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Economic Consequences of an Israel-Iran War

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"Economic Consequences of an Israel-Iran War"

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He’s trying to paint a bleak picture, but I think Jeffrey Goldberg’s new piece’s description of the consequences of a war between Israel and Iran winds up understating the economic damage that might be wrought:

They stand a good chance of changing the Middle East forever; of sparking lethal reprisals, and even a full-blown regional war that could lead to the deaths of thousands of Israelis and Iranians, and possibly Arabs and Americans as well; of creating a crisis for Barack Obama that will dwarf Afghanistan in significance and complexity; of rupturing relations between Jerusalem and Washington, which is Israel’s only meaningful ally; of inadvertently solidifying the somewhat tenuous rule of the mullahs in Tehran; of causing the price of oil to spike to cataclysmic highs, launching the world economy into a period of turbulence not experienced since the autumn of 2008, or possibly since the oil shock of 1973; of placing communities across the Jewish diaspora in mortal danger, by making them targets of Iranian-sponsored terror attacks, as they have been in the past, in a limited though already lethal way; and of accelerating Israel’s conversion from a once-admired refuge for a persecuted people into a leper among nations.

I don’t know nearly enough about the oil industry to be sure whether prices really would spike to cataclysmic highs (seems plausible enough, though) but if such price spikes do happen the consequences would be much worse than either 2008 or 1973. That’s because the pre-crisis economic conditions in the early seventies were totally fine, one of the reasons Nixon cruised to re-election in ’72:

FRED Graph 1

If you took all our current problems and plopped a giant supply-side on top, we’d be really screwed. You’d have, for example, a whole new round of state and local budget crises. What’s more, you’d have inflation. Right now it’s frustratingly difficult to persuade monetary policymakers to do what’s needed to boost growth, but it might be impossible if rising energy prices led to a high headline inflation rate. Obviously, insofar as the Israeli government believes that national survival is at stake these kind of issues won’t persuade them. But the American government needs to consider the full range of consequences here, which will be felt all around the world.

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