This story was first featured in the Aftermath newsletter, a series from David Dayen exploring the economic consequences of the war in Iran. To have these stories delivered to your in-box as soon as they are published, sign up for the newsletter here.

Welcome to Aftermath, our periodic series on the consequences of the war in Iran. Today’s edition is about why those consequences have been relatively muted: One answer is we are running historic government deficits that are dragging the economy to the finish line. If you aren’t getting Aftermath in your email, you can sign up at prospect.org/aftermath.

Are We Still at War?

As of the beginning of this week, the president of the United States has stated on 37 separate occasions that we were just about ready to sign a deal to end the war. That’s 37 different times the markets reacted by boosting stocks and lowering oil prices, 37 different times that investors breathed sighs of relief, and likely 37 different times that cronies of the president who knew he was blowing smoke got to take profits.

We haven’t totally dispensed with this tomfoolery; statement number 38 came on Thursday afternoon, with claims that deal points had been “approved by all parties.” But the man who found negotiations on a cease-fire “very boring” has spent the past two days attacking Iran with Tomahawk missiles, and receiving fire back in response. We are now “negotiating with bombs,” in the parlance of Pete Hegseth. The latest is that President Trump has threatened a seizure of Kharg Island, Iran’s primary oil export terminal, which could only be done with ground troops.

Trump can’t negotiate an end to the war because the outcome will reveal that he lost. Everyone knows that a framework deal to free up frozen assets in exchange for opening the Strait of Hormuz trades something we already had (open seas) for something Iran wants (unfrozen assets). Trump blathered about “pallets of cash” given to Iran under Barack Obama, and he can’t give Iran pallets of cash now to get out of his mistake. So here come the bombs.

Airstrikes failed to bend Iran’s will before, and I feel confident saying that none will work now. If the president wants to put American troops in harm’s way during an unpopular war with scant popular support, I’d say that Republican Hill staff should start polishing their résumés.

The Trump Stimulus

On Wednesday, Trump boasted about a “secret mission” that extracted stranded ships in the Persian Gulf in the dead of night, bringing millions of barrels of oil to where it was needed. First of all, this secret mission was not at all secret—it was publicly discussed in The New York Times two weeks ago. Second, the mission, which involves steering commercial ships through the Strait of Hormuz, has according to the military’s own count successfully moved 200 ships. In a normal month, 3,000 ships traverse the strait.

This is why crude oil stocks, including in the U.S. despite all the fracking and tapping of strategic petroleum reserves, are dropping precipitously, which portends an eventual, catastrophic price spike. It’s why global food supply is also expected to shrink, as fertilizer and fuel costs rise. (Even as prices for urea, a key fertilizer input, have crashed in the U.S. because of demand destruction after the spring planting season, indicators like wheat futures are signaling higher costs.) It’s why annual inflation is now above 4 percent, with the Producer Price Index, which tracks inputs, at 6.5 percent. It’s why prices are sharply outpacing wages, taking real wage gains in the second Trump administration all the way to zero, and it’s why workers are increasingly tapping personal savings and even 401(k) balances to keep up.

If all of that is true, why has the U.S. economy not fallen off a cliff? Runaway inflation and dwindling savings can kill an economy that relies heavily on consumer spending. But consumer spending has been holding up relatively well. Inflation can really hamper job growth. But the last jobs report surprised to the upside, and the trend is much improved since a flat winter. Stocks have certainly been manipulated by all the fake cease-fire talk, but overall the trend is positive. What exactly is going on?

The Prospect in your inbox

Subscribe for analysis that goes beyond the noise.

There are a few different explanations. Weaker reliance on fossil fuels, led by dramatically lower Chinese imports, could be one factor. The AI hyperscaler boom could be driving investor confidence at least, even if data center delays are messing with the grand design. And the K-shaped economy might be playing a role: The wealthy’s portfolios are still doing fine, they account for nearly half of all consumer spending, and their wallets are still open.

But there could be another, less-discussed factor: enormous, if quiet, support from the government sector.

According to the Joint Economic Committee, the U.S. government has run a $1.246 trillion deficit through May. The Congressional Budget Office predicts that by the end of fiscal year 2026, the annual deficit will hit $1.9 trillion. For context, the American Recovery and Reinvestment Act—the Obama stimulus—spent $787 billion. The American Rescue Plan—the Biden stimulus—was about $1.9 trillion. (Some of that money was unspent and later clawed back.) The CARES Act—the Trump-signed legislation at the height of COVID to let Americans stay home for months—was around $2 trillion.

In other words, this fiscal year we are spending the equivalent of the largest economic stimulus packages in American history. It’s a hugely inefficient stimulus, funneled toward rich people, the military-industrial complex, and a mass abduction and deportation program more than anything else, while continuing to enable the astronomical waste in the U.S. health care system. But it’s still stimulus, and when you dump all of that money into the economy, it’s probably going to at least accidentally create spending, jobs, and investment.

Aftermath

This story first appeared in The American Prospect’s free Aftermath newsletter, a series on the economic consequences of the war in Iran.

What’s more, the fact that so much of the money is going to the already rich, who tend to save and invest their money rather than spend it, may help explain why the stock market keeps going up and up. Rich people are also the ones who tend to buy government debt, and these days they are paid a lot of money for doing so. Inequality is increased coming and going.

Another thing that government stimulus can do, of course, is raise prices. Mountains of ink were spilled about whether the Biden ARP, which was passed in the context of economic stagnation and pain coming out of the pandemic, caused the later bout of inflation. I’ve seen literally none of this conjecture regarding the similar-sized deficit spending of the Trump administration. But it’s probably contributing in some measure to inflation, along with the Iran supply shock and tariff uncertainty. It’s at the very least something that will make inflation much harder to bring down in the future.

Remember also that Trump entered office on a vow of handing over the government to Elon Musk and his band of traveling adolescents to make everything more efficient and stop the endless piling up of government debt. All that efficiency led to one of the highest annual deficits in the history of the United States.

I am just about the furthest thing from a deficit hawk and have gone to war with deficit hawks repeatedly over my career. I’ve heard the arguments about a debt crisis from people I respect and I’m not completely moved by them, though the higher-interest-rate environment is certainly making things more challenging.

But I do think that the current environment is unsustainable, if only because Republican scolds are likely to use these deficits as a rationale not for rolling back tax giveaways to the wealthy but to cut safety-net programs for the poor as much as possible. The recent Social Security Trustees Report showing that the social insurance program will be unable to pay full benefits by 2032 is another data point that will be seized upon in this manner. We are more likely to respond to warnings of a debt crisis with painful spending cuts.

There’s a tension here between massive deficits being a primary crutch for the economy and the party in power wanting to slash the most effective anti-poverty programs in the name of pretending to cut the deficit. Military and paramilitary Keynesianism isn’t going to last. And it’s putting Democrats in an impossible position if they continue playing footsie with a tax cut agenda.

It also isn’t fated to work forever. Supply shortages and inflation accelerating in multiple ways will eventually take down even a stimulus-based economy. There’s something that feels very Turkish about it.

Links

Gas prices are going to get worse. (Washington Post)

Food and fuel inflation typically triggers global unrest. (Vox)

The Iranian economy has been battered by the war. (Drop Site News)

Supply chain logistics costs are rising. (Mish Talk)

Same with aluminum. (Wall Street Journal)

Thanks for reading. If you have tips or ideas for future stories, let us know! You can email us at aftermath@prospect.org.

Before you go.

I hope that you found this article interesting and thought-provoking. The reason we’re able to publish stories like this — free of programmatic ads and never behind a paywall — is because readers like you step up to support our work. 

The Prospect doesn't answer to advertisers or billionaire owners. We answer to you and to our commitment to pursuing the truth, wherever that leads us. 

Independent, reader-supported journalism is critical at a time when the free press is under assault. 

If you believe this kind of reporting should exist and remain free to read, we hope you'll consider chipping in. Every contribution, however modest, makes a real difference.

David Dayen
Executive Editor