Trump's 'Economic D-Day' Against Iran Backfires as US Markets Take First Hit

US President Donald Trump has threatened a severe financial campaign against Iran, which he called an "economic D-Day," as the war with Tehran continues. However, on August 20, the first casualty appeared to be the US market itself.

US crude oil prices inched up from $86.20 a barrel on August 19 to $86.70, while US stock markets experienced their worst session in three weeks. This week, the US also reported total public debt surpassing the record $40 trillion mark.

What is Trump threatening?

On Truth Social on August 19, Trump said Iran had "missed" its chance for a deal and would face "economic warfare and isolation on a scale never seen before." He also threatened new sanctions against any country doing business with Iran.

"ANY country that allows its financial institutions, businesses, airports, or government agencies to provide any form of support to Iran will face MASSIVE ECONOMIC CONSEQUENCES," he wrote.

On August 20, Treasury Secretary Scott Bessent told CNBC that this new "economic war" could include secondary sanctions targeting countries and companies trading with Iran.

The Trump administration's latest statement comes amid the continued closure of the vital Strait of Hormuz in the Gulf, which has disrupted global energy and financial markets. Before the war, about 20% of global oil and natural gas supply transited this waterway.

The war is increasingly unpopular among Americans as gasoline and other living costs rise. On August 19, Tehran dismissed Trump's threats, with Foreign Minister Abbas Araghchi calling "economic D-Day" a "distraction from America's own crisis."

How are US markets reacting?

The US-Israel war on Iran has paralyzed the Strait of Hormuz, the only open-sea route through which Gulf oil producers can ship exports. Before the war, about 130 ships passed through the strait daily; now only a few do. This has seriously destabilized global energy and financial markets.

Following Trump's economic threats against Iran on August 19, global oil prices rose to near one-month highs on the morning of August 20, with global benchmark Brent surpassing $93 a barrel. By the morning of August 21, Brent was still at $93.28. US crude climbed to $86.70 on August 20, trading around $86.20 on August 21.

Meanwhile, US stock markets recorded their worst session in three weeks. The Dow Jones dropped 703.84 points, or 1.32%, closing at 52,759.21 on the evening of August 20. The S&P 500 fell 0.87%, closing at 7,641.16. On the morning of August 21, US indices showed signs of stabilizing.

Frederic Schneider, a non-resident senior fellow at the Middle East Global Council, noted that US 30-year Treasury yields exceeded 5.25%, near two-decade highs after Trump's announcement. This indicates falling US bond prices as investors shy away, reflecting a lack of confidence in the US.

Bessent announced emergency measures to double the Treasury's long-term debt buyback program to at least $4 billion, but it failed to soothe markets. "This is a strong signal when the treasury of the world's most powerful nation resorts to extraordinary measures and still fails to stabilize the market," Schneider told Al Jazeera. "Long-term Treasuries have faced a 'buyer's strike' since June, due to widening budget deficits, a wave of AI-related corporate borrowing, and now an inflation premium from higher oil prices."

Broader economic pressures

Analysts say both Iran and the US are feeling economic pressure from Washington's war on Tehran. The "economic war" keeps the Strait of Hormuz closed, sustaining high oil prices. The US Energy Information Administration does not expect Gulf output to recover near pre-conflict levels until early 2027, and shortages are fueling US inflation, affecting the bond market where real damage is evident.

The war has also exposed US vulnerabilities despite an oil industry that meets domestic demand. "Technically, the US is energy self-sufficient, but not protected. Gasoline prices and the general cost of living are central issues in the midterm election year. But the Federal Reserve cannot cut rates to support a slowing economy without adding fuel to the inflation fire caused by the oil price shock," Schneider said.

The US Treasury this week released an update showing total public debt surpassed $40 trillion for the first time in history, two years earlier than projected, due to war costs and Trump's corporate tax cuts. Schneider also noted the US must consider its allies' economies, as Gulf states and East Asian economies are the hardest hit and are also the largest holders of US assets.

On the night of August 19, Trump warned any country with "financial institutions, businesses, airports, or government agencies" supporting Tehran would face "MASSIVE ECONOMIC CONSEQUENCES." Hours earlier, the UAE, a long-time trade hub with Iran, announced an indefinite embargo after accusing Iran of firing missiles at its territory, a move analysts consider significant because Iran depends on UAE financial access.

Consequences for Trump

The war against Iran, which the Trump administration cannot end, is increasingly unpopular among Americans. It comes just weeks before the November midterm elections, which will determine whether Republicans retain control of Congress.

Senator Mark Warner, Vice Chairman of the Senate Intelligence Committee, criticized continued US involvement in the conflict with Iran in an X post on August 20. "When will Trump end this disastrous and deadly war?" he questioned.

On August 21, Trump told supporters that paying "a little more for your gasoline" is worth ensuring a "very evil country" like Iran cannot obtain nuclear weapons.

However, peace talks between the US and Iran, which would include Iran's nuclear capabilities, have not seriously begun as the Strait of Hormuz crisis continues. Iran is negotiating an agreement with Oman on the future management of the strait, which was freely open to commercial shipping before the US launched attacks on Tehran on February 28.

Iran says it will not negotiate directly with the US on this matter and will not join talks until the Hormuz issue is fully resolved, among other conditions. Experts see little hope for a successful conclusion.

Despite Trump's claims that US forces have "total control" over the Strait of Hormuz, data analyzed by Al Jazeera and Kpler, a maritime intelligence firm, suggests ship operators may currently fear violating Iran's blockade more than the US naval blockade in the region.

Trump's approval rating has dropped to its lowest of his presidency, with a vast majority of Americans fearing the US-Israel war on Iran will last a very long time. Consumers have seen fuel prices surge since the war began in February, with gasoline prices up nearly a third from a year ago, according to the American Automobile Association.

Only 33% of respondents approve of Trump's performance, according to a Reuters/Ipsos poll. That matches the low seen in December 2017 during his first term. Trump, who campaigned on controlling inflation and avoiding protracted wars, initially promised the conflict with Iran would last only a few weeks.