Theory has it that the flapping of a butterfly’s minuscule wings can cause a typhoon halfway around the world. Indeed, the war in West Asia and the choke-up of the Hormuz Strait is driving the private credit bubble into dire straits. The sultans of spin may conjure up word salads, but there is no escaping the spectre of the next global financial crisis.
Context is critical for comprehending the role of persona in leadership. Julius Caesar observed, “Fingunt simul creduntque”—very simply, some people can invent a reality and believe in it at the same time; in Francis Bacon’s words, the affinity of fiction and belief. US President Donald J Trump can certainly imagine and believe an alternative reality at the same time. The wide chasm between what was intended, what is claimed, what is happening in West Asia is accelerating the transmission of wing speed to precipitate the tornado.
Nothing in the data points makes sense. The war was intended to liberate Iranians. But Iran, defying Trump, replaced one Khamenei with another Khamanei, plausibly more hardline than the father. Trump frequently uses the term ‘obliterated’ to claim military success. And yet, Iranian projectiles continue to find US aircraft in Saudi Arabia and targets in Israel. In 1936, Robert K Merton defined the “unanticipated consequences of purposive social action”. The American sociologist said one of the primary causes was imperious immediacy of interest—pursuing an intended consequence despite being cautioned about grave risks. How Trumpian!
Trump came to power on the promise of ensuring affordability. How is he faring? Consider the data points. In less than 10 trading days, over $2 trillion worth of American savings have been wiped out. US mortgage rates—the marker of household economics—shot up from 5.9 percent to 6.4 percent. In a country where mobility is paramount, fuel prices at the pump have jumped 22 percent in less than a month.
A fifth of global oil supplies pass through the blocked Hormuz Strait. On Friday, Saudi Arabia cut its output by 20 percent amid the crisis. Trump had imposed sanctions on Russia to bring peace in Ukraine; this week, he lifted sanctions on Russian crude to quell prices. The war has driven up crude prices from under $70 to over $100 a barrel and has curtailed supplies too.
This week, oil price projections were revised upwards—Goldman Sachs saw oil staying above $100 through March, others saw prices touching $150, and Iran warned prices may touch $200. History doesn’t always repeat, but it frequently rhymes. The last time crude prices were in the neighbourhood of $150 was in 2008, also over a fracas between the US and Iran, which had test-fired missiles.
The risk of delinquency and default is not limited to private credit, but can spill over into public markets. In India and across the world, the rise of costs and fall of currencies are challenging repayment and renewal. As countries step in to ease the burden on cost-of-living, debt-to-GDP ratios will spiral up further. The cost of Trump’s tariffs is yet to be factored in the calculus. Any crack in the rather opaque private credit market will only perpetuate pain.
The general belief is that the private credit market—now at over $2.1 trillion—is a gated republic where rich people play with richer people’s money. The fact is, private credit also depends on debt raised publicly to fund asset creation, and rising rates have pushed down returns and pushed up redemptions. The spectre of higher rates has triggered tremors. Morgan Stanley has limited redemptions, Cliffwater has capped them, Blackstone injected cash to instil confidence, while Blue Owl shifted from fixed to discretionary rates for redemption. Fears also stem from the advent of artificial intelligence and its impact on software giants. For the record, around 25 percent of private credit money is locked in software companies.
The surge of interest rates and rush of investors are reminiscent of the 2000 and 2008 bubble-bursts. Without getting into the weeds of the data swamp, consider the similarities. In 1999, the bet was that money would follow once the infrastructure was built to chase dot-com eyeballs. The infra got built, but the eyeballs stayed stuck. In 2008, financial wizards conjured a recipe of risks to fund a real estate boom. Meanwhile, crude at $147 pushed inflation and interest rates higher, shattering notions.
The saga in 2026 is once again about the gap between hope and reality. For a while, tech companies—asset-light and cash-rich—were described as growth stocks and got high valuations. In 2026, these tech stocks are the biggest borrowers, with around $600 billion to be raised by the Magnificent Seven groupies betting on AI infra. That would make them asset-heavy and cash-poor. Would the valuations hold? And what would happen to the debt? What happens indeed if the rates ratchet up following bust-ups?
The sense of déjà vu doesn’t take a pause. Consider the analogues. In 2008, a global financial crisis was triggered as higher inflation pushed out rate cuts. What is the story in 2026? The choking of the strait disrupting supply chains across sectors, driving up inflation. Trump’s desire for a rate cut is fading into the future. J P Morgan CEO Jamie Dimon famously said if there is one cockroach there will be others.
The roach reviews have thrown up many and credit markets are frothing with fear. The cost of war will pain the people beyond the drone of rhetoric. Someday, folks may well sing along with Mark Knopfler: “We’re fools to make war / On our brothers in arms.”
SHANKKAR AIYAR
Author of The Gated Republic, Aadhaar:
A Biometric History of India’s 12 Digit
Revolution, and Accidental India
(shankkar.aiyar@gmail.com)