The War Development(s) That Should Truly Scare Us
How Iran could speed up de-dollarization and how Trump could put boots on the ground in Iran—sort of.
Housekeeping: With travel and our Texas live shows this week I’m not sure what the Triad schedule will look like. Don’t panic if I go missing for a couple days.
1. Invasion
If you want to understand the difference in the quality of strategic thinking between Washington and Tehran, consider the messages being sent out over the last three days:
Washington: The war is over. We’ve defeated Iran totally. If other countries don’t come in and help fight Iran they will regret it. Especially our terrible allies, like Great Britain. Please, President Xi, come help us re-open the Strait of Hormuz?
Tehran: We will continue to resist, however we are open to allowing oil transport in the strait that we control provided the product is sold in yuan and not dollars.
I have been saying since the beginning that America is playing checkers while Iran plays chess, but it’s worse than that. American leadership is utterly incoherent: We won, but we need help. We hate our allies; but will our adversaries please come bail us out?
Meanwhile Iranian leadership survived a transition of power in the midst of war, achieved its strategic objective in closing the strait, and is now looking to leverage China’s rising economic ambitions against the United States.
I cannot overstate how significant it would be if Iran and China reached an agreement to allow oil transport under condition of a switch from the dollar to the yuan,1 so here’s European Business:
The condition, if formalised, would represent the most significant challenge to the petrodollar system in its fifty-two-year history, striking at the financial architecture that underpins American global power rather than at US military assets. . . .
To understand why the yuan condition matters, it is necessary to understand what the petrodollar system actually is. Born from the Nixon shock of 1971 and formalised in 1974, the arrangement under which Saudi Arabia and the broader Gulf agreed to denominate all oil sales in US dollars created a self-reinforcing loop that has governed global finance ever since. Because oil—the world’s most traded commodity—must be purchased in dollars, every nation that imports energy must first acquire dollars. Every central bank holds dollar reserves for precisely this reason. The dollar’s status as the world’s primary reserve currency is not an abstract achievement; it flows directly and mechanically from oil. . . .
[Iran] is proposing that access to the world’s most critical energy chokepoint be conditional on currency denomination.
The practical consequence, if even partially adopted, would be a bifurcated global oil market: yuan-denominated barrels flowing through Hormuz for those willing to pay in China’s currency, dollar-denominated barrels rerouted at significant additional cost and time for those who are not. The war premium that Western energy importers are already absorbing would become structural rather than temporary.
I don’t know how to make people care about this except to say that if Iran and China made this deal it would absolutely be the beginning of the end of the dollar backstopping the global financial order. The long-term cost to America would be incalculable.
The fact that Iran is making this overture ought to scare the crap out of us because it’s another sign that America’s political leadership is completely out-classed. We have an illiterate madman tweeting contradictory bullshit every ten minutes. Meanwhile, the Iranian regime is calmly and methodically probing the structural weaknesses of the American-dominated global financial order.
All of which is why I want to update my view that the most likely outcome of this war is that Trump will quickly declare victory and walk away. That’s one possible outcome. But it now seems possible that he will try to invade Iran, half-way.
Let me tell you about Kharg Island.