Economist Warns 50-Year Crisis To Break Market Bubble

Introduces the topic: comparing current geopolitical oil risks to the 1979 crisis, noting the Strait of Hormuz closure and oil price surge to $86/barrel.

David

Steve Hanke

The potential for oil disruption is lower today than in 1979 because Iran's production share is smaller (5.2% vs 8.5%), Middle East share is lower (31% vs 34.3%), US production is higher (18.9% vs 15.6%), and oil intensity per GDP has dropped dramatically.

References his long history in petroleum economics and a 1985 OPEC collapse prediction to establish credibility.

Steve Hanke

The oil price increase is not inflationary per se; inflation is always a monetary phenomenon. Using Japan in 1973 vs 1979 as an example, he argues that if central banks don't accommodate the price rise with money supply expansion, general inflation does not follow.

Criticizes media narratives that oil price rises cause inflation, stating they only change relative prices.

Steve Hanke

The stock market is in a bubble (PE ratio ~29 vs 8 in 1978), making it vulnerable to an external shock like this war. The negative wealth effect from a market crash would ripple through the economy.

Notes that the equity market hit has been surprisingly small given the high valuations.

Steve Hanke

The quickest way to mitigate the acute oil problem is to pivot towards Russia and lift sanctions to allow the shadow fleet's stored oil to be offloaded.

Mentions that Iraq and Kuwait have shut down oil fields due to full storage, creating additional costs.

Asks what the US government can do to stabilize gas prices short of price controls.

David

Steve Hanke

Advises dropping sanctions on Russia as step one. Also confirms the Strategic Petroleum Reserve (SPR) could be used, noting a rule of thumb: every $10 change in crude leads to a ~25 cent change in gasoline per gallon.

States that without price controls, the market will clear and there will be no lines at gas stations.

Challenges Hanke on inflation, citing Mohamed El-Erian's view that the conflict is stagflationary.

David

Steve Hanke

Reiterates the Japanese example and states that the inflation genie will not be put back in the bottle because the money supply (M2) is already accelerating. The Fed has stopped QT and started QE, and bank lending is loosening.

Predicts the Fed will cut rates due to a weakening labor market (citing a loss of 92,000 jobs in February) and political pressure, not because of oil prices.

Steve Hanke

Dismisses the de-dollarization narrative as 'rubbish', citing a 31% increase in net investment inflows to the US last year and a strong dollar-euro exchange rate.

Advises Asian central banks like Indonesia to maintain steady monetary policy and recommends a currency board system to avoid currency problems.

Asks about China's reaction to the Strait of Hormuz closure, given 40-50% of its crude imports pass through it.

David

Steve Hanke

China will do whatever it has to do to preserve the Iranian regime. The conflict is already spiraling out of control beyond the Middle East.

Notes that China has been increasing its oil storage, suggesting they saw trouble on the horizon.

Steve Hanke

The US is fighting Netanyahu's war. The Israeli lobby in Washington is very powerful, and Trump will do whatever Netanyahu tells him to do. The list of strategic benefits for the US is very short, while the costs are enormous.

Cites books by Mearsheimer/Walt and O'Rourke on the failure of US regime change attempts, predicting this will also end in disaster. Warns of massive long-term political costs and creating enemies in the Muslim world.

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