Economist Steve Hanke says that the ongoing War in Iran could keep oil prices elevated and inflict growing damage on the global economy, thus resulting in a complete catastrophe.
Speaking on The David Lin Show, the market expert thus pushed back on comments from Larry Fink, CEO of BlackRock, who said that the war’s outcome could potentially lead to lower oil prices if tensions ease or a global recession if prices remain high.
According to Hanke’s view, Iranian oil exports have actually increased since the war began due to shipments rising while being sold at higher prices. Moreover, he argued that Tehran’s control over access to the Strait of Hormuz gives it significant strategic leverage, meaning Iran is likely to emerge stronger in the conflict.
The energy shock pushes inflation higher
The economist warned that the energy shock could push inflation higher in the United States, pointing to projections that domestic inflation could climb above 4%. As a result, he argued the U.S. is not insulated from global oil dynamics despite being a major energy producer.
“The current U.S. fiscal deficit stands at over a trillion dollars. And so if the government spends more than it takes in by the order of a trillion dollars every single year, what does that mean for the purchasing power and value of your savings? Well, historically, governments don’t fix deficits by cutting spending,” Hanke said.
At the same time, the U.S. is not blocking Iranian oil shipments because doing so could send energy prices sharply higher, damaging the global economy further. Instead, Hanke argued, keeping as much oil as possible on the market has become a priority.
Is the U.S. insolvent?
Beyond the conflict, the guest touched on the claims that the U.S. government is effectively insolvent based on its balance sheet.
Citing consolidated financial statements released by the federal government, Hanke said the U.S. has a little over $6 trillion in assets compared with nearly $48 trillion in liabilities.
When additional obligations such as Social Security and Medicare are included, he said, total liabilities could reach roughly $136 trillion, while implying the war is likely to make things worse.
“It’s a complete catastrophe, and the numbers are deteriorating very rapidly… The quality of the balance sheet is getting worse and worse. And now we’ve got the war going on,” he commented.
As a warning, the interviewee also noted that financial markets have begun reacting to the pressure, with declines in the bond market already evident. However, he acknowledged that “it doesn’t necessarily translate into higher inflation if the Fed does not monetize,” leaving at least some room for optimism.
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