By Valery Bonakhau

Financial warfare is conventionally understood as an instrument applied to declared, identifiable assets. Common tactics include freezing accounts, cutting off correspondent banking access, and market delisting of entities. The Hormuz conflict of March 2026 introduced a structurally distinct mechanism operating on none of those principles. What follows is an analysis of that mechanism — how it emerged, how it functions, and why existing maritime security frameworks are not adapted to recognize it.

Executive Summary

In March 2026, the Hormuz conflict introduced a financial warfare instrument that most strategic analysts have not yet identified. Not the oil price shock. Not the insurance premium surge. This new instrument was the systematic immobilization of cargo in transit as active leverage. At peak, approximately 140 million barrels of oil were rendered undeliverable in the Persian Gulf.

This constitutes a new class of coercive instrument distinct from sanctions and asset seizure which shall be termed the weapon of frozen assets. The weapon of frozen assets is defined as a condition in which a supply chain position becomes illiquid through the convergence of three independent constraint systems. No freezing authority issues an order. No asset is formally declared blocked. The system constructs itself empirically.

The Mechanism: Frozen Assets as Active Leverage

Conventional financial warfare operates on declared assets: accounts frozen by executive order, correspondent banking access removed, entities delisted. The target knows what has been frozen. The freezing authority controls the instrument. What emerged in March 2026 is structurally different.

The blocked assets are not declared. They are positional.

A positional asset is a contractual, logistical, or financial state that becomes unrealizable under specific conditions. A vessel at anchor awaiting Iranian permission is a positional asset. How many such vessels are waiting — UKMTO, Kpler, and Lloyd’s List count them. The fact is recorded. The mechanism is not. Monitoring systems see the symptom: the vessel is stationary. Why every possible exit is simultaneously blocked — without a single official order, without a sanctions list, without a formal prohibition — is a question they do not ask. This is why the weapon of frozen assets went unidentified.

A very large crude carrier (VLCC), a supertanker exceeding 200,000 deadweight tons, carrying two million barrels of Abu Dhabi crude in transit becomes an unrealizable asset the moment it cannot deliver cargo, cannot obtain war-risk coverage for forward transit, or return to port without losses exceeding the cargo value. Returning is not a neutral option as the vessel has already paid freight, fuel, and port fees. A reversal means a new charter back, penalties for breach of the delivery contract, and the loss of sums already paid. The operator had done everything correctly. The cargo was legitimate. The documentation was clean. None of that mattered.

This is the weapon of frozen assets, and countermeasures have not been found.

In any conflict, equipment and personnel losses are counted. Financial warfare produces losses of a different kind: 1,600 vessels at anchor, billions of dollars of cargo going nowhere, and tens of thousands of trapped mariners. Kpler records these losses via satellite.

However, losses are not the weapon but the consequence of its use.

The weapon is the mechanism that created them. Three systems operate simultaneously without a single official order: a permit regime, an insurance barrier, and legislative formalization. None of them formally blocks a vessel, but together they make forward progress impossible.

Jask & the Architecture of Asymmetry

The weapon of frozen assets functions only if Iran can credibly threaten Hormuz while maintaining its own export capability. Without that asymmetry, mutual blockade produces symmetric damage, and the weapon loses its leverage.

Forty years of sanctions were not wasted. Iran spent four decades preparing for this scenario. The scale of Iranian preparation was systematically underestimated by external analysts.

The centerpiece is Jask, Iran’s only oil export terminal located outside the Strait of Hormuz. Crude reaches Jask via the Goreh-Jask pipeline from Bushehr province. Kpler data shows the terminal’s first loading in the current conflict was on March 7, 2026: tanker Dore, 2 million barrels. Design capacity is 1 million barrels per day, and effective capacity is estimated by the EIA and Kpler at approximately 300,000 barrels per day. Inside the Gulf, Iran also operates smaller terminals at Lavan Island, Sirri Island, and Soroosh. These terminals are primarily for cargo top-ups and are typically unable to receive fully loaded VLCCs.

This asymmetry is not incidental. It is the structural condition that makes the weapon of frozen assets viable as a sustained instrument rather than a one-time escalation. Iran can impose transit uncertainty on all other operators while maintaining its own revenue flow. This is not mutual deterrence. It is a directional weapon.

The asymmetry gives Iran a sorting mechanism. States that acquiesce receive access. Adversaries pay an uncertainty premium. Those undecided find their exposure used as an argument for compliance.

There is one further dimension that external analysis has underweighted. Fortune reports that Iran is exploring rail shipments of petroleum products to China via the China-Iran freight corridor, a 5,300-kilometer route through Turkmenistan and Kazakhstan that cuts transit time from 30-40 days by sea to 14-15 days by land. The critical caveat is that railways cannot transport bulk crude oil on an industrial scale. The rail corridor handles petroleum products, petrochemicals, and high-value goods. It is a contingency channel, not a replacement for tanker volumes. Nonetheless, its existence means Iran has built redundancy into its trade architecture that was not present in any previous standoff.

The Insurance Architecture as Operationalization

Within the first week of the conflict, Lloyd’s of London syndicates sharply repriced Hormuz transit coverage. War-risk premiums reached 2.5% to 5% of hull value per transit — $10 to $14 million for a single VLCC voyage. The Lloyd’s Market Association confirmed on March 23, 2026 that insurance was not withdrawn outright and coverage remained technically available. However, at rates approximately sixty times pre-conflict levels, the practical effect was identical to withdrawal. Operators consistently report that the primary constraint is physical danger to crew. The insurance architecture amplified that constraint into a financial impossibility for most commercial transits.

New coverage was available only through the DFC (U.S. International Development Finance Corporation) reinsurance facility and only for U.S.-flagged vessels or vessels with U.S. commercial interests at premium levels that rendered most commercial transits economically unviable. The two-tier structure was partly a design choice and partly a capacity constraint that no one had modeled in advance. On April 3, DFC expanded the program to $40 billion, adding six new underwriters. There is little evidence of actual utilization. The mechanics of this structure and its limits are analyzed in detail in RUSI Commentary on April 2, 2026.

Iranian legislative action on Hormuz transit developed in stages. In late March 2026, the parliamentary National Security and Foreign Policy Commission approved a 12-article bill titled “Consolidation of Iran’s Sovereignty in the Strait of Hormuz” and forwarded it to the Presidium of the Majlis. On March 31, the commission chairman stated: “47 years of hospitality are over forever.” As of May 7, 2026, the bill has not yet passed a full plenary vote — but Tehran has not waited for the law to implement its provisions operationally.

On May 5, 2026, Iran launched the Persian Gulf Strait Authority (PGSA): an official body with a formal email address providing a single window for arranging transit authorization with the IRGC Navy. Vessels must complete a “Vessel Information Declaration” disclosing ownership, insurance, crew manifests, and intended routes before receiving a transit permit. CNN obtained the form from Lloyd’s List. Richard Meade, editor-in-chief of Lloyd’s List, stated that Iran had positioned the PGSA as “the only valid authority to grant permission to ships transiting the straits,” per AGBI. As Splash247 noted, the creation of the authority gives Iran’s toll regime a veneer of bureaucratic legitimacy but resolves none of its legal problems as the IRGC remains a U.S.-designated foreign terrorist organization.

The convergence of three conditions — permit-based transit access, insurance-conditioned financial viability, and legislative formalization — produced the situation described above. A vessel operator simultaneously facing a permit fee demand, a repriced insurance market, and a formally constituted Iranian transit authority has no commercially viable path forward. Remove any one of those three constraints and the trap does not hold at scale. As of this writing, all three remain in force.

In existing analytical literature, this mechanism has not been described as a distinct instrument. It is not a single mechanism. It is what occurs when three independently operating constraint systems act simultaneously.

The $2 Million Question: Sanctions Exposure

The closest historical analogy is the ongoing management of the Suez Canal. Egypt has collected billions for passage through a waterway that geography created and lawyers formalized. What Iran did in March 2026 is structurally near identical with one distinction: the Suez Canal Authority holds a legal mandate. The Iranian corridor does not.

The $2 million is not the central issue. The central issue is that someone paid it. That payment is the precedent.

According to verified Bloomberg data, the Islamic Revolutionary Guard Corps’ (IRGC) base rate is $1 per barrel of crude, which translates to $2 million per transit for a VLCC-class vessel. On April 2, the container vessel CMA CGM Kribi, flagged in Malta and operated by French carrier CMA CGM, became the first Western European-operated vessel to transit Hormuz since the conflict began. The payment mechanism has not been officially disclosed. That same day, France vetoed a UN Security Council resolution that would have authorized military reopening of the strait. The timing is not coincidental.

In a single day, Paris appears to have settled its transit terms and blocked the resolution that would have rendered those terms unnecessary. This is the first documented instance of a NATO member acting openly at variance with allied positions based on national commercial interest alone. The precedent was not set by Tehran. It was set by Paris.

Payments were routed in Chinese yuan or through stablecoins, cryptocurrencies pegged to fiat currency values. Not dollars. This is deliberate architecture. The IRGC has constructed a five-tier system that ranks flag states by degree of political alignment. Yuan-denominated transactions fall entirely outside the dollar clearing system. Stablecoins settle on blockchain rails, circumventing traditional bank intermediaries.

Secretary Bessent’s March 16 statement addressed oil flows, not payment flows. On March 20, OFAC issued General License U (GL U), authorizing transactions necessary for the delivery and sale of Iranian-origin crude loaded prior to March 20 through April 19. GL U addressed oil flows. No authority addressed payment flows at that time. Baker McKenzie analysis confirms GL U was the first OFAC general license broadly authorizing transactions involving Iranian-origin crude oil.

That gap has since been partially closed — but only for U.S. persons. On May 7, 2026, OFAC updated its FAQ, stating: “Payments to the government of Iran or the Islamic Revolutionary Guard Corps (IRGC), directly or indirectly, for safe passage through the Strait of Hormuz would not be authorized for US persons, including US financial institutions, or for US-owned or -controlled foreign entities.” For non-U.S. operators, the legal ambiguity persists. GL U itself expired on April 19, 2026 and was not renewed — Secretary Bessent announced on April 15: “We will not be renewing the general license on Iranian oil.” Financial institutions are left with a compliance question Washington has answered only partially.

Implications for Maritime Security Planning

The situation described above is a structural trap. Documentation was clean. Cargo was legitimate. Every obligation was met. Yet the environment developed a permit system with no legal foundation, an insurance market repriced beyond commercial viability, and a sanctions framework that no authority is applying consistently to non-U.S. operators.

Four implications follow that current maritime security frameworks do not yet account for:

First, the unit of analysis for financial warfare in maritime conflict is the position, not the asset. Existing frameworks are designed around declared, identifiable assets. The weapon of frozen assets operates on positions — contractual, logistical, and financial states that become impossible to exit under specific conditions. A vessel at anchor awaiting an Iranian permit does not trigger any standard financial warfare indicator. This category of exposure is invisible to frameworks built for a different instrument.

Second, the DFC facility has set a precedent. Beijing and Tehran will both model the DFC response as a baseline constraint on U.S. escalation tolerance. The template is now established, and one can only wonder how this precedent will impact future action in the Taiwan Strait, the South China Sea, or the Turkish Straits. The RUSI analysis of the first DFC cycle examines this in detail. France demonstrated the practical consequence: when transit access is available at a price, commercial interest overrides coalition position.

Third, the weapon is self-sustaining once deployed. It does not require active maintenance. The permit regime, the insurance repricing, and the legislative structure each reinforce the others. Dismantling any single layer does not dissolve the trap as the Project Freedom experience confirms.

Finally, the legal architecture is deliberately ambiguous for non-U.S. operators. Tehran has structured the toll regime to create maximum uncertainty for third-country shipping firms: pay and risk U.S. secondary sanctions or refuse and remain stranded. That ambiguity is not a design failure. It is the instrument.

Conclusion

On May 4, the United States launched Operation Project Freedom, deploying guided-missile destroyers, over 100 aircraft, and 15,000 service members to guide neutral vessels out of the Persian Gulf. The operation was paused within 48 hours. Only two vessels transited through the Gulf. Approximately 1,600 remain stranded with the IMO reporting approximately 20,000 mariners aboard nearly 2,000 vessels trapped in the Gulf. Pre-war traffic through Hormuz averaged 120 crossings per day. The same day Project Freedom was paused, Iran launched the Persian Gulf Strait Authority, a formal bureaucratic structure with an official email address, application forms, and a stated mandate to regulate all Hormuz transit. The convergence of three constraints that produced the weapon of frozen assets has not been dismantled. It has received institutional form and will continue to evolve the longer the situation in the Gulf continues.

Valery Bonakhau is an Independent Analyst in Dubai. He spent two decades in capital management across Commonwealth of Independent States (CIS) and United Arab Emirates (UAE) markets before transitioning to independent research. His work applies financial mechanism analysis to geopolitical forecasting, identifying the structural constraints that force political decisions before they occur.

Featured Image: U.S. forces disabled M/T Sevda, an Iranian oil tanker, on May 8 prior to it entering an Iranian port on the Gulf of Oman in violation of the U.S. blockade of Iranian ports and the Strait of Hormuz. (U.S. Central Command photo)

By Michael D. Purzycki

Advocates of free trade often criticize the Jones Act as an unnecessary protectionist measure. Today, with inflation and supply chain weaknesses prominent in the news, the requirement for all cargo moving between American ports to be transported by U.S.-flagged ships strikes many as a senseless increaser of prices. Critics allege that the Jones Act makes intra-U.S. shipping “prohibitively expensive,”¹ and call for “repeal or significant reform of this outdated law.”² Why, they ask, should consumers pay higher prices so American sailors can protect jobs that foreign sailors could do just as well, for less money?

However, a strong case for the Jones Act can be found in the writing of one the first great advocates of the free market: Adam Smith. While he is remembered as the father of modern capitalism, he did not believe in market forces reigning supreme in every sector of the economy. One of the exceptions to his laissez-faire beliefs was the Navigation Acts, Britain’s equivalent of the Jones Act in Smith’s time, which he defended on national security grounds.

There is a lesson in Smith’s stance for the Jones Act’s critics. All sectors are not created equal – those that help support national security are different in importance, and different in the need for government intervention, from those that support private consumption. By giving American seafarers opportunities to practice their skills, the Jones Act helps the United States prepare for great power conflict. This is especially vital when Russia’s invasion of Ukraine has reminded the world how important NATO is to international security, and how vital it is for the U.S. to be ready to quickly defend its allies when they are attacked.

The Importance of the Merchant Marine

Passed in 1920, the Jones Act was intended to rectify a national security weakness that had emerged during World War I. As the Navy League has put it, “having realized the nation’s merchant fleet was not independently robust enough to neutralize German attacks,” Congress was determined not to allow such vulnerability in future conflicts.³ By making the transportation of cargo between domestic U.S. ports the preserve of American ships and their crews, it sought to give the U.S. Merchant Marine experience that would prove valuable during another major war.

If there were ever a situation in which the Merchant Marine proved its worth, it was World War II. Merchant mariners were the ones who brought American weapons, ammunition, and food to Britain in the face of Nazi U-boats. Their casualty rate was higher than any branch of the military, with 9,300 merchant mariners killed.⁴ But thanks to the Merchant Marine, when the Allies began to liberate Europe from Hitler, “[n]o Allied army was ever driven back from a hard-won beachhead for lack of supplies,” as TIME put it in 2016.⁵

Today, thanks to the Jones Act, the U.S. has “thousands of skilled mariners who, during surge sealift operations, can operate government-owned sealift vessels and provide supplemental crews on international fleet ships,” in the words of the Navy League.⁶ The act has endured for more than a century despite long-standing criticism from those whose belief in free trade trumps what value they might see in America’s sealift capability. For the sake of national and international security, it should be kept in place; however, many voices continue to clamor for its repeal.

When Free Trade Works

There are cases in which free trade makes geopolitical as well as economic sense. After World War II, the U.S. undertook the reconstruction of Western Europe and Japan, helping to ensure they would not fall into the Soviet orbit during the Cold War. It did this not only through direct funding efforts like the Marshall Plan, but by opening the American market to European and Japanese exports, helping to revive industrial bases devastated by the war. As Robert D. Atkinson and Michael Lind noted in American Affairs in 2019, when West German and Japanese industries began to gain ground against their American competitors, “the U.S. government looked the other way (or in some cases, provided active support for these policies), in the interest of a unified alliance against the Soviet Union.”⁷ Pairing NATO and the U.S.-Japan alliance with economic growth across the Atlantic and Pacific tightened the links between the U.S. and its allies in the struggle against communism.

Similarly, had the United States ratified the Trans-Pacific Partnership (TPP), today it would be standing at the head of a twelve-nation bloc making up 40% of the world’s GDP – including highly developed economies like Japan, Australia, Singapore, and Chile – while pointedly excluding China.⁸ The U.S. would be taking the lead in writing the rules of trade in the Pacific, rules serving the interests of American industries and workers rather than the Chinese Communist Party. Instead, since the U.S. abandoned the TPP, a successor agreement has emerged – one that China now seeks to join.⁹

The value of excluding China points to the need for a national security exception to free trade. While Vladimir Putin’s war in Ukraine has understandably focused the world’s attention on eastern Europe, a Chinese invasion of Taiwan, or a Chinese attack on Japan, is a continuous possibility. When conflict with rival great powers is on policymakers’ minds, sealift capability should be, too. If the U.S. cannot get its troops and their supplies to the front, it will be at a disadvantage. A country unable to protect its vital interests is a country unable to enjoy the benefits of international trade.

Can the U.S. Do Sealift?

Today, America’s ability to bring its forces and supplies to battle is far from certain. In January 2020, Rear Admiral Mark Buzby told the Surface Navy Association Symposium that, in a September 2019 exercise to test the Ready Reserve Force’s ability to sail on short notice, only about 40% of the vessels involved proved ready to leave port.¹⁰ This is a troubling statistic at a time when the U.S. may have to rapidly move personnel and equipment across the Atlantic to protect NATO allies from Putin’s forces.

Meanwhile, an October 2020 report by CNA on COVID-19’s effects on seafarers around the world, described “despair in the US Merchant Marine.” It was unclear whether Military Sealift Command’s (MSC) “Gangways Up” policy, keeping mariners on their ships to protect them from the pandemic, was truly “balancing the health of the fleet with the wellbeing of the mariners.”¹¹ Mariners’ health should be factored into discussions of the Jones Act. If the crews who transport troops and equipment are not physically or mentally healthy, even vessels ready to set sail may not be of much use.

These vulnerabilities coincide with the relatively low priority the U.S. places on military sealift. At a February 2022 conference of the National Defense Industrial Association, Eric Labs, a naval analyst at the Congressional Budget Office, described sealift as the “black sheep” of shipbuilding.¹² Even though sealift vessels move about 90% of Army and Marine Corps combat equipment and supplies, less than two percent of the Navy’s shipbuilding budget is being allocated to sealift platforms.¹³ If low investment in vessels is paired with the U.S. undermining the crews needed to man those vessels, American sealift could be doubly weakened when the country needs it.

Britannia Ruled the Waves

When 17^th century England sought to become the world’s preeminent sea power, it understood the importance of a nation’s hard power to its trade. Beginning in 1651, the Navigation Acts sought to ensure England had a robust maritime workforce. The first act, passed during England’s brief period as a commonwealth after the execution of King Charles I, read:

“…no Goods or Commodities whatsoever, of the Growth, Production or Manufacture of Asia, Africa or America, or of any part thereof…as well of the English Plantations as others, shall be Imported or brought into this Commonwealth of England, or into Ireland, or any other Lands, Islands, Plantations or Territories to this Commonwealth belonging, or in their Possession, in any other Ship or Ships, Vessel or Vessels whatsoever, but onely in such as do truly and without fraud belong onely to the People of this Commonwealth, or the Plantations thereof, as the Proprietors or right Owners thereof; and whereof the Master and Mariners are also for the most part of them, of the People of this Commonwealth”¹⁴

After the monarchy was restored in 1660, King Charles II continued the policy. The second Navigation Act, passed in the first year of his reign, stated:

“…noe Goods or Commodities whatsoever shall be Imported into or Exported out of any Lands Islelands Plantations or Territories to his Majesty belonging or in his possession or which may hereafter belong unto or be in the possession…in any other Ship or Ships Vessell or Vessells whatsoever but in such Ships or Vessells as doe truely and without fraude belong onely to the people of England…or are of the built of, and belonging to any of the said Lands Islands Plantations or Territories as the Proprietors and right Owners therof and wherof the Master and three fourthes of the Marriners at least are English.”¹⁵

This was, as James Fallows noted in a 1993 Atlantic article comparing different philosophies of trade, “blatantly protectionist legislation.”¹⁶ At first glance, these laws appear likely to alienate an advocate of the free market like Smith. And yet, the patron saint of capitalism supported them.

Smith’s National Security Exception

In his 1776 magnum opus, An Inquiry into the Nature and Causes of the Wealth of Nations, Smith wrote:

“The defence of Great Britain, for example, depends very much upon the number of its sailors and shipping. The act of navigation, therefore, very properly endeavours to give the sailors and shipping of Great Britain the monopoly of the trade of their own country, in some cases, by absolute prohibitions, and in others, by heavy burdens upon the shipping of foreign countries.”¹⁷

And:

“As defence, however, is of much more importance than opulence, the act of navigation is, perhaps, the wisest of all the commercial regulations of England.”¹⁸

There is a sense in which Smith’s position should not be especially surprising. His book is, after all, about the economic strength of nations, not individuals or corporations. Given his understanding of the need for geopolitical power to protect trade, it makes sense that he would favor British seafaring strength over market forces when the two conflicted.

America’s strength and prosperity, like Britain’s before it, has always depended on maritime power. Like the Royal Navy in the 18^th and 19^th centuries, the United States Navy is the ultimate guarantor of its country’s preeminence on the world stage, both economically and politically. And like Smith’s Britain, today’s America requires a capable maritime workforce, one that can regularly exercise its skills, so it is prepared for war when the time comes.

Follow Smith’s Example

At a time of high inflation, it is understandable that consumers and their representatives would look for any possible way to lower prices. But quickly putting more money into people’s pockets is not the only aim of public policy with a maritime component. National security, including the ability of a country to win conflicts and protect its interests abroad, makes national prosperity possible in the long term – and conflicts like the current war in Ukraine show just how vulnerable economic forces are to the military power of America’s rivals.

As a superpower whose closest allies are oceans away, the U.S. must always be able to bring its troops and their supplies quickly across those oceans to its allies’ defense. The current threat of Russia, and the long-term threat of China, should focus policymakers’ attention on sealift capability. Keeping the Merchant Marine in good working order is in America’s interest, even if it raises prices a little. In the spirit of Adam Smith, and his nuanced understanding of markets and security, the U.S. should keep the Jones Act in place.

Michael D. Purzycki is an analyst, writer, and editor based in Arlington, Virginia. He has worked for the United States Navy, Marine Corps, and Army. In addition to CIMSEC, he has been published in Divergent Options, Merion West, the Washington Monthly, Wisdom of Crowds, Charged Affairs, Braver Angels, and more. He can be found on Twitter at @MDPurzycki and on Medium at https://mdpurzycki.medium.com/. The views expressed here are his own.

References

¹ The Editors. “Supply-Chain Crisis Isn’t Going Away.” National Review, December 15, 2021. https://www.nationalreview.com/2021/12/supply-chain-crisis-isnt-going-away/#slide-1

² Grabow, Colin, and Inu Manak. “The Case against the Jones Act.” Cato Institute, June 2020. https://www.cato.org/books/case-against-jones-act

³ Navy League of the United States. “China’s Use of Maritime for Global Power Demands a Strong Commitment to American Maritime.” November 2020. https://navyleague.org/wp-content/uploads/2020/11/2020_Jones-Act_digital.pdf

⁴ Geroux, William. “The Merchant Marine Were the Unsung Heroes of World War II.” Smithsonian Magazine, May 27, 2016. https://www.smithsonianmag.com/history/merchant-marine-were-unsung-heroes-world-war-ii-180959253/

⁵ Geroux, William. “World War II Shows Why We Need the Merchant Marine.” TIME, April 21, 2016. https://time.com/4303121/world-war-ii-merchant-marine/

⁶ Navy League of the United States. “China’s Use of Maritime for Global Power Demands a Strong Commitment to American Maritime.” November 2020. https://navyleague.org/wp-content/uploads/2020/11/2020_Jones-Act_digital.pdf

⁷ Atkinson, Robert D., and Michael Lind. “National Developmentalism: From Forgotten Tradition to New Consensus.” American Affairs, Summer 2019. https://americanaffairsjournal.org/2019/05/national-developmentalism-from-forgotten-tradition-to-new-consensus/

⁸ Granville, Kevin. “The Trans-Pacific Partnership Trade Accord Explained.” New York Times, July 26, 2016. https://www.nytimes.com/2016/07/27/business/international/the-trans-pacific-partnership-trade-accord-explained.html

⁹ Reuters. “China applies to join Pacific trade pact to boost economic clout.” September 17, 2021. https://www.reuters.com/world/china/china-officially-applies-join-cptpp-trade-pact-2021-09-16/

¹⁰ Werner, Ben. “Test of Ready Reserve Force Exposes Need For Newer Ships, More People.” U.S. Naval Institute, January 16, 2020. https://news.usni.org/2020/01/16/test-of-ready-reserve-force-exposes-need-for-newer-ships-more-people?utm_source=USNI+News&utm_campaign=b5cddb026e-USNI_NEWS_DAILY&utm_medium=email&utm_term=0_0dd4a1450b-b5cddb026e-234331785&ct=t(USNI_NEWS_DAILY)&mc_cid=b5cddb026e&mc_eid=bf408583f1

¹¹ Tallis, Joshua, Cornell Overfield, Kevin Inks, and Cherie Rosenblum. “Adrift: COVID-19 and the Safety of Seafarers.” CNA, October 2020. https://www.cna.org/CNA_files/PDF/CSI-2020-U-028490-Final.pdf

¹² Harper, Jon. “Military Sealift Considered ‘Black Sheep’ of Shipbuilding Family.” National Defense, March 25, 2022. https://www.nationaldefensemagazine.org/articles/2022/3/25/military-sealift-considered-black-sheep-of-shipbuilding-family

¹³ Ibid

¹⁴ “An Act for increase of Shipping, and Encouragement of the Navigation of this Nation.” https://www.british-history.ac.uk/no-series/acts-ordinances-interregnum/pp559-562

¹⁵ “An Act for the Encourageing and increasing of Shipping and Navigation.” https://www.british-history.ac.uk/statutes-realm/vol5/pp246-250

¹⁶ Fallows, James. “How the World Works.” Atlantic, December 1993. https://www.theatlantic.com/magazine/archive/1993/12/how-the-world-works/305854/

¹⁷ Smith, Adam. “An Inquiry into the Nature and Causes of the Wealth of Nations.” https://www.gutenberg.org/files/3300/3300-h/3300-h.htm

¹⁸ Ibid

Featured Image: A large banner bearing “Jones Act” is featured on a large container ship (Credit: Kendra Seymour).

By Michael A. Dennis and Anand Toprani

Part One introduced readers to an idea, Modern Monetary Theory (MMT), which challenges many of the shibboleths of public finance, most notably the desirability of balanced budgets. In The Deficit Myth, author Stephanie Kelton described her conversion to MMT as a Copernican moment in which the scales suddenly fell from her eyes. She now understood that currency “issuers” have utterly different problems than currency “users.”

To illustrate this point, Kelton described a thought experiment she conducted while working in the U.S. Senate. She asked her fellow staffers on the Budget Committee if they would abolish the U.S. national debt and nearly all agreed. She then asked if they would rid the world of Treasury bills. The very same people now hesitated, realizing instinctively that Treasury bills and the national debt are identical – the two sides of the government ledger that must balance.

Subconsciously, far too many public officials and national security professionals remain in thrall to a Gold Standard mentality about finance – specifically the notion that a paper currency must be “backed up” by something precious to have any value. During the heyday of the Gold Standard before 1914, a nation’s money supply was tied to the quantity of gold it possessed, but the last remnants of that system vanished in 1971, when President Richard Nixon refused to convert U.S. dollars for gold.

As Kelton realized, the end of the Gold Standard did not mean an end to Gold Standard thinking. Even those well-versed in financial matters could not grasp that the supply of money was not tied to the supply of some metal stored in a vault.

The Peril and Power of MMT

The pandemic has shown MMT’s power, although proponents have not really claimed it as their vindication. Instead, the pandemic has become, like the 2008 Financial Crisis, another demonstration of John Maynard Keynes’ continuing relevance. This is a welcome development, but Keynes is perhaps not as useful for dealing with the challenges we face moving forward. If Copernicus removed Earth from the center of the solar system, MMT essentially removes money from the center of economics and replaces it with politics – who gets what, when, and how in Harold Lasswell’s immortal turn of phrase.

Without resorting to scaremongering about “hyperinflation,” there are plenty of legitimate criticisms of MMT. Kelton unfortunately relied on bad history in the service of good politics. For instance, she claimed that “Deficits did not stop Franklin Roosevelt from implementing the New Deal,” which echoes right-wing condemnations of FDR more than the judgments of sober historians. She also asserted that there is a causal relationship rather than just a correlation between periods of deficit reduction and financial crises. Boiling down a number of 19^th century panics or the collapse of the international financial system after 1929 to American presidents’ debt reduction is a form of historical reductionism that obscures the complex sources of global financial crises. It is no different than claiming that the 2008 crisis was the fault of minority U.S. homeowners defaulting on their mortgages.

At this point, supporters of MMT might accuse this article of historical nitpicking. The authors would counter that any political program is stronger if rests upon a solid historical foundation.

There are also numerous reasons to be skeptical of MMT from the perspective of political economy (the interrelationship of political and economic affairs). Supposedly, monetary sovereigns have no deficit constraints if they control their own monetary supply and borrow in their own currency. This is true but only up to a point.

First of all, conflating monetary sovereignty with being a currency issuer seems a rather narrow definition of sovereignty. According to the Mundell-Fleming Trilemma, if a government chooses to embrace monetary sovereignty (narrowly defined as an independent monetary and fiscal policy), it must choose between stable exchange rates and capital mobility. During the Bretton Woods era, the nations of the developed world chose the former, and afterward, the latter. There were many reasons they went in these directions, but they had to make a choice. Once a country has committed itself to capital mobility and independent monetary/fiscal policy, it must accept the risks posed by fluctuating interest rates.

Additionally, although its supporters never acknowledge it, MMT poses risks for countries that must purchase large quantities of goods in foreign currencies even if they are monetary sovereigns. Consider the example of Britain, which is dependent on imports of any number of goods as well as capital for its financial services sector. One term that never appears in The Deficit Myth is the “twin-deficits hypothesis” – the idea that government deficits might worsen a nation’s trade balance by encouraging domestic consumption, which can raise domestic prices if the economy is at or near capacity or encourage imports. Unless earnings by foreigners are converted into bonds to cover government deficits, the importing nation will suffer currency depreciation.

This is a real danger for all countries that must purchase goods in foreign currencies. While Britain has monetary sovereignty, what would happen to its exchange rate if its budget deficit causes its current-account deficit to balloon? Either its exchange rates will deteriorate, which will happen for a country dependent on imports, or it must impose capital controls. Keynes was not afraid of capital controls and had a clear preference for limited external trade but adopting his mindset would entail a radical transformation of British society.

Furthermore, what about all the countries that do not have to worry about the deficit constraint but are not monetary sovereigns? The German government, for example, can borrow in its own currency, but it is not a currency issuer – rather, it is the European Central Bank. Nevertheless, the nominal interest rate on German debt has been 1% or less since 2012. Not every member of the Eurozone enjoys such a luxury – why? Is it because Germany is such a valued customer or because it generates massive current-account surpluses? Despite this uncertainty, Germany enjoys considerable fiscal flexibility even though, according to MMT, it should not.

The reality is that MMT, while a compelling theory for understanding how states can use their control of money to achieve specific political ends, has little to say about the structure of economies or how best to allocate resources. As our colleague Mark Blyth put it in his inimitable fashion, MMT assumes: “Get the money right and everything else follows.”

The example of Germany shows that MMT has it entirely backward – states must get the economy “right” before they can take advantage of the monetary/fiscal opportunities of MMT. Specifically, the Germans can afford to ignore deficits today because they spent decades building an industrial Exportweltmeister that is the envy of the world. It is the sacrifices of ordinary Germans that makes their nation such an appealing counterparty rather than the worries of German elites about hyperinflation and rejection of budget deficits.  

The Ironies of MMT

For an idea associated with the social-democratic left, MMT shares neoliberalism’s dim view of democratic oversight. Kelton is critical of the Federal Reserve’s technocratic management, with its inflation phobia and search for the “Non-Accelerating Inflation Rate of Unemployment” (NAIRU). Granted, Uncle Sam’s track record at managing tax policy to compensate for inflation hardly inspires confidence, either – as evidenced during the 1960s, when taxes could not reduce consumption fast enough during the boom in spending resulting from the Vietnam War and the Great Society. Therefore, Kelton wants to substitute rule by central bankers with automatic legislative stabilizers that modify government spending to account for inflation or unemployment. In other words, she is substituting one form of technocratic governance by financiers for another led by MMT economists.

Implementing such a system depends less on economic persuasion than political power. Such power is essential for stabilizing this arrangement at home and abroad. We have already seen, however, that some nations can only do the former but not latter. In fact, the only true monetary sovereign capable of fulfilling the promise of MMT is also the closest thing the world has to a hegemon – the United States.

The United States is a monetary hegemon because the world is denominated in dollars, not renminbi, sterling, euros, or yen. Despite the rise of China, the U.S. dollar still accounts for over 60% of central bank reserves and over 40% of all cross-border loans, international debt securities, global trade invoicing, and payments through the SWIFT system (the Society for Worldwide Interbank Financial Telecommunications, which governs how banks communicate financial transactions across international borders). This hegemony is not without its costs – a higher dollar makes U.S. exports less competitive – but it allows the United States to exert a degree of influence over world affairs beyond what its other instruments of national power could deliver by themselves.

The Risk of Ignoring the Power Pyramid

Given the extent of this power, it is remarkable that the United States has done so much to undermine Susan Strange’s pyramid of national power, described in Part One: military force, productive capacity, financial strength, knowledge production, and maintenance. Whether by restricting immigration, cutting the funding for research and development, or imposing sanctions with an unprecedented alacrity against its allies as well as its rivals, administrations of both parties have displayed little awareness of the factors that made the United States a great power.

As a result, they have presided over the gradual evaporation of the United States’ technological edge. For example, the United States, once the source of the world’s most powerful computer chip designs, is no longer the world’s leader in this vital technology. The Taiwan Semiconductor Manufacturing Company (TSMC) is the most advanced fabrication plant in the world capable of rendering the 5 nm chips that lie at the heart of Apple’s future laptops and phones.

People – and not just Americans – pay for these chips and the products housing them in dollars, but how much longer will that be the case in a world where the “most important” real estate for the world economy is in Taiwan rather the United States? Fortunately, Taiwan remains a de facto U.S. ally, but what happens if China achieves its goal of chip independence –a quest fueled, in part, by the Trump and Biden administrations’ restrictive trade policies?

This transition of technological power away from the United States is evident in the most ordinary of circumstances. Consider one of the most-popular apps on the phones of America’s youth: TikTok. Despite the fact that TikTok’s Chinese owner, ByteDance, is not part of an industry that benefited from Chinese government patronage, the AI in TikTok is apparently beyond the skills of U.S. programmers, which explains the U.S. government’s wariness toward TikTok’s Chinese origins. U.S. government efforts to engineer that company’s sale to an American firm appear to have stalled, but Washington has nonetheless set a dangerous precedent – the United States relied on political coercion to stem the dissemination of a superior Chinese product irrespective of consumer preferences.

It might seem ridiculous to national security professionals to think that China’s development of an app to share user-generated videos presages a geopolitical revolution, but consider the following point. Despite crushing Nazi Germany and sending the first man into space, the Soviet Union never produced something that an American firm could not match or better, much less a consumer good that captured the United States’ youth demographic.

Perhaps worse, the country is discouraging the best means of redressing the qualitative difference between Chinese and U.S. firms: immigration. These immigrants play a vital role in the worldwide knowledge economy – the vaccines Americans are counting on to deliver them from the pandemic are the result of small firms populated by immigrants either in the United States or, in the case of the Pfizer vaccine, in Germany. In the alternative universe where Donald Trump won a second term in 2020, U.S. research productivity would further suffer due to the restrictions on visas for graduate students and postdocs in the physical and biomedical sciences. U.S. universities have already taken a financial hit since foreign students often pay the retail tuition price, especially students from China.

MMT: An Incomplete Solution

If MMT is the answer to some of the most challenging threats confronting the United States – notably the transition to a green economy – Americans cannot afford to forsake the preservation of U.S. monetary hegemony. U.S. hegemony does not rely on the crude metrics of earlier generations – numbers of soldiers and weapons, or steel, coal, and oil production – but rather on something both more ephemeral and durable: the confidence of the rest of the world that it can benefit from U.S. hegemony.

If debt is not really the constraint but rather inflation, as MMT advocates contend, the next question Americans must answer is how the government should mobilize its seemingly unlimited fiscal resources. Military strength is a vital component of Strange’s pyramid, but it seems the United States has reached the point of diminishing marginal returns. New weapons take too long to develop and cost too much to mass produce. Despite record budgets, U.S. military aircraft and ship readiness rates are deficient, which has problematic implications for the readiness of the rest of the military, and the Pentagon has been of modest help during the pandemic.

Rather than continuing to pour money down the defense sinkhole to purchase new weapons when it cannot maintain the ones the country already has, the United States should be using government spending to “build back” the U.S. entrepreneurial state to confront the challenges posed by climate change, recover from the pandemic, and repair the nation’s physical and human infrastructure. A national government that is free from the sorts of constraints that limit private firms can and should spearhead this effort.

There are still some who would argue that the United States should rely on the “invisible hand” to allocate capital. It is an alluring theory, but U.S. historical experience has thoroughly undercut it. After World War II, it was the entrepreneurial state rather than “heroic capitalists” that bore the risks to invest in new knowledge, and which continues to pay dividends today. Private firms that are beholden to shareholders demanding immediate returns on their investment simply cannot undertake the kinds of long-term, speculative investment in pure (as opposed to practical) R&D required to generate genuine novelty.

Just as the U.S. government has a monopoly on the legitimate use of force and printing money, so too does it have a near-monopoly on the ability to take risks over long-time horizons. Recall that it was U.S. Army ordnance in the 19^th century that perfected the development of standardized parts over a 40-year-plus period in its arsenals. In the 20^thcentury, the U.S. government provided invaluable support to several industries, including aviation, nuclear power, computing, and space. This should not imply that governments are wiser than private investors, only that the former can afford to place large bets that they might lose; after all, they are gambling with the house’s money.

These sorts of investments rarely seem justified under normal circumstances, but they can generate enormous windfalls. One of the many legacies of government sponsorship of R&D in the United States was a biomedical research system that allowed for the rapid development of the mRNA vaccines that are taming COVID-19. Whether it was supporting research on DNA and RNA that venture capitalists ignored or the vast array of technologies now embedded in smartphones, the U.S. government was essential in “bringing good things to life.” That the latter was an advertising slogan from General Electric from 1980 to 2003 only reinforces a collective historical amnesia, just as Americans forget how money actually works.

Not All Spending is Equal

Critics of MMT are right about one thing – not all spending is equal and running up deficits over the long run without enhancing the nation’s productive capacity and its economic attractiveness will undermine U.S. monetary hegemony. The goal of an expansive fiscal policy should be the creation of an economy in which people from all over the world wish to continue participating, which in turn will preserve the dollar as the preferred instrument for both debt and credit.

There are steps that the U.S. government can take that would generate dividends for the United States’ economic and national security. The government could, for example, revisit the 1958 National Defense Education Act that resulted from the fear following Sputnik’slaunch that the United States was falling behind the Soviet Union. A new education act would enable training up the workforce that contemporary industries demand. It should fund industrial apprenticeships in both civilian and defense industries, as well as the vocational training that the United States has allowed to wither. The country might also turn the surfeit of advanced degree graduates into managers of government investments in fields vital to its national health instead of stranding them as poorly paid adjuncts in the U.S. educational gulag.

Perhaps the great irony of contemporary American political economy is that many of the proponents of MMT are also the biggest critics of the other aspects of U.S. power that make MMT possible. The United States can afford the Green New Deal as well as providing universal health care and other necessities – but only as part of a wider process of “keeping America great.”

Politics truly makes for strange bedfellows.

Michael A. Dennis and Anand Toprani are professors of strategy and policy at the U.S. Naval War College and visiting professors at Brown University. They wish to acknowledge their profound debt to their colleague, Brown University professor Mark Blyth, whose insights inspired this piece.

The views expressed here are Dennis and Toprani’s and not necessarily those of the U.S. government.

Featured Image: U.S. Capitol Building is superimposed over scaffolding and currency imagery. (Credit: Christina Animashaun)