Trump’s economic time bomb still ticks

Trump is trying to spin the “peace deal” with Iran as a victory for the United States—but  the war has exposed deep weaknesses in the global economy (Photo: WikipediaCommons)

“I didn’t want to see economic catastrophe. If you kept this going, that could have happened.” This was Donald Trump’s uncommonly honest explanation for the 14 point memorandum of understanding representing his defeat by Iran.

Whatever Trump claims, that catastrophe is still a possibility.

There are several reasons the oil price didn’t reach the stratospheric heights that some oil analysts predicted the Iran war would bring. Saudi Arabia boosted oil supplies to the Red Sea port of Yanbu. Other oil producers, including Russia, also increased oil production.

Oil reserves were also massively run down. And China cut demand for oil by diverting energy production to coal-fired power stations and solar power.

However, the oil price is still around a third above pre-war levels. Reserves now must be rebuilt. Meanwhile, oil refineries have sustained damage in the Gulf and cannot be repaired overnight.

Oil tanker owners want reassurance that the peace will hold before they risk sending tankers into the Gulf again.

The peace is very fragile—Trump keeps threatening to bomb Iran again and Israel’s murderous bombing campaign in Lebanon continues. Meanwhile, Ukrainian drone attacks on Russian oil refineries are impairing Russian oil production.

But there are more problems facing the world economy. Fertiliser production vital for food supplies has been drastically cut.

A severe El Niño in the pacific is likely to combine with global warming to produce extreme weather conditions which will further adversely affect food production.

Then, there are mounting concerns over government debt—which is at record levels outside wartime and severe recessions.

US federal debt, already at over 100 percent of total annual US production, is on course to hit 150 percent because of tax cuts, primarily for the rich, increased arms spending and economic growth which is too slow. To fund that debt, the US government has to borrow massively from the bond markets.

The US government has long been considered the most trustworthy debtor in the world, so funding its debt hasn’t been a problem. But there is growing competition for money to fund government debt across the world. And some of that money is now being diverted into funding AI data centres.

The bond markets are also increasingly wary of the growing debt mountain and the threat of inflation arising from the disruption caused by the Iran war. Interest rates on government bonds have been rising.

The effect of rising interest rates generally is obviously to make the cost of borrowing more expensive. That, in turn, discourages borrowing both for investment and consumption and reduces economic growth.

Trump is very chuffed that on the many occasions when he has announced victory in the Iran war, the US stock market has risen. Stock markets in general, and the US stock market in particular, keep rising to record levels boosted by the idea that the AI revolution will bring a productivity, economic growth and profits bonanza.

However, far from the stock markets being more intelligent than anyone—bar Trump himself, as the orange ego proclaims—the maths just doesn’t add up. Sooner or later, the AI bubble is going to burst.

An AI crash will likely cause a decline in US consumption spending, which is only growing because the richest 10 percent of Americans have seen their stock market wealth grow.

A drop in wealth and consumption will lead to a fall in US economic growth. This will make the US federal debt even worse and cause further problems in the bond markets.

Nor is China, now the second largest economy in the world, likely to come to the rescue. Despite Trump’s tariffs, China is still running an enormous trade surplus and seems unwilling, or perhaps unable, to stimulate domestic consumption—which has been constrained by the bursting of its property bubble.

It seems very unlikely that there will be the peace dividend that Trump wants from the deal with Iran. And when he mentions the possibility of an economic catastrophe, it simply increases the odds of such a catastrophe happening.