IS THE U.S.-ISRAELI WAR ON IRAN A STRATEGIC MOVE AGAINST CHINA?

IS THE U.S.-ISRAELI WAR ON IRAN A STRATEGIC MOVE AGAINST CHINA? - ANALYSIS

China condemns Khamenei’s killing as analysts warn US escalation against Iran reflects a broader confrontation with Beijing. 

 

By Palestine Chronicle Editors

March 2 2016

 

BEIJING’S SHARP REBUKE

 

China has “strongly condemned” the killing of Iran’s Supreme Leader Ayatollah Ali Khamenei in US–Israeli airstrikes, calling it “a grave violation of Iran’s sovereignty and security.”

 

In an official statement, Beijing urged “an immediate stop to military operations” and warned against further escalation in the Middle East. The language was deliberate: sovereignty, stability, de-escalation. China framed the assassination not merely as a regional incident, but as a destabilizing act with global consequences.

 

The statement comes at a sensitive diplomatic moment. US President Donald Trump is scheduled to meet Chinese President Xi Jinping later this month in Beijing — a meeting now overshadowed by a rapidly expanding regional war.

 

China’s response reflects more than solidarity with Iran. It signals concern that Washington’s latest military intervention could destabilize energy routes and political alignments central to Beijing’s long-term strategic planning.

 

A FRENCH WARNING: “TRUMP HITS IRAN TO CHOKE CHINA”

 

The geopolitical framing was sharpened further in Europe. Jean-Luc Mélenchon, leader of France’s left-wing party La France Insoumise, accused Washington of igniting wars to preserve its global dominance — and specifically to block China’s access to energy.

 

Speaking at a rally in Perpignan ahead of municipal elections, Mélenchon argued that the war on Iran is part of a broader US strategy aimed at “cutting oil supply lines to China.”

 

According to Mélenchon, the United States has lost its uncontested global leadership and is now methodically preparing for confrontation with Beijing by weaponizing energy corridors and strategic chokepoints.

 

He linked the current war to a wider pattern of what he described as imperial overreach: threats to retake control of the Panama Canal, pressure on Canada over Arctic security, proposals to acquire Greenland, and escalating tensions over maritime trade routes.

 

In this reading, Iran is not simply a regional adversary. It is part of the larger map of US–China rivalry.

 

CHINA AT THE CENTRE OF U.S. POLICY

 

Whether openly acknowledged or not, much of Washington’s Middle East policy can be understood through the prism of competition with China.

 

This is not new. The 2003 invasion of Iraq was widely justified through weapons-of-mass-destruction claims, but strategic analysts at the time openly discussed energy dominance and denying emerging powers secure access to Gulf oil. The assumption was simple: control the oil, shape global power.

 

That assumption proved flawed. China did not retreat from the region. It expanded. Beijing deepened energy partnerships, invested in infrastructure under the Belt and Road Initiative, and strengthened diplomatic ties with Gulf states — including US allies.

 

Rather than isolating China, US military entanglement created space for Beijing’s quieter, investment-driven strategy. Today, the pattern appears to be repeating itself.

 

WAR VERSUS STABILITY

 

The United States operates through forward deployment, military alliances, sanctions regimes, and coercive pressure. Its readiness for war is constant. Its readiness for stability is less evident.

 

China’s model is different. Beijing rarely deploys troops abroad. It does not anchor its strategy in regime change or air campaigns. Instead, it builds ports, funds railways, signs long-term energy contracts, and avoids overt political interference. Its power accumulates through infrastructure and economic interdependence rather than shock-and-awe interventions.

 

This distinction matters. When Washington escalates militarily in the Middle East, it disrupts energy markets, destabilizes governments, and creates uncertainty. China, by contrast, positions itself as the actor calling for calm, sovereignty, and non-interference. The more instability spreads, the more China appears as the stable alternative.

 

FIGHTING ISRAEL’S WAR?

 

Another layer complicates Washington’s posture. Critics argue that the United States is not only confronting Iran as a geopolitical rival but also advancing Israel’s regional objective of dominance.

 

Israel’s strategic doctrine prioritizes overwhelming military superiority and the neutralization of perceived threats. Its emphasis is deterrence through force, not necessarily regional economic integration or political stability.

 

If Washington aligns itself fully with this doctrine, it risks being drawn into perpetual confrontation rather than long-term stabilization. And prolonged instability does not weaken China — it weakens American credibility.

 

THE ENERGY EQUATION

 

Iran sits at one of the world’s most critical energy corridors: the Strait of Hormuz. Roughly a fifth of the global oil supply transits this narrow waterway. China is the largest importer of Gulf energy. If the US goal is to pressure Beijing by destabilizing Iranian influence, the calculation assumes Washington can control escalation and maintain dominance over energy flows.

 

History suggests otherwise. The United States has struggled to control outcomes in Iraq, Afghanistan, Syria, and Libya. Military superiority has not translated into political mastery. Each intervention has produced unintended consequences. Each has eroded US authority while pushing regional actors to diversify partnerships — often toward China.

 

THE PARADOX OF AMERICAN POWER

 

There is a deeper paradox at play. The United States remains unmatched in conventional military power. But its repeated reliance on force has often accelerated the very shifts it seeks to prevent.

 

China does not need to win wars in the Middle East. It needs only to avoid losing stability. While Washington invests in aircraft carriers and air campaigns, Beijing signs energy contracts and builds ports in the Gulf.

 

The US is perpetually prepared for war. China is perpetually preparing for the post-war order.

 

WILL THIS STRATEGY SUCCEED?

 

Mélenchon’s accusation — that Washington is striking Iran to suffocate China’s energy lifelines — may overstate coordination, but it captures an underlying truth: every major US move in the Middle East now unfolds against the backdrop of US–China rivalry.

 

Yet history offers a cautionary lesson. The United States has repeatedly attempted to reshape the Middle East through force. Each time, it underestimated local dynamics, overestimated its capacity to dictate outcomes, and inadvertently strengthened alternative powers.

 

If the goal is to weaken China’s strategic position, escalation may instead accelerate Beijing’s rise.

 

China’s influence grows not because it conquers territory, but because it offers trade, infrastructure, and non-interference to states weary of war. And the longer instability defines American engagement, the more appealing that alternative becomes.

 

A BROADER CONTEST

 

The war on Iran is not only a regional confrontation. It is part of a broader contest over how power is exercised in the 21st century: through coercion or connectivity, through dominance or development.

 

Washington believes it can shape the Middle East through decisive force. Beijing believes it can shape it through patient integration. If history is any guide, attempts to control the flow of history in the region through war have consistently failed.

 

In trying once again, the United States may find that its greatest strategic competitor is empowered not by victory, but by American overreach itself.

 

This article is shared from The Palestine Chronicle: https://www.palestinechronicle.com/is-the-us-israeli-war.../? 

Trump’s forever war – and no ‘off ramp’ in sight. View from the UK.

Republished from the UK socialist website Left Horizons

Trump’s forever war – and no ‘off ramp’ in sight

20 March 2026

By John Pickard

All the serious capitalist newspapers have their military experts and analysts commenting on the war that Israel and the US are waging on Iran, and the limited but effective response of a state so relentlessly bombed for three weeks.

We have, on the one hand, the swaggering bombast and exaggeration from the White House and Jerusalem, but on the other, a cold hard reality: that despite suffering enormous losses to its military capability, Tehran has blocked the Straits of Hormuz for the foreseeable future.

We should not forget the appalling human cost of this unnecessary war and given the complete imbalance militarily, most of the cost is borne by those populations bombed by Israel and the USA. The Iranian Red Crescent Society has reported that more than 18,000 civilians have been injured and 204 children have been killed, most of the latter by a US Tomahawk missile hitting a girls’ primary school on the first day of the war. More than 1,400 people have been killed.

In the conflict between the Lebanese Hezbollah and Israel, nearly 800 have been killed, again the big majority of them civilians killed by aerial bombing by the Israeli ‘Defence’ Force. On the other side of the conflict, few have died: thirteen US service personnel and around the same number of civilians in Israel, killed by Iranian missiles.

The overwhelming might of the two most powerful air forces in the world, have tipped the military scales completely in their favour. However, so far, the economic and political consequences of the war are largely being determined by Tehran.  

Iran is a country of 92 million, and even though it being crippled by an unrelenting air assault, the regime is defiant. For the ‘Islamic Republic’, having elected Mojtaba Khamenei, the son of Ayatollah Ali Khamenei, as the new Supreme Leader, the bottom line is simply survival. Every day it survives will be counted as a victory.

Iran planned for an asymmetric war

Iran always planned for an asymmetric war, meaning they would never be able to answer Israeli/US air power, but they would still be able to widen the war to all the other oil-producing states in the region. In planning for this eventuality, they ensured that their command and control structures were far less centralised than they had been. So far, they have successfully widened the war, closing the Straits of Hormuz through which a fifth of global oil flows and an even greater proportion of Liquefied Natural Gas.

According to all of the expert commentators now, the current crisis in oil production and distribution is the most significant ever – more important and serious than any other oil crisis in modern times.

According to military experts, it takes very little in the way of sophisticated armaments to blockade the Straits. Simple contact mines – which Iran has yet to deploy – can do it, spreading them around the twenty-mile wide waterway by its circular currents. Even the threat of mines will deter shipping, and that is before taking into account anti-ship missiles and other ordnance which the Iranians still have intact and unused.

Donald Trump is not committing the US navy to escort tankers through the Straits of Hormuz, because his top brass will have explained to him with simple pictures and four-letter words, that any naval escorts would be sitting ducks. Something like eighteen ships of various sizes have been hit by Iranian drones or missiles and any naval vessel would be a key target.

Trump’s comment on Truth Social, in which he branded European powers as ‘COWARDS’ for refusing to do what his navy refuses to do…escort tankers through Hormuz

In 1988 a US naval vessel struck a contact mine doing precisely what Trump is demanding of European navies – providing escort. As for the rest of the NATO navies, they have replied to Trump very politely, “Certainly, Mr Trump, but after you”. One top French naval officer was more blunt on social media, comparing Trump’s call for European naval escorts to selling cheap tickets on the Titanic, afterit had already hit the iceberg.

The economic fallout of the war is escalating, slowly but surely. By bombing the Iranian facilities tapping the undersea gas field, which it shares with Qatar, Israel has provided Iran with the pretext it needed to attack and disable the Qatari side of the field. As we write, the price of Brent Crude, an international price marker, has risen to $112 a barrel.

The political and economic fall-out of the war

The longer the war goes on, the greater will be the economic consequences and therefore the greater the political risk to the White House. Even if the war were to end this week – and that is unlikely – it would take many months to bring oil and gas production back to anything like the levels of February. Higher petrol prices are here for the duration.

Not only that, but the blockading of fertilisers through the Straits will also impact on food prices, as will the costs of transporting food.

[See this post by Marxist economist, Michael Roberts, on Iran the US economy.]

Trump was elected on a promise to keep out of foreign wars and to raise living standards. He has done neither. A majority of the US population are opposed to the war and the longer it goes on, and the more the oil blockade impacts on prices, the greater will be the opposition. The price of gasoline for US motorists is not coming down any time soon. If anything, it is likely to increase further – and with each passing week the US mid-term elections loom closer.

There are voices of opposition to the war even from within the Republican Party, as leading politicians of the right can see which way the wind is blowing. The US media outlet CNN reported on the suggested additional $200bn that Trump is apparently going to request from Congress for defence – the war is costing around $10bn a week – but some Republicans are against. Lauren Boebert, “a staunch Trump ally”, told CNN she would not support more money for the war “under any circumstance”.

“I am a no. I have already told leadership.” She said, “I am a no on any war supplemental. I am so tired of spending money over there. I have folks in Colorado who can’t afford to live. We need America first policies right now.”

Texas Republican, Chip Roy, CNN, “They [the administration] got a whole lot more briefing and a whole lot more explaining to do on how we’re going to pay for it and what’s the mission here?”

Kentucky Republican, Thomas Massie said to CNN: “It begs the question, how long do they plan to be there? What are the goals? Is this the first $200 billion? Does this turn into a trillion?”

Trump likely looking for an ‘off ramp’

Yet for Trump, there is no easy way out from this war, although by now he is most likely looking for one. “There are hints”,  a recent Financial Times editorial noted, “that he [Trump] is indeed seeking an off-ramp…Yet the war he started has no good ending…Trump will pay the price of his Iran folly”. It is impossible to say what Trump will do; he is as unpredictable as he is ignorant and shallow. But it cannot be a bright future for him.

In Israel, too, there will be consequences in the long term. There is widespread popular support at home for Netanyahu in his war against Iran, but the war with Hezbollah in the north is turning into another “forever war”, involving ground troops and the occupation of ever more territory (in Syria also). One correspondent in the Israeli newspaper Haaretz, has referred to the wars in Iran and Lebanon turning into “Israel’ Vietnam”.

Haaretz article

Israel is isolated diplomatically and politically more than at any time in its entire near eighty-year history. Even in the United States, before the war, CNN reported that “Gallup polling had shown Americans’ views of Israel hitting a 21st century low; most strikingly, Americans for the first time didn’t sympathize more with Israelis than Palestinians.”

Now, within the media, among politicians and in the public at large, there is a growing perception that this war was initiated and directed by Netanyahu, not Trump. The resignation of Joe Kent, Trump’s top ‘counter-terrorism’ official is an indication of that. That being the case, it will lead to further and far more damaging isolation for Israel. This is important, because Israel as a colonial-settler enterprise, was only viable because of the vast amounts of military and financial assistance given to it, especially by the USA.

The idea that the war can be easily ended with regime change is a pipe-dream of Trump and Netanyahu. The Iranian government is hated by a large part of the population, and not without good cause. The recent opposition demonstrations and strikes were met with ferocious violence by regime supporers and the Iranian ‘Revolutionary’ Guard, with possibly tens of thousands killed.

Iranian opposition will develop after the war

But the air campaign of Trump and Netanyahu has reduced the chance of a serious opposition making itself felt. If anything, the regime has been strengthened. The opposition, under a rain of bombs will be naturally hesitant, particularly seeing a hated ‘Supreme Leader’ replaced by someone worse and thirty years younger.

One Iranian sociologist, speaking to the Financial Times from Tehran (under conditions of anonymity), reported that “there was anecdotal evidence of a growing ‘sense of nationalism emerging from the war’ as happened during Israel’s 12-day conflict against Iran last year”. This spokesperson, who has been an opponent of the regime, nonetheless suggested that “The fear of Iran’s destruction is increasingly uniting people as they fear the consequences of such a large-scale conflict.”

The exiled son of the late and unlamented Shah of Iran, Reza Pahlavi, actually welcomed the joint US/Israeli military action, and that has not endeared him to oppositionists in Iran. “Maybe he should come now with his three daughters and see how it feels to be bombarded,” one woman told the Financial Times. “Those who supported the war should take responsibility now. But I doubt they will.” As if to reinforce the message, the leaders of the regime are urging their supporters – and they are still there in their millions – into the streets to suppress any opposition voices.

But like all wars, this war will have to end sometime, even if it is far too late to prevent significant political damage to Trump. When it does end, and when millions of ordinary workers are picking up the pieces of their shattered lives, that is when it would be far more likely that there will be opposition developing again, as workers regain their confidence.

Higher energy prices as the big corporations make a killing

For us here in the UK, the economic consequences of the war are going to fall on the shoulders of ordinary working class people. As we go to press, the interest rate of government 10-year bonds is over 5%, the highest for years (it was 4.4% a month ago). The big oil and energy companies will make a killing as households are forced to pay huge rises in electricity and gas prices.

Look out in the coming months for emergency budget statements and either higher taxes or cuts in public expenditure, or both. We will hear all the usual arguments about “all being in this together”, as the big energy companies see their share price going through the roof.

Starmer, too, will suffer political fall-out for this war. His personal ratings could not fall much lower, without breaking the YouGov scales, but his vacillating “no-we-don’t- yes-we-do” support for Trump’s war on Iran will come back to haunt him, as will his constant act as a mouthpiece for the Labour Friends of Netanyahu.

We are barely three months into the new year. If capitalism were a ‘house’ we would have to say that it is a building being consumed by fire, a huge conflagration that will impact on the lives of billions of people. It is time to end the system and put out the fire. 

Markwayne Mullin: The Same as He Ever Was

By Janis Baron

On Facebook 3-19-26

Thanks to David Muir for sharing.

Keetoowah Cherokee Troy Littledeer went to school with Markwayne Mullin, potentially our next DHS Secretary. He has followed Mullin’s life and career closely and wants to tell us what kind of person he is.

Troy Littledeer is a prominent award-winning Indigenous journalist and photographer. He is a member of the United Keetoowah Band (UKB) of Cherokee Indians and is known for his commitment to press freedom within tribal communities. In his words... 

***

 

I went to school with Markwayne Mullin.

 

I am not saying that to establish proximity. I am saying it because it matters to what comes next. When you grow up in a small town in Adair County, a rural county in the northeastern corner of Oklahoma near the Arkansas state line, you know people in a way that no Senate confirmation hearing can replicate. You know how someone carries themselves before they have a title.

 

You know what they were like when nobody was watching and nobody was voting and the only audience was a hallway full of kids who would remember.

 

Markwayne was the same then as he is now. He believed he was right. Not that you were wrong. That distinction matters. A person who thinks you are wrong is engaging with you. A person who simply believes he is right has already moved past you. He was already talking before you finished. He was already certain before the facts arrived.

 

That is not confidence. That is a habit. And habits do not require thought. That is exactly what makes them dangerous.

 

I have watched this man operate for years from a place I know better than he knows it himself, which is saying something because he grew up here too. I have watched him claim the Trail of Tears as his family’s story and then edit that claim out of his own website when someone asked a follow-up question. The Cherokee Phoenix reported the discrepancy in November 2018.

 

The language disappeared. No correction was issued. He said the original wording was imprecise. He did not provide his ancestors’ names when asked.

 

I have watched him insert legislative language targeting the United Keetoowah Band of Cherokee Indians, the people most directly descended from the Old Settlers he publicly claimed as his own, into a federal appropriations bill that nobody was supposed to find. The tribe found it anyway. Through a Freedom of Information Act request.

 

Because that is what you have to do when the person writing the legislation does not want you to know it exists. An internal Bureau of Indian Affairs email obtained through that same FOIA request shows a senior federal official forwarding the language to government lawyers and asking them to confirm what it was designed to do. The man who sent the language to the federal government needed the federal government’s own lawyers to explain it.

 

I have watched him go on national television four days after an ICE agent shot and killed Renee Good, a 37-year-old woman, outside her vehicle in Minneapolis on Jan. 7, 2026, and declare the shooting justified. He told CNN anchor Jake Tapper that her vehicle became a lethal weapon.

 

He did not mention that his own brother-in-law, Brandon Rowan, was convicted of aggravated assault and battery upon a peace officer for striking a Westville, Oklahoma police officer with a vehicle at a roadblock in Adair County in December 2015. That case is public record. Adair County District Court, Case No. CF-2015-256. The CNN interview was Jan. 11, 2026. He did not mention it because he does not think about what he does not think about. That is not cynicism. That is the pattern.

 

I have watched him publicly support the Lumbee Fairness Act, a bill that would have granted federal recognition to the Lumbee Tribe of North Carolina through an act of Congress rather than through the established federal process every other tribe has been required to follow. All three federally recognized Cherokee governments, including the Cherokee Nation he claims as his own, formally opposed it. Their objections were entered into the Senate record. The bill continued to advance.

 

He doesn’t know any better is not an excuse. It is a reason. It is the reason a man who believes he is right without first being certain he is accurate should not be making decisions that affect sovereign nations, federal enforcement policy, and the lives of people who cannot afford the cost of his certainty.

 

Adair County has a 34% poverty rate. Stilwell’s per-capita income runs about $12,872 a year. The Cherokee Reservation is not a metaphor here.

 

It is the ground people walk on to get to work, to school, to the clinic. Federal policy is not abstract in a place like this. It arrives. It has consequences. And the people it arrives for deserve representation that starts with listening rather than talking.

 

I covered this community for more than two decades. I was the media director of the United Keetoowah Band of Cherokee Indians in Oklahoma. I wrote an opinion piece about the federal funding freeze and what it was doing to Indian Country.

 

I was ordered to remove it. Months later, according to an account relayed to a tribal elder whose identity is being withheld to protect them from retaliation, a council member said the chief had conveyed that Mullin’s office indicated the tribe’s position could hurt its relationship with the senator. The elder shared that account with me directly. I have the documentation. The Indigenous Journalists Association gave me a free press award for the piece I was ordered to remove.

 

I want to be clear about something. This is not about politics. I have covered power in Indian Country long enough to know that the party affiliation of the person holding it matters less than how they use it. This is about a specific man with a specific record in a specific place that I know from the ground up. The record is public. The documents are real. The pattern is consistent.

 

He has been in positions of power long enough to have done real damage.

Now he is being considered for the cabinet position that oversees U.S. 

 

Immigration and Customs Enforcement, border operations that intersect directly with tribal sovereignty, and federal law enforcement in communities that have spent two centuries watching federal power arrive without accountability.

 

At his Senate confirmation hearing on March 18, 2026, Mullin said in general terms that he respects tribal nations and would work with them on border and security issues.

 

No senator asked him about the $2.1 million in property his family sold to the Cherokee Nation in 2024. No senator asked him about the legislative rider his office drafted targeting the United Keetoowah Band. No senator asked him what he knew, and when he knew it, about federal enforcement actions involving Native Americans in communities his agency would oversee.

 

He answered the questions he was asked. That has always been the arrangement.

Here is Troy Littledeer's LinkedIn profile, so you can assess his legitimacy:

https://www.linkedin.com/in/troylittledeer

For readers abroad, Markwayne Mullins is Trump’s nominee for Homeland Security Secretary. He will have to be confirmed by the US Senate that the US Senate.

 

Michael Roberts: Iran and the US economy

Iran and the US economy

by Michael Roberts

The Iran war rages on.  Having failed to repeat his Venezuela option’’ ie decapitating the Iranian leaders and then getting Iran to surrender, US President Trump has been dragged into a long war.  So far, he has opted for escalation, cajoled by his advisers and forced on by unbridled attacks on Iran and Lebanon by Israel.  Strikes by both sides on so-called upstream gas production facilities in recent days are a significant escalation, with potentially long-term consequences. The latest strikes were the first time facilities associated with the production of fossil fuel energy had been hit in the conflict, rather than sites associated more generally with the oil and gas industry.

As I said in my first post at the outbreak of the attack by the US and Israel, that “two things need to happen before oil prices shoot up to $100/b or above. First, there must be significant and prolonged disruption of all traffic through the Strait of Hormuz, given that the Strait carries about one in five barrels of oil in the world. Second, the missile and drone attacks must start hitting oil production installations. If those two factors come into play, then the oil price per barrel could be in triple figures.” 

This has come to pass.  Today, crude oil prices hit $116/b (before falling back to $110) and even worse, natural gas prices in Europe exploded to over €68 per MWh, thus reaching their highest levels in over three years.

The International Energy Agency (IEA) now reckons that the war in the Middle East is @creating the largest supply disruption in the history of the global oil market@.  “With crude and oil product flows through the Strait of Hormuz plunging from around 20 mb/d before the war to a trickle currently, limited capacity available to bypass the crucial waterway, and storage filling up, Gulf countries have cut total oil production by at least 10 mb/d. In the absence of a rapid resumption of shipping flows, supply losses are set to increase.”

Global oil supply is projected to plunge by 8 mb/d in March, with curtailments in the Middle East partly offset by higher output from non-OPEC+ producers, Kazakhstan and Russia following disruptions at the start of the year. The loss of energy imports and the rise in prices hits some countries more than others. Asia in particular, suffers, followed by Europe, while, at least for energy, the US economy is relatively least affected.

Indeed, one part of the US economy is benefiting, namely US oil companies.  They stand to receive a windfall of more than $60bn this year if crude prices maintain the levels they have hit since the start of the Iran war. Modelling by investment bank Jefferies estimates American producers will generate an extra $5bn cash flow this month alone following a roughly 47 per cent rise in oil prices since the conflict began.  The capitulation of Venezuela to US control is also enabling US energy companies to raise production and increase sharply revenues from the now highly priced Venezuelan oil exports.

But for the rest of the US economy, the sharp rise in energy prices, whether at the gas stations or in home heating and industry, is already starting to feed through to prices overall.   Even before the war started, US producer prices (ie the prices that manufacturers sell their goods to wholesalers and retailers) were on the rise.  The producer price index (PPI) rose 0.7% in February with fuel and related products up 1.1%.  That meant PPI inflation was up 3.4% from February last year. Inflation in the US was not heading towards the Federal Reserve target of 2% a year, but instead heading back up. 

As for economic growth, the second estimate of US real GDP growth in Q4 2025 was revised down sharply to an annualised 0.7% qoq, well below 1.4% in the advance estimate. The new estimate reflected downward revisions in every component of GDP: exports, consumer spending, government spending, and investment. US real GDP growth for 2025 is now estimated at 2%, down from 2.4% in 2024 and 3.4% in 2023, while per capita real income rose only 1.1% in 2025 and fell in the last quarter of that year.

Slowing growth in national output is now also accompanied by falling employment growth.  In January, the US economy lost 92,000 jobs. Job openings in the professional and business services sector have fallen to just 4.0 per 100 employees, the lowest since the 2020 pandemic slump and down nearly 60% since the peak of white-collar employment in 2022. When white-collar hiring slows this sharply, the rest of the job market usually follows. 

Now the Iran war will widen the scissors between slowing economic growth and employment and rising inflation – in other words, stagflation is the order of the day. Donald Trump’s one-time pick to lead the Bureau of Labor Statistics said the US economy is too weak to handle oil at over $100 per barrel: “I don’t think this is an economy that is going to be able to handle $100 a barrel for oil, it’s just not,” EJ Antoni told the FT. “The economy is weaker than we thought it was, and inflation is worse than we thought it was.” New home sales plunged by 17.6% in January, the sharpest decline since 2013. 

This stagflationary environment has thrown the US Federal Reserve into a quandary.  Should the Fed raise its policy interest rate in attempt to curb inflation; or should it lower the rate to support employment and growth?  Yesterday, the Fed decided by a majority on the monetary policy committee to do nothing. The Fed increased its forecast for inflation this year and indicated that only one rate cut was likely in 2026, if at all. Far from heading towards the Fed’s target for inflation of 2%, inflation is now heading back towards 3% or above.  Today, the UK’s Bank of England and the ECB also held their policy rates.

Mainstream economists reckon that what primarily causes inflation is a rise in ‘inflation expectations’, a behavioural theory that this blog has refuted several times.  Five-year, five-year forward inflation expectations have not moved much in the last five years. Rising inflation had mainly a supply-side cause in the post-pandemic period and it will be the same this time.

The impact of the war is intensifying the widening gap between the rich elite in the US and the rest of American households – a gap that mainstream economists have called a ‘K-shaped’’ economy.  Spending growth has been notably faster at the top end of the income spectrum, while consumers at the bottom, who saw a brief burst of high wage growth post-pandemic, are now seeing wage growth slow.

Forbes magazine just released its latest annual ranking of global billionaires. The pace at which extreme wealth is rising is simply staggering.  According to inequality expert, Gabriel Zucman, the wealth of global billionaires has now reached the equivalent of 17% of world GDP.

The Iran war is also exposing new risks to the US economy that could trigger a financial crash. The 2008 global financial crash was not caused by high public debt, as many mainstream economists continually argue.  On the contrary, it was the meltdown in private sector debt that led to bailouts by government and then the rise in public debt followed.  In 2026, a private debt meltdown is again the danger. The recent report by an obscure financial analyst group, Citrini Research, on the future impact of AI caused a stock market sell-off in software companies before financial investors decided that there would be no crash in that sector.

However, what has become an issue is the possibility of defaults and bankruptcies in firms that have borrowed money, not from the traditional commercial banks, but instead from what are called private credit sources. In the past two decades, direct lending by private funds has become a crucial strand of the US financial system, providing credit to start-ups and other companies that would struggle to get bank loans or sell bonds. A classic private credit fund takes money from pension funds and endowments and locks it up for five years or more. That allows these private funds to make long-term loans to companies without fear that their investors will want their money back.  

But some of the big boys in private finance decided to attract pension funds and others to invest by offering “semi-liquid” funds, which promised investors quarterly access to their money, with the caveat that withdrawals could be capped at 5 per cent of fund assets to avoid fire sales.  These ‘financial products’ were a hit, attracting nearly $200bn investment and growing 60 per cent annually between 2021 and last year.

But these private credit funds are not regulated like commercial bank lending, so there is an inherent risk involved, just as there was with sub-prime mortgage lending in the financial crash of 2007-8.  It’s true that the size of the private credit market is relatively small compared to the total US loans market. Also, private credit funds are highly capitalised, with equity typically accounting for 65-80% of total assets more than six times the capitalisation of the banks, where equity represents about 10%.  As a result, the Fed’s 2025 stress tests found that even under severe recession scenarios, private credit would not threaten financial stability. Across the full spectrum of US credit markets, private credit has only a modest share of total credit outstanding. 

So there’s nothing to worry about? That is what they said about the mortgage companies that lent wildly in 2008.  Small cogs that clog up can also cause blockages for large cogs. As the US economy slowed, the private credit default rate (ie companies borrowing from private credit funds) has hit 9.2%. That’s higher than the 2008 bank loan default rate.

UBS says private credit defaults could hit 15%. That’s three times the peak bank loan default rate in 2008.

As a result, investors in private credit funds are trying to get out. And while most private credit funds have rules that limit quarterly redemptions to 5 per cent of assets — enabling them to “gate” (ie prevent) excess outflows — the exodus already echoes 2008.

Moreover, private credit and commercial banks are closely connected. “Banks are lenders, counter parties, service providers and, at times, backstops to non-bank entities,” observes Hernández de Cos, lamenting the “complex ecosystems of leverage, liquidity transformations and duration risk” beyond regulators’ control, which makes private credit a potential channel of systemic risk. US banks have $300 billion in exposure to private credit: Wells Fargo leads with $60 billion in loans to private credit funds. JPMorgan, which recently marked down software-linked loans and curbed lending, has $22 billion in exposure.

Goldman Sachs estimates that up to $70bn could flow out of private credit funds in the next two years and force the worst-hit managers to sell loans to meet redemption requests. And the longer the Middle East turmoil grinds on, the more risks will rise. Or to put it another way: the Iran war-private credit combination may not seem damaging enough to cause a global recession, but it could certainly spark a financial crash.

But maybe the AI technology boom will come to the aid of the US economy.  Some are arguing that already the US productivity of labour is rising faster as a result of the adoption of AI models and AI agents in companies.  In 2025, US labour productivity rose 2.8% compared to 2.3% in 2024, above the long-term historic average and above consensus forecasts.

Labour productivity is calculated as real GDP divided by hours worked. This can vary with changes in technology and in the amount of capital per worker.  But mainstream economists also look at total factor productivity (TFP), which is a measure of the growth in productivity not accounted for by increased capital investment or labour intensity. That is also picking up.

Everything depends on how quickly companies and their employees adopt AI models in their work and how far that spreads through the economy.  The St Louis Fed economists reckon that workers who used AI models could save 5.4% of their work hours, or 2.2 hours a week. But a 2024 working paper by Kathryn Bonney and others found that only 5.4% of firms had formally adopted generative AI as of February 2024.  That suggests that worker adoption remains mostly informal and won’t appear in productivity statistics.  

In a paper, Jed Kolko reviewed recent research on AI and its impact on the US labour market.  He concluded that @early research findings on AI’s impact on the labor market are inconclusive, weak signals about the future, and only one part of the AI research landscape.  And that @the commercial diffusion of the current generation of large language models (LLMs) is so recent that any lasting economic impact would likely take years to show up in employment, output, or productivity data.@

Current data from the Census Bureau’s Business Trends and Outlook Survey shows that fewer than one-fifth of firms are using AI in any capacity, and even fewer are using AI directly for producing goods and services. Indeed, the @transitional disruption from AI to date is not outpacing recent technological changes. The occupational mix has changed over the past three years at a similar pace to the years after the start of the commercial computer era (1984) and the commercial Internet era (1996) and has not accelerated since the release of ChatGPT.

So the hoped for productivity gains from shedding human labour and replacing it with AI agents still seem some time away.  Meanwhile, the huge investment bubble in AI could soon burst.  Take the leader in AI, OpenAI. It is a $730 billion company in invested assets, but last year it generated just $13.1 billion in revenue, losing $8 billion in doing so. This year, the losses could hit $14 billion, with cumulative losses reaching $143 billion by 2029!  These projected losses are five times greater than Uber accumulated before making a profit. OpenAI claims it will be profitable by 2029, but its AI model ChatGPT’s web traffic share has dropped from 86.7% to 64.5% in the last 12 months as Google’s Gemini eats into its market share. And the cheap Chinese DeepSeek can match the performance of ChatGPT at just 1/30th of the cost.

OpenAI needs 1.2bn paying subscribers to make a profit by 2029. That does not seem likely. OpenAI hopes to keep the loans and equity investments coming because it claims it can soon achieve an AI model that is super-intelligent, reasoning on its own at a superior level to the human brain. This is the AI companies’ ‘holy grail’, the moment of total enlightenment.  But the holy grail was just 19th century fiction. 

As Ruchir Sharma put it back last October, @America is now one big bet on AI@. It’s seen as the magic fix for every threat to the US economy.  But can it deliver?  More likely, there will be an AI financial bust first and possibly a recession before that question will be answered.  So AI as the saviour for Trump and the US economy remains an each-way bet.