A debt burden of 348 trillion yuan looms! This round of the oil crisis coincides with a period of global vulnerability, and the United States is not immune?

The world is facing an unprecedented dual crisis of debt and geopolitical tensions. The ongoing escalation of the U.S.-Iran conflict, coupled with a global debt burden of $348 trillion, has severely squeezed fiscal space for countries, leaving even the United States in a vulnerable position.

Ruchir Sharma, Chairman of Rockefeller International, the global investment strategy division under Rockefeller Capital Management, stated that the world is entering an unprecedented crisis. The current level of global debt has reached a historical peak, making even the United States, the world’s largest oil producer, appear particularly vulnerable.

In a column published in the Financial Times on Sunday, he warned that the extreme lack of fiscal space leaves heavily indebted governments with little capacity to respond to the energy shock triggered by Trump’s war against Iran.

Sharma pointed out that historical experience shows that such crises often lead to the collapse of fiscal budgets. The oil crisis of the 1970s was a turning point, after which governments shifted from occasional deficits to persistent long-term deficits.

Today, the average government debt ratio of the G7 countries has soared from just 20% of GDP at that time to over 100%. Meanwhile, global debt grew last year at its fastest pace since the pandemic, reaching a record high of $348 trillion, more than three times the world’s GDP.

With one-fifth of the world’s oil and liquefied natural gas supply trapped in the Persian Gulf, governments are rushing to implement price controls, rationing, and subsidy policies. However, many governments have exhausted their fiscal resources, while bond investors stand ready to punish any excessive spending.

“Long-term inflation expectations seem stable, but market concerns are rising that an Iranian oil shock will further increase government spending on top of rapidly expanding deficits and debt, leading to higher term premiums on bonds,” wrote Sharma.

This trend is already evident in the United States: recent weak demand at U.S. Treasury auctions has forced yields higher than expected, highlighting investor concerns about how the war with Iran could exacerbate deficits and debt.

At the same time, central banks around the world are also constrained and struggling to effectively contain inflation. The Federal Reserve has failed for five consecutive years to bring U.S. inflation back to its 2% target, undermining its ability to counter economic slowdowns caused by oil shocks through interest rate cuts.

“The most vulnerable countries are those with high levels of government debt and deficits, where central banks are also unable to meet inflation targets. Among advanced economies, the U.S. and the UK face the greatest risks; among emerging markets, Brazil, Egypt, and Indonesia are at the forefront,” said Sharma.

He added that although the U.S. is the world’s largest oil producer, given its nearly 6% annual budget deficit last year—the highest among developed nations—it cannot remain unscathed in a prolonged war.

Trump plans to increase annual defense spending by 50% to $1.5 trillion, which could further worsen the outlook for U.S. debt—currently, U.S. debt interest payments already exceed $1 trillion annually. Sharma estimates that, combined with recent tax cuts, the U.S. deficit this year may rise to 7% of GDP.

Trump had predicted that the war with Iran would last four to six weeks. Now that the conflict has entered its sixth week, there are few signs that it will end quickly.

In fact, various signals point to an escalation and prolonged nature of the war: thousands of U.S. troops are being deployed to the Middle East; a third aircraft carrier is en route; and the Pentagon has almost exhausted its entire stockpile of JASSM-ER stealth cruise missiles on the Middle Eastern battlefield.

All of this comes at a high cost. According to reports, after the extensive consumption of expensive munitions and the destruction of U.S. fighter jets, radar systems, and bases by Iranian attacks, the Pentagon is seeking $200 billion in funding from Congress for the war effort.

Joseph Brusuelas, chief economist at RSM, noted in a report at the end of last month: “The additional war expenditures will exacerbate U.S. debt and trigger a sell-off in the bond market as investors demand higher premiums to offset potential losses. Long-term rates such as 30-year mortgage rates are partly based on the yield of the 10-year U.S. Treasury bond. Most importantly: the bond market has never lost.”