Can the U.S. Even Afford Another Multi-Trillion Dollar War?

“War is a racket. It always has been. It is possibly the oldest, easily the most profitable, surely the most vicious. It is the only one international in scope. It is the only one in which the profits are reckoned in dollars and the losses in lives.”

– Smedley Butler, War Is a Racket

June 23, 2025 — In recent days, I’ve been reminded of one of the many reasons that I like living in Argentina, down in the “southern cone” of South America. It’s not all about fabulous steak and red wine. (Next such appointment: Friday lunch with a friend.)

Put simply, Buenos Aires is a long way from the world’s geopolitical pressure points and likely conflict zones. Namely Europe, the Middle East and Asia.

I grew up in South-East England during the ’70s and ’80s Cold War with the Soviet Union. We were constantly reminded that nuclear Armageddon could be just minutes away. So it’s quite nice these days to have a lower risk of imminent vaporisation while I enjoy my afternoon cup of tea.

Obviously enough, the current war of attrition between Russia on one side and Ukraine / NATO on the other continues to grind on. Sadly, things seem to have gone a little quiet with regards to President Trump’s efforts to negotiate a peace.

Back in England, perhaps the vaporisation risk hasn’t actually reduced that much since my childhood. Actually, given the flock of assorted mid-wits that seem to run a lot of countries these days, perhaps the risk is higher than ever. The Cold War was bad. But at least you had the impression that the people at the top were intelligent, and aware of the real risks.

Returning to the present day, and over in the Middle East, it had begun to look as if the conflict between Israel and Hamas might be edging towards some sort of vague (if not permanent) conclusion. Then, out of the blue, there’s now the sudden eruption of a war between Israel and Iran. With the US sending aircraft carrier groups into the region, it feels like it could easily tip into a far larger conflict. We’ll find out soon enough.

Israel kicked things off with air strikes, and Iran has retaliated. We’re being told that Iran is on the cusp of having nuclear weapons. But Tulsi Gabbard, who is Trump’s director of national intelligence (no less), said as recently as 25th March that Iran is not developing nuclear weapons. That was in her testimony to the Senate Select Committee on Intelligence. To quote:

“The IC [Intelligence Community] continues to assess that Iran is not building a nuclear weapon, and Supreme Leader Khamanei has not authorized the nuclear weapons program he suspended in 2003”

Seems pretty clear.

But which state of affairs is correct? Was there a major failure of US intelligence? Has new information come to light during the past three months? Or are there shades of the “dodgy dossier” fake claims of “weapons of mass destruction”, that were used to justify the invasion of Iraq in 2003?

(For those wishing to sharpen hazy memories after more than two decades, a brief reminder about the dodgy dossier can be found here.)

And then there’s Asia, which is vast and complex. It seems obvious that there will be some sort of conflict, sooner or later. That’s as China continues to embed its status as an economic, industrial and military superpower. What’s more, at the current rate of growth, India might also achieve superpower status within a few decades.

In terms of potential Asian wars, Taiwan is obviously a prime candidate. China views it as a rogue province, and essentially as an internal matter. Xi Jinping, the Chinese president, is 72 years old. My theory is that he would love to insert himself permanently into the pantheon of revered Chinese communist leaders, perhaps second only to Chairman Mao.

Getting hold of Taiwan would be an obvious way to achieve that. The Chinese military is certainly doing a lot of rehearsals. Given that Xi is running out of personal time – before body or mind fail him – anything is possible in coming years.

But there are other potential conflict zones in the region, including over disputed territories in the South China Sea. India and Pakistan were recently trading blows across their border, as they are prone to do from time to time. And we shouldn’t forget the “little rocket man” up in North Korea. He’s been suspiciously quiet recently.

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Incidentally, turning back to the Middle East, Iran is a country of about 92 million people, which is roughly twice the populations of either Iraq or Afghanistan. It’s also a far larger land mass than either Iraq or Afghanistan (see the map below).

The country sits between Iraq on one side and Afghanistan and Pakistan on the other side, presumably with porous borders that armed groups can traverse with relative ease. And it’s north of the Strait of Hormuz, which is a choke point for a large share of the world’s oil supply.

That does not sound like a set up for a quick or easy full-blown war, if it gets to that. In fact, it sounds more like a recipe for a multi-decade quagmire.

I don’t usually write much about politics. That’s because there’s already endless commentary about it, and political matters tend to send people around the emotional bend.

(I make an exception for Argentina’s ongoing freedom experiment – e.g. see here. That’s not just because it’s unusual and radical. Balanced budgets! Slashed government waste! Massive deregulation! More freedom! But also because I happen to live here, and thus witness it first-hand.)

But I do cover politics when it has important potential implications for economies or investors, such as the recent decision by the US to slap big import tariffs on all other countries (see here, here, and here). That situation continues to evolve.

The potential for another major US-led war in the Middle East clearly has investment implications. And that’s beyond the obvious potential for a spike in the price of oil.

The US spent $4-9 trillion dollars on the wars in Iraq and Afghanistan, depending on who you believe. Whatever the correct figure, it accounts for a big chunk of America’s current federal debt of $37 trillion.

Whatever any of us may believe about the rights or wrongs of taking on Iran, and whether regime change would actually make things better or worse, there’s a more fundamental question.

Can the US actually afford another multi-trillion dollar war?

If it tries to borrow that much – on top of an already sky-high fiscal deficit – would it be enough to tip the US dollar and treasury bond markets into meltdown?

After all, the US federal debt-to-GDP ratio was around 54% in 2001, when the 9/11 attacks triggered the “war on terror”. But that debt ratio has now ballooned to 121%.

Looking more broadly, this is actually a serious strategic issue for all the many Western governments that are drowning in debt, and not just the US.

In some cases, debt-to-GDP levels have been similar or higher in the past, but only after major conflicts (e.g. in the UK after World Wars I and II). As of now, excruciatingly high debts have been incurred by many countries despite a prolonged period of relative peace.

For all the posturing at G7 meetings, the chest thumping at summits, the chairing of crisis committee meetings, does the collective West have the financial strength to fund a major war?

Hopefully, we won’t have to find out anytime soon. But, if and when push comes to shove, I suspect that the West has placed itself in a far weaker strategic position than most people realise.

This weak financial position was totally self-inflicted by a complacent, arrogant, short-termist, feckless and incompetent political class. The damage was mainly done over the past couple of decades, as public spending and debts spiralled out of control, and especially since the global financial crisis that began in 2007.

Even though it’s obvious that the debt party is coming to an end, and that government finances are creaking, there’s very little evidence that much is being done to fix the issues.

Large fiscal deficits continue. Debts keep piling up. No meaningful efforts are being made to control public spending. (Despite much initial fanfare, it looks like the DOGE initiative in the US has barely made a dent.)

If the US does plunge into a big war with Iran, or simply get dragged into one somehow, the result is likely to be trillions more dollars of government debt.

Market moves suggest that hard questions were already starting to be asked about the sustainability of US government finances, and whether it’s still safe to hold US dollars and treasury bonds.

Recently, despite looming recession risk, the dollar has been weak and long-term treasury yields have been rising (meaning prices have been falling). Usually, the opposite happens, as there’s an investor “flight to safety”. This suggests that investor perceptions of US paper as a safe haven are already changing.

Another spike in borrowing to fund a big war could drive a lot of investors towards the exits from dollars and US treasuries, and perhaps towards havens such as gold. Only time will tell.

We’re meant to believe that wars are won or lost by great leaders, visionary generals, or the collective effects of individual acts of bravery.

Of course, all of those things are important.

But, ultimately, history tells us that wars can only be won with plentiful supplies of sound money.

And they’re lost when it runs out.

Please send comments or questions to the email shown below.

Until next time,

Rob Marstrand
OfWealth & Grey Swan

P.S. from Addison: Grey Swan Live! this Thursday, June 26 at 11 a.m. ET. We’ll look at all the latest events swirling around markets right now, plus a rousing discussion on the GENIUS Act — how stablecoins may become a backdoor lifeline for the U.S. Treasury. You’ll want to hear this one.

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