Nouriel Roubini: The global economy hangs in the balance as a result of the Middle East conflict

The financial and economic implications of the US-Israeli war with Iran will depend on the war’s duration. The longer it goes on, the longer we can expect oil, gas, fertilizer, helium and other prices to remain elevated.

The greater the damage done to the Gulf’s oil production and export facilities, the greater the stagflationary pressure, which will have a major impact on global equity markets, bond yields and credit spreads.The economic damage from higher inflation and lower growth would be most severe in Asia, which is suffering both an energy-price and -quantity shock. Europe is facing negative terms-of-trade pressure and serious inflation risks, but its energy-supply shock will be more limited than Asia’s.

The United States, by contrast, is looking at a positive terms-of-trade shock, because it is a net energy exporter. Nonetheless, US inflation will be higher and its growth lower, because those who consume energy (such as households and businesses) will spend less, whereas those energy producers that enjoy windfall profits will not produce or invest more (knowing all too well that the shock is temporary).The Donald J.

Trump administration and Israel made two serious miscalculations. They assumed that decapitating the Iranian leadership would cause the regime to collapse in a few weeks and that Iran would prove unwilling or unable to block the Strait of Hormuz or damage Gulf energy-production facilities.

They were wrong on both counts, and now the market is pricing in US President Trump’s desperation for an off-ramp—the famous ‘TACO’ (Trump Always Chickens Out) scenario.But expecting TACO also looks like a miscalculation. If Trump ends the war at its current stage and locks in the status quo, the threat to shipping