The background
Markets are being horribly complacent over the inflationary consequences of the Middle East crisis. This is not unusual. Time and again we have seen markets and the authorities underestimate the consequences of these events. The most recent example was the inflation following Russia’s special military operation against Ukraine, when the Fed was reluctantly forced to increase its funds rate leading to a number of regional banks having to be rescued.
This reluctance to embrace higher rates and bond yields has a long history, from usuary laws to Keynes’s General Theory to Regulation Q. Suppressing interest rates is the primary tool of central bank economic management. And over time it always leads to an unexpected crisis.
The crisis in the Middle East is extremely serious. Any observer worth his salt can anticipate the impact on global business, which faces a slump. At the same time, consumers face higher energy, logistics, and transportation costs. A vicious El Niño following a European summer drought is driving up food prices. The destructive synergy of these events combining is widely ignored. But just as interest rates were forced higher in the wake of Russia’s SMO, here we go again.
