Let’s set the scene. The U.S. government is staring down a projected $1.9 trillion deficit for this fiscal year, with the total national debt now pushing $39 trillion. Simultaneously, the expanding war in Iran and the subsequent crisis in the Strait of Hormuz have fractured global energy supply chains, driving Brent crude to $119 a barrel and sparking a massive inflationary shock. By any standard metric of sovereign risk, a state that is rapidly accelerating its debt issuance while engaging in a war of choice that is throttling the worldwide supply of oil should be facing the possibility of having its bonds repriced.
Yet Wall Street and Washington continue to treat U.S. Treasuries as the ultimate “risk-free” asset, resting comfortably on the AA+ and Aa1 ratings assigned by the major credit agencies. For decades, these ratings have been the financial expression of an imperial dividend. They bank on the assumption that American military power will guarantee both global economic stability and the dollar hegemony required for the United States to service its debts, in perpetuity.
This pristine rating is no longer a reflection of reality. Many countries are beginning to explore alternatives to the petrodollar. And the physical infrastructure and foreign policy that underpin its value are in tatters, replaced by a series of ad hoc military strikes in the Persian Gulf and temporary waivers to “protect” American consumers from the resulting inflation (like the recent suspension of the Jones Act, as well as the suspension of sanctions on Russian and Iranian oil at sea).
Simultaneously, Trump is calling on the U.S. to borrow trillions of dollars to finance the military, while signaling that the U.S. may withdraw from policing the Strait of Hormuz altogether. Viewed in this light, the “full faith and credit” of the U.S. government is poised to hit a hard limit in the near future. The Congressional Budget Office estimates that the net cost of interest will top $7,700 per household in fiscal year 2026, with the total amount topping $289,000 per household. But for whatever reason, the bond market is failing to price in the risk of the U.S. fighting perpetual wars, whose primary exports are no longer oil but instability.
For the last 46 years, the math of U.S. debt relied on a geopolitical bargain with the rest of the world. The U.S. could run perpetual deficits because its military secured global trade, keeping the commodity inputs for industrialization at the periphery cheap and plentiful. This arrangement allowed the U.S. to export its inflation and import the world’s surpluses at massive discounts, passing the savings along to domestic consumers as their wages began to stagnate in the late 1970s. But now, the clocks are running out and the bills are coming due.
The U.S.-initiated war in Iran is inverting the mainstream value proposition of the arrangements wrought in the pre-Trump status quo, threatening everyone from regional Gulf allies, Asian oil importers, European financiers, and domestic consumers. There is a unique historical precedent for this specific brand of reckless deficit spending, warmongering, resource extraction, and domestic “deindustrialization,” predicated on the global adoption of a local currency.
In the sixteenth and seventeenth centuries, the Spanish empire assumed its hegemony and sovereign credit would be eternally guaranteed by the massive influx of silver coin from the Americas, specifically from the mines at Cerro Rico and the Potosí mint. But as the Spanish Crown engaged in decades-long, debt-fueled military campaigns across Europe, that coin chased interest payments and a strained supply of goods from Europe and China, rather than building productive capacity in Spain. This triggered the devastating, global price revolution.
Living through this, the Dominican friar Martín de Azpilcueta articulated many of modern economics’ foundational concepts, including the quantity theory of money, the time value of money, and money as a commodity. Eventually, the Spanish empire’s financial backers in Genoa were forced to cut it off, and the Spanish empire entered a two-centuries-long era of decline. The U.S. empire’s financial backers in London and Brussels may soon be forced to consider the same.
The Federal Reserve will soon be confronted with an inflationary shock that monetary policy is ill equipped to fix. You cannot print oil, and no amount of quantitative tightening can clear a blockaded strait. Because this inflation is driven by physical scarcity manufactured by America’s own foreign policy, the central bank and the Treasury are trapped in a macroeconomic bind. There are only two exits, and both are likely to diminish the value of U.S. Treasuries.
Path one is monetization. To keep the war machine running and prevent the federal budget from collapsing under its own weight, the Fed can choose to absorb ballooning wartime deficits. But printing money to buy debt during a shortage of cheap oil is like pouring gasoline on a fire—please pardon the obvious simile. Inflation would spiral further out of control, minimizing returns for short-term bondholders and crushing domestic consumers.
Path two is hiking interest rates. But here, the Fed runs into the practical limits of America’s $39 trillion national debt. The federal government is already spending over $1 trillion annually just to service its existing debt. Pushing rates higher to crush inflation will cause those servicing costs to explode, eating the federal budget and pushing the U.S. closer to functional insolvency.
Ultimately, sovereign debt is a claim on a portion of the wealth generated by the domestic population. But there is a physical and political limit on how much capital a government can extract from its citizens to service its liabilities—in particular, within the context of a country that refuses to fairly tax its billionaires.
The American consumer, already living under the long shadow of Covid-era inflation, is rapidly approaching the limit of what it can supply. To maintain the current trajectory of wartime deficit spending, the U.S. will force the public to absorb a dual shock: the punishing downstream costs of $119-a-barrel oil at the pump and at the grocery store, combined with the possibility of “ahistorical adjustments” that were already being theorized before the U.S.-initiated war in Iran.
Credit rating agencies have historically treated domestic political instability, at least in the U.S. and Europe, as background noise. But we are entering a phase where the math of debt service will require a level of domestic wealth extraction that the American political apparatus may not be able to sustain. Under Republican control, the U.S. federal government is no longer capable of consistently passing budgets, implementing an equitable tax regime, or even maintaining basic public safety. Understood in this light, its capacity to guarantee returns for bondholders has been, to put it mildly, diminished.
Downgrading U.S. debt would undoubtedly be interpreted by the Trump administration as financial warfare. But the prevailing AA+ and Aa1 ratings rest on the assumptions of the unipolar, neoliberal era, backed by the now-dead Carter Doctrine. Trump’s aims with the so-called “Donroe Doctrine” in Latin America have begun to take clear shape, but his aims in the Middle East are still opaque. Trump’s threats to the Federal Reserve, his aforementioned use of temporary waivers to existing laws, and rumors that he intends to extort war reparations from Gulf Coast allies, suggest that he may be trading the physical fixes the U.S. has historically relied on (infrastructure investments and expanding into new Middle Eastern markets), in favor of time-bound fixes to “bridge the gap”—sustaining the domestic economy until the U.S. completes its reintegration with Latin America.
Regardless of how one feels about this strategy (or nonstrategy), it’s obvious that America’s pivot to the Western hemisphere contradicts the expectations that are baked into its current bond prices. The U.S. can afford to wage an inflationary war in the Middle East while retreating into pan-American autarky, or it can maintain its current sovereign credit rating. What the math of our current crises makes clear is that it does not have the long-term material capacity to do both.
