Rising geopolitical tensions may weaken dollar recycling as Gulf states deepen ties with Beijing, keeping base rates higher. This comes as private credit—now a key absorber of capital—shows growing stress. Higher funding costs, redemption limits, and valuation gaps in BDCs signal the credit cycle is turning. With inflows slowing and capital absorption weakening, the system is entering a late-cycle phase where credit expansion stalls and pricing begins shifting from models to market reality.
From the 17th century, Caribbean sugar fueled European wealth via plantations reliant on enslaved labor. Napoleonic Wars, slave revolts, and embargoes disrupted trade, while Europe’s sugar beet offered a cheaper, local alternative. Similarly, today EVs, renewables, and local energy reduce dependence on oil and natural gas, slashing costs and reshaping global energy markets—history repeating itself in technological disruption.
Energy price shocks from war don’t reinforce fossil fuels—they accelerate their decline. As seen after the Russia conflict, higher oil and gas prices drove rapid EV adoption and faster renewable substitution across major economies. With cost curves falling, each new shock strengthens the transition rather than reversing it.
Wars are not deflationary, especially for the U.S., where high debt and deficit monetization create inflationary pressures. Bond rallies during crises are often knee-jerk reactions, not true signals. With heavy short-term issuance, repo stress, and structural deficits, markets may misread conditions. If conflict persists, risks shift toward inflation and potential instability in the U.S. bond market.