The Iran-US war is gradually evolving from a geopolitical crisis into a global economic issue — not simply because oil prices have risen, but because three critical prices in the global economy are rising simultaneously: the price of energy, the price of capital and the price of risk. From oil markets and US Treasury bonds to the Japanese yen, German bonds and major Saudi projects, the signals appear less like isolated developments than parts of a common trend — one that has now reached US domestic politics and the November elections.
The starting point of this chain reaction is the energy market. The US faces a serious paradox in its confrontation with Iran: if it refrains from escalating military pressure, Tehran can maintain pressure on the Strait of Hormuz and energy markets at lower cost and risk; but if the US intensifies military operations, rising uncertainty could drive up shipping insurance, transport, refined-product and ultimately energy costs. Thus, even without a complete halt to oil flows, the risk surrounding Hormuz has become a price-setting factor.
This is where the Achilles’ heel of US military power becomes apparent. Not using military power carries geopolitical and deterrence costs; but using it more extensively can increase the economic cost of the war. The US is effectively faced with a choice between the “cost of deterrence” and the “cost of escalation.”
The oil market has taken this possibility seriously. Morgan Stanley has raised its forecast for oil prices in the fourth quarter of 2026 from $75 to $100 per barrel, while putting its forecasts for the first and second quarters of 2027 at $95 and $90, respectively. The change shows that markets are no longer pricing in merely a short-term oil-price spike; the possibility of a more prolonged disruption to Middle Eastern supplies has entered investors’ calculations.
But higher oil prices do more than increase producers’ revenues; they also fuel inflation. Higher oil prices mean more expensive gasoline, diesel, transportation and production, with part of those increases eventually passed on to the prices of refined products, goods and services. This is what economists refer to as an inflationary shock — an increase in costs caused by an external factor that reduces household purchasing power.
From there, the energy crisis moves into the money market. Bond yields, simply put, are the return investors demand for lending money to the government. When bond yields rise, it means the government has to pay more to finance its debt. In recent weeks, the yield on 10-year US Treasuries has remained above 4.75%, while the yield on 30-year Treasuries has exceeded 5%. At the same time, pressure in the bond market has spread to Europe and Japan.
Washington has turned to a relatively unconventional measure to calm the market: Treasury buybacks. In other words, the Treasury buys some of its previously issued debt back from the market to temporarily and artificially reduce supply pressure. But this tool cannot resolve the underlying problem because investors remain concerned about inflation, budget deficits, debt and war-related risks and will demand higher yields to hold Treasuries.
Japan is a crucial link in this chain. As the largest holder of US government bonds, Japan holds more than $1.1 trillion in US Treasuries, and movements in the yen can directly affect the US Treasury market. If the yen weakens excessively, Tokyo needs dollars to support its currency; but if that support involves large-scale sales of dollar-denominated assets, it could increase selling pressure on US Treasuries and push their yields even higher.
That is why the US has become increasingly sensitive to the yen market. Between July 30 and August 26, Japan spent about 15.4 trillion yen, equivalent to $96.5 billion, supporting its currency, while Washington and Tokyo also carried out a joint intervention on July 31.
The discussion around the use of the Foreign and International Monetary Authorities (FIMA) repo facility to obtain dollar liquidity against Treasury securities is also important in this context. FIMA allows central banks to obtain dollars by pledging US Treasuries as collateral, enabling countries that hold US government bonds to avoid selling those securities to meet their foreign-currency needs. In other words, Japan can obtain dollar liquidity without necessarily being forced to sell a large volume of US Treasuries directly. This matters to the US because large-scale Treasury sales by one of the world’s biggest foreign holders could place additional pressure on the debt market and create a market psychology that encourages a rush by Treasury sellers to bring more securities to market.
But the problem is not limited to the US and Japan. Europe is also feeling the effects of this wave. Lars Klingbeil, Germany’s vice chancellor and finance minister, attributed higher borrowing costs to uncertainty stemming from the Iran war. The yield on Germany’s 30-year bonds also reached its highest level since 2011.
In Saudi Arabia, the trend is taking a different form. Riyadh is considering securing at least $8 billion in new loans, while Aramco is also examining financing options. At the same time, major Vision 2030 projects and the new city of NEOM are being reviewed and reprioritized.
A global chain reaction is therefore taking shape: the war first raises the risk surrounding Hormuz; the Hormuz risk makes energy more expensive; higher energy costs fuel inflation; inflation makes interest-rate cuts more difficult; higher interest rates increase borrowing costs; more expensive capital puts pressure on bond markets and government budgets; and ultimately, large and costly projects become less attractive.
But this chain has another crucial link: the daily lives of Americans.
American voters do not need to know what Treasury yields are or how FIMA works. They see the consequences at the gas pump, in stores and in their mortgage payments. Higher oil prices mean higher gasoline prices; higher inflation means less purchasing power; and higher Treasury yields mean higher costs for long-term borrowing, including mortgages.
This is where an economic issue becomes a political one.
A Reuters/Ipsos poll at the end of August showed Trump’s approval rating at 33%, while 71% of Americans said they were dissatisfied with the way he was handling the Iran war. Only 31% of Republicans said they were highly motivated to vote in the midterm elections, compared with 46% of Democrats. For the first time in a decade, a larger share of Americans also said Democrats would do a better job managing the economy.
These figures matter greatly to Trump and Republicans. The November elections are not solely about foreign policy; voters will also judge the cost of living. If the war continues while oil, gasoline, inflation and borrowing costs remain elevated, a war intended to demonstrate American power could instead translate at home into a higher cost of living.
As a result, Trump faces a serious paradox: military escalation may be viewed as necessary to preserve deterrence, but that same escalation could increase energy and inflation risks; reducing military pressure, meanwhile, could be interpreted as a retreat or a weakening of deterrence.
For this reason, the Achilles’ heel of US military power is no longer merely military; it has become economic and political as well.
The chain that begins in Hormuz can extend to oil, inflation, the bond market, the yen, Europe, Saudi Arabia and ultimately the daily lives of Americans:
The Iran war is on the verge of becoming a global financial crisis, with signs of its transmission into the world’s financial system emerging one after another.
The US now faces a question more difficult than the limits of its military power: How can the war continue without its costs being transmitted to energy markets, the Treasury market, the cost of debt and, ultimately, the American ballot box?
NOURNEWS