I have held off on writing more about Iran because not much has happened. Something now has, sort of, so it is worth returning to the topic.
At this point there have been more days of ceasefire than of military action since the Feb. 28 start of Operation Epic Fury. And today we hear that a Memorandum of Understanding (an MOU) is almost complete between Iran and the United States.
Details are still coming out and are probably not even agreed to by the signatories yet, but what we do know is that there will be a 60-day extension of the ceasefire. This will include an opening of the Strait of Hormuz and a lifting of the blockade on Iranian ports.
This will bring relief to Iran’s economy and probably the economy of so much of the world that relies upon shipments coming through the Strait. But it is hard to say. The economy hasn’t acted the way most economists predicted.
When the “military action” began in February, the most common and historically precedented expectation was that four things would happen:
1. Oil would at least double in price;
2. The stock market would crash;
3. Government bonds would rise in value;
4. Gold would soar in price.
These expectations followed what happened in other wars, especially in the areas of oil production. But that’s not what happened this time.
Oil was $67-$72 per barrel before the attack on Iran in February. Today it is $87-$92 per barrel. It was over $100 for much of that time, but even that was not near the $150-$200 prices some people were expecting. For those of us who have to fill our cars, we notice the rise in prices. That’s real. But this is nothing like what people legitimately expected.
The Dow Jones Industrial Average was 48,977.92 on Feb. 27 and could reach over 51,000 at the close of trading today. The market has gone up over this period!
Bonds are up about half a percent (48-50 basis points) from 3.95%–3.97% to 4.44%–4.45%. Not huge.
But gold is the real surprise. Usually in times of economic uncertainty and especially times of war, gold rises in price because it is a secure investment, as are bonds. Gold dropped in price from $5,184 per ounce to $4,520–$4,550. What?
There has certainly been a lot of economic havoc wrought by the war, and especially more in other countries, but it hasn’t been what was expected. I point this out because this MOU seems to be intended to have an impact on the economy. Who knows if it will?
As I said, the ceasefire has lasted longer than the fire, so there isn’t much “war” going on at the moment. Yes, there have been some missiles and drones out of Iran. And some of the Gulf states have attacked sites in Iran as a response. But the US has not reengaged in anything like the fashion it did at the beginning. The real “fight” now is economic, and most of that is about which side can hold out longer.
Almost everyone was wrong about the economic effects of the bombing of Iran. How do we know what the extended ceasefire and opening of the Strait will do? Of course, it seems logical to assume that allowing all those tankers to move freely through the Strait will be good for the economy. But it was also logical to think a major war in the Middle East would be really bad.
If the intention of the MOU is to jump start the economy and it doesn’t work, what happens then? We just assume it will work, but what if we’re wrong? Given how poorly economists predicted the results of war, I’m not sure we can be confident about the results of peace. If it doesn’t have the desired effect, that raises a whole lot of questions about what to do next.