It is no longer possible to assess the state of the global economy — particularly the US economy in the aftermath of the recent military confrontation with Iran — without examining the dramatic shifts in economic indicators and policy trends that have unfolded within just a few months. The global economy has moved from the threshold of recovery to an era defined by mounting challenges. At the same time, economic prosperity has increasingly become contingent on decisions made in military command centers, rather than on the pursuit of the public good envisioned by classical economic thinkers.
For decades, US policymakers have viewed overseas military engagements as a means of stimulating domestic demand through increased defense spending — a longstanding Keynesian proposition that regards wartime production as a catalyst for economic activity. The recent confrontation with Iran, however, has challenged this premise in the contemporary context. Unlike previous conflicts, the economic shock did not originate solely on the battlefield. Instead, it spread through the arteries of the global economy, disrupting supply chains, energy markets, and critical maritime routes in the Strait of Hormuz. As a result, American consumers have borne the costs of the conflict directly through higher fuel prices and rising consumer goods costs.
The economic consequences of war for the United States remain a central subject in the political economy literature. While proponents of higher defense spending argue that military conflicts provide a short-term boost to growth and employment by injecting substantial liquidity into the defense manufacturing sector, historical evidence, together with analyses by leading think tanks and international organizations, indicates that the long-term structural costs far outweigh any temporary economic gains. Against this backdrop, this analytical article seeks to address a fundamental question: Why does Washington continue to resort to the option of war despite its enormous economic costs?
First: The 2026 Iran War — An Unconventional Economic Shock
The military campaign against Iran marked a fundamental shift in the nature of the economic shocks confronting the US economy. Unlike protracted conflicts such as the wars in Afghanistan, Iraq, or Vietnam — which imposed a gradual fiscal burden over many years — the confrontation with Iran generated an acute financial shock that disrupted the core of global energy supply.
On June 22, 2025, the United States launched Operation Midnight Hammer, deploying B-2 Spirit stealth bombers to strike Iran’s principal nuclear facilities at Fordow, Natanz, and Isfahan with GBU-57 bunker-buster munitions. According to the Costs of War project, the direct military cost of the operation alone was estimated at between $2.04 billion and $2.26 billion. As the confrontation escalated into a direct military conflict beginning on February 28, 2026, expenditures increased rapidly.
While the Pentagon’s initial estimate placed direct military spending at approximately $29 billion, the Center for Strategic and International Studies (CSIS) estimated the actual cost of the war at between $34 billion and $42 billion. A comprehensive analysis published by Popular Information put the true cost of military operations during the first 60 days alone at $71.8 billion, indicating an expenditure rate of approximately $1.12 billion per day.
These costs came in addition to ongoing US regional security expenditures between October 2023 and September 2025, which ranged from $9.65 billion to $12.07 billion to support operations in Yemen, safeguard critical maritime routes, and expand the US military presence across the region. Over the same period, direct US military assistance to Israel totaled approximately $21.7 billion during the two years following October 2023. Additional naval force mobilization in January and February 2026 incurred an estimated $450 million to $650 million in extra costs. Consequently, total US military spending allocated to Middle East-related operations since October 2023 exceeded $31.35 billion, reaching as high as $33.77 billion.
Unlike the Iraq War, which was largely associated with securing control over oil resources, Iran’s strategy centered on waging what can be described as an economic war against the global economy. Military operations resulted in the near-complete closure of the Strait of Hormuz — the world’s most strategically important maritime chokepoint, through which approximately 20%–30% of global oil consumption and 20% of global liquefied natural gas (LNG) trade normally pass. Oil shipments through the strait fell dramatically from 20 million barrels per day to fewer than 2 million barrels per day.
The closure of the strait, coupled with damage to Gulf energy infrastructure, severely disrupted exports from the region’s leading energy producers. On the night of March 18, 2026, Iranian forces struck Ras Laffan Industrial City in Qatar, damaging LNG production Trains 4 and 6 at the RasGas facility, a joint venture involving ExxonMobil. The attack alone reduced Qatar’s LNG export capacity by 17% — equivalent to 12.8 million metric tons annually — and resulted in estimated annual revenue losses of nearly $20 billion.
As domestic storage facilities reached capacity, major Gulf producers were forced to scale back crude oil production. Saudi Arabia’s output declined from 10.11 million barrels per day to 6.87 million barrels per day. Iraq’s production fell from 4.14 million to 1.49 million barrels per day, the United Arab Emirates reduced output from 3.39 million to 2.02 million barrels per day, and Kuwait’s production dropped from 2.58 million to 560,000 barrels per day. Collectively, the four countries lost approximately 9.28 million barrels per day in oil supply.
The sharp contraction in global supply triggered a rapid surge in crude oil prices. West Texas Intermediate (WTI) rose from below $60 per barrel at the beginning of 2026 to approximately $90 per barrel, while Brent crude climbed above the $100 threshold, peaking at $119 per barrel during the height of the crisis.
The spike in energy prices quickly translated into a direct inflationary shock for American households. According to a report by the Brown University Climate Lab, US consumers had incurred more than $40 billion in additional indirect fuel costs by mid-May 2026 — equivalent to an extra financial burden of more than $300 per American household.
Second: What If the War Had Never Occurred? Comparing the Economic Outcomes of the “War” and “No War” Scenarios
To assess whether the US economy ultimately benefited from or was harmed by the conflict, it is essential to examine the counterfactual scenario — what the economic trajectory might have looked like had the confrontation with Iran never occurred.
Prior to the outbreak of hostilities in early 2026, the global economy exhibited strong signs of stabilization, with inflationary pressures continuing to ease. In its April 2026 World Economic Outlook, the International Monetary Fund (IMF) indicated that, absent the war, its forecast for global economic growth in 2026 would likely have been revised upward by 0.1 percentage point, reaching 3.4%.
Instead, the conflict prompted the IMF to lower its global growth forecast to 3.1% for 2026. The World Bank adopted an even more pessimistic outlook, reducing its projection for global growth by 0.4 percentage point to 2.5%, while warning that prolonged financial market disruptions and continued energy shocks could drive growth down to 1.3%.
The United States, meanwhile, managed to sustain real GDP growth of between 2.2% and 2.4%, supported by AI-driven consumer spending and continued capital investment. However, this resilience came at the cost of a sharp resurgence in inflation. Rising gasoline and diesel prices — particularly significant given that 70% of US freight transportation relies on diesel-powered trucks — pushed the Consumer Price Index (CPI) to 3.8% and the Producer Price Index (PPI) to 6%. The resulting inflationary surge effectively erased the real wage gains American workers had achieved over the previous year.
2.1. The War’s Impact on Financial Markets and Purchasing Power
According to an analysis by the Yale Budget Lab, the war, together with the emergency tariff measures associated with it, imposed substantial indirect annual financial burdens on American households. Middle-income families earning approximately $85,000 per year faced additional costs ranging from $2,565 to $3,471, while lower-income households with annual earnings of around $30,000 incurred extra expenses of between $2,143 and $2,548. These figures underscore the highly regressive nature of the economic shock, with its heaviest burden falling on the most financially vulnerable segments of society.
At the federal level, the cost of petroleum fuel consumption by government agencies, of which the military accounts for 87%, increased by an additional $1.19 billion during the first 78 days of the conflict alone. These expenditures came on top of the long-term fiscal burden associated with higher public debt. According to scenarios developed by the Congressional Budget Office (CBO), US taxpayers are expected to incur between $10.9 billion and $26.9 billion in additional interest payments over the coming decade solely to finance the military operations.
Had the conflict not occurred, these substantial financial resources could have been redirected toward long-term structural investments. According to data from the Watson Institute, the $40 billion in additional fuel costs borne by American consumers would have been sufficient to:
- Fully finance the Federal Bridge Investment Program, enabling the rehabilitation and modernization of more than 10,200 aging bridges across the United States.
- Exceed the estimated $31.5 billion required to modernize and overhaul the entire US air traffic control system.
- Finance more than twice the proposed federal investment of $18.9 billion for electric vehicle infrastructure and EV charging networks.
2.2. Labor Market and Employment Effects
The narrative that military spending serves as a catalyst for employment contains a fundamental structural contradiction. While wars may generate temporary jobs in defense manufacturing and military-related logistics, they have consistently failed to facilitate the long-term reintegration of returning service members into the productive civilian economy.
According to US Bureau of Labor Statistics (BLS) data released in August 2024, a significant employment gap exists among veterans of the post-9/11 conflicts — classified as veterans of the Second Gulf War, a group in which those who served in Iraq and Afghanistan account for approximately 40%. The unemployment rate among veterans who served in Afghanistan rose sharply from 2.6% in August 2023 to 7.3% in August 2024. By comparison, unemployment stood at 3.4% for veterans who served in Iraq and 5.1% for those who served in both Iraq and Afghanistan.
These figures highlight the persistent challenges facing veterans as they transition from military service to civilian employment. Approximately 26% of returning service members live with service-connected disabilities, compared with 14% of the overall veteran population, further complicating their labor market integration.
Historical trends reinforce this pattern. In 2011, the unemployment rate among veterans of the Second Gulf War reached 12.1%, while unemployment among younger veterans aged 18 to 24 climbed to a record 29.1%. Together, these figures suggest that military conflicts do not generate sustainable employment gains. Instead, they leave behind long-lasting labor market challenges that hinder the successful integration of young veterans into the civilian economy.
2.3. Public Opinion Trends
Unlike previous military interventions that initially benefited from the “rally ‘round the flag” effect, the war with Iran represented a notable historical departure. Public opposition was widespread even before military operations began, reflecting growing concerns over the conflict’s anticipated economic and strategic costs.
A May 2026 survey conducted by the Chicago Council on Global Affairs illustrates the depth of public dissatisfaction and the perceived economic consequences of the war. Key findings include:
- Impact on the cost of living: 86% of Americans believed the war had directly increased their cost of living and reduced their purchasing power.
- International relations and global standing: 72% of respondents said the conflict had significantly damaged America’s international relationships and global reputation.
- National security assessment: 65% believed the war had weakened rather than strengthened US national security.
These findings were reinforced by a separate public opinion survey conducted between May 15 and 21, 2026, by the Critical Issues Poll at the University of Maryland, in partnership with Ipsos, which revealed an unprecedented level of political and public division over the conflict. Overall opposition to the war reached 58%, compared with 38% who expressed support.
Partisan differences were particularly pronounced. Opposition was nearly unanimous among Democrats, with 84% rejecting the war, while 63% of independent voters also opposed it. Even among Republicans, who have traditionally been more supportive of military intervention, 33% believed the war had negatively affected US interests, compared with only 25% who viewed its impact as positive.
Taken together, these findings point to a growing erosion of domestic consensus regarding the effectiveness of military solutions and an increasing public awareness of the substantial economic costs of war, reflected in the higher prices Americans face at gas stations and in everyday consumer markets.
2.4. Inflation Dynamics and US and Global Interest Rate Outlook
Against this backdrop, remarks delivered by Federal Reserve Chair Kevin Warsh in July 2026 underscored that the US central bank would not rush to ease monetary policy. He emphasized that any decision regarding interest rates would remain contingent on incoming inflation and labor market data rather than on political pressure or market expectations.
Warsh stressed that the conflict in the Middle East has emerged as a new source of economic uncertainty, not only because of its impact on global energy prices, but also because it has the potential to rekindle inflationary pressures through higher transportation, insurance, and raw material costs. He also noted that substantial investment in artificial intelligence and digital infrastructure could generate short-term price pressures, even as it enhances productivity over the longer term. These remarks reflect a clear shift in the Federal Reserve’s policy stance, with priority now placed on preventing inflation from becoming entrenched, even if that requires maintaining elevated interest rates for a longer period.
Following the Federal Reserve’s June 2026 policy meeting and Chair Warsh’s subsequent remarks in July, most major global investment banks revised their expectations for the trajectory of US interest rates. Compared with projections at the beginning of the year, market consensus has shifted markedly. Financial institutions have moved away from anticipating a gradual easing cycle during 2026 and now increasingly expect a “higher-for-longer” interest rate environment, driven by persistent inflationary pressures, the continued strength of the US labor market, and renewed geopolitical risks stemming from escalating tensions in the Middle East.
The following section summarizes the principal forecasts issued by leading global financial institutions:
- First: Goldman Sachs — No Rate Cuts Before 2027:
Goldman Sachs Research has adopted one of the most hawkish outlooks among major global financial institutions. In June 2026, the bank revised its forecast, concluding that the Federal Reserve is unlikely to begin cutting interest rates before June 2027, with a second reduction expected in December 2027. This marks a significant shift from its earlier expectation that the easing cycle would begin by the end of 2026.
Goldman Sachs attributes this revision to three primary factors:
- Inflation remaining persistently above the Federal Reserve’s target;
- The continued strength of the US labor market;
- Elevated risks of ongoing supply-side disruptions stemming from energy price volatility and geopolitical tensions.
The bank’s chief US economist, David Mericle, argues that inflation is unlikely to return sustainably to the Federal Reserve’s 2% target before 2027, provided no additional shocks emerge in global energy or trade markets.
- Second: J.P. Morgan — Rates Expected to Remain Unchanged Throughout 2026:
J.P. Morgan expects the Federal Reserve to maintain its current policy rate throughout 2026, with its baseline scenario assuming no rate cuts during the year. The bank also leaves open the possibility of a limited rate increase in 2027 should inflationary pressures reaccelerate.
According to the bank’s assessment, the US economy continues to demonstrate considerable resilience, while robust consumer spending and a strong labor market do not yet justify a shift toward monetary easing. J.P. Morgan further warns that persistently high oil prices resulting from tensions in the Middle East could delay any transition to a more accommodative monetary policy.
- Third: Morgan Stanley — Higher Rates Through the End of 2026:
Morgan Stanley has adopted a broadly similar outlook, projecting that interest rates will remain unchanged through the end of 2026, with the possibility of only two rate cuts during the first half of 2027, contingent on a clear and sustained decline in inflation.
The bank argues that elevated energy prices, together with continued strong investment in artificial intelligence and digital infrastructure, are likely to keep inflationary pressures elevated, reinforcing the case for maintaining a restrictive monetary policy for an extended period.
It is also worth noting a Reuters survey of leading global financial institutions — including Goldman Sachs, J.P. Morgan, Morgan Stanley, Citigroup, Barclays, HSBC, UBS, and Deutsche Bank — which found that most now expect no Federal Reserve interest rate cuts during 2026. This represents a marked shift from their projections at the beginning of the year, when they anticipated the start of a monetary easing cycle in the second half of 2026. The revision reflects a broad reassessment of the US economic outlook, driven by persistently elevated core inflation and renewed inflationary pressures stemming from higher energy prices amid escalating geopolitical tensions.
Third: Why Does the United States Go to War?
The continued deterioration of key macroeconomic indicators raises a fundamental question: Why have successive US administrations continued to engage in military conflicts if the overall economic outcome is negative and ultimately borne by taxpayers? The answer lies in the structure of the military-industrial complex and in the unequal distribution of economic benefits and costs.
Military spending functions as a large-scale mechanism for transferring public resources, including taxpayer revenue and sovereign borrowing, into private-sector profits for major defense contractors. Between 2020 and 2024, private companies received $2.4 trillion in Pentagon contracts, representing approximately 54% of the Department of Defense’s estimated $4.4 trillion budget over the same period.
These financial flows were concentrated among just five major defense contractors — Lockheed Martin, RTX, Boeing, General Dynamics, and Northrop Grumman — which together secured $771 billion in Pentagon contracts between 2020 and 2024. This amount exceeded twice the combined US spending on diplomacy, humanitarian assistance, and international development during the same period, which totaled $356 billion.
The scale of these firms’ political influence is reflected in lobbying data for 2024. According to the figures, the defense industry employed 950 registered lobbyists in Washington—equivalent to nearly two defense industry lobbyists for every member of the US Congress. This demonstrates the structural political influence exercised by the defense sector over US policymaking.
The defense industry’s influence extends beyond government procurement. Major defense contractors collectively allocated $34.7 million to support 50 leading US think tanks, including the Brookings Institution, the Center for Strategic and International Studies (CSIS), and the Center for a New American Security (CNAS). These institutions play a significant role in shaping strategic policy debates and providing analytical frameworks that often link increased defense spending to emerging or perceived existential security threats.
Companies such as Lockheed Martin and RTX have also emerged as powerful lobbying forces, each spending approximately $13 million annually to oppose efforts to reduce defense budgets or impose tighter oversight on defense pricing and profit margins. Together, these networks of political influence contribute to a policy environment that tends to favor military options over diplomatic solutions, generating concentrated commercial benefits for defense contractors, their shareholders, and senior executives, while distributing the broader economic costs across taxpayers and consumers.
Fourth: What Do These Developments Mean for the Egyptian Economy?
The implications of these developments extend well beyond fluctuations in global financial markets. They are likely to affect the Egyptian economy through several key transmission channels.
- First, higher import costs. Rising oil prices and shipping expenses increase Egypt’s import bill for fuel, intermediate goods, and grain, adding further inflationary pressures to the domestic economy.
- Second, higher external financing costs. The prospect of US interest rates remaining elevated for an extended period raises the cost of international borrowing for both the Egyptian government and the private sector, while also increasing the expense of refinancing external debt.
- Third, capital flows. Higher yields on US Treasury securities make American assets more attractive to global investors, potentially slowing capital inflows to emerging markets and placing additional pressure on local currencies.
- Fourth, pressures on Suez Canal revenues. This channel is particularly significant for Egypt. Continued disruptions to Red Sea shipping and higher maritime insurance costs are likely to weigh on traffic through the Suez Canal, reducing one of the country’s most important sources of foreign exchange earnings.
Against a backdrop of persistent global uncertainty, several economic priorities become increasingly important for Egypt. These include diversifying sources of foreign currency earnings, accelerating efforts to attract foreign direct investment, strengthening industrial and agricultural exports, maintaining prudent management of external debt, and reducing reliance on short-term external financing. At the same time, expanding investment in renewable energy and natural gas projects will be critical to mitigating the fiscal impact of volatility in global energy prices.
Conclusion
The economic repercussions of the war with Iran reaffirm a central principle long advanced by many economists: wars are, ultimately, a losing proposition for all parties involved, including the great powers that believe themselves insulated from the battlefield. The US administration appeared to assume that it could wage a military conflict in a strategically vital region such as the Middle East without incurring significant costs at home. Yet the very process of economic globalization that the United States helped shape has become the mechanism through which the consequences of geopolitical shocks are transmitted back to its own economy.
The conflict has reignited inflationary pressures, prompting the Federal Reserve, under the leadership of Kevin Warsh, to reaffirm that restoring price stability will take precedence over supporting economic growth. This commitment implies that interest rates are likely to remain elevated for an extended period. As a result, the “higher-for-longer” interest rate environment appears far from over.
For emerging economies, including Egypt, this translates into a more restrictive global financial landscape characterized by higher borrowing costs, increased exchange rate volatility, and persistent pressures on energy markets and international trade. Against this backdrop, accelerating structural reforms and strengthening the competitiveness of the Egyptian economy will be essential to transforming these external challenges into opportunities for sustainable growth and increased investment.
