The main reason to be pessimistic about the war between Iran versus the United States and Israel is the lack of path towards peace. The United States does not have a plan that is remotely viable, since there is little sign that the Iranian regime will collapse. On the Iranian side, the plan appears straightforward: strangle traffic through the Strait of Hormuz until the damage forces third countries to move in directions favourable to Iran (e.g., expel American bases).
We appear to be on a worst case trajectory — American and Israeli leaders unable to find a meaningful way to end the conflict, and Iran closing the gulf to shipping traffic for an extended period. There is no sign of the American leadership having any plans for containing the economic fallout, and they are scrambling for ways of posting their way to victory.
The last 24 hours were chaotic in the oil futures and equity markets. From the perspective of an East Coast North American time zone, oil futures (both West Texas Intermediate and Brent) had record intraday upward movements, and equity indices tanked Sunday night. The carnage slowed down until a press release on 3:30 PM Monday that suggested the war was over, which caused a reversal in North American equities and oil futures markets to around Friday’s levels. President Trump gave an erratic press conference after the North American market close which both had claims of victory and statements that the war would be continued.
The main global economic risk associated with the renewed war against Iran is an energy price spike. (Regional problems are very easy to see.) I discussed energy price spikes in Section 5.4 of Interest Rate Cycles: An Introduction. A very short-term spike would not matter that much, rather the risks are of an extended period of a reduction in energy exports from the region. Once again, political risks emanating from an erratic American executive overwhelms traditional econometric business cycle analysis.
It is possible to see a way to a relatively rapid end to this this phase of the conflict — Israel and the United States and other allies have total control of the air in terms of conventional air weapons. There are indications that Iran remains willing to make peace.
However, the statements of the American leadership are shambolic, and there is no clear war aim that is achievable. Without committing boots on the ground to occupy Iran, discussions of regime change are fantasy. Meanwhile, it is entirely possible that Iran has far more unconventional drones than the U.S./Israel have interceptors that they are willing to commit. The striking power of groups aligned with Iran is unclear to me, but it appears that they have been weakened ahead of this (although future recruitment will be easier).
This article is a preliminary unedited draft section of my inflation manuscript. There are therefore references to other “sections” and charts in those sections that the reader is unaware of. That manuscript has been on the back burner for some years now. I was not happy with the text, and rather than just push it out, I decided to wait and move onto other projects. I have done a partial re-write and update, and I am now happier with the text. No promises as to when it hits bookstores.
This section discusses an idea that pops up in various contexts. The basic premise is a reaction against the idea that “deflation is bad,” which is a common view that was cemented by The Great Depression of the 1930s (and not the earlier Great Depressions, which I will get back to later in this section).
