UBS Warns Iran War Threatens US Debt

The U.S. government is already on track for record-breaking debt levels, even before accounting for a new conflict. The Congressional Budget Office projects federal debt held by the public will reach 101% of GDP in 2026, swelling to 120% by 2036. This trajectory is set to surpass the previous record of 106% of GDP, a high-water mark set just after World War II. Historically, America's largest spikes in national debt are directly tied to wartime spending. The Civil War, for instance, caused the national debt to increase by more than 4,000%, from $65 million in 1860 to nearly $3 billion by 1865. World War II similarly saw debt skyrocket to fund the war effort. Unlike past conflicts that were funded through a combination of debt and tax hikes, the post-2001 wars in Iraq and Afghanistan were financed almost entirely by borrowing. This approach of cutting taxes while increasing war spending contributed to historic increases in the national debt. Any new military engagement would add to a defense budget that is already substantial. U.S. military spending stood at approximately $820 billion in 2023, having increased 62% since 1980 after adjusting for inflation. The Department of Defense's 2024 budget request was for $842 billion. The most immediate economic shock from a conflict with Iran would be to global oil markets. Roughly 20% of the world's oil supply passes through the Strait of Hormuz, a critical chokepoint that could see transit disrupted or halted entirely. Analysts warn that a complete outage of Iranian oil supply could raise prices by about 20%, while a closure of the Strait of Hormuz could cause prices to spike dramatically higher. Brent crude, the international benchmark, has already jumped on the escalating tensions. Such a spike in energy costs would have stagflationary effects, slowing economic activity while simultaneously pushing up inflation. This would particularly harm major energy importers in Europe and Asia, creating broader global economic instability.