“The past is never dead. It’s not even past.”
William Faulkner, Nobel Prize Winner
Western news outlets treat the current Middle East conflagration as if it exists in a vacuum, disconnected from the compounding economic disasters of the past five years.
They’re wrong. Dead wrong.
The war’s effects are not single-dimensional. They compound and connect with other recent economic and military crises, including the COVID-19 pandemic and the ongoing Ukraine war.
The global pandemic first awakened the world to supply chain collapse: toilet paper shortages, empty supermarket shelves, stay-at-home Zoom culture. Governments spent trillions supporting unemployed workers and failing businesses, deliberately inflating economies to counter the pandemic’s deleterious effects.
The US Federal Reserve had only recently completed its interest rate cycle before facing the Iran war and Hormuz closure. Now, with inflation rising from an energy supply crisis, the Fed sits paralyzed while rate increases loom again.
The Ukraine war created similar shocks: skyrocketing energy costs, shortages of essential grain and fertilizer from two world-class producers and exporters. The war triggered a global recession, now easing in some regions, but many nations still struggle with its effects.
Germany exemplifies the damage. The EU’s economic workhorse slides into its third recession, battered by high energy prices and US tariffs. Europe suffers acutely from rising energy costs. Africa and the Global South endure far worse.
Given these crises’ long tails, one might expect caution from any world leader before compounding their effects with a new Middle East crisis capable of shattering the global economy. One might also expect the US had learned from failed Middle East wars in Afghanistan, Iraq, and Syria.
Instead, we have a President‚ a quintessential one-dimensional thinker who ignores history’s lessons and the implications of his actions, setting the global economy ablaze. As his disasters mount, he claims complete innocence through bewildering one-dimensional thinking in a multidimensional world:
- Iran won’t dare close the Strait of Hormuz (despite warnings from his generals and Iran itself)
- The Navy will escort oil tankers through Hormuz
- We’ll use military force to open the Strait
- We don’t even need the Strait of Hormuz
- On Iran’s attacks on US regional bases: “We hadn’t expected that”
On Israel’s bombing of Iran’s South Pars‚ the world’s largest natural gas field‚ Trump claimed Israel attacked without informing the United States or Qatar, while Israel insisted Trump gave the green light. Results: Qatar, the world’s largest liquefied natural gas exporter, sits offline indefinitely after Iran’s retaliatory bombing following Israel’s strike on Iran’s South Pars Field.
The consequence:
According to Goldman Sachs, the Hormuz’s closure could peak at a loss of some 17 million barrels of oil daily from world markets‚ an amount global producers cannot replace. The result: In just two weeks, oil prices rose from $70 per/barrel to $100+ per barrel, a 40% increase.
The fact is that the world simply cannot afford oil at these prices. Signs of inflation rising is everywhere; One example, the US stock markets are crashing, with highflyers like Microsoft losing $1.25 trillion in market cap. This is only four weeks.
Bond yields increased by more than 40 basis points, climbing from 3.96 (2/28) to 4.40% (3/24) as their price fell, making home mortgages and car loans more expensive.
The market quickly adjusted to the expectation that the Federal Reserve would hold off on interest rate cuts or potentially hike rates to battle the inflationary pressure from the energy supply disruption. Informed investors quickly switched their investments from buying the dips to selling the peaks.
For consumers the worst is yet to come. The Hormuz closure not only effects energy shipments but also fertilizer shipments. The combined price rise of fertilizer and transport will inevitably force food prices higher, bad news in the West, a disaster for the global south.
Political Consequences: Winners and Losers
Major European allies have lost all trust in Trump, as clearly illustrated by their refusal to answer US calls for help in the conflict. As Bloomberg reports, international chaos from the US/Israel attack on Iran has sent European leaders racing to Beijing to rebuild bridges with China.
China has assumed the Middle East mediator role while arming Iran. The Iran conflict has likely killed Trump’s dream of a grand bargain with China.
Russia emerges as a major winner. The US temporarily dropped sanctions on Russian energy industries to counter global shortages. Russia now replaces Iran as the largest energy provider to China, India, and Japan‚ now at premium prices, thanks to Hormuz’s closure.
US sanctions on Iranian oil would also be dropped to counter the energy crisis Trump created, a classic example of closing the barn door after the horses have fled.
So much for winning.
Conclusion
The war’s shattering effect on the global economy and collapsing stock and bond markets has forced Trump to suddenly seek a quick end. As Netanyahu stated, the war will end sooner than anyone expects because Iran’s nuclear capabilities and missiles have been destroyed (Bloomberg). Translation: world pressure has grown so intense it’s time to declare victory and leave.
Yet, even as Trump temporarily pauses on his threat to bomb Iran’s power stations, while also proposing a cease fire plan that Iran immediately rejected, an anxious world awaits to see if a US invasion of Iran is still in the cards.
Skyrocketing energy and commodity prices may not be the worst disaster the world faces. The greater threat: a bewildered world leader who fails to understand the world around him or its history.
Bob Berke may be contacted at [email protected]