Tail Risks Rising, Iran’s Economic Misery, and 737 MAX/Min


  • Tensions flare up between Iran and the United States.
  • Sanctions have severely damaged Iran’s economy.
  • The 737 MAX crisis is yet another economic headwind

Mark Twain famously said that “history does not repeat itself, but it often rhymes.” I was thinking of that phrase late last week, as an American embassy in the Middle East came under siege. I thought of it again this week, as masses marched through the streets of Tehran chanting “death to America” and missiles flew over Iraq. Events have not yet escalated to the extent they did forty years ago, or thirty years ago, but the final stanza of this epic has yet to be written.

Economies and markets often work through stressful situations smoothly. Fortunately, sparks rarely become conflagrations. But the Middle East has once again become a center of concern, and there aren’t many cool heads to prevail upon the aggressors to stand down. The situation brought an abrupt end to the holiday lull for investors and policy makers and highlights the geopolitical risk that colors the outlook for 2020.

Stress between Iran and the United States has long and deep roots. In 1953, the U.S. Central Intelligence Agency facilitated the overthrow of the democratically elected president in order to strengthen the power of the shah, Mohammad Reza Pahlavi. The main reason was access to oil, which was coveted by both the Soviets and by the West. The shah of Iran was embraced by America, but his methods ultimately alienated his citizens. The shah fled in early 1979, and later that year Iran became an Islamic Republic.

In the wake of the revolution, oil supplies were interrupted and oil prices more than doubled. This produced a body blow to the U.S. economy, which experienced two recessions in three years. Heavier industries were hollowed out; some never recovered.

Weekly Economic Commentary -01/10/20 - Chart 1

Fortunately, spikes in oil prices aren’t as threatening as they were back then. The United States has become the world’s largest producer of petroleum, reducing its reliance on imported crude. The energy intensity of Western economies has declined significantly, as manufacturing has gained efficiency and services have come to dominate output.