Hormuz Crisis Erodes US Strategic Margin

The US's decision to attack Iran has led to a strategic miscalculation that has far-reaching consequences beyond the military battlefield.

While the initial assumption was that pressure on Iran would remain confined, the Strait of Hormuz crisis has shown that war does not only flow where missiles land. The costs are now showing up in diesel prices, gas contracts, shipping insurance, Treasury bond markets, Federal Reserve interest rates, and the cost of financing America's $40 trillion debt.

The crude oil market still has tools to absorb the shock, but the real point of transmission for the crisis is now less crude oil itself and more products like diesel and jet fuel. The average US diesel price has risen by 55% since the start of the conflict, directly affecting production costs and consumer prices.

The Federal Reserve faces an equation with no clean solution: raising interest rates does not reopen Hormuz but could push the economy toward recession, while excessive delay allows inflation to become entrenched again. The real issue lies in Christopher Waller's remarks about the erosion of the 'safety and liquidity premium' of US Treasury bonds.

The US government must now compete for capital with large private companies, creating a dangerous feedback loop: expensive energy makes inflation stickier; sticky inflation limits room for interest rate cuts; higher rates raise the cost of issuing and rolling over debt; and so on.