertibility into gold on Aug. 15, 1971. The oil shock that followed the 1973 Middle East war brought the crisis to a peak. The United States then protected the dollar’s central role through the petrodollar system and reshaped its industrial economy around advanced technology and finance.

The current conflict, however, has exposed limits in the country’s industrial base, the commentary says. It claims that only four or five of the 11 aircraft carriers are operational and that stocks of expensive precision-guided weapons have fallen by 30% to 80%, with replenishment taking six years. It also says the United States can no longer build even one ocean-going ship, while defense companies focused on high-margin weapons cannot produce cheap drones and missiles on the scale used by Iran.

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If you really want to hit Iran, you would have to cut countries such as China off from the U.S. financial system, but such a measure would cause serious disruption to our economy and raise international questions about the dollar’s role as a reserve currency.

The debt picture is similarly strained. U.S. national debt has exceeded $40 trillion, Treasury yields have reached a 20-year high, and the government is considering buying back its own bonds. Interest payments consume 20% of federal revenue and 15% of the federal budget. A 0.1 percentage-point rise in rates would add roughly $35 billion to $38 billion in annual interest costs, according to the article.

The proposed economic campaign against Iran would test whether Washington can stop oil transactions between Iran and China and limit non-dollar trade. The article questions whether the United States is willing and able to sanction Chinese banks without damaging the dollar’s international role. It also points to China’s rare-earth restrictions and the growth of yuan-based trade after years of Western sanctions against Russia. Former President Barack Obama previously acknowledged that cutting China off from the U.S. financial system could seriously disrupt the American economy and raise international doubts about the dollar.

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The Trump shock does not seem likely to save the United States.