Opinion
U.S. Escalation Is the Most Likely Scenario in Iran.
—
By Nouriel Roubini
As seen in: Project Syndicate
The financial and economic implications of the US-Israeli war with Iran will depend on the war’s duration. The longer it goes on, the longer we can expect oil, gas, fertilizer, helium, and other prices to remain elevated. The greater the damage done to the Gulf’s oil production and export facilities, the greater the stagflationary pressure, which will have a major impact on global equity markets, bond yields, and credit spreads.
The economic damage from higher inflation and lower growth would be most severe in Asia, which is suffering both an energy-price and -quantity shock. Europe is facing negative terms-of-trade pressure and serious inflation risks, but its energy-supply shock will be more limited than in Asia. The United States, by contrast, is looking at a positive terms-of-trade shock, because it is a net energy exporter. Nonetheless, US inflation will be higher and its growth lower, because those who consume energy (households and businesses) will spend less, whereas those energy producers who enjoy windfall profits will not produce or invest more (knowing all too well that the shock is temporary).
The Trump administration and Israel made two serious miscalculations. They assumed that decapitating the Iranian leadership would cause the regime to collapse in a few weeks, and that Iran would prove unwilling or unable to block the Strait of Hormuz or damage Gulf energy-production facilities. They were wrong, and now the market is pricing in US President Donald Trump’s desperation for an off-ramp—the famous TACO (Trump always chickens out) scenario.
Read the full Project Syndicate article.
___
Nouriel Roubini is a Professor Emeritus of Economics and International Business and the Robert Stansky Research Faculty Fellow.