The escalating conflicts in the Middle East and the closure of the Hormuz Strait have resulted in a global reshuffling of monetary policies, compelling governments to inject billions of dollars under the guise of emergency support. This shift comes at a time when the world was preparing to close the chapter on the 'easy money' policies left behind by the COVID-19 pandemic.
The Hormuz Strait, through which approximately 20 million barrels of oil and gas pass daily, serves as a lifeline for the global economy, accounting for 20 percent of global consumption. With this vital artery disrupted due to threats and attacks, governments have once again been forced to take urgent measures to support their economies.
Details of the Event
In December 2025, the U.S. Federal Reserve announced the end of its quantitative tightening program and fixed its balance sheet at $6.5 trillion, a move seen as the last step towards returning to 'monetary normalcy.' Although this figure remains about 60 percent higher than pre-pandemic levels, recent events have imposed a new reality that requires a swift response.
The liquidity injected during the COVID-19 pandemic was directed towards supporting individuals, while governments today are channeling this liquidity to repair 'energy fractures' and ensure the stability of food supply chains, especially with 30 percent of global fertilizer exports disrupted.
Background & Context
During the peak of the COVID-19 pandemic, the balance sheet of the Federal Reserve surged to $9 trillion, representing about 35 percent of U.S. GDP. Major central banks were not immune to this trend, as the European Central Bank and the Bank of England injected massive amounts to support their economies.
In Japan, the balance sheet of the Bank of Japan reached a record high of over ¥730 trillion, while the People's Bank of China pumped ¥1.2 trillion to ensure global trade did not come to a halt. These alarming figures raise concerns among analysts about the return of these powers to open the money taps once again.
Impact & Consequences
Central banks are facing a 'double nightmare' of inflation and deep recession, hindering their ability to make effective decisions. On one hand, the explosion of prices imposes 'imported inflation' that necessitates a sharp increase in interest rates, while on the other hand, the steep rise in costs pressures low-income households.
In the United States, the budget deficit soared to $3.7 billion in the first 100 hours of the conflict, reflecting increasing pressures on the economy. This contradiction renders interest rate hikes ineffective, leading analysts to predict a return to quantitative easing to support volatile bond markets.
Regional Significance
The Arab region is directly affected by these developments, as many countries rely on oil and gas exports. The ongoing conflict in the Hormuz Strait could lead to rising energy prices, negatively impacting the economies of Arab nations and increasing inflationary pressures.
In conclusion, it appears that geopolitical factors are taking the reins, threatening global economic stability and reshaping monetary policies. The world today is in a phase of 'managing collapse,' where current conditions demand a swift and effective response from governments.