How the structural vulnerabilities of dollar hegemony, the shadow banking system, and geopolitical overextension are converging to produce an irreversible crisis of the capitalist order
Editorial Analysis | September 2026
The American empire is not merely experiencing a cyclical downturn but is entering a terminal phase of structural decline in which the contradictions that have accumulated over decades are now converging to produce an irreversible crisis. The material foundations of American hegemony have eroded across multiple dimensions simultaneously, and the financial architecture that once served as an instrument of dominance has become the mechanism of dissolution. The petrodollar system, the shadow banking system, the bond market, the AI bubble, and the military overextension in multiple theatres are not separate problems but interconnected expressions of a single structural contradiction: a system that requires perpetual expansion to sustain itself has reached the limits of the finite world it seeks to control. The trajectory is irreversible, and the only question is which mechanism of expropriation will be deployed first and which class fractions will bear the costs.
The petrodollar system has been the cornerstone of American financial hegemony for five decades, compelling the world to trade oil in US dollars and channelling the resulting surplus into American financial institutions. When oil is traded in dollars, the demand for dollars creates global demand for US financial assets, allowing American banks to borrow at lower rates than would otherwise be possible and to finance deficits that would be unsustainable for any other country. The system ensures that the wealth generated by oil production in Iran, Nigeria, Kazakhstan, or Venezuela ultimately flows to Western financial centres in London, New York, and Paris. A Western bank issues a loan to an oil company for the development of resources in a foreign country, and that loan becomes an asset on the bank’s balance sheet. The oil company services the loan by selling oil in dollars, and regardless of where the oil is produced, the cash flows that service the debt are denominated in dollars and flow toward Western money centre banks. The wealth of the producing country is transformed into the assets of Western financial institutions through a system of financial extraction that operates through the weaponisation of dollar-denominated oil trade.
The incentives for colonisation and war emanate from the Western financial system rather than from the oil companies themselves because a company like Chevron does not care whether it is paid in dollars or rials. A dollar is a dollar or a rial is a rial, and Chevron’s material interest is in extracting oil and selling it at a profit regardless of the currency of denomination. But Western banks like JP Morgan and Goldman Sachs get nothing if Chevron enters into a loan agreement with an Iranian bank or a Nigerian bank, and it is therefore in the Western financial system that the ultimate incentives for colonisation and war are determined. To ensure that companies like Chevron behave in ways that serve their bankers, the boards of directors of these corporations are populated with representatives from the major financial institutions, ensuring that corporate decision-making aligns with the interests of finance capital rather than the interests of shareholders or the populations of the countries where they operate.
This system is now under threat from the coordinated efforts of the BRICS nations, led by China, which are developing alternative payment systems, development banks, and currency arrangements that would allow oil and other commodities to be traded without using the dollar. Trump has said he wants to get rid of BRICS and has even claimed to have defeated it, but the reality is that the diversification of the global financial system is accelerating as more nations seek to escape the discipline of dollar-denominated trade. The petrodollar system is the foundation of American financial hegemony, and its erosion would have profound consequences for the ability of the United States to finance its deficits, sustain its military presence abroad, and maintain the standard of living of its population.
The material reality that the United States can no longer guarantee the security of the energy corridors on which the petrodollar system depends further accelerates this erosion. The Strait of Hormuz, through which approximately twenty per cent of global oil supplies transit, remains effectively closed by Iran, and the Houthi blockade of the Bab el-Mandeb has closed the alternative route for Saudi oil exports. Saudi Arabia’s oil production has fallen from ten point nine million barrels per day in February 2026 to approximately six point two million barrels per day in August 2026, and its exports have fallen to near zero at various points during the year. Qatar’s LNG exports have plummeted from around twenty million tons per quarter in 2025 to less than two million tons between April and June 2026, a decline of over ninety per cent. The disruption of oil production in the Middle East has created conditions for a systemic banking crisis because Western banks have massive investments in the oil and natural gas sectors, and the cash flows from those investments service the debts that are the assets of these banks. If the cash flows stop because oil production is disrupted, because exports are blocked, or because the oil cannot be sold in dollars, those assets become non-performing loans, and the banks that hold them face the prospect of insolvency.
The shadow banking system, valued at approximately $220 trillion, represents a systemic vulnerability that cannot be contained by central bank intervention without accelerating the inflation that is already eroding the purchasing power of wages, savings, and pensions. The shadow banking system includes pension funds, hedge funds, insurance and reinsurance companies, and endowments, and the bulk of their assets are invested in government bonds. If government bonds collapse, the shadow banking system collapses as well, and while these institutions are not necessarily leveraged to the same extent as the banks, they will take a very significant haircut and then collapse in real terms. The crisis will affect everybody with pension plans, not just wealthy investors, because pension plans are part of the shadow banking system. Workers who pay into their pension plans throughout their lives find themselves on the hook for the speculative activities of finance capital, and their retirement savings are devalued to protect the assets of the bondholders.
The bond market itself is the epicentre of the coming crisis because the cost of dollar-denominated debt is rising and at some point this could cause panics in the markets that accelerate the collapse. The mechanism is straightforward: as cash flows to the financial system shrink, banks get beset by greater and greater bad debts. Once upon a time, bank runs occurred because when people suspected that they would not be able to withdraw their deposits, they would panic. With modern banking systems and central banks, this can be avoided because the central banks can print all the liquidity that is needed to backstop all those bad debts. But what they do in the process is create so much money that it ends up diluting purchasing power, and most of the liquidity tends to flow towards the equity markets because as the purchasing power of the currency is diluting, investors seek to preserve their wealth in real assets. This creates an indirect route from central bank printing presses into equities, which tends to cause an accelerating bull run to some peak that is unpredictable, and once it peaks in a vertical climb, the stock markets collapse.
The historical precedents for this dynamic are instructive. Weimar Germany experienced hyperinflation in 1922–1923, with the currency becoming worthless and the stock market rising nominally as the currency collapsed. Argentina has experienced repeated currency crises and hyperinflation, and Venezuela experienced hyperinflation in 2015–2019, with the bolivar becoming worthless. These cases demonstrate that currency collapse and asset price inflation can occur simultaneously, and that the destruction of the middle class is the consequence of the monetary authorities’ response to a crisis of corporate debt. The same process is now underway in the Western financial system, and the consequences will be equally devastating for the working class and the middle class alike.
The United States has bet the ranch on artificial intelligence, investing one point three five trillion dollars in the AI industry with another one point six five trillion in off-balance-sheet debt that has been concealed from investors. The five largest AI infrastructure companies hold roughly one point six five trillion dollars in off-balance-sheet obligations, exceeding the one point three five trillion they report on their main balance sheets. This hidden debt has grown eightfold over the past four years and is now larger than the official debt of these companies, with the mechanisms of concealment including long-term data centre lease commitments and GPU supply contracts structured as take-or-pay obligations that under US accounting rules are treated as off-balance-sheet items and disclosed only in footnotes to financial statements. The AI bubble was predicated on the assumption that the United States would achieve undisputed permanent global supremacy in AI and would be able to hold the world ransom by controlling access to the technology, but this assumption has proven false as Chinese AI models such as DeepSeek and Moonshot AI’s Kimi K3 have achieved competitive parity with American frontier models.
The failure of the AI monopoly has profound implications for the financial system because the investments that were predicated on monopoly profits cannot be justified in a competitive market, and the AI companies that have accumulated one point six five trillion in hidden debt may find themselves unable to service that debt. The AI bubble is not an isolated phenomenon but a symptom of the broader crisis of accumulation in Western capitalism, as the declining rate of profit in traditional industries has driven capital into speculative ventures including the dot-com bubble, the housing bubble, and now the AI bubble, each of which has produced a temporary illusion of prosperity followed by a crash. The AI bubble is the largest and most dangerous of these speculative episodes because it is intertwined with the energy wars and the petrodollar system. The Gulf states, which have been major investors in American AI companies, may be forced to withdraw their investments if their oil revenues collapse, and the withdrawal of Gulf capital could burst the AI bubble and trigger a broader financial crisis.
The Western financial system’s exposure to Ukraine is another source of systemic risk that prevents the ruling class from accepting defeat because Ukraine has been given loans by Western powers and has sold tens of billions of dollars’ worth of bonds to Western private investors. If the war were to end and the mainstream media acknowledged that it was lost, Ukrainian bonds, which were trading at approximately sixty cents on the dollar in 2024, would go close to zero, and the bondholders would face a complete wipeout. The Bank of England’s decision to accept questionable risky assets as collateral in the repo market was a political decision to treat Ukrainian bonds as good assets because the ruling class intended to win the war and was never going to allow Ukraine to stop fighting. If the war ends in defeat, the impairment of these assets would become permanent, and hundreds of billions of dollars of bondholders’ wealth would evaporate overnight, which is why the people at the top of the financial pyramid will never allow the war to end.
The same logic applies to the war in Iran because the Western financial system has invested heavily in Middle Eastern oil production, and the disruption of that production has created bad debts on bank balance sheets. If the war ends in a negotiated settlement that leaves Iran intact and the Gulf states independent, the assets that are tied to Western control over Middle Eastern oil would be permanently impaired. The financial oligarchy therefore has a material interest in continuing the war, even if it cannot be won, because ending it would force the recognition of losses that would threaten the stability of the entire financial system. This is the political economy of permanent war because the wars in Ukraine and the Middle East are not being fought for territory or ideology but for the preservation of a financial system that depends on the extraction of wealth from the periphery. The costs of these wars are borne by the working classes of the countries involved through taxation, military service, inflation, and the destruction of public services, while the benefits accrue to the financial institutions that hold the debt and the defence contractors that manufacture the weapons.
The Realist analysis of hegemonic transition provides the structural context for understanding why the American empire cannot arrest its decline. Realism posits that hegemonic stability is a function of material capabilities, including military power, economic output, and control over critical resources, and that when these capabilities erode, the hegemon’s capacity to shape the international system diminishes. The security dilemma operates with particular intensity in the current conjuncture because American efforts to maintain primacy are perceived by China, Russia, and Iran as existential threats, and their responses are perceived by the United States as challenges requiring further escalation. The result is a spiral of escalation that neither side can control, and the prediction of collapse is a recognition that this spiral cannot continue indefinitely. The comparison of the American empire to the British Empire is an example of the Realist method of historical analogy, in which past cases of hegemonic decline are examined for insights into contemporary dynamics. The British Empire maintained its dominance through control over trade routes, financial markets, and strategic chokepoints, but it was unable to prevent its relative decline as other powers industrialised and challenged its position.
Game theory provides the analytical framework for understanding the strategic interactions that produce the collapse. The dollar hegemony game is a repeated game in which the United States seeks to maintain the dollar’s role as the global reserve currency while other states seek to diversify away from the dollar to reduce their vulnerability to American sanctions and monetary policy. The United States has an incentive to maintain the dollar’s role, while other states have an incentive to defect from the dollar system if they can find viable alternatives. The collapse is coming because the coordination problem of moving to an alternative system is being solved, and the defection from the dollar is accelerating. The bond market game is a coordination game in which each player’s decision to hold or sell bonds depends on their expectations of what other players will do. If enough players expect a collapse and sell their bonds, the collapse becomes self-fulfilling, because the selling pressure drives prices down and triggers margin calls and liquidations. The transition from a stable equilibrium to a crisis equilibrium can occur suddenly and without warning.
The central bank game is a game in which central banks must choose between allowing a banking collapse or printing money to backstop the system. The time-inconsistency problem means that policymakers have an incentive to promise restraint but then renege when the costs of restraint become apparent, and the prediction of hyperinflation is the outcome of a game in which the central bank’s optimal strategy, given the payoffs, is to inflate away the debt, even though this destroys the purchasing power of the currency. The geopolitical game is a multi-player game in which the United States, Russia, China, Iran, and other powers interact in multiple theatres simultaneously. Overextension in multiple theatres is a losing strategy because the costs of maintaining commitments exceed the benefits, and the resources devoted to one theatre are unavailable for others. The United States cannot win these wars, and the attempt to do so is accelerating its decline.
A materialist analysis must identify the class forces and material interests that structure the collapse. The financial oligarchy that controls the banking system and the petrodollar system is a class fraction whose interests are served by the current arrangement, and its resistance to change is the primary obstacle to reform. The working class, which bears the costs of the collapse through unemployment, inflation, and the destruction of pension savings, has an interest in the transformation of the system, but it is excluded from the decision-making processes that determine its fate. The coordination problem in the bond market is an analysis of the collective action problem facing the working class, which is dispersed and lacks the organisational capacity to challenge the financial oligarchy. The security dilemma is an analysis of the inter-imperialist rivalries that arise from the competition for markets, resources, and investment outlets. The synthesis of these perspectives yields an understanding of the collapse as a multi-dimensional process in which economic, strategic, and class dynamics interact to produce outcomes that are structurally determined but not mechanically predictable.
The response of the capitalist class to this crisis is not to reform the system but to intensify the exploitation of the working class. The hyperinflation that is now underway is a mechanism of expropriation that transfers wealth from wage earners and pensioners to the financial oligarchy. The wars that are being fought in the Middle East and Ukraine are mechanisms for the destruction of productive capacity in the periphery so that the core can maintain its monopoly on advanced production. The working class has an interest in opposing these wars, in demanding the socialisation of the banking system and the oil industry, and in building the organisations necessary to challenge the power of the capitalist class. The energy wars are a symptom of a system in crisis, and the crisis will not be resolved until the system itself is replaced.
The collapse that is now underway is not an accident but the logical outcome of a system in which the means of production and the means of finance are controlled by a small minority. The working class has an interest in the transformation of the system, but it is excluded from the decision-making processes that determine its fate. The coordination problem that prevents collective action is the primary obstacle to change, and the task of the working class is to build the organisations and consciousness necessary to overcome it. The final assessment must remain analytical rather than definitive because multiple plausible outcomes remain possible. The Western financial system could collapse in a banking crisis, triggering a global depression and a fundamental reordering of the international system. It could experience hyperinflation that destroys the savings of the middle class and concentrates wealth in the hands of the oligarchy, producing social unrest and political instability. Or the crisis could be managed through a combination of capital controls, debt restructuring, and the emergence of alternative financial architectures that reduce the hegemony of the dollar. The indicators that would confirm or undermine each scenario are observable as the trajectory of oil prices and oil production, the level of bank leverage and non-performing loans, the pace of money creation by central banks, the inflation rate, and the willingness of the working class to resist the expropriation of its living standards.
Authored By: Global GeoPolitics
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