In the previous 1963Macro article, a case was made that Iran, not the U.S., is locked into an “escalation trap.” The logic applied runs contrary to the common, prevailing narrative that the United States was ill prepared for this conflict, planned poorly, executed OK, and is now stuck in the “quagmire” they — and President Trump specifically — wanted to avoid. That story plays against a backdrop of the SPR drained below 300M barrels, some days from 1983 lows, and less than 50M barrels from minimum.
The prevailing narrative also folds in inflation, rates, broader economic concerns, and mid-term risks into a blanket claim that the United States has failed to achieve its stated military objectives. This narrative is pervasive. It gives hope to financial and energy markets that President Trump will take an offramp, Iran will emerge victorious or at least intact, the Strait will return to pre-war volume, and things will get “better” economically in a relatively short period of time. Said plainly, U.S. defeat followed by economic improvement on the basis of energy flows.
That narrative may be true, and may well come to pass. But it leaves us omitting a perspective that tracks the cadence of this conflict more accurately:
Material escalation or a significantly larger phase of the conflict was always a highly probable outcome. A deal was never tenable for the IRGC, and the pattern of U.S. actions is consistent with a strategy that has been shaping the environment toward a more decisive engagement if diplomacy failed to deliver.
That perspective changes how you view the chessboard.
When the conflict started, President Trump and many others discussed this being a “quick” operation. Weeks, maybe months, but not many of each. No quagmires. That sold well to the American people, and initial support for the war was high following the successful operation to capture Maduro. That support faded once the United States stopped shooting and began the negotiation process in April. Since then we have seen multiple returns to hostilities and a significant amount of positive and “hopeful” messaging around the diplomatic process.
This is where the 1963Macro base-case started before the conflict: negotiation that lands the United States the victories it seeks is very unlikely to succeed — not because that is the wrong path, but because the IRGC will not accept it. The IRGC faces an existential threat. Inking any deal that opens the Strait, curbs nuclear ambitions, or removes their ability to exert influence over their existing population and the broader Middle East is a tactical non-starter. It would equate to signing away decades of work for no benefit relative to their stated mission.
The United States knows this from experience. The strategy it has employed — chipping away with airstrikes, sanctions, and the blockade — appears designed to create repeated opportunities for an offramp while preparing for the possibility that none would appear. Strikes, threaten larger strikes while a campaign is actively engaged, call off larger strikes at the last minute with great fanfare, negotiate. Repeat. Given the repetition, this is a deliberate pattern (noted in a previous article). The prevailing narrative paints the same sequence as disorganization and failure. Said differently, it makes the United States appear rudderless and out of options. That may not be the case at all.
Viewed through a lens of the conflict being executed to plan, the United States has been managing the conflict such that if a decisive phase becomes necessary, it occurs when the IRGC is degraded. Their conventional military — air force and surface navy — is functionally destroyed. This leaves drones, missiles, proxies, and asymmetric tools, but not the ability to prevent the United States from establishing air dominance and striking more freely, which has already happened more than once. That is military success. The diplomacy path was both legitimately hopeful and strategic — a point Iran itself has called out multiple times. From the U.S. perspective, if an offramp appears, that is preferred. If not, the grinding process allows more time to plan, watch Iran expend resources it does not have in abundance, and reconstitute.
The U.S. strategy, viewed this way, has been far more effective than most reporting suggests. In essence, the United States has successfully degraded Iranian capacity while increasing the IRGC’s need to fight, which pushes Iran deeper into its own escalation trap.
Break away from the prevailing narrative and consider the point. The United States created significant optionality between diplomacy and military engagement, provided tactical pauses, and left the door open to a deal that would avoid a costly larger engagement.
That same strategy is what created Iran’s escalation trap — not one for the United States. The allied air campaigns materially degraded Iran’s ability to fight and to prevent U.S. air dominance. The last set of U.S. strikes lasted approximately ten days before stopping. Even more dovish voices noted at the time that unless the United States was willing to strike the remaining escalatory targets — the “20% we didn’t hit” in the opening wave — further limited strikes would not move the needle. President Trump opted against that engagement, citing a preference for negotiation and a desire to avoid additional suffering inside Iran.
Fast forward to today, and the IRGC has stated it is shifting to an “offensive doctrine” and will extend the conflict “beyond our borders.” That is defiant rhetoric, but it may also be a promise. Throughout this conflict, when Iran says it is going to do something, it eventually does so absent intervention. This is the escalation trap in action. A deal is tantamount to existential defeat. Fighting may also bring defeat, but a deal is a certain loss that fighting, from the IRGC’s perspective, may still prevent. Or, as Iran has said for a long time: “we won’t give up with negotiations what couldn’t be taken by force.”
The United States strategy of negotiation tried to minimize force while letting time create diplomatic opportunity and degrading Iran in a manner that shapes the battlefield in its favor. Results on the ground support this as a coherent approach if the aim was to have any larger phase of the conflict occur on more favorable terms. This suggests that “power plant and bridge day” remains the strongest escalatory option — the remaining target set. Viewed this way, the United States has spent five months attempting to avoid that scenario, the major economic problems that would accompany it, and the associated human cost, while understanding that a more decisive phase might still be required. The current position — a degraded adversary facing internal political friction over whether to deal or fight — is a more optimal setup for such an engagement than the one that existed at the outset.
This is not to discount IRGC capability. It retains reach and fortitude, paired with a reportedly capable supply of drones and missiles. As demonstrated, that alone is enough firepower to impose significant costs through coercive control over broader GCC economies. The IRGC will use it. That reality plays directly into the U.S. decision to avoid immediate escalation and watch the leadership realignment and open debate inside Iran about what a fold-or-fight future looks like.
Laying this review over the conflict today, the probability is high that this is how the United States has calculated and managed the campaign — including the understanding that further escalation may still be required and that it is likely the IRGC who will climb the ladder. The United States managed for optionality, degraded a tough adversary, and left itself in a better position than commonly reported to prosecute an engagement that could break the stalemate. The ball has been placed in the IRGC’s court. The United States retains political cover for returning to talks, and if the IRGC escalates materially, the United States can respond with clearer justification than a unilateral move would have provided.
The validator of this managed approach is the yen intervention. On the Friday that Trump met with his cabinet at Camp David, Treasury Secretary Bessent also made comments about intervening in the yen. At the time the yen was beyond 160 and rising. Bessent’s move to intervene over the weekend and into early this week was the tell. If major escalation is coming, the yen must be backstopped to avoid a disorderly carry-trade unwind that would be extremely painful not only for global markets but for U.S. Treasury securities. Japan would need to sell Treasuries to support the yen, spiking yields. In a larger engagement, energy prices would likely rise materially. That would hit Japan severely, as well as Europe.
Bessent sold euros to fund the yen support in high enough volume that he received a diplomatic phone call from the ECB. That type of uncoordinated euro sale had not happened before. It came on the heels of Camp David, where plans for managing the next phase of the conflict and military optionality were discussed. If you assess that something is coming that could disrupt energy markets — and by extension Japan — then you need to protect the carry trade to minimize damage, and you burden-share with the euro because dumping U.S. Treasuries would be a self-inflicted wound.
This is managing the conflict, not merely reacting to it. At the time, yen weakness was concerning, but that Bessent used euros rather than Treasuries to offer support reads as signal. The United States may be managing against the risk of the Treasury market being “weaponized” when a larger phase arrives.
Consider the sequence:
The United States has managed this conflict with the understanding that a more decisive phase would likely be required if its goals are to be achieved or if the IRGC is to be removed from functional power.
The strike–threaten–pause–negotiate cycle provided repeated opportunities for offramps.
The United States shaped the environment to leave itself in a stronger position to prosecute a larger conflict if necessary.
That shaping created the current scenario in which the IRGC, not the United States, sits in the tighter escalation trap.
Because the United States has controlled the tempo, Secretary Bessent’s role includes supporting the economy and preparing to defend the dollar and Treasury market if necessary.
Yen intervention says the assessed probability is high enough that preparation is required.
Hank Paulson recently noted that the United States needs to be prepared to defend the Treasury market and the dollar because they could be “weaponized” back against us. That comment received some airtime but little dissection. Japan owns approximately $1.13 trillion of U.S. Treasuries. The United Kingdom holds roughly $949 billion. China holds approximately $659 billion. The risk begins here. If Japan must sell Treasuries for the legitimate purpose of supporting the yen, that is not an act of aggression but of necessity. No harm to the United States is intended, yet meaningful sales would pressure U.S. rates. If China, or other actors with incentive to do so, decided to sell meaningful amounts of Treasuries while Japan is a forced seller, the combination creates the potential for a negative feedback loop — selling begets more selling. The weaponization is not Japan’s need to stabilize its currency; it is the ability of malign actors to pile onto a necessary move and exacerbate stress on the dollar and the Treasury market. Note that actors do not need to sell all of their holdings. They need only create an environment in which augmented volumes are being offered into the market at a sensitive moment.
Attention has been focused on energy and oil, but the second-order effects of an energy disruption are inflation, currencies, and sovereign debt. The SPR has helped keep energy prices from spiraling, which stabilizes the broader system and holds off those three problems. That buffer is thinning.
Finally, the IRGC knows this landscape and maintains relationships with actors who hold significant amounts of Treasuries. If they go on the offensive and aggressively strike GCC energy infrastructure, they open the door to material problems for the yen, the dollar, the euro, and the global yen-funded carry trade. By extension, short-term economic pain for China could still serve a longer multi-polar objective if it produces a period of U.S. financial stress.
The United States has managed the conflict to this point knowing Tehran retains the ability to strike GCC energy infrastructure and tick the first domino in that sequence. That is why Washington has had to be careful about tipping the scale into a scenario that invites Treasury market stress before it is prepared. The yen intervention is evidence that the United States is building moats and thinking through how it would defend the Treasury market and the dollar if that risk materializes as a byproduct of a larger phase of the conflict.
That the United States has managed the conflict this effectively — using this lens — suggests it is thinking ahead and that the engagement will continue to be managed on multiple fronts. Confidence can at least be drawn from the fact that the United States is five months into an engagement it avoided for almost fifty years, gasoline remains cheaper than it was a few years ago, inflation is elevated but not uncontrolled, and equity markets are solidly positive seven months into the year. That is effective management.
If the same approach that produced those results can be trusted going forward, it may still be possible to avoid the worst of the outcomes described here.
In any case, the IRGC got what it always wanted: the world is in many ways at the mercy of its next move.
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