Johns Hopkins economist Steve Hanke has warned that the United States is heading toward an economic catastrophe unless the Strait of Hormuz reopens and oil prices retreat from their war-driven highs. 

Hanke suggested that President Donald Trump is racing to exit the Iran conflict specifically because he fears repeating Herbert Hoover’s legacy as the president remembered for the Great Depression, he said in an interview with David Lin published on July 1. 

Hanke’s warning centers on one scenario where the war drags on, the strait stays shut, and crude climbs even higher than his already-elevated baseline forecast. 

In that outcome, he said, the Federal Reserve would be forced to cut rates aggressively to offset the shock, a reactive move rather than a planned one.

“Trump is implying that if the war continues, if the Strait remains closed, if oil prices go to the moon, we’ll have a great depression. He used the word economic catastrophe. In that scenario, obviously that changes everything. So that would change what I think the Fed probably would do — goose things under that scenario. And we would get a lowering,” Hanke said. 

Notably, the Strait of Hormuz carries roughly a fifth of the world’s oil supply, and its effective closure since the war began in late February has already pushed crude above $110 a barrel and U.S. gas prices past $4.10 a gallon, the highest level since 2022.

Iran’s leverage in war 

Hanke’s read is that Iran, not the United States, currently holds the leverage over that chokepoint, and that Tehran’s control of the strait is the single biggest variable standing between the current economy and the “catastrophe” Trump has publicly invoked.

Hanke has argued that Iran’s position has strengthened since the war began, citing rising oil exports and a stronger rial as signs that Tehran can outlast Washington economically. 

He believes Trump’s use of the word “catastrophe” reflects concerns about being blamed for an economic downturn, similar to how Herbert Hoover is associated with the Great Depression. 

According to the scholar, that fear is pushing Trump to present the ceasefire as a victory regardless of its terms, while a separate memorandum effectively leaves Iran with significant leverage over the Strait of Hormuz, including the ability to charge tolls.

He stated that the most likely resolution is implementing the agreement largely as written, with Iran retaining significant leverage and control over access to the Strait of Hormuz. 

He expects Trump to accept that outcome, including tolls, rather than risk a prolonged disruption that could drive oil prices high enough to push the U.S. economy toward recession. 

Hanke has also warned that the U.S. government’s strained balance sheet leaves it less able to withstand an extended oil shock.

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