America's Debt Crisis Is Worse Than You Think — And The Oil Shock Will Expose It

While investors fixate on the Middle East, Professor Steve Hanke says the more dangerous story may be playing out at home. The Johns Hopkins economist argues that the war around Iran and the Strait of Hormuz is not just a geopolitical shock. It is a stress test for a US balance sheet he believes is already broken. Hanke called the conflict a "massive supply-side shock to the world economy," noting that it lies at the opposite end of the spectrum from the 2020 pandemic shock. "You'll probably get at least a 10% contraction in the supply of oil in the international market," he said in a recent interview with Metals and Miners. Oil, he said, is "the major input to the world," meaning higher costs will ripple through refined products, chemicals, plastics, and fertilizer. The Insolvent Household That scenario would be damaging even if Washington were entering the crisis from a position of strength. Hanke's point is that it is not. The Treasury Department's latest consolidated financial statements show the US government ended fiscal 2025 with $6.06 trillion in assets and $47.78 trillion in liabilities, leaving a negative net position of $41.72 trillion. That figure excludes the government's long-term social insurance promises. With those included, total obligations rise above $136 trillion. Still, trillion-dollar balance sheets can be abstract to the population. Thus, when Hanke shrunk the federal budget by eight zeros, the government started to look like a regular household budget. By his estimates published in Fortune, it’s earning $52,446 a year while spending $73,378, running an annual deficit of $20,932. That same household would hold just $60,554 in assets against $1,361,788 in liabilities and unfunded promises. "Uncle Sam, by any accounting standard, is insolvent," he wrote, pointing to the fiscal analysis accompanying the Treasury release. Bond investors have also shown some unease. The iShares 7-10 Year Treasury Bond ETF (NASDAQ:IEF) is down 1.55% year to date. Hanke points to two legislative actions: the bipartisan H.R. 3289 — the Fiscal Commission Act — and an Article V Convention limited to proposing a fiscal responsibility amendment to the U.S. Constitution. He believes those actions represent a path toward rebalancing the economy. A Deadly Cocktail The Middle East matters here because war makes a weak fiscal position weaker. With the federal deficit over 6% of GDP by peacetime standards, additional conflict-related spending could further widen it. For Hanke, absorbing those deficits may bring renewed pressure on the Federal Reserve. "There'll be tremendous pressure on the Fed to monetize some of that deficit," he said. However, for a veteran economist who advised President Ronald Reagan's administration during a turbulent economic episode in the early 1980s and various heads of state globally, the greater danger is not the energy spike alone. It is the policy regime surrounding it. He describes the mix as "protectionism," "militarism," and "interventionism" — a "deadly cocktail" for an economy already carrying enormous fiscal strain. Washington may still be able to project power abroad. But the numbers suggest it is doing so from a balance sheet that looks less like a superpower's and more like a household already drowning in debt. Image: Shutterstock