Choke Point
At this point it seems like the Trump administration is trying to fuck the global economy on purpose. The president’s latest “strategy” is to close the Strait of Hormuz from the other side. Now no one can have anything. There. That’ll solve everything.
Let’s recap in case you’re having trouble playing along.
Last year we supposedly destroyed Iran’s nuclear capabilities because it was “weeks away” from being able to produce a nuclear bomb. Several, actually. Just like they were “weeks away” in the early 2000s and all throughout the 2010s. Now we’ve launched a full-scale (not really) war to stop Iran from developing a nuclear bomb because it was months away after we completely destroyed their ability to develop a nuclear bomb just one year ago. In response to this unprovoked war, Iran simply shut the Strait of Hormuz and started bombing strategic U.S. positions in the Middle East and various oil and gas facilities in the Gulf region. This put a COVID level kink in the supply chain and drove oil prices through the roof.
So we negotiated a peace deal with ourselves and told everyone we’d won. On that news, Iran also declared victory and issued a ten point plan with completely different terms than the plan we negotiated with ourselves. Under the cover of the actual and rhetorical bombs being lobbed in both directions, the Knesset in Israel passed a new death penalty law that applies only to Palestinians, stepped up its bombing campaign against Southern Lebanon, sent more IDF members into the West Bank to secure settlements, and killed an additional 730 Palestinians in Gaza since the other ceasefire was announced between Hamas and Israel in October of last year.
Aside from the painfully obvious fact that our Commander in Chief has absolutely no idea how to prosecute a war, and has zero interest in intelligence briefings that show Iran is nearly impenetrable, everything is running pretty smoothly.
If we back away from the foreign policy and military disaster that has turned into the largest unforced error of modern times, the domestic economic picture is incredibly bleak. We can see with our own eyes that the disruption to Asian economies is happening in real time. Price caps, fuel rationing, travel shut downs and strategic reserve releases are rolling across the globe like a tidal wave but no one in the United States seems to notice. It’s like the coronavirus all over again. Don’t get me wrong, we can all see the prices at the pump but even here there seems to be a widespread belief that this is somehow temporary.
This is not temporary.
Any hope that a return to normalcy might occur in the coming months is effectively gone. Had things in the Persian Gulf straightened out after a couple of weeks we might have seen relief in this calendar year. Unfortunately, it’s already gone on too long for oil and gas prices to revert to where they were at the beginning of this year. So expect prices at the pump to remain elevated for the foreseeable future. The important thing is that this is just the beginning, because it’s piling on top of an existing inflation disaster.
Energy costs flow into everything. Every product that’s manufactured uses energy. Every product that’s shipped—by truck, by rail, by container ship—uses diesel. Every piece of food that’s grown requires fertilizer, which is petroleum-based. Every warehouse, every cold chain, every factory floor.
Remember tariffs? The San Francisco Fed published a study in late March showing exactly how tariff-driven inflation works through the economy in stages. Last year importers took it on the chin and manufacturers ate most of what was passed through to them. What leaked through after the bulk of the tariffs were absorbed fell disproportionately on small businesses. The St. Louis Fed dug even deeper (see chart of the week) to examine how most of the attempted workarounds also resulted in higher import costs, leaving little to no wiggle room throughout the supply chain.
So we already know that the inflation trend reversal in Trump’s first year is almost exclusively related to tariffs. But that’s just year one. The San Francisco Fed piece details how goods inflation peaks in year two. Services inflation—the stickier, harder-to-reverse component—peaks in year three and lingers into year four. We’re entering the window right now where the tariffs that went into effect in early 2025 begin showing up in earnest. Average U.S. tariff rates went from under 2% to nearly 17%. And those price increases are now compounding on top of an energy shock.
This is what has many economists concerned. While all the headlines were about the jump in the Consumer Price Index (CPI) the real story is the Personal Consumption Expenditures (PCE) price index—which is the Fed’s preferred measure because it strips out the more volatile food and energy inputs. The February PCE reading came in at 2.8% headline, 3.0% core. This means that inflation is set to explode once the war is factored in.
Let’s say for argument’s sake that you are the leader of the biggest consumer economy in the world. You’ve already screwed the pooch with your failed tariff plan because the government agencies you control told you as much. Sure, you brought in a few extra dollars, but way more damage to the average American was done in the process. Knowing that affordability (the thing that got you re-elected) is definitely getting worse, would you start a war with the one country that can bring the global economy to a halt? Especially since they’ve done it once before?
No. If your aim was to stay in power, be popular and prove everyone wrong, you would not. Because you would know that the only thing covering up the inflation that YOU CAUSED single handedly through tariffs was declining oil and gas prices that YOU CAUSED by forcing the world to once again reorient the supply chain. In fact, you would also know that the WORST THING you could do to blow the cover off inflation is attack Iran and choke off the world’s supply of oil and gas.
Listen, I know his economic advisers like Howard Lutnick, Kevin Hassett and Peter Navarro aren’t the sharpest tools in the shed. And I’ve been fiercely critical of people like Scott Bessent and Stephen Miran for being useful idiots in their attempts to delegitimize the Federal Reserve and cover for the Liberation Day blunder. However, the negative economic evidence is so overwhelming that there’s no way they haven’t warned Donald Trump of the guaranteed fallout of something as egregious as this war.
Either he is dismissing the advice of his advisers or they are legitimately too scared to tell him. If it’s the former, then he’s deliberately torching the economy in service of some other dystopian goal that probably has something to do with canceling elections. If it’s the latter, then we’re just as screwed, because it means Trump is truly making decisions day-to-day with zero regard for downside risks. It’s the ultimate lose-lose scenario for the American people. They just haven’t realized it yet.
