A Nobel Economist Sounds the Alarm
As the Iran war heads into its second month, Paul Krugman’s assessment of what may be underlying the war is a rather dismal one. The assessment is not just of the war itself but is a commentary on what may be economically and politically underlying the war and what possible implications it may have on the world economy.
Paul Krugman has opined that the war may not just be a war in itself but may also be a part of a larger and more alarming trend of economic weakness, policy missteps, and elite excess.
“This isn’t happening in isolation,” wrote Paul Krugman, hinting that the war may become “the straw that breaks the camel’s back” for a strained American economy.
A Fragile Economy Meets Global Shock
One of the main issues with which Krugman is concerned is the timing of the war. His view is that “the war is arriving at a time when the global and American economies were already in a precarious state.”
Increases in interest rates, inflationary pressures, and the decelerating economy had already set the stage for a volatile situation. The war’s effects, considering the energy factors involved, might be too much to bear.
“The economy is subject to a great many strains,” said Krugman, “but the longer the war persists, the greater damage there will be.”
Oil, Energy, and the Real Risk
The crux of Krugman’s argument is energy, and this is where the Middle East still remains a vital part of the energy supply, especially with regard to the Strait of Hormuz, through which a significant portion of the world’s flows on a daily basis.
This has already resulted in oil prices rising to over $100 a barrel, which in turn has resulted in inflation in many parts of the world.
Krugman has already pointed out energy as a key area through which this war would result in a slowdown in economic growth.
“When oil prices spike, the effects ripple everywhere,” an energy analyst was quoted as saying, which echoes Krugman’s views on this subject.
Krugman has already drawn parallels with events in the 1970s, when oil prices were first hit, which resulted in inflation.
“I remember the gas lines and the panic,” he has written, which echoes his views on a possible repetition of these events.
A “War Without a Clear Plan”?
Apart from economics, another aspect of the war, which Krugman expressed his concern about, is the strategic nature of the war. In his articles, there were mentions of the possibility that the decision-making process in relation to the war may not be as strategic as people think.
“It becomes clearer with each passing day… that the people who took us to war… had no idea what they’re doing,” he mentioned in his analysis on the issue.
This is in line with the expressed concerns of experts on the war, specifically on the absence of an endgame strategy in the war.
“There’s a sense of drift,” mentioned a geopolitical expert. “That’s what markets and policymakers find most dangerous.”
The Influence of Wealth and Power
Perhaps one of the more provocative ideas put forward by Krugman was that economic interests might be at work behind policy decisions.
“Who put… this leadership in power?” he wrote, making a link between politics and economic power.
Although Krugman does not propose a solution to the war, his work encourages an assessment of the impact of economic power on foreign policy decisions.
“This is where his theory gets darker,” says a political economist. “It suggests that not just policy errors, but also structural forces are at work.”
Market Reactions and Suspicion
Krugman has also pointed to unusual activity in the markets with reference to important news coming out in the context of the conflict.
Such activity, it is suggested, is suspicious in the sense that it is believed some people might be making profits out of this.
“I’d very much like to know exactly who was making those trades,” Krugman wrote with reference to suspicious activity related to news about the conflict.
It is important to note that the above is speculative in nature.
Courtesy Of Ali Kazerooni ( Flickr CC0)Systemic Risk
Significantly, for Krugman, this Iran war is not simply an oil shock, but a part of a broader framework of risks which may mutually intensify each other.
The global supply chain is already under strain, and a rise in energy prices can result in food shortages and inflation.
Analysts have warned that if this war persists, it will result in a recession for the global economy.
“This is how crises compound,” an economist said. “One shock feeds into another.”
Are We Better Prepared Than Before?
In spite of his concerns, Krugman has admitted that “the economy is less dependent on oil than it was in the 1970s, which may help to alleviate some of the effects.”
The risks have been lessened with technological advances, alternative energy sources, and a more efficient use of oil.
But, according to Krugman, this does not mean we are not vulnerable, especially in a severe disruption.
“We may be more resilient,” said a market strategist. “But we’re not immune.”
A Warning About Duration
Another theme that is constantly seen in the analysis of Krugman is the factor of time. Small-scale wars are not a problem for the economy, but if the wars are prolonged, it may have a cumulative effect on the economy.
“The longer the war goes on, the heavier the burden becomes,” he warned. ()
The significance of the factor of time is seen in the fact that the markets are still sensitive to the war.
A Cautionary Outlook
The perspective offered by Krugman, however, is ultimately a perspective that needs to be taken into consideration, as it represents a sobering reminder of the Iran War, which represents a situation where there are elements of economics, politics, and structural risk at work. “This isn’t just about geopolitics,” the political economist explained. “It’s about how fragile the system already was.”
As this situation continues to rage on, the dark theory offered by Krugman helps to illustrate the fact that, ultimately, the biggest risk associated with the Iran War is the fact that a number of different factors are at work, and the implications of this are such that “The real risk,” it is suggested, “is that everything hits at the same time.”
The implications of this situation on the world economy, which will take a number of years to fully comprehend, are significant.
By William Hernandez
Journalist for Vlixx Magazine, reporting on news from around the world, ensuring timely, accurate, and detailed information to keep the public informed and educated.
Sources:
Slate : Economist Paul Krugman Has a Dark Theory About the Iran War
Global News: Here is what could tip Iran war oil shock into an ‘economic catastrophe’
Featured and Inset Image Courtesy of Farshad2Star Flickr Page – Creative Commons License
Inset Image Courtesy of Ali Kazerooni Flickr Page- Creative Commons License
