This was confirmed by the economic thinker and head of Queen's College at Cambridge University, Mohamed El-Erian, in an article in the British newspaper “Financial Times”, under the title “Markets are a boiled frog in the pot of Iran and Israel.”
The boiling frog theory, which Al-Erian refers to in his article, is a commonly used heuristic to depict the effect of slow and gradual changes compared to sudden and rapid changes.
This theory assumes that when a frog is placed in boiling water, it will immediately jump (trying to escape), while if it is placed in water at the appropriate temperature and then heats the water slowly, the frog will not jump even after the water boils after heating it slowly, until it dies. .
In Al-Erian’s opinion, “When comparing the market reactions to the views of the majority of national security experts, I cannot help but be reminded of the story of the frog in boiling water.”
There is disagreement among national security experts and financial markets about what will happen next with regard to the recent escalation of tensions between Iran and Israel.
While the question of who is ultimately right has profound repercussions, not only on the already unstable Middle East, but also on the well-being of the global economy and the stability of its financial system.
- Both sides (Iran and Israel) crossed a lot of lines. The two countries attacked each other directly for the first time in history, rather than simply using proxy agents and striking targets in third countries.
- Tehran did the unthinkable, directing a large number of missiles and drones towards Israel, in response to the Israeli attack in Damascus, which claimed the lives of a number of Iranian officials.
- The Israeli retaliation came on Friday, after explicit warnings by the Iranian Foreign Minister that his country would respond immediately if it was directly attacked.
Markets reaction
El-Erian says that, despite all this, the markets' reaction was relatively calm and controlled. Instead of pricing in the market ramifications of a long-term escalation of geopolitical threats and the larger, unforeseen risk of a significant, prolonged rise in oil prices, traders were quick to smooth out the initial moves in many asset prices.
This includes oil, the most sensitive international price to date, which closed last Friday's trading below levels recorded before the first Iranian retaliation to the Tel Aviv attack on the consulate.
These prices were unable to maintain their initial gains due to recent news about the Israeli response.
- The consequences of this discrepancy between market and expert views could extend beyond regional stability.
- The matter is directly related to four issues that the International Monetary Fund spoke about this week, considering them important for global economic well-being and financial stability. These issues are: insufficient growth, persistent inflation, lack of policy flexibility, and pressures associated with greater international variation in economic outcomes and policy setting.
- While the global economy can weather a temporary bump, its fragility will not enable it to deal with a new major economic shock.
- An additional round of military escalation between Iran and Israel would undermine already low and fragile global growth, pushing goods inflation higher at a time when services inflation remains very high.
- Not only that, but it will impose demands on the fiscal and monetary authorities, which have already exhausted much of their political flexibility and have limited room for action.
Stagflation
Al-Erian adds in his article in the British Financial Times: At the same time, the distribution of this stagflation shock will exacerbate the economic and financial disparities, which are already resulting in some amount of pressure on the global system.
The expected scenarios in this context are drawn as follows:
- Two potential engines of global growth, the already stressed European and Chinese economies, will suffer a relatively large shock, given their heavy dependence on imported energy.
- Declining US inflation will become more difficult as progress towards reducing price pressures is disappointing this year, which will be a greater disincentive to the Fed's early rate cuts.
- A stronger US dollar will enjoy further gains, undermining trade and financial intermediation.
- Risk premia increase as economic and geopolitical conditions deteriorate. This, in turn, causes borrowing costs to be higher than they would have been without these developments.
These considerations are even more important when taking into account what happened in the recent exchanges between Iran and Israel.
He continues: Whether this was intentional or not, neither party suffered significant damage on the human or material levels. Moreover, Iran has not made much use of its proxies in the region, and in this case it would have been a more comprehensive attack on Israel. At the same time, Israel did not attack Iranian nuclear sites in its strike, nor did it respond to pressure from its closest allies, especially the United States and Britain, to adopt a greater degree of restraint and de-escalate.
Relative imbalance
All of this indicates a huge shift in the dynamics between these two countries. More importantly, this has changed the relatively stable imbalance, in which both sides were reluctant to launch direct attacks, to an unstable and unpredictable imbalance, in which dire precedents have set in and each side has more reasons to do so. to escalate tensions.
When comparing the markets' reaction to the views of the majority of national security experts, I can't help but be reminded of the frog in boiling water story.
Al-Erian concludes his speech, saying: There is no doubt that the latest round of skirmishes between Iran and Israel crossed many lines and increased the heat of geopolitical tensions in the region for a long time. However, it seems that the markets are keen to ignore this matter, as they feel comfortable that things have not yet reached the boiling point, and this represents significant human losses and material damage in these rounds of revenge, a point that could have caused severe economic and financial imbalances. This reaction may have been too muted considering that it is an area prone to falling victim to errors in judgement, inadequate understanding of opponents, as well as mishaps in application.
Different interpretations
From London, energy economics expert, Nihad Ismail, said in exclusive statements to the “Eqtisad Sky News Arabia” website, that there are several different explanations behind the markets ignoring the recent wave of escalation represented by the Iranian attack and the Israeli response to it, including dispelling fears of escalation, and that both parties They reduced the size of the strikes (..).
He stated that the oil markets at the end of last week’s trading, last Friday, rose by $3 per barrel for Brent crude to $89.55, following the Israeli strike in Iran, and after Tehran reduced the seriousness of the Israeli strike, prices fell and gains were lost, that is, the risk premium decreased, and futures contracts for standard Brent crude closed at $87 per barrel as well as West Texas Intermediate crude settled at $83, showing that the geopolitical risk premium oscillates between $5 and $10.
He ruled out a major escalation between Iran and Israel, as well as a rise in prices to $100 a barrel, but he said, “If a dramatic development actually occurs and Israel, for example, strikes Iranian oil and gas installations and facilities, the markets may react and oil prices will move northward to above $100.”
He believed that the most dangerous scenario would be for Iran to target oil tankers that ship oil from Iraq, Kuwait, Saudi Arabia, and the UAE to the markets of Asia and Europe, and that cross the Strait of Hormuz. He expected that then prices might rise to $120 or $130 per barrel.
He stressed that closing the Strait of Hormuz, through which 21 million barrels per day sail, or 20 percent of the global daily oil consumption, would be a very dangerous development, which would lead to an American reaction. But he ruled out this scenario because Iran would not be able to risk closing the strait and realize its dire consequences.
He enumerated the economic consequences of such escalations, including: high inflation, slowdown in European and American economic growth, and the occurrence of energy crises in Asia, especially in China, which imports more than 11 million barrels per day, most of which from the Arab OPEC countries and also from Iran.
Rising prices
In addition, Nidal Al-Shaar, chief economist at ACY Financial Company in Australia, confirmed in exclusive statements to the “Eqtisad Sky News Arabia” website that any direct military clash in a region full of oil producers and exporters would have an impact on oil prices.
He explained that the impact on oil prices in this case is indirectly in terms of rising shipping and insurance costs, and not in terms of production and export, as happened in 1973 during the Arab boycott. In addition, Iran’s exportable oil production can easily be compensated for by other countries.
In a related context, Al-Shaar pointed out that the world knows that it is not in Iran’s interest to be in direct confrontation, with its forces dispersed in side conflicts such as Iraq, Syria and Yemen, and that it is too weak to engage in a direct military conflict with a militarily strong country supported by the West like Israel. She is definitely unable to do that, knowing that she will be alone in this conflict and that Russia, China, or other countries will not stand with her.
He added: The international community excludes this conflict in particular after the clear lessons it learned from the war in Ukraine, which led to losses for the Russian economy, which is a much larger and stronger country than Iran and faces a much weaker opponent than Israel. There is a kind of wisdom that has been formed that prevents a major clash from occurring, given For countries to appreciate the power of the catastrophic effects of such a conflict.
ACY Financial's chief economist in Australia stressed:
- Every time we witness a side confrontation like the one we are currently witnessing, there will be rises and falls in the prices of petroleum products and gold.
- Fear of these confrontations is an essential element of all economies. The declines and rises here represent a natural matter, in proportion to the size of the conflicts and the countries’ appreciation of them.
- With the exclusion of direct war and the involvement of many parties in a global war, it is unlikely that we will witness sharp long-term fluctuations in oil prices.
- Most of the world's countries are currently not ready to enter into conflict as happened in the 1940s.
- Countries are currently wiser and their economic interests are greater than engaging in military conflicts, especially since they are quasi-political conflicts that are not over territory or over extension and expansion, with the exception of the war in Ukraine.
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