Hormuz Vortex: US Economy Enters Treacherous Waters

The US is facing a financial crisis due to its strategic miscalculation in attacking Iran. The initial assumption was that pressure on Iran would remain confined, but the Strait of Hormuz has shown that war does not flow only where the missiles land.

The crisis has moved beyond crude oil and into refined products like diesel and jet fuel, which directly fuels trucking, mining, agriculture, machinery, and industrial production. The average US diesel price has risen by 55% since the start of the conflict to $5.820 per gallon.

The Federal Reserve faces a tough decision: raising interest rates could push the economy toward recession, while excessive delay could allow inflation to become entrenched again. Christopher Waller's remarks highlighted the erosion of the 'safety and liquidity premium' of US Treasury bonds, which would require higher interest to attract capital even without a Hormuz shock.

The crisis has created a 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. The US government's freedom of action is shrinking, and it no longer enjoys the same historic discount on its borrowing costs.