As you know, I am increasingly preoccupied with the question of the sustainability of the quasi-monopoly of the US dollar as the world’s reserve currency. This is because it constitutes an economic anomaly with far-reaching distortions and, consequently, an expiry date. There is undoubtedly a causal link between the US’s assumption of hegemonic roles, the quasi-monopolistic status of the currency, the prevailing interest rates (which are dependent on inflation rates), and the financing challenges of the US federal budget and deficit.
If one of these factors changes drastically, new equilibria must form. I try to imagine this process, specifically in three phases:
- What might be the trigger points that would call the status quo into question? How precarious is this status quo already, under certain circumstances? After all, we know, for example, the level of US national debt (124% of GDP) and the resulting interest payments (currently 17% of all fiscal expenditure). We are also aware of the tensions between the US President and the Fed Chair, which centre precisely on the issue of US budget financing.
- How would an adjustment process unfold? Abruptly, meaning with significant collateral damage to the financial system and the global economy, or relatively smoothly and continuously, because very powerful counterforces such as the AI revolution are also at work?
- What might the resulting state of the global financial system and the world economy be? Could anyone have imagined the world after the collapse of the Bretton Woods system (1973)? Could people have prepared for it? More specifically: what would replace the US dollar? A Chinese currency? One or more blockchain currencies? What consequences would this have for institutions such as the World Bank or the IMF? What would happen to ‘global banking’?
All this sounds relatively technical, but it is actually quite concrete. It concerns a possible bond crash, persistently high oil prices, partial sovereign default, stubborn stagflation in the global economy and a geopolitical realignment across the globe.
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Just under a year ago, together with Ivan Adamovich, I wrote the paper ‘Dealing with America’ (Progress Foundation Zurich, 2nd edition May 2025), in which we examined the possible and deliberate end to the hegemonic status of the new American administration (and the presumed resulting erosion of the US currency’s quasi-monopoly). Now, following the decapitation strike against Venezuela and the decapitation strategy initiated against Iran, one can reasonably argue that exactly the opposite has occurred: President Trump is pursuing a completely different, new, more effective, less costly, less bloody and less damaging hegemonic policy using means that appear incredibly precise.
That may well be the case, and it might just be the ideal path to a more peaceful world and a prosperous global economy: That ‘someone’ – namely the US, which is both capable and equipped for the task – should, albeit without a mandate under international law and without the blessing of a now toothless UN, eliminate the most bothersome elements on the globe by sending the elites straight to the afterlife or to prison. Such decapitation would allow more moderate forces to take political control in such rogue states; a hundred Dubais could spring up not only in Gaza, but along the entire Persian coast – and so on.
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However, the sceptic in me is speaking up. I am sure you have all been following the situation following the Israeli-American intervention in Iran and are rather over- than under-supplied with news and commentary. Much is currently being written, claimed and rumoured. Much of it is biased because Donald Trump and the Israelis are involved – that can’t, shouldn’t be good…! I don’t wish to go into that. Rather, I am keen to sharpen the focus on a looming dilemma that the US government may well find itself facing.
This stems from the increasingly apparent situation that, whilst a spectacular strike succeeded in severing one of the key heads of the Iranian mullah regime’s hydra (for which we shed not a single tear) and striking its entourage, The Iranian elite, committed to a strange, apocalyptic sectarian belief, no longer exists. However, the Persian people have not yet risen up against their tormentors, because that apparently is too dangerous. The possibility of a regime change in the near future is not yet off the table. But we must also reckon with the possibility that such a change will not take place yet, or not at all.
For the mullahs, committed to their apocalyptic beliefs, have taken precautions. They may – presumably? – have established a highly decentralised, resilient system of power comprising Revolutionary Guards, military and paramilitary forces, equipped with everything necessary (weapons, ammunition, information and communication systems) and capable of operating largely autonomously. They obey Khamenei’s son, who directs operations from underground. The mystery surrounding his existence fuels the unconditional obedience of the decentralised forces; there is no sign of demoralisation. Furthermore: should they ever give up, the people would face a double void: a hopeless existence in a secularised Persia and the loss of their front-row seat in paradise.
What remains of the Revolutionary Guards is not nothing. Take heed: Persia is vast, there are hundreds of thousands of hiding places; an opponent operating largely asymmetrically – that is to say, using terrorist tactics – is almost impossible to defeat. The frightened population (apparently 80% are critical of the regime) will not be able to side with any ‘liberators’ so quickly, or at most only in parts of the country.
I have the impression that the American government, for all its undeniable qualities and determination, could not have anticipated this. The aim and approach were rapiddecisive decapitation. That the body of the Hydra might live on and generate, countless new heads with a clear mission (“survive, keep fighting, ‘cleanse’ Jerusalem, prepare the ground for the arrival of the 12th descendant of the Prophet”) – such possibilities are presumably beyond the mindset of a team at, which is primarily focused on short-term deals and profits, and its leader.
What particularly concerns me is the situation on the Strait of Hormuz, which is heavily fragmented on the Persian side. We are faced with the possibility that Iranian forces – even if they are merely uncontrollable armed fractions – could threaten shipping traffic for weeks and months, perhaps even years, thereby rendering it practically impossible. Drones – there are millions of them; they can literally be launched from every corner of the Persian coastline. The effort required to intercept or combat them is extremely disproportionate and high. Added to this is the threat posed by sea mines, underwater missiles and other such weapons. Escorting civilian ships with an armada of warships is extremely costly and may even be an ineffective approach, as it takes very little to cause damage to unarmoured vessels full of oil – which is, after all, the nature of civilian tankers.
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What options are available to the US, which started the war, in this situation? In my view, there are three swords of Damocles, which largely rule each other out:
- The US President decides to resort to conventional warfare. He deploys ground troops to ‘smoke out the pirate nests’, perhaps starting with the complete takeover of Kharg Island, Iran’s hub for deep-sea shipping – an easy target offering significant prestige in the short term. This would then be followed by commando-style raids on identified Iranian positions along the Strait of Hormuz, culminating in a full-scale invasion, because a measured approach to warfare would not have proved effective. It would be worse than the Normandy landings in 1944, as the Iranian hinterland is essentially impossible to control militarily. In other words, another Vietnam or Afghanistan – something the vast majority of Americans would never have wanted – triggered by a president who, until recently, wanted to win the Nobel Peace Prize. The Israelis are certainly pushing for the seizure of the well-known nuclear facilities such as Fordo, Natanz and Isfahan, all three located deep within Iran, which could not be achieved without complex airborne landings involving multiple divisions. The attacker would have to expect to deal with ‘Ukrainian’-style battlefield conditions and accept heavy losses.
- The American government is trying to sit the problem out. It drops bombs here and there, tries to appease, attempts to escort merchant ships through the waters, strikes short-term deals with dubious forces, and muddles through from one promise to the next. Apart from the fact that patience is not one of the current president’s key strengths, the US mid-term elections scheduled for autumn 2026 argue against choosing this option. But more importantly: the attempt to ‘ride it out’ would result in persistently high oil prices. If 20 per cent of global oil production is permanently lost, adjustment and substitution processes will indeed take place (Asian countries are already substituting oil with coal on a large scale). However, energy prices are only truly elastic in the long term, and that could mean several years. Higher energy prices lead to higher inflation rates, lower growth (stagflation), and interest rates are likely to rise in the long term.
- The US government will soon declare the war ‘over’ without the problem of the Strait of Hormuz having been resolved, and will leave the entire Middle East theatre to the neighbouring states of the United Arab Emirates, Saudi Arabia, Bahrain, Qatar and Oman. In my view, these countries would be forced to seek assistance from the Chinese, who are most dependent on the flow of oil, resulting in one of the greatest geopolitical shifts in power at the expense of the Americans in recent decades. The current US President would be sidelined, the result of the mid-term elections disastrous; the US would descend into a state of dysfunction with impeachment, lawsuits and counter-lawsuits. This would last at least until the next presidential elections in 2028. It is not yet possible to assess how Israel would react to a premature withdrawal by the Americans.
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Common to all three scenarios is that the question of financing the US budget would become even more acute. Presumably, the three scenarios would also be accompanied by significantly higher inflation, whether as a result of an exogenous oil price shock or due to endogenous developments that may arise in a dysfunctional state structure. Long-term interest rates would then be significantly higher than the current levels of 4.28% for 10-year or 4.89% for 30-year Treasury bonds. Interest payments would account for 20 per cent or more of the total budget; the President would be tempted to trigger a partial debt relief in line with the ‘Mar-a-Lago’ scenario.
If the ‘ideal solution’ outlined above – namely, the successful decapitation of the Iranian hydra and the emergence of a new Persia supported by the vast majority of the people – does not materialise very soon, then we will likely move quite rapidly into phases 1 (trigger point) and 2 of a profound restructuring of the world’s monetary and financial system. We do not wish to pass judgement here. For instance, on whether this would have been necessary or sensible. That is a matter for impartial historians to assess at a later date.
However, such a structural break will not occur without major upheavals in the financial markets. There will be a deluge of losses. In the fixed-income sector, but certainly also in the equity markets. Although I am, as is well known, antagonistic to hedging strategies, more cautious investors do need to give this some thought. For, as the following charts show, risk premiums on fixed-income securities are still relatively moderate today, and volatility in the equity markets remains quite low. Those seeking greater security can still buy it relatively cheaply for the time being. The markets currently believe in a reasonably ‘sensible’ outcome to the Iran issue and in the dominance of positive themes such as AI and the like. C’est à vous de choisir, but I simply wanted to give you a few pointers.
Best regards,
Konrad Hummler
19.03.2026
This text was first published on March 19, 2026 as a personal newsletter from Konrad Hummler and is reproduced here with his kind permission.
