Popular Economics Weekly
There is plenty of speculation on the effects of killing Iran’s Quds Force General Qassem Suleimani. Of course the first question is how Iran will retaliate? But terrorist attacks by its proxies, such as by the Iraqi militias that were bombed by the U.S., should be the least of our worries.
More important is the effect on world oil prices and economic growth in general, since the only reason the U.S. economy is continuing to grow is the very low inflation coupled with very low, recession level interest rates. And that can’t be maintained if oil prices spike for some reason.
I say recession-level rates, since current interest rates were last this low during the Great Recession. It’s one reason the Federal Reserve had to lower interest rates three times last year. Otherwise the U.S. would already be in recession territory, since the manufacturing component has been shrinking for the past 4 months, according to the ISM’s Manufacturing survey.
We are skating on thin ice, economically speaking, since there were dangerous signals in 2018 when the Fed was raising interest rates to slow down incipient inflation and had to reverse course. The stock market plunged, because money was no longer cheap, and it raised fears of an oncoming recession.
So the unique combination of low rates plus low inflation has kept the U.S. growing in the 11th year of this recovery from the Great Recession, which is the longest post—WWII recovery on record.
But low inflation cannot last forever, as past history has shown. The question may not be skyrocketing oil prices, since the U.S. in now domestically producing more than 7 million barrels per day. But economic growth is already slowing with the tariff wars that have cut foreign trading by almost 25 percent, the UK’s Brexit battle, and now a possible Middle East war. Iran has many ways to create more trouble.
Texas intermediate crude prices per barrel stayed in the $100 per barrel range from 2011 to 2015, per the FRED graph, before coming down to the $50-$60 range in 2015. It was a major reason economic growth hasn’t risen above 2 percent this decade.
Then why has the U.S. been killing Iran’s leading general and Iraqi militia commanders in the recent drone attacks? Reuters is reporting that Iran-backed militias had already been planning attacks on U.S. installations and civilians with advanced weaponry brought in from Iran.
So a new Middle East war may have already begun.
Harlan Green © 2019
Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen