Chris Bambery looks at the burgeoning levels of US debt and the threat of de-dollarisation as the Iran war continues

One impact of the Iran war is that interest payments on the US’s huge Federal debt have increased. The U.S. national debt reached $39.01 trillion on 26 March 2026. The debt is growing faster than ever, with the most recent trillion added in roughly five months.

The debt now totals about 125% of US GDP, up from 36% in 1981. The Congressional Budget Office reported in February that the annual budget deficit will likely reach $1.9 trillion this year and grow to $3.1 trillion by 2036, which is expected to help create a $64 trillion national debt within a decade.

President Trump has called for increasing the 2027 Fiscal Year defence budget to $1.5 trillion rather than the $1 trillion he previously wanted to propose. That will mean more borrowing

US Treasury bonds are experiencing a significant sell-off, with prices dropping and yields surging to their highest levels since mid-2025 (e.g., the ten-year yield rising towards 4.4% in March 2026). This is driven by fears of persistent inflation, the expectation that the Federal Reserve may not lower interest rates at all this year, and the other symptoms of the fallout from the war with Iran.

Former U.S. Senator Rob Portman, a Republican, warned that, ‘This is uncharted territory. And it’s driving up interest rates already. It affects inflation, jobs and America’s standing in the world’.

Increased debt payments will hit Federal budgets such as Social Security. Portman points out that, ‘When you poll young people and ask if they think they will ever receive Social Security, they say no. These are serious problems we have to face as a country’.

As much as $9.3 trillion of the US debt is owned by foreigners. Japan is the largest foreign creditor, purchasing $39.8 billion in recent days to bring its total stockpile to $1.2 trillion: the highest since July 2022. Japan is followed by the United Kingdom in purchasing US debt, adding $29.3 billion to make a total of $895.3 billion, its third-highest level on record.

China is, by contrast, turning away from the dollar. Despite a modest $10.9 billion increase in January, China’s overarching strategy reflects a sharp divergence from traditional US allies. Beijing has systematically reduced its reliance on the US dollar amid geopolitical tensions, pivoting instead toward assets like gold.

Danger for US economic hegemony

How can Washington borrow cheaply, run persistent deficits, and still maintain the dollar as the world’s reserve currency?

The answer goes back to a secret deal made in 1974 between the US and Saudi Arabia, brokered on behalf of President Richard Nixon by Henry Kissinger, and that ended the Bretton Woods agreement:

‘The world wouldn’t know for another 50 years what Nixon and Kissinger replaced [Bretton Woods] with, striking a deal that would quietly govern the global economy for the next half-century. Riyadh agreed to price and trade its oil in U.S. dollars and channel its petroleum windfalls back into U.S. Treasury bonds. In return, Washington promised military aid, equipment, and security guarantees—a deal that would quietly govern the global economy for the next half-century’. The other Gulf States soon followed Saudi Arabia, which meant that any country trading oil had to use the dollar.

The 1974 deal remains in place, even though Saudi Arabia has not formally renewed it. However, the deal is now in the crosshairs of Iranian defence policy. The speaker of Iran’s parliament warned this week that financial institutions backing the US military budget were ‘legitimate targets’ and buyers of U.S. Treasury bonds were purchasing ‘an attack on your headquarters and assets’. Those ‘legitimate targets’ are in Saudi Arabia and the Gulf States. The aim of Iran’s policy is to warn that America’s $39 trillion debt load could become a pressure point in an escalating conflict.

Whether Iran has the leverage to make that happen is a moot point, but it puts down a marker for any future US conflicts, particularly with China. Though it has to be said that China is in no position to challenge the dollar’s dominance at present. The Chinese renminbi (RMB) holds less than 3% of the world’s reserve currency. The Euro holds second place at roughly 20%, but no single currency has emerged to challenge the dollar.

The Singapore-based Hinrich Foundation notes that, ‘While talk of de-dollarization is prone to hyperbole, IMF data shows a slow erosion of the US dollar’s dominance as a global reserve currency’. It charts a fourteen percentage-point decline from 2000 to 2025 of the dollar’s share as a global hard currency.

There are serious, and related, concerns in financial circles regarding an Iranian blockade of the Strait of Hormuz: ‘Every week the strait stays closed, Asian economies are forced to test alternative supply chains — existing bypass routes like Saudi Arabia’s East-West Pipeline and the UAE’s Abu Dhabi Crude Oil Pipeline to Fujairah absorb only a fraction of normal Hormuz volumes, meaning the pressure to find workarounds is real — and, at the margin, alternative payment mechanisms. If the crisis is resolved in weeks, those experiments are quickly abandoned. If it drags into months, habits begin to form. The dollar’s dominance is not a cliff—it is a long, slow slope—and the question the Hormuz standoff raises is not whether America falls off the edge today, but whether Trump’s handling of this crisis steepens the gradient.’

The ‘long, slow slope’ will not erode the dollar’s dominance in the short term. But what Trump has to pay attention to is that the war with Iran is fuelling higher prices and higher interest rates, which hit US citizens who have debts:

‘Total consumer debt in the U.S. hit a record $18.8 trillion at the end of 2025, according to data from the Federal Reserve Bank of New York, incorporating all types of debts, including credit card bills, auto loans and mortgages. That works out to an average of $105,056 per U.S. household.’

The US economy is carrying serious levels of debt and a prolonged war in Iran can only fuel the existing problems. It is difficult to see his Republican base holding unless there is a sharp change of direction away from further escalation and increased borrowing.

Chris Bambery is the author of The Second World War: A Marxist History, (Pluto Press, 2014)

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