A financial crisis could be looming because of Donald Trump's administration and their actions in Iran, an economist has claimed.
The president confirmed strikes on Iran earlier this week with a Truth Social post, but the longer-term effects of such a strike will unravel in the coming weeks. Nobel Prize winner Paul Krugman believes a dangerous precedent has been set with the bombing of Iran, and that it could bring financial instability to the US.
In his Substack, Krugman pointed out two reasons people should be more worried about the economic volatility that may follow a strike on Iran.
He wrote, "Yet there are, as I see it, at least two reasons — in addition to the threat to shipping — to be more worried about a war in the Middle East than we would have been decades ago.
"First is financial fragility. In 1979, the U.S. financial system was still highly regulated, so that there was little room for serious bank runs and other disruptions. Today, many observers have been warning about potential risks to financial stability, most urgently from private credit. Could the Iran war trigger a broader financial crisis? I don’t know, but it doesn’t seem alarmist to be worried.
"Also, might the war burst a market bubble? The next-to-last line in the table shows the price-earnings ratio for the S&P 500, which was low in 1978 but is very high now. Will those high valuations be sustainable if the fallout from the war causes significant economic damage?"
The Middle East's growing importance in the world economy is also a concern for Krugman, who believes strikes against Iran and subsequent retaliatory strikes on neighboring nations could affect the economy further.
He wrote, "Finally, one point I haven’t seen many observers emphasize is that the modern Middle East now plays an important role in the world economy that goes beyond its status as a major source of oil. Dubai in particular is an important node in the global financial system, as well as playing host to many extremely rich people who thought they had found a safe haven.
"One indicator of that changing status is the transformation of Dubai International Airport into one of the world’s most important travel hubs. To the extent that the war disrupts this new role for the region, that will be another risk to the world economy."