This War Could Destroy the Dollar

Iran, Oil, a Trapped Fed — and a Devaluation in the Making

I was thinking about what Doug Casey said just days after Operation Epic Fury killed Khamenei and Iran closed the Strait of Hormuz:

This war could be the catalyst... the pin that the bubble has finally found.

I keep coming back to that. And the more I look at what’s actually happening, the more I think he’s onto something most people are missing. Sure, Doug had financial markets in mind when he said that. But this pin could end up doing something far more damaging than a stock market crash — it could destroy the dollar itself.

The war, you see, has effectively shut down the world’s most important energy artery. That hits everyone, not just resource investors — at the pump, at the grocery store, on your heating bill. But it’s only the first domino. What makes this war genuinely dangerous is what it landed on: a system that was already cracking in ways that make the usual government fixes unavailable. I’m not talking about Iran’s system. I’m talking about America’s.

Oil Shocks Break Things

Here's the thing about oil shocks. Every major spike in modern history has been followed by a recession.

1973 — OPEC embargo, prices quadrupled, recession followed. 1979 — Iranian Revolution, prices doubled, recession followed. 1990 — Gulf War, oil spiked, recession followed. 2007 — oil went from $60 to $147, the worst recession since the Great Depression followed.

Every single time.

Why? Because oil isn’t just another commodity. It’s what economists call an input cost for basically everything. The food on your table was grown with fertilizers derived from oil, harvested with machinery that runs on oil, and shipped in trucks that run on oil. The plastic in your phone, the packaging around your groceries, the asphalt on the road outside your house — petrochemicals, all of it.

And to top it all off — to get anything from point A to point B, you need oil too. Over 90% of all global transportation runs on it — every truck on every highway, every cargo ship crossing every ocean, every plane in the sky. The point is simple: the global economy has never moved without oil, and it still doesn't.

So when the price of crude spikes, no wonder the cost of making and moving everything spikes with it. Businesses get squeezed. They cut costs. They cut people. Consumer spending drops, the economy contracts, and the whole system gets stressed. And boom — before you know it, you have a recession on your hands.

Now, thanks to the closure of the Strait of Hormuz — through which roughly 20% of the world’s oil flows — we have another oil shock on our hands. But this one is different from almost all the previous ones in one critical way.

Out of Bullets

In the past, the Federal Reserve had a go-to playbook: cut interest rates, flood the system with cheap money, let businesses borrow and hire again. It never actually solved anything — it just delayed the reckoning, each time at a higher cost. More debt, more inflation down the road, more bubbles waiting to pop. But it bought time. And as long as there was room to keep running it, the consequences stayed just far enough in the future that nobody in Washington had to care.

That room is largely gone.

Just consider what’s been happening over the past year. The Fed cut rates three times — in September, October, and December — despite inflation still running well above its 2% target. Keep in mind, central banks are supposed to cut rates when inflation is under control and the economy needs a boost. The Fed did the opposite — it cut into elevated inflation, with the stock market near all-time highs and GDP still growing.

And then, in December, it went a step further — ending quantitative tightening and restarting the money printer, buying $40 billion a month in Treasury bills with no stated end date. The official story was “reserve management.” We called it stealth QE because the mechanism is identical: the Fed buys Treasury bills by conjuring new reserves from nothing, which flows into the banking system and loosens financial conditions. The only distinction is that this targets the short end of the curve rather than long-term bonds.

The point is: before this war even started, the Fed was already in damage-control mode — cutting and printing simultaneously into an inflationary environment. That’s not a central bank with room to maneuver. That’s one that’s already used most of its ammunition.

And therein lies the problem.

With a war-driven oil shock now piled on top of all that, the economy will need relief — and fast. Oil hits everyone: the trucker, the farmer, the manufacturer, the consumer. When it spikes, the pressure on the Fed to cushion the blow will become enormous. But rate cuts alone won’t be able to do that job. The Fed controls short-term rates — the overnight stuff. What actually determines whether a family can afford a mortgage, whether a business can refinance its debt, whether the U.S. government can service its ~$39 trillion in obligations, is the 10-year Treasury yield. That’s the long end. And the only way to push that down will be to buy long-term bonds directly — full-scale QE.

This Time the Printer Can't Be Stopped

And here’s where it gets worse. As I wrote to you just last week, Gulf oil producers are some of the largest foreign buyers of American assets. Saudi Arabia, the UAE, and Kuwait alone held over $1 trillion in U.S. financial assets as of late 2024. When their oil revenues collapse, their fiscal balances flip from surplus to deficit almost overnight. And when that happens, they don’t just tighten belts domestically — they start pulling capital back. That means selling U.S. Treasuries, liquidating equity positions, repatriating hundreds of billions of dollars.

And it's probably already happening as I write this. At the very least we know from a recent Financial Times report that Saudi Arabia, the UAE, Kuwait, and Qatar are already discussing whether to review their U.S. investment commitments and whether force majeure clauses could be invoked.

Note: Separately, there's also a direct (and Hormuz-related) threat to the dollar itself worth flagging. Iran is reportedly moving to allow limited tanker passage through the Strait — but only if the oil is traded in Chinese yuan, not dollars.

Bottom line: the Fed will print. It has no other choice.

But printing from here is a very different proposition than printing in the past. Before 2008, the Fed’s balance sheet sat at around $900 billion. After the financial crisis, after COVID, after years of the printer running hot, it stands today at $6.6 trillion — and that’s after three years of supposed tightening. Powell himself acknowledged the new reality at a conference last October:

Normalizing the size of our balance sheet does not mean going back to the balance sheet we had before the pandemic.

But here’s the rub.

The last time they conjured a few trillion out of thin air, inflation hit 9%. Doing it again from a base that’s already eight times larger — with pandemic-era cash still sloshing around the system — we could be looking at double digits. Possibly worse.

We don’t need to imagine what that looks like. History already showed us — as recently as the 1970s. And fittingly, back then too, oil was at the center of it. And so was Iran.

Two separate oil shocks — the 1973 OPEC embargo and the 1979 Iranian Revolution — hit an economy where inflation was already running hot. Cut rates to fight the recession, and you pour fuel on the inflation fire. Raise rates to fight inflation, and you crush an economy already reeling from an energy shock. Caught between the two, the Fed — unsurprisingly — fumbled both, and the result was stagflation: a toxic combination of stagnant growth, rising unemployment, and inflation that just kept climbing — peaking above 14% by 1980.

It took Paul Volcker — then Fed chair — hiking rates all the way to 20% to finally break it.

But here’s the catch. That cure — which many who lived through the ‘70s will tell you was about as bad as the disease itself — isn’t available this time. You can’t hike to 20% when the government is carrying ~$39 trillion in debt. The interest payments alone would be catastrophic. So the printer will keep running. And when you print your way out of a hole this deep, you don’t just get inflation. You get currency destruction.

Regards,

Lau Vegys

P.S. Doug's words at the top of this essay weren't just commentary — they were a call to action. In our latest Crisis Investing alert, we recommended a position designed to capitalize on the turmoil this war has unleashed. Make sure you haven't missed it. And even if you're not a paid subscriber yet, the lead is free to all.