The report further details, “From a policy perspective, the implications are significant. The crisis challenges the traditional separation between energy security and food security. In a system where energy inputs are embedded in agricultural production, disruptions in one domain inevitably affect the other. Strategic reserves, long focused on oil, may need to be reconsidered to include fertilizers and other critical inputs. International coordination mechanisms, particularly those aimed at supporting vulnerable economies, become essential in managing such crises. The closure of the Strait of Hormuz offers a clear window into the evolving nature of global risk. What appears at first as a localized geopolitical event quickly unfolds into a systemic disruption, affecting energy, industry and food simultaneously. The key insight is not simply that the world depends on Hormuz, but that this dependence is embedded across multiple layers of economic activity.” In addition to the short-term economic damage that is being incurred by entering this conflict, there is also the long-term damage being done to America’s global economic standing. As a recent report by Deutsche Bank details, the longest-lasting legacy of the Iran War could be its destruction of the dollar as the dominant global-reserve currency. The report outlines, “The dollar’s dominance in cross-border trade is arguably built on the petrodollar: globally traded oil is priced and invoiced in USD. This arrangement can be traced to a deal struck in 1974, where Saudi Arabia agreed to price oil in USD and invest surpluses in USD assets in exchange for U.S. security guarantees. Because oil is a core input to global manufacturing and transport, there is a natural incentive for global value chains to dollarize, and global surpluses to accumulate in USD. From 1945-1971, the dollar was “backed” by gold — namely, global central banks were able to exchange $35 for 1 oz at the Fed. This was the foundation of the international monetary system known as Bretton Woods. In 1971, the U.S. broke the dollar’s link to gold. Since then, the dollar has been in a purely fiat regime — one that is backed by the sovereign creditworthiness of the U.S. and willingness of the world to save in its debt.” The Deutsche Bank findings continue, “Enduring support for the fiat dollar arguably comes from the dominance of the dollar in the pricing of cross-border trade. Globally traded goods and services are largely priced in USD, with payments exchanged over U.S.-controlled payment rails. Global surpluses are thus built in USD and mostly invested back into U.S. assets. Corporations are incentivized to save and borrow in the currency of their payables and receivables, banking systems are dollarized, and central banks save in dollars to act as effective lenders of last resort. A crucial anchor to this system is the petrodollar: the fact that most globally traded oil is priced and invoiced in dollars. Because oil is so central to global manufacturing processes — from petrochemicals, fertilizers and transport, to running factories and offices — companies are incentivized to price end products in dollars as a natural currency hedge to a key cost.” The report concludes, “The current conflict has arguably shaken some core foundations of the petrodollar regime: the security-for-oil-pricing arrangement. U.S. military assets and bases in the Gulf have come under attack in the war. Oil infrastructure in the Gulf has also been hit. And the U.S.’s ability to provide maritime security to ensure the global flow of oil has been challenged with the closure of Hormuz. The U.S. security umbrella has been fundamentally tested. The legacy of this conflict for the dollar could be the ways in which it tests the foundations of the petrodollar regime. In the long-run, if the world uses less oil, the Gulf draws more deeply on existing dollar savings, if the Gulf moves closer to Asia in its trade and investment relationships, and eventually prices less oil in dollars — there could be significant downstream effects to the dollar’s usage in global trade and savings.” The decision to start a wide-ranging war with Iran was long off-limits for a reason. It throws into question the very foundation that America has built its economic power on in the first place. This country built a great deal of economic might on guaranteeing a combination of security, predictability and diplomacy, all of which have been completely thrown out the window in recent years. The United States is being seen as unstable and unpredictable on the world stage, and it will have vast long-term consequences for everyday citizens. As a country, we’re entering a brand-new world, one with a lot less safety and security than the last. The United States is being seen as unstable and unpredictable on the world stage, and it will have vast long-term consequences for everyday citizens. 12
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