By waging war on Iran, Trump leaves the US economy more vulnerable

War in the Middle East is again producing an oil shock, as was the case in past years. For the chief perpetrator of the new shock – the United States – this will be a multi-front war where the financial impact could hit the country harder than import price shocks. The US is a debtor nation on a grand scale, running as it does both current account and budget deficits and therefore being highly dependent upon foreign capital inflows. Will the Trump administration’s antics – widely perceived as illegal rather than simply misguided – still allow the US to attract flows from international investors as the war continues? The reaction of financial markets to the war has been relatively muted so far, particularly in terms of equity prices. Movements in stock indices are what attract most attention among investors. However, what matters more is the impact on banks and other institutional lenders when it comes to investment in US bonds. If these financial flows are curtailed, what will be the impact on the American war machine, which supports US and Israeli attacks on Iran? These are questions that have gone largely unanswered. Some have focused on the fact that energy self-sufficient and even energy-exporting nations, such as the US, should be able to insulate themselves from energy import shocks or even find an economic advantage. The Financial Times, for example, noted in a report on March 9 that the shale revolution had transformed the US into an energy superpower over the past two decades. Some believe these strengths will endure. Genron NPO, a Tokyo-based non-profit research organisation, expects the US to “continue to use its military and economic strength to dominate the world through ‘stability through power’ for a long time”. But other forecasts of prospects for the US in a post-oil-shock world are more nuanced, pointing out that while high US domestic production partially shields US consumers against natural gas price rises, they are more exposed to price shifts in the global oil market. In other words, higher inflation is on the horizon for the US, even if not to the same extent as in the more energy import-dependent nations such as those in East Asia and Europe. Rising prices will make it difficult for the US Federal Reserve to bow to the wishes of US President Donald Trump for lower interest rates to support growth and to pay for a war of his own making. This could be only one of the financial consequences of Trump’s rash actions, as was illustrated, albeit without specific reference to the war on Iran, in the most recent issue of the International Monetary Fund’s Finance and Development publication. Writing for the publication, Era Dabla-Norris and Rodrigo Valdes note that fiscal policy has always involved trade-offs, but unprecedented debt levels and higher borrowing costs have raised the stakes. “Societies can reconcile competing priorities successfully only if they depend on something often overlooked and currently in short supply: public trust,” they write. Where is “public trust” currently in most short supply? The answer has to be trust in the US by the international community, given Trump’s rash and erratic foreign policy, as manifested in the attack on Iran, which cannot be justified as being in response to an imminent threat and far less as being in self-defence. “In a low-debt, low-rate world,” write Dabla-Norris and Valdes, “governments could sidestep hard choices by borrowing more and hoping economic growth would generate enough additional tax revenue to service and eventually repay the debt. But today, the era of easy choices is over. “Every dollar a government borrows without matching revenue implies higher taxes or lower spending in the future, at least to cover the additional interest the new debt generates. Beyond a certain point, more borrowing forces painful decisions – through austerity, inflation, financial repression or even default.” Those words, though not directed to any particular country, apply with particular force to the heavily indebted US. Unfortunately, this is not merely a case of Trump shooting himself in the foot or hurling a boomerang destined to come back and hit him and his administration squarely and painfully on the head. The rest of the world will be impacted too, and not only in terms of energy supplies and costs, but also in terms of inflation as well as consumption, investment and confidence – or even pressure from Washington to put “boots on the ground” in Iran. The war in Iran drives a further nail in the coffin of the post-war global order. According to Genron NPO’s report: “Only a minority believe that the UN will return to the centre of the international order, and the idea is growing that it will play only a complementary role in addressing security issues and global challenges.” While nearly 57 per cent of global experts surveyed by Genron NPO believe that allies will maintain their alliances with the US, just under 40 per cent believe that allies should reassess these alliances. While the Genron NPO report does not say so explicitly, such reassessments could result in nations pulling the financial rug from under the US via bond markets.

By waging war on Iran, Trump leaves the US economy more vulnerable

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}As Washington fights a war with global economic ramifications, allies may soon begin to reassess their financial support of US coffers

As Washington fights a war with global economic ramifications, allies may soon begin to reassess their financial support of US coffers