The Economic Consequences of Trump’s Iran War (w/ Catherine Rampell) | Bulwark on Sunday
Quick Read
Summary
Takeaways
- ❖The US economy was already showing signs of fragility before the war, including zero net job creation over six months and elevated inflation.
- ❖Trump administration policies, specifically tariffs and immigration restrictions, contributed to pre-war inflation and stagnant employment.
- ❖The war in Iran, particularly the closure of the Strait of Hormuz, immediately disrupted 20% of global oil and liquefied natural gas supply.
- ❖Bombing of critical energy infrastructure (e.g., South Pars natural gas field, Qatar's processing facility) causes permanent damage, requiring years for recovery.
- ❖Oil prices surged, with United Airlines planning for $175/barrel, leading to increased jet fuel costs, higher airfares, and flight cancellations.
- ❖Rising oil and gas prices have ripple effects on everyday products, including fertilizer (impacting crop prices) and petrochemical-based consumer goods like shampoo.
- ❖Consumer spending on non-essential goods is reduced by increased gasoline costs, creating a vicious cycle of business uncertainty and reduced investment.
- ❖The risk of stagflation (high inflation, stagnant growth) is elevated, presenting a dilemma for the Federal Reserve's dual mandate.
- ❖A 'taco' feedback loop, where markets' negative reactions to Trump's policies previously caused him to pull back, is now broken, removing a key check on destructive actions.
- ❖China has proactively invested in renewables and coal to reduce its vulnerability to global oil price shocks, demonstrating a long-term strategy for energy independence.
Insights
1Pre-War Economic Fragility: Zero Job Growth and Elevated Inflation
Before the hypothetical war, the US economy was already on shaky ground. The Federal Reserve estimated zero net job creation over the past six months, indicating a lack of dynamism. Inflation remained higher than desired, partly due to lingering effects from COVID-era fiscal policies and the re-ignition of inflation by Trump's tariffs. Additionally, reduced legal immigration contributed to a shrinking labor force of native-born individuals, creating a worker shortage in key sectors like construction and agriculture.
Catherine Rampell states, 'before the war started the economy was kind of like chugging along but there were definitely some signs of fragility out there. So just as an example, if you look at the jobs numbers, the Fed thinks that we have had zero job creation in the past 6 months.' She also notes, 'the tariffs probably reignited inflation to some extent.'
2War's Immediate Impact: Strait of Hormuz Closure and Infrastructure Destruction
The war immediately escalated economic risks by targeting critical energy infrastructure and disrupting shipping routes. The Strait of Hormuz, through which 20% of the world's oil and a similar fraction of LNG transits, was shut down. Beyond blockades, direct bombing of facilities like the South Pars natural gas field (largest in the world) and Qatar's largest natural gas processing facility caused permanent damage, with recovery estimates as long as five years. This means the disruption is not easily reversible.
Rampell explains, 'the straight of Hormuz... is responsible for transiting 20% of the world's oil supply... And when that gets shut down... that just unilaterally in like in one fell swoop takes out a fifth of the world's oil from traveling.' She adds, 'Israel bombed the South Pars natural gas field which is the largest natural gas field in the world... Iran bombing a bunch of refineries or other kinds of facilities around the region... the largest natural gas processing facility in the world which is in Qatar... it'll be like five years before potentially they get that back online.'
3Widespread Inflationary Ripple Effects Beyond Fuel
The surge in oil and gas prices has far-reaching inflationary consequences beyond just gasoline. Jet fuel prices doubled, leading airlines like United to plan for $175/barrel oil and implement higher airfares and flight cancellations. Crucially, the impact extends to products made from oil and gas byproducts, such as fertilizer (a third of the world's urea fertilizer transits Hormuz), which then drives up crop prices. Even everyday items like shampoo, containing petrochemicals, will become more expensive, embedding inflation across the economy.
Rampell notes, 'the CEO of United Airlines said that they were planning on the assumption that oil will go to $175 a barrel... jet fuel, which I think has already doubled in price because jet fuel is made from oil, uh, jet fuel is going to continue to be really expensive.' She further states, 'fertilizer that gets made uh from the byproducts of natural gas and I think something like... a third of the world's ura which goes into a nitrogen fertilizer comes through the straight of Hormuz that is now disrupted.'
4The Broken 'Taco' Feedback Loop and Market Complacency
Historically, markets would 'freak out' in response to Trump's economically destructive announcements (e.g., tariffs), prompting him to 'taco' or pull back. This market reaction served as a crucial feedback mechanism. However, market participants became accustomed to this pattern, anticipating his eventual retreat and thus tempering their initial negative responses. This complacency has broken the feedback loop, meaning Trump may no longer receive the clear market signals that previously moderated his actions, increasing the risk of unchecked destructive policies.
Rampell explains, 'market participants started sort of tempering their response because of taco... it became evident that Trump would like announce a really uh horrific economically thing and then he would be chasened by the market reaction and he would pair it back.' She concludes, 'The thing that was causing Trump to chicken out was the market flip out. So if the markets are not flipping out, the worry is he's not getting the feedback that he needs.'
Key Concepts
Stagflation Dilemma
A situation where an economy experiences both high inflation and stagnant economic growth. This creates a policy dilemma for central banks like the Federal Reserve, as actions to combat inflation (raising interest rates) can worsen stagnation, and actions to stimulate growth (cutting interest rates) can exacerbate inflation.
Broken Feedback Loop (Taco Effect)
Refers to a situation where markets initially react negatively to a leader's economically destructive policies (e.g., tariffs), prompting the leader to 'taco' or pull back. Over time, markets anticipate this pullback and temper their initial reaction, thereby removing the feedback mechanism that previously incentivized the leader to change course, leading to potentially more reckless policy decisions.
Uncertainty as a Corrosive Economic Force
High levels of economic and geopolitical uncertainty deter businesses from making long-term investments (e.g., hiring, expanding, investing in new infrastructure) and cause consumers to reduce discretionary spending. This collective 'freezing' can slow economic activity, even before direct impacts of a crisis are fully realized, and can become a self-fulfilling prophecy for recession.
Lessons
- Businesses should stress-test their supply chains for vulnerabilities to geopolitical shocks, particularly those reliant on critical chokepoints like the Strait of Hormuz.
- Policymakers must consider the long-term economic implications of military actions, especially the potential for permanent infrastructure damage and the exacerbation of pre-existing economic fragilities.
- Investors should monitor a broader range of indicators beyond oil prices, including fertilizer prices and crop futures, to anticipate widespread inflationary impacts from supply chain disruptions.
Quotes
"Before the war started the economy was kind of like chugging along but there were definitely some signs of fragility out there. So just as an example, if you look at the jobs numbers, the Fed thinks that we have had zero job creation in the past 6 months."
"The straight of Hormuz... is responsible for transiting 20% of the world's oil supply through there. I think it's a similar fraction of the world's liquefied natural gas goes through there. And when that gets shut down... that just unilaterally in like in one fell swoop takes out a fifth of the world's oil from traveling."
"The CEO of United Airlines said that they were planning on the assumption that oil will go to $175 a barrel and that it will remain elevated above $100 a barrel until at least 2027."
"The number that I saw was that like uh American consumers are spending an extra $300 million a day than they were about a month ago just on gasoline. And they can't easily scale back from that because they have to drive to work, they have to take their kids to school, etc."
"The thing that was causing Trump to chicken out was the market flip out. So if the markets are not flipping out, the worry is he's not getting the feedback that he needs."
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