Economist Steve Hanke says the United States faces a dual crisis: a weakening strategic position in the Iran conflict and a fiscal balance sheet so stretched that it amounts to functional insolvency. In a recent appearance on The David Lin Report, the Johns Hopkins University professor argued that Washington is understating both the geopolitical costs of the war and the financial strain now being recognized by markets.
Hormuz disruption sits at the center of Hanke’s argument
Hanke’s assessment begins with the Strait of Hormuz, one of the world’s most critical energy chokepoints. According to his remarks, throughput through the Strait has fallen by roughly 95% during the ongoing conflict. In his view, that reality gives Iran meaningful leverage over Western economies, regardless of official narratives suggesting Tehran is cornered.
He argued that Iran is not merely enduring pressure but is instead benefiting from an attritional dynamic. Hanke said Iran has mobilized more than one million troops and continues to hold influence over a passage essential to global energy flows. From his perspective, this has left the U.S. and its allies exposed to the economic consequences of prolonged disruption.
Hanke also claimed that Iranian oil exports have actually risen since the conflict began. Citing contacts inside the country, he said Iranian crude is still moving through tankers leaving the region, but now at higher prices and with narrower discounts than before hostilities intensified. He added that the Iranian rial has appreciated by 6% since the war began. At the same time, the inflation rate he independently tracks remains high at 67% annually, though down from levels above 80%.
Energy stress is spreading beyond the Gulf
Another pillar of Hanke’s argument is that physical energy markets are showing greater stress than paper markets currently reflect. He said physical oil markets in Asia are trading well above futures prices, suggesting that benchmark contracts have not fully absorbed the scale of the supply disruption.
He pointed to a series of downstream effects already appearing across multiple economies. In the interview, Hanke noted that the Philippines has declared a national energy emergency. He also said New Zealand is making weekly cash payments to about 150,000 families to help offset fuel costs. Taiwan, meanwhile, was described as facing shortages of helium, a key input for chip manufacturing that is sourced from the Gulf, and has reportedly begun turning to Russia for alternative supply.
That broader commodity disruption is central to Hanke’s view that the consequences extend well beyond oil. If supplies of petroleum, industrial gases, and fertilizer are constrained at the same time, the pressure can spread through transport, manufacturing, food systems, and household budgets all at once.
Russia emerges as a relative beneficiary
In Hanke’s telling, Russia stands out as one of the clearest winners of the current environment. He argued that Russia produces three commodities whose strategic value rises when Gulf logistics are impaired: oil, fertilizer, and helium. As those flows become more valuable, Moscow’s ability to convert commodity strength into diplomatic or sanctions leverage may increase.
He also dismissed the idea that U.S. consumers are insulated from the oil shock because America is often described as a net energy exporter. Hanke stressed that while the U.S. may export more energy products in aggregate, it remains a net importer of crude oil. That distinction matters because crude pricing is globally linked, meaning higher international prices still flow through to American businesses and households.
In his view, claims that the U.S. can ignore world oil prices are misleading. As long as crude remains globally priced and imported in net terms, a disruption in Hormuz can still hit domestic fuel costs, logistics, inflation expectations, and growth.
Strategic assumptions have not held up, Hanke says
Hanke was equally critical of the strategic assumptions behind the U.S.-Israeli approach. He argued that expectations of rapid regime collapse in Iran following leadership decapitation did not materialize. In his words, the strategy had already failed if its core objective was swift political breakdown in Tehran.
That conclusion fits into his larger thesis: the longer the conflict continues without achieving decisive strategic outcomes, the more leverage shifts toward the side able to weaponize time, geography, and market bottlenecks. For Hanke, Iran’s position in the Strait of Hormuz is more consequential than the official framing of battlefield pressure alone.
The fiscal picture is, in his words, catastrophic
Hanke’s concerns are not limited to war and energy. He tied the geopolitical strain directly to the U.S. fiscal position, arguing that the country’s balance sheet is deteriorating rapidly. Referring to analysis he co-authored with former U.S. Comptroller General Dave Walker, Hanke cited the federal government’s own consolidated financial statements.
As of September 30, 2025, he said, the U.S. federal government had roughly $6 trillion in assets against nearly $48 trillion in on-balance-sheet liabilities. When Social Security and Medicare obligations are included, total liabilities rise to approximately $136 trillion. Hanke’s conclusion from those figures is stark: the federal government is functionally insolvent.
His argument is not merely accounting-driven. He said markets are beginning to respond in visible ways, particularly through higher yields on the 10-year U.S. Treasury. Rising yields, in his view, reflect mounting concern over expanding deficits and the sustainability of federal borrowing as war-related costs and structural obligations continue to build.
Bond yields, gold, and market repricing
Hanke also addressed the interaction between bond yields and gold. He noted that higher Treasury yields can weigh on gold in the short term because they raise the opportunity cost of holding a non-yielding asset. That does not mean he has turned bearish on the metal over the larger cycle.
He maintained a gold target range of $6,000 to $7,000 per ounce for the current cycle, while acknowledging that stronger yields and a firmer dollar can slow the pace of gains. The implication is that short-term market mechanics may pressure gold, but deeper macro vulnerabilities still support the longer-term thesis.
Hanke’s proposed remedies
To address what he sees as a systemic fiscal problem, Hanke proposed two broad policy responses. First, he called for a congressional commission to tackle existing liabilities. Second, he endorsed a constitutional amendment modeled on Switzerland’s 2001 debt brake, a framework designed to limit spending growth to the pace of real GDP expansion and enforce a balanced fiscal position over the business cycle.
Whether either proposal gains traction is uncertain. Hanke himself reportedly noted that congressional action is “another issue.” Even so, his policy recommendations underscore the severity of his diagnosis: the problem, in his view, is not cyclical overspending but a structural imbalance that can no longer be obscured by optimistic official framing.
Why his warning matters to investors
For markets, Hanke’s message is that geopolitics and public finance can no longer be analyzed in isolation. A disruption in Hormuz feeds energy inflation; energy inflation complicates monetary and fiscal management; larger deficits pressure bond yields; and rising yields reshape the outlook for risk assets and safe havens alike.
His thesis is controversial, but it is internally consistent: Iran’s leverage over a global chokepoint raises near-term economic stress, while America’s debt burden limits the room for policy response. If investors begin to accept that combination, they may continue repricing sovereign risk, commodity exposure, and defensive assets across the board.
In that sense, Hanke’s warning is not just about the war itself. It is about the possibility that a military conflict, an energy shock, and a fiscal reckoning are converging at the same time—and that financial markets may be quicker than policymakers to recognize what that means.