When the System Breaks, the Working Class Pays

Tracing the Economic Fallout from Hormuz to the American Labor Market

Look at South Korea today. That’s the canary in the coal mine for everyone else.

The KOSPI Index plummeted 12 percent in one session, having already dropped 7 percent the day before. This event triggered a trading halt and eclipsed the single-day plunge following the 9/11 attacks in 2001. Of the more than eight hundred stocks listed on the benchmark index, ten finished in the green. A market volatility measure spiked to its highest level since 2008. Korean stocks have plunged more than 18 percent this week and are tracking for their worst weekly performance since the global financial crisis.

This is not some niche market that nobody pays attention to. This is South Korea, home of Samsung, SK Hynix, Hyundai, and LG, the world’s 14th largest economy. The boom in artificial intelligence has made it a darling. Memory chips and hype-fueled exuberance in technology stocks have propelled the country’s benchmark KOSPI index up around 40 percent at its highest point this year. On a price-to-earnings basis, it was trading in overdrive. Over the previous 12 months, the KOSPI had leaped more than 100 percent. Samsung Electronics soared 216 percent all on its own. SK Hynix, a semiconductor memory manufacturer, climbed 356 percent.

Retail investors crowded in, leveraging up with margin debt reaching unprecedented levels. The iShares MSCI South Korea ETF became the darling of individual investors, experiencing its most frenetic period of trading as participants sought to board the express elevator to riches. Everyone figured the good times would last forever.

Then they watched the Strait of Hormuz close, and everything reversed at the drop of a hat.

The immediate question is whether Americans should care about a crash in Seoul. After all, the US market is different, being broader and more diversified. Nvidia and Apple together represent about 14 percent of the S&P 500 while Samsung and SK Hynix alone account for more than a third of the Korean index. The US has circuit breakers and doesn’t see 12 percent single-day drops.

That’s the wrong way to look at it though. It’s not a question of whether there will be a US Market crash just like Korea; rather, we should ask what Korea has to teach us about the forces operating all over the world. The real story is the extreme concentration and the borrowed money chasing a story that seemed too good to check. The government encouraging it all, seeing a rising stock market as the answer to structural economic problems. It’s a tale of an economy based on hype, where investors convinced themselves that this time was different, and that the AI narrative would deliver results into the indefinite future.

Korea has just been buffeted by an external shock, which has exposed its vulnerabilities. While the US has yet to be similarly shocked, it’s on its way. The American economy was already on the exact same trajectory even before the war.

The Global Choke Point

That’s where we were. The economic foundation was cracking in places no one wanted to look at, and yet the stock market kept going up and up. Now drop a war on top of it all.

You don’t much think of the Strait of Hormuz until you have to. A channel on the southern border of Iran, it connects the Persian Gulf with the Gulf of Oman, and it’s maybe 33 kilometers across at its narrowest point. Through it passes some twenty percent of the world’s seaborne oil on a daily basis. Twenty percent of all the world’s shipped LNG as well. A third of the most widely used fertilizer.

This waterway is the funnel through which the lifeblood of the modern world flows. It’s the lubricant of global civilization. Now it’s cut off with Iran having declared they’ll burn any ship that tries to force its way through. The Revolutionary Guards and the regular navy are out there enforcing the blockade, and the tankers are now burning. But Iran doesn’t even need to get every single ship trying to pass through. The mere possibility of a sinking is enough because the insurance companies start edging away at the first sign of trouble. And without insurance there’s no shipping.

The news of the closure sent oil prices reeling. Brent crude spiked 13 percent, to a high not seen in over a year, and things only got worse from there on out. QatarEnergy, the world’s biggest LNG producer, shut down its facilities at Ras Laffan and Mesaieed got hit. Saudi Arabia closed its main oil refinery at Ras Tanura after a fire broke out from a drone attack. Iraqi Kurdistan suspended production, with two hundred thousand barrels a day flowing in February now gone. Israeli gas fields went offline, and Chevron received an order to mothball Leviathan, which had been expanding rapidly to exploit a recent $35 billion export deal with Egypt.

Europe’s Energy Mirage

To understand the significance of those shutdowns, you have to wind the clock back a few years. When the Ukraine war broke out, there was a great public effort by Europe to wean itself off Russian energy. There were speeches and promises. Energy independence was talked about as if it were a mirage in the desert. And they actually sort of did it, with Russian gas having dropped from around 48 percent of European imports to just 12 last year. But that gas still had to come from somewhere, and Qatar was already supplying around 14 percent of LNG. It was the world’s leading producer of LNG, it was friendly, and it was willing to sign long-term supply contracts. European leaders flew to Doha, inked deals, shook hands, and congratulated themselves on having outsmarted Putin.

Now, let’s again look at what’s happening in Ras Laffan. QatarEnergy’s production facilities were heavily damaged in the Iranian strikes. The disruption was so profound that production has ground to a halt, and they’ve declared force majeure on shipments. The gas that was supposed to keep Europe’s lights on is offline. So there Europe is, having spent years and billions to wean itself from Russian gas, and now watching its alternative vanish in a puff of smoke.

And here’s where it gets worse. Putin announced that Russia might halt most of its natural gas sales to Europe altogether. The EU had been talking up phasing out Russian gas by late 2027. Putin’s response was, why wait? “Other markets are opening now,” he said on state television. “Maybe it’s better for us to end supplies to the European market right now.”

Think about Europe’s predicament here for a moment. They bet on Qatar which is now offline, and Russia isn’t about to rescue Europe. Why should they? Putin has friends in Asia who will be happy to buy whatever’s for sale at a discount. Why help your enemy when you can help their competitors instead?

Europe is in a real bind now. An LNG tanker carrying Nigerian gas to France just made a sudden turn and instead set course for Asia. European gas prices have already spiked 53 percent since Friday and are at their most expensive levels since 2023. At the same time, gas storage in Europe is less than one-third full, against a seasonal average of about 45 percent. The preparation for next winter begins now, and at these prices, with this depletion rate, it’s going to cost a pretty penny.

So the Hormuz closure cuts off Middle East supply. Russia is exiting the European market faster than expected. Europe is being pinched from both ends at the same time, and there’s no longer a major supplier left to turn to.

You might wonder about the US here. The US does indeed export LNG, but it simply can’t fill a gap this large. Existing export terminals are already operating at full, and increasing capacity takes years. Even if there were surplus capacity, the US is wise enough to put its own needs first. Every cubic foot of gas delivered to Europe is one less cubic foot to heat American homes or run American factories.

There are no other major players with enough spare capacity sitting idle waiting to step in at a time when the world’s energy system, which was already tight even before the war, is being asked to make up for a staggering shortfall of seaborne oil, LNG, fertilizer shipments, and a major chunk of Russian supply that Europe was still depending on. The math here does not work.

An Interconnected Collapse

We’re seeing a whole system of things breaking all at once, with each crisis turning the same screws. Europe feels it first and worst. It built its whole energy strategy on mirages that vanished overnight. But the US isn’t exactly insulated either. When your partners slow down, your exports slow down with them. Beyond a certain point, imagining the US is insulated is a category error. The world economy is deeply interconnected. A slowdown in Frankfurt means a slowdown in Ohio six months later.

The direct cost, as calculated by Penn Wharton, is observed to have a conservative estimate of some $40 billion if military operations are limited and $95 billion if they prove more protracted. Then there’s the broader economic impact which includes the loss of trade and the evaporation of financial markets, adding up to about another $115 billion. And then there’s the tariff mess currently tied up in court, that could result in another $179 billion having to be refunded. That’s all based on a scenario where the conflict only lasts a couple of months, which seems increasingly likely. On top of all that, the pace of ammunition expenditure is far higher than its manufacturing capacity, some estimates suggest depletion of critical stockpiles in a matter of weeks. Just the cost of rallying the fleet and getting airpower deployed came to a cool $630 million. All this money has to be extracted from the existing budget, implying that something else will have to go unfunded down the road.

But the cost that matters most isn’t even the budget line. It’s the cost that shows up in places like Seoul. Korean retail investors have, in some sense, cottoned on. Their government believed that a rising stock market might be the cure for economic stagnation, and so these investors borrowed record amounts of money and piled it into those companies, driving margin debt to its highest level ever.

The combination of oil prices driven up by the war and leverage, which amplifies every loss, precipitated a cascade of forced liquidation. Foreign investors ended up taking $8 billion out of Korean stocks in just two days. The index of volatility jumped to 2008 levels. Trading was suspended. And underneath all that financial distress is a real economy in worse and worse shape. Because Korea imports almost all its energy, every dollar oil costs more is a body blow to the nation. Manufacturers are taking it on the chin, and consumers feel it at the pump. Traders now see two interest rate increases from the Bank of Korea just to keep inflation in line.

But when Korean firms stumble, US supply chains also writhe in pain. With Korean stocks tanking, and capital fleeing from risk, Korean consumers have less discretionary income, and the sales of US exporters also take a hit. Korea offers a case study on how fragile it all is, how vulnerable when the debt-fueled exuberance of a bubble economy encounters a negative supply shock no one saw coming. There’s a Korean equivalent to this vulnerability in US equity markets as well, especially the high-flyers of the AI complex. Different architecture, but same essential reality.

After all, the AI economy runs on enormous amounts of energy. Data centers are insatiable for electricity, and that power requires a lot of fuel. Every search query, every training run of a new model, every automated task, is one more use of power. So if there’s a sharp increase in the price of energy, and it sticks, operating costs will soar. The largest companies may be able to weather the hit, and they might be able to pass some cost along to customers. But the arithmetic by which we justify those sky-high valuations of today changes. The ability to go to investors for money for the next round of investment contracts. Those startups without a large safety net get pinched. And bubbles pop when there’s a big disconnect between market expectations and economic reality.

A Domestic Reality Check

Domestically, the cracks are already showing in the labor market. On one side you have the stock market riding a wave of AI hype that’s keeping it afloat. The numbers up there are gorgeous, telling a story about a thriving economy and unbounded growth. But, the other side, where the human beings actually live, is like looking in a dark mirror. Industrial production has been contracting for nine straight months, just a slow bleed that nobody wants to talk about. The Institute for Supply Management kept running the numbers and watching them come in mostly under that 50 percent threshold that separates expansion from contraction. New orders were sagging, supplier deliveries were slowing, employment was dropping at a faster clip than the month before. And underneath it all there’s a quiet confession from those surveyed, with 67 percent of them saying managing headcounts is still the norm, as opposed to hiring. That’s just a polite way of saying nobody’s actually bringing people on.

The Bank rate is the number that holds you back, with 59 percent of Americans lacking a measly thousand dollars in emergency funds. That’s money to pay for a broken transmission in the car you depend on, or an urgent care visit to the doctor, or a new refrigerator when the old one finally expires. But for most people, that kind of money is the difference between getting by and falling behind. The situation had worsened from 2024 to 2025. News reports claimed that inflation was subsiding, but the cost of living continued to rise, and more people than ever were dipping into their credit cards, forcing them to carry interest rates of 24 percent just to buy groceries, or medicine, or gasoline for the tank.

Twenty-seven percent of Americans have no emergency savings. None. Nothing. Another 29 percent have enough to cover less than three months. So when the furnace dies, or the transmission seizes, or the water heater fails, they have to borrow. They borrow from relatives, from credit cards, from those buy now pay later apps that people are increasingly dipping into for groceries and not just for gadgets. Consumer spending keeps humming. But the foundation is cracking, even as the news insists it’s still sound.

The Bureau of Labor Statistics tracks long-term unemployment, defined as being jobless and seeking employment for at least six months. Right now, 1.8 million Americans, one in every four of the unemployed, fit this category. This figure has been increasing for three consecutive years. The official rate stays the same. Politicians can still get away with saying the economy is humming, but the gap between the misleading statistics and people’s daily experience keeps growing.

Job openings have been declining since the post-pandemic hiring surge in 2022. In all of 2025, there were just 181,000 net jobs added by the private sector which is a fall from 2.2 million in 2024. But layoff announcements reached 108,000 in January alone. The architecture of the job market is shifting as well, in ways that make it harder for specific groups to find footing. Postings for entry-level jobs are down about 35 percent from January 2023. So, you get people graduating from top schools and doing everything they’re supposed to do. They’re submitting dozens of bespoke applications each week, networking, following up, only never hearing back, or sailing through eight rounds of interviews, say, and then the company just stops responding. The average job opening today receives 242 applications, triple the number in 2017, with most of those never even glanced at by a human being.

If you’ve been out of work for any length of time, the situation becomes much more dire. In most states, unemployment benefits run out after six months. But even if you’re eligible, they rarely compensate you for more than 40 percent of your lost earnings. Savings dwindle, and people move in with relatives if they’re lucky enough to have ones who can afford them. Part-time employment. Gig employment. You take whatever paying work is available. Former six-figure earners are delivering food because there’s nothing else.

The cost is more than just financial. There’s a mental price exacted as well. You have the need to demonstrate that you’re still trying, still valuable, still worthy of being hired even as the rejections mount, the little social minefields. Every time someone asks how the search is going, you’re faced with a tedious process of having to decide whether to lie, to tell the whole story, or merely to assent, the slow attrition of your sense of self-worth as you find yourself doing everything right and going nowhere.

Right now, there are about a million more people looking for work than there are job openings. That’s the reserve army of labor being built. The tightness of the job market is measured by the ratio of jobseekers to job openings, and the leverage is on the employer side, which means lower wages, less bargaining power, more rounds of interviews, more ghosting, and more people falling out of the labor force entirely when they give up.

It was already happening before the first bomb fell. Before the strait was closed, before Qatar diversified away from manufactured goods, before Russia announced it would sell to other places, before energy costs were marked up, before the Korean margin calls began to accumulate, before the whole fragile mechanism of the world economy began to jam and scrape.

The pressure keeps mounting. Higher energy prices ripple through the economy, increasing the cost of transportation and manufacturing and heating and air conditioning, businesses are squeezed, families on marginal incomes are pinched. Businesses respond by hiring less and laying off more, and families cut back on spending. That means less earnings for the businesses, which then feel even more pressure to trim their expenses. The vise keeps closing.

Most humiliating of all to acknowledge is the fact that for many this is not a passing aberration, a bleak interlude from which they will emerge when the economy rights itself. This is something more profound. People are lowering their expectations because they’re just too weary. They settle, take what they can get, and try not to think about what they thought their life would look like. Such surrender is socially corrosive long before it becomes fiscally ruinous.

The Inevitable Breaking Point

Now bring it back to Korea and the strait of Hormuz. It goes back to Putin’s announcement. The situation loops around back to the AI bubble, the higher energy costs, the margin calls, the forced liquidation. All these threads weave together. The pre-existing fragility, the industrial atrophy, the jobs’ drought, the depletion of savings. That’s the baseline.

The stock market may be able to stay afloat for a little while. It might even go higher. Markets have a tendency to do that, especially just before they crash. But down there in the real economy the pressure keeps building, and it’s doing so methodically and implacably.

Can the system take another hit like 2008? Sure, maybe. Large systems are resilient in the face of shocks because of their inertia. But that’s not the right question, or at least it’s not the only question. We should ask what the mechanism is underneath, where you look beneath the hood. Here’s how these dislocations work. The system accommodates them by shifting the load onto the human beings inside it, onto those who still have a little give left. The costs are borne out of savings, out of retirement accounts, out of home equity, out of the margin that allows people to help a child through college or pay a medical bill without falling behind. It all comes out of the safety net of the people. Every dislocation, every wave of layoffs and budget cuts and financial chicanery, that’s Wall Street shorthand for theft, takes just a little bit more away from what the ordinary families have managed to scrape together.

The system looks sound from the outside because those at the bottom keep soaking up the strain, keep cutting back, keep spending what little they have instead of defaulting all at once. But everyone knows this has a breaking point. You see it when too many people are already scraping by, with nothing more to trim. When over half of Americans can’t cover a small unexpected expense, the only way they can manage a new crisis is by stopping the rent, or skipping meals, or declaring bankruptcy. Eventually those who’ve been propping everything up finally run out of give. The shock hits those who’ve been precariously close to slipping through the cracks. The crises cascade. When these people go down, they bring the rest tumbling with them. You don’t notice the ground eroding until suddenly there’s nothing left to stand on.

Korea is the canary. Europe is the next domino. The only question that remains unanswered is when the tidal wave will reach America’s shores.