SATISH SHARMA - not just Rotigraphy.: Iran’s fundamental mistake is that it believes this war is not existential for the US.

https://x.com/m4h007/status/2064902886744838214

Majid Hosseini

Iran’s fundamental mistake is that it believes this war is not existential for the US. 

This war is existential for the so called American pact aka Pax Americana. The pact in which the US provided investments, military protection, and a very sophisticated financial infrastructure. In return, the other participants focused on what they could do best. The division of labor, and comparative advantage: China: high quality labor, GCC Arabs: cheap and reliable energy, etc.  

As part of the pact, any excess capital from these participants would get invested in US financial markets, primarily in the form US treasuries, but also venture capital (eg Saudi money in Softbank), and other instruments. 

This did two things:
1-Lower the cost of capital in the US. This meant lower interest rates, higher stock market, more money available for startups, lower housing costs, and many other things.

2-The invested capital served as a hostage, a guarantee of good behavior by those in the system, which supplied some level of stability to the pact. The US could theoretically seize or freeze the assets of any misbehaving participants. 

Parts of this pact have already been going away. China is not a US satellite state or even a partner. It is a competitor, building its own pact in the form of Belt and Road Initiative. It is also reducing its exposure to US treasuries and increasing its gold reserves. 

If the US loses its dominance over the Persian gulf, another part of this pact will break. The GCC Arab states have lost their protection, while still having a hostage in the US. That’s an incentive to reduce their exposure and diversify their assets out of the US. 

It will also send a signal to everyone else in US orbit that the military protection is not available anymore. 

As these orbit states reduce their exposure to US assets, the cost of capital in the US will rise: higher interest rates, lower stock market, higher home financing costs, fewer startups, etc. 

Furthermore, the US has $31T public debt, with average maturity of 5.9 years. As the interest rates rise, the cost of rolling over this debt is going to rise.

Last but not least, there’s about $1.6T in additional debt that gets added every year, which will be paying higher interest. 

As the debt/GDP ratio rises, the feedback loop kicks in: the US has to pay a higher interest rate to keep the same investor.

This is why the loss of the Persian Gulf is so significant for the US.

I might write a later post about the effect of rates on debt financing.