Interesting author as well
John Rapley is a contributing columnist for The Globe and Mail. He is an author and academic whose books include Why Empires Fall and Twilight of the Money Gods.
Donald Trump said he’d blow up Kharg Island. He may have blown up the bond market instead.
The market has been a tinderbox for months, if not years. Government debt has been rising for decades but blasted off after the 2008 financial crisis, then reached hyper-speed during the pandemic. In consequence, the total global stock of government debt has risen fivefold since the turn of the millennium, with Western governments and China accounting for most of the increase
As a result, global investors are being asked to buy ever more bonds by governments that show no desire to reduce their borrowing habits.
Further kindling has been added through recent moves by AI ‘hyperscalers,’ which have burned through their cash reserves and so have started borrowing to fund their massive data-centre buildouts.
Thus, with the demand for global credit outstripping the supply, investors are in a position to demand better returns on their loans.
With the pressure on interest rates consequently rising, all that is needed to ignite a credit fire would be a resurgence in inflation.Enter Donald Trump. His war on Iran is starting to resemble one of those dark thrillers, when a supposedly carefree engagement enmeshes the main character in a toxic and destructive relationship from which there’s no escape.
Now, Mr. Trump is desperate to leave Iran; ( I disagree) but Iran has locked him in and refuses to give him the key.
On the face of it, the TACO trade – Trump Always Chickens Out – still operates: each time the President escalates U.S. actions, oil prices surge, and he backs down.His problem is, the Iranians don’t reciprocate. The regime appears to have concluded (correctly) that negotiating with the U.S. is pointless, since Mr. Trump will break his word, (as he has on multiple occasions) and so it’s trying to establish facts on the ground to which Washington will have no choice but to accede
Specifically, Tehran is determined to control the Strait of Hormuz, where it has shown it can bring tanker traffic to a virtual standstill with the occasional drone strike. The U.S. has had some success escorting tankers out of the Strait, but the supply of oil from the region still falls short of global demand, causing prices to steadily rise.
This, in turn, is putting upward pressure on inflation. It’s not only gasoline prices that are rising but crucially, distillates such as diesel, which are critical to the transportation and farming sectors. Farmers have already seen costs increase because of the shortage of fertilizers (since so much of the world’s fertilizer supply is produced in the Gulf).
If the standoff continues without resolution, therefore, the risk is that inflation, already above target in most Western countries, will resume rising this autumn.
Rather than wait for the bad news to come, bond investors are starting to demand a higher rate of interest now, to compensate for the loss of their dollars’ buying power over time.
If next week’s inflation report comes in soft, bonds may get a breather. Nevertheless, for as long as the war continues, the paths of inflation and interest rates both look more likely to head uphill rather than down.
Although Iran has been devastated and its economy is in ruins, there is still little sign of the regime being anywhere near collapse. As a result, Mr. Trump is trapped between the Scylla of an inflation spike that could cause a recession and the Charybdis of a failure that would expose him to ridicule.
The world economy really needs this war to end. However, since Mr. Trump fears few things more than to be called a loser, don’t expect that to happen any time soon.
He’s already a loser IMO