The United States crossed three hazardous thresholds this past week, each of which will test whether Washington can summon the resources, political will, and allied cohesion necessary to sustain its global leadership role.
The first was financial. National debt passed forty trillion dollars for the first time, a jaw-dropping figure that resulted last week in Treasury Secretary Scott Bessent’s intervention to prop up the jittery $31.5 trillion US Treasury market. After a brief rally, investors resumed their so-called debasement trades, driving up gold and crypto prices and pressuring the dollar. While the Treasury zeroes in on bond buybacks, Wall Street is focused on realities Bessent didn’t address: stubbornly high interest rates, the loftiest US debt levels in decades, and worries about an artificial intelligence–driven surge of corporate borrowing.
The second was military and strategic. After nearly six months of war, the Trump administration has found that overwhelming US military superiority has failed to provide an acceptable outcome in Iran. So, US President Donald Trump has decided instead to deploy more robust economic weaponry, declaring an “ECONOMIC D-DAY” on Iran. But the offensive is unlikely to succeed fully unless he’s willing to take on China in a manner that he’s avoided thus far—namely, its oil traders and financial institutions. The administration taking such an approach ahead of Trump’s planned September 24 summit with Chinese President Xi Jinping in Washington seems unlikely.
The third has to do with allies, and particularly Canada. This one may be more easily solved than the other two as it only requires two countries’ leaders to reach agreement on a relatively narrow set of issues. However, both Trump and Canadian Prime Minister Mark Carney have dug in since Canadian negotiators walked away from talks on Friday. Other US allies are watching as Carney threatens “dollar for dollar” retaliation once 50 percent US tariffs kick in on twenty billion dollars of Canadian goods. “Canada is becoming stronger and less dependent on America,” Carney said in a fiery Saturday speech. “And we are just getting started.”
The bottom line: The hour of escalating dangers to sustained US global leadership is arriving on several fronts simultaneously—fiscal, military, strategic, and allied. And America’s ammunition to deal with each of them is dwindling.
A drain on resources
The United States remains the world’s richest country, and it still has the most capable military. There is little doubt it has the capacity for extraordinary action financially and militarily. At the same time, however, the United States is consuming both the financial and military reserves of power faster than it is restoring them. It is also confronting increased allied resistance to its economic pressures, symbolized by Canada this week.
Allied attitudes toward the United States are cumulative: governments don’t compartmentalize trade, security, and diplomacy. Among US allies, the Canada showdown compounded Trump’s abrupt decision last week to curtail military exercises with South Korea, in part because Seoul had declined to join the US effort against Iran. These episodes reinforce a growing concern that the Trump administration views long-standing US commitments less as strategic bonds than transactional arrangements, conditional upon compliance with Washington’s immediate wishes.
A superpower can survive forty trillion dollars in debt. It also can survive a costly and inconclusive war. It can survive skirmishes as well with allies, over trade deals and military burden-sharing matters that required change in any case. What the United States can’t do indefinitely is treat money, military capability, and allied loyalty as inexhaustible. Great powers decline when tactical superiority fails to produce strategic results, when their commitments grow faster than their resources, when their leaders choose badly among priorities.
As Russia ramps up its air assault on Ukraine and continues to test NATO allies, and as China presses for advantage against Taiwan and other US interests in the Indo-Pacific, leaders in both countries will be watching Washington.
Tests of credibility and capability
The Wall Street Journal devoted some of journalism’s most valuable real estate, the cover of its Review section on Saturday, to a thoroughly reported essay by Yaroslav Trofimov under the headline, “Is America Still Capable of Defending the World Order?” In it, Trofimov writes:
- “The question that officials in allied—and adversary—capitals are asking themselves is whether industrial decline, strategic incoherence and political dysfunction have weakened the U.S. to the point where it would no longer wield decisive force in a multi-front conflict that may encompass Europe, the Middle East and Asia. It is a concern shared by many in Washington, too.”
The Atlantic Council’s Matthew Kroenig provides his answer to Trofimov’s question in the essay:
- “If you think about deterrence, it’s about capability and credibility.… The question used to be credibility—will the United States really do it? But capability is an important part of this equation. And, with all the reporting about how the U.S. is expending munitions, it’s just logical that adversaries would assume that the U.S. is less capable now than it was several months, or several years, before.”
New tests of American credibility and capability are unfolding in real time, raising questions regarding the sustainability of the dominant US global leadership position of the past eighty years. Writing in the Financial Times, columnist Katie Martin made the direct link between declining US credibility in treasury markets and Iran:
- “Scott Bessent’s running battle with the bond market is starting to look like his boss’s war in Iran—started by his own hand with a tangled set of objectives, an underestimated opponent and an implausible path to victory. And like the conflict in the Middle East, we are all going to suffer its effects.”
A sharp sell-off in ten-year and thirty-year Treasury bonds last week brought US borrowing costs to the highest level since 2007. Last Wednesday, Bessent tried to stabilize the world’s most important bond market by announcing the US Treasury would at least double its purchases of long-term government debt. That prompted a market rally, but it quickly fizzled due to what the Financial Times called investors taking fright “at America’s deteriorating public finances, persistently high inflation and the borrowing binge by Big Tech to finance the AI boom.”
Bond yields ended the day Monday down from last week’s highs, but not by much. The uneasy markets are putting more pressure on new Federal Reserve Chair Kevin Warsh, as the Fed’s annual conference in Jackson Hole, Wyoming, kicks off on Friday.
The cost of “economic D-Day”
Earlier, Bessent turned from bonds to Iran, warning in an op-ed in the Financial Times what Monday would bring: “At dawn begins an economic D-Day—the single greatest financial offensive ever marshalled against an adversary.” He went on:
- “The president has created the conditions to leverage every agency, every authority and action many assumed we would never summon. Any remaining tie to Tehran will hasten the economic ostracism of countries and entities, whether that tie be purposefully constructed or wilfully ignored.”
The Treasury Department followed up Monday afternoon with something that sounded far less historic in nature: its announcement of relatively limited sanctions against entities from China, the United Arab Emirates (UAE), and elsewhere. Bessent described this as a “warning shot,” promising more to come from “Operation Economic Outcast.”
Getting ahead of the new US campaign, the UAE on August 19 ordered a sweeping, open-ended halt to all trade, commercial exchanges, and financial transactions with Iran “until further notice.” Enforcement will be everything, but this could be devastating to Iran. Until now, the UAE has been Iran’s most significant regional commercial gateway, by providing third-country goods, foreign currency, shipping, and sanctions-circumvention networks. Watch this space as the UAE has the potential to close a financial circulatory system through which Iran has survived sanctions.
The big question is how will Beijing react? While it’s unlikely that China will help the United States punish Iran, its behavior will be more important than its rhetoric. China is sure to respond harshly to any US secondary sanctions on its companies or financial institutions, up to and including restricted access to the critical minerals needed by US defense and tech industries.
The administration knows this. When Bessent was asked Monday why he did not impose harsher immediate penalties, he replied: “Why would I want to blow up the global financial system?” Instead, deft diplomacy could provide quiet Chinese help in de-escalating the situation, working behind the scenes to do more to constrain Iran given its larger interests in the Gulf and with energy flows.
The Trump administration faces a fourth depleting reserve: political time. Midterm elections are approaching in ten weeks, and the outcome could be divided government, congressional investigations, and potentially paralyzing disputes over war powers and spending. Soon thereafter, the 2028 presidential campaign will gear up, and it could be the most consequential election since the end of the Cold War. It will determine not merely who succeeds Trump, but also whether either party can offer a sustainable definition of American leadership—along with the financial resources, military capability, political will, and allies to support it.