Iran showed that it now constitutes the new decisive player in the region and that American security guarantees are not only insufficient but may also function destabilizingly, as the American presence introduces risks and instability to the regimes of the region.
The geopolitical developments are affecting the global economy in real time . and by now the USA no longer has the power to manage the consequences of the crises that they themselves cause. We are already in a new era and the war with Iran is likely the last one that America wages as a superpower. Even though the stock market has not yet registered the major risks due to the AI euphoria, the facts are relentless: The Persian Gulf states with the thick wallets that used to buy the debt of the USA and constituted a critical source of financing for the financial system and American businesses no longer find a reason to pay insurance premiums to the USA. The debt of the USA will no longer be recycled through petrodollars, while the risk of hyperinflation is no longer an extreme scenario, as the erstwhile buyers of surplus dollars will head towards the yuan. Wars historically constitute one of the most important factors driving up the public debt of the United States, but also of any state in a state of war.
War and debt in the USA
In the American Civil War of the 1860s it was the first real debt explosion: the federal debt increased from about 65 million dollars in 1860 to about 2.7 billion after the end of the war, an increase of over 4,000%. (This huge percentage increase was due to the fact that the debt was starting from an extremely low base, as President Andrew Jackson had completely eliminated it in 1835. Conversely, in subsequent wars the percentage increases appear smaller because the initial debt level was already very high.) World War I caused another huge jump, raising the debt from about 2.9 billion dollars in 1914 to about 25 billion in 1920, an increase of about 760%. World War II was even more painful in absolute numbers, skyrocketing the debt from about 51 billion dollars in 1940 to about 260 billion after the war, an increase of about 410%. During the Vietnam War, the American public debt increased from about 317 billion dollars in 1965 to about 533 billion in 1975, a jump of about 68%. Based on the best available estimates, the war in Afghanistan added costs equal to approximately 59% of the federal debt that existed when it began, while the war in Iraq in 2003 added costs equal to approximately 47%. We are now in the third month of the war with Iran. The federal debt of the United States was at approximately 38.7 trillion dollars when the war broke out and has already exceeded 39.2 trillion. Where will it be when the war ends? No one can know. However, it is almost certain that it will be significantly higher. Indeed, the equation holds true: War = Inflation There is, however, an intermediate stage in the process: debt. War expenditures are funded mainly through borrowing, which is then largely purchased by the central bank with money created from thin air. A more accurate equation would therefore be: War = Debt = Inflation Thus, the war with Iran accelerates the upward debt spiral of the American government and reinforces even further the continuous devaluation of the dollar, which had already approached a critical point before even taking into account the cumulative consequences of the war. But that is not all.
The alarm from the Persian Gulf
Another possible victim of the war is the petrodollar system, which functions essentially as a protection mechanism for the major oil-producing countries of the Middle East that are aligned with the United States, such as:
1) Saudi Arabia,
2) Kuwait,
3) United Arab Emirates,
4) Bahrain,
5) and Qatar.
The petrodollar system constitutes a core pillar of the international power of the dollar since 1971, when Nixon definitively severed the last link of the American currency to gold. The logic of the system is simple: the American military protects these countries and they, in exchange, agree:
1) to price oil in dollars,
2) and to reinvest their revenues in the purchase of American government bonds and in the US financial system. In this way, the dollar is supported and interest rates are kept lower than they would be under other circumstances. The oil-producing countries of the Persian Gulf continue to constitute important investors in the market of American government bonds (US Treasuries), although their participation is smaller compared to the largest countries that hold American debt such as Japan or China. According to the most recent data of the American Department of the Treasury and international financial sources, Saudi Arabia held about 149.6 billion dollars in American bonds in March 2026, while the United Arab Emirates held about 114.1 billion dollars. Kuwait also recorded a significant increase in its holdings, reaching about 66 billion dollars at the end of 2025, a record level for the country. In total, the main monarchies of the Persian Gulf, Saudi Arabia, United Arab Emirates, Kuwait, and Qatar, are estimated to directly hold about 350 to 500 billion dollars in American government bonds, while their total investments in the United States through sovereign wealth funds, stocks, private equity, and real estate reach several trillion dollars.
The petrodollar system
The significance of these funds is directly linked to the petrodollar system. Since the 1970s, the Gulf countries price their oil mainly in dollars and reinvest a large part of their surpluses in American assets, particularly in government bonds. This process contributes to maintaining high demand for the dollar and allows the United States to finance its public debt with lower borrowing costs. However, in recent years, trends of gradual diversification are observed. Recent reports state that Saudi Arabia and the United Arab Emirates reduced their holdings in American bonds by nearly 17 billion dollars within one month, in March, amid geopolitical tensions and pressures in the oil markets. At the same time, discussions are increasing regarding the use of alternative currencies, mainly the Chinese yuan, in certain energy transactions. Despite these developments, the dollar still maintains a dominant position in the global financial system. The total foreign holdings in American bonds remain at historically high levels, with the American Department of the Treasury estimating that total foreign holdings in American securities exceeded 35 trillion dollars in 2025.
Source: BN Analysis
However, this system now appears to be weakening rapidly. The war with Iran reveals the limits of American military power and the inability of the United States to provide the protection that the Arab states of the Gulf believed they were securing. Iran showed that it now constitutes the new decisive player in the region and that American security guarantees are not only insufficient but may also be acting destabilizingly, as the American presence introduces risks and instability to the regimes of the region. With the Straits of Hormuz closed and important energy infrastructure destroyed, oil exports have decreased significantly. This means that far fewer petrodollars are now returning to the market of American government bonds. This is yet another negative factor for the market of US Treasuries. There is not only decreased demand for American bonds due to the shrinking of petrodollar recycling, there is also the risk of active sales, a sell off.
The currency swap lines
The United Arab Emirates reportedly examined the possibility of selling part of the American bonds they hold, which constitute a large part of the 285 billion dollars in foreign exchange reserves, in order to offset the loss of oil revenues. Instead, however, of proceeding with sales and causing turmoil in the markets, they negotiated, according to reports, a currency swap line. The Secretary of the Treasury Scott Bessent described these lines as a means of: preventing a disorderly sale of American assets. It is clear that there is intense concern about pressures on the American bond market. At the same time, Iran stated openly that one of the conditions for the safe passage of oil tankers through the Straits of Hormuz is the payment of a fee in Chinese yuan, approximately one dollar per barrel of oil. According to information, more than 20 countries have already accepted these new terms. Iran appears to collect these revenues in accounts of Chinese banks and then use the yuan:
1) for the purchase of physical gold,
2) or Chinese goods and raw materials, some of which directly reinforce its war effort. Japan is reportedly one of these countries. Tokyo depends to a huge extent on imported energy, as about 90% of its oil passes through the Straits of Hormuz.
This explains the reports that Japan might even be using the Chinese yuan, the currency of a strategic competitor, so as to keep its energy supplies uninterrupted. It is possible to see the petrodollar system gradually giving its place to or coexisting with a petroyuan system, the old world has died and the new one has not been born.
www.bankingnews.gr
Σχόλια αναγνωστών