Economist Steve Hanke Says US Is Losing Iran War and Is Financially Insolvent

Background Context

Steve Hanke is a professor of applied economics at Johns Hopkins University and a senior fellow at the Cato Institute. He has served as an adviser to presidents, prime ministers, and finance ministers across dozens of countries, and is widely credited with designing successful currency reforms in nations from Argentina to Bulgaria. His views on monetary policy, inflation, and sovereign debt carry significant weight in both academic and policy circles.

The United States has been engaged in an escalating military and economic confrontation with Iran for years, but tensions have intensified sharply under the current administration. Washington has deployed additional naval assets to the Persian Gulf, imposed sweeping sanctions, and conducted covert and overt operations targeting Iranian proxy networks across the Middle East. The conflict has drawn comparisons to the prolonged entanglements in Iraq and Afghanistan — wars that cost trillions of dollars and yielded ambiguous strategic results.

Meanwhile, the US national debt has surpassed $36 trillion, and annual deficits continue to exceed $1.7 trillion. Interest payments on the debt now consume a larger share of the federal budget than defence spending — a milestone that fiscal analysts have warned about for over a decade. The Congressional Budget Office projects that debt held by the public will reach 166% of GDP by 2054 under current law.

Hanke’s intervention comes at a moment when the bond market is exhibiting unusual volatility. Yields on long-dated US Treasuries have surged, a phenomenon analysts attribute to growing investor anxiety about the sustainability of American fiscal policy. The term “bond vigilantes” — coined in the 1980s to describe investors who punish profligate governments by demanding higher yields — has returned to mainstream financial discourse.

Detailed Coverage.

Hanke’s central argument is straightforward: the United States is pursuing an aggressive military posture against Iran without the fiscal capacity to sustain it, and Tehran knows it. “The US is functionally insolvent,” Hanke stated, pointing to the gap between Washington’s obligations and its revenue streams. He argues that the country’s debt trajectory is not merely unsustainable — it is actively undermining America’s ability to project power and credibility on the world stage.

The economist contends that Iran has effectively seized the strategic initiative. By absorbing sanctions, deepening ties with Russia and China, and sustaining its proxy networks in Yemen, Iraq, Syria, and Lebanon, Tehran has demonstrated a capacity for endurance that Washington underestimated. “They’ve handed Tehran the leverage to dictate terms,” Hanke said, suggesting that the Islamic Republic now occupies a stronger negotiating position than at any point in recent memory.

Hanke also took aim at the administration’s fiscal narrative. He argued that official deficit figures understate the true scale of America’s financial commitments by excluding unfunded liabilities in Social Security, Medicare, and other entitlement programmes. When those obligations are included, Hanke suggests, the real fiscal gap dwarfs the headline numbers that Treasury officials present to the public.

• US national debt: over $36 trillion and rising
• Annual federal deficit: exceeding $1.7 trillion
• Interest payments on debt: now exceeding defence spending
• CBO projection: 166% debt-to-GDP ratio by 2054
• Estimated cost of Middle East military operations since 2001: over $8 trillion (Brown University Costs of War Project)

The bond vigilantes, Hanke warned, are already making their move. Rising long-term Treasury yields signal that investors are demanding higher compensation for the perceived risk of holding US government debt. This dynamic increases borrowing costs across the economy — from mortgages to corporate loans — and constrains the federal government’s ability to fund both military operations and domestic programmes simultaneously.

Hanke’s critique extends beyond the current administration. He argues that decades of bipartisan fiscal irresponsibility — from unfunded tax cuts to open-ended entitlement commitments — have created a structural vulnerability that no single policy can fix. The Iran confrontation, in his view, merely exposes a weakness that has been building for years.

Expert Perspectives & Data

Hanke is not alone in his assessment. Ray Dalio, founder of Bridgewater Associates, the world’s largest hedge fund, has repeatedly warned that the United States faces a “debt doom loop” in which rising interest payments crowd out productive spending. In a January 2025 post on LinkedIn, Dalio wrote: “The US is approaching a point where the debt dynamic becomes self-reinforcing. Each dollar borrowed increases the cost of the next dollar borrowed.”

The Brown University Costs of War Project estimates that post-9/11 US military operations have cost over $8 trillion when accounting for future obligations such as veterans’ care.

Neta Crawford, the project’s co-director and a professor of political science at Oxford University, has noted that “the true cost of war is always higher than what governments initially project, because it includes long-term medical, disability, and interest costs that persist for decades.”

On the geopolitical front, Trita Parsi, executive vice president of the Quincy Institute for Responsible Statecraft, has argued that Washington’s maximum pressure campaign against Iran has backfired.

“Sanctions have not weakened Iran’s regime,” Parsi stated in a recent interview. “They have strengthened hardliners, deepened Iran’s partnerships with Russia and China, and accelerated Tehran’s nuclear programme. The policy has achieved the opposite of its stated goals.”

Data from the US Treasury supports the fiscal alarm. Net interest costs on federal debt reached $882 billion in fiscal year 2024, surpassing defence spending for the first time in modern history. The Congressional Budget Office projects that interest costs will exceed $1.2 trillion annually by 2030, consuming roughly 20 cents of every federal dollar collected in revenue.

Implications

Mohamed El-Erian, chief economic adviser at Allianz and former CEO of PIMCO, has described the current bond market environment as “a slow-motion repricing of US sovereign risk.” In a Financial Times column, El-Erian wrote: “Markets are beginning to treat US Treasuries less as a risk-free asset and more as a credit instrument. That shift has profound implications for everything from global reserve currency status to the cost of financing a military presence abroad.”

If Hanke’s analysis is even partially correct, the implications are far-reaching — both for the global order and for ordinary Americans.

At the macro level, a functionally insolvent America confronting a resilient Iran reshapes the strategic calculus across the Middle East. Allies such as Saudi Arabia, the UAE, and Israel must weigh whether Washington can credibly guarantee their security over the long term, or whether hedging — through diversified partnerships with China and Russia — becomes the rational move. The dollar’s status as the world’s reserve currency, already under pressure from de-dollarisation efforts among BRICS nations, could face accelerated erosion if bond markets continue to price in elevated sovereign risk.

For ordinary Americans, the consequences are tangible and immediate. Rising bond yields translate into higher mortgage rates, more expensive car loans, and increased borrowing costs for small businesses. If the federal government is forced to divert an ever-larger share of its budget to interest payments, the squeeze falls on domestic programmes — infrastructure, healthcare, education, and social safety nets that millions of families depend on. Veterans returning from expanded military operations will add to an already strained VA healthcare system.

The inflation dimension matters too. If Washington attempts to finance military escalation through money creation rather than taxation or genuine borrowing, the result is further erosion of purchasing power — a dynamic that disproportionately harms lower- and middle-income households who spend a larger share of their income on essentials like food, fuel, and housing.

The critical question now is whether bond markets will force a reckoning before policymakers choose one — and whether that reckoning arrives in time to prevent a fiscal crisis that compounds the geopolitical one already underway.

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