Trump is Complacent as the Economy Heads towards Disaster

The strategy of cult leader, convicted felon, and failed President Donald Trump with regard to his war against Iran can seem baffling at times. In many ways, the war has dropped into the background. Trump has admitted to being bored with it. But, at the same time, the world is reaching a dangerous point in terms of petroleum supplies, and there was just renewed fighting within the past two days. Resolving the situation in the Persian Gulf should be a top priority of the U.S. government. Instead, the U.S. appears to be sleepwalking into a disaster.

Last month, I wrote a post describing how Trump is badly losing this war. In fact, he lost the war within its first 24 hours when he turned out to be wrong in his expectation that killing Iran's top leaders would lead to their replacements suing for peace. Trump had no backup plan and has been improvising ever since. In my earlier post, I noted a JP Morgan report that said, "the accelerating pace of oil inventory depletion will ultimately force the reopening of the Strait of Hormuz, one way or another. Our base case envisions the Strait reopens in June—anchored on June 1 for simplicity". It is now June 4 and the strait has not returned to its pre-war state of free navigation. Several countries have made arrangements with Iran to allow their ships to traverse the strait and the U.S. Navy has apparently quietly assisted fewer than 100 ships to exit the Gulf. But, traffic is nowhere near the 100 ships a day that used to pass through the strait. So, what's going on? Why has the world economy not collapsed?

I am beginning to feel a little like Chicken Little, constantly warning that the sky is falling. But I still don't think that I am wrong. There are a few reasons that we have not reached the point of crisis yet. One is that trickle of traffic that has been transiting the strait. This, along with Iranian and Russian oil for which Trump has lifted sanctions, has helped to somewhat alleviate shortages. In addition, the U.S. and other non-Gulf markets have ramped up their own production capacities. But more importantly, the world has been heavily drawing down petroleum reserves. These measures combined have provided a cushion and kept petroleum prices from reaching crisis levels. However, depleted reserves will soon upset this applecart.

Recently, oil executives warned that inventories are at near unprecedented lows. Exxon Senior Vice President Neil Chapman said that "We’re approaching unheard of inventory levels. I mean really, really low levels. You can debate whether that’s going to hit those really low levels in two weeks or three weeks. Once you get to that point, then you’ll see price shoot up." Chevron CEO Mike Wirth concurred, saying "Over the next few weeks, we’re likely to see those pressures flow through more directly to physical prices and there’s more upwards pressure that I would expect as we get into June and certainly into July." Politico reports that oil industry representatives have explicitly warned the Trump administration about this:

“We’re at dangerously low levels already,” said one industry executive who was granted anonymity to discuss private conversations with the administration. “We have shared those concerns at the highest levels of government about what’s coming in mid-to-late June. … I hope they are paying attention to inventories right now. You’re hitting tank bottom.”

Let's go over this again. The restrictions that Iran has placed on traffic through the Strait of Hormuz, combined with subsequent restrictions placed by the U.S., have prevented a critical amount of petroleum from reaching world markets. This has caused oil prices to increase, but not nearly as much as fearmongers such as myself have predicted. However, due to depleted reserves, those of us crying wolf are likely to soon be proven correct. Moreover, this is just where oil and gas are concerned. Farmers are being crushed by increased fertilizer and diesel costs. This will eventually show up in higher food prices.

What we can now say for sure is that Americans will be entering the summer driving season with gas well over $4.00 a gallon and likely rapidly increasing as time passes. At this point, there is little hope of gas prices recovering before the November midterm elections, even if the war ends. Yet Trump explicitly doesn't care.

Trump gets by with frequent claims that negotiations between the U.S. and Iran are about to conclude in a peace agreement imminently. Just yesterday, for instance, Trump said that an agreement could come as soon as this weekend. He offers such assurances weekly and nobody seems to care that they never pan out. This does have the effect of calming oil and investment markets, which is likely Trump's goal.

However, when pushed on the daily cost increases facing most Americans, Trump has been clear that he simply doesn't care. Yesterday, Trump claimed that "The economy is unbelievable," an opinion that most Americans would likely find delusional. In an interview with CNBC, Trump said that he was not worried about high oil prices. He has previously said that he doesn't care about Americans' financial situation. Trump has also said that he doesn't care about the midterms. It appears that Trump is about to drive the U.S. economy off a cliff, and he simply doesn't care.

What explains Trump's complacency? I have a few theories. One, Trump has always believed that he can bend reality to his desires. Therefore, he probably thinks that if he keeps insisting that everything is great, it will turn out to be that way. This is obviously not going to work in this case. Trump is also used to being bailed out when he gets himself in trouble. So he probably expects to be rescued from his own predicament. However, again, this is probably not going to happen. A large part of what is happening is, as I have written many times, due to the fact that Trump has no good option available to him. He can make a deal that will be humiliating to him, or he can escalate the conflict, which will probably only delay a humiliating agreement. Faced with such choices, Trump is probably happy to do nothing.

However, I think the real answer is the unequal way in which the impact of the Iran conflict is being distributed in the United States. While the average American is facing high gas prices and will soon see rapidly increasing food prices, the financial markets and the oil industry are doing great. I can't account for the stock market other than to suggest that investors are delusional. But the oil industry is easier to explain.

Even before the Iran war, the U.S. had become the world's leading oil producer. With the halt of most Persian Gulf oil, purchasers flocked to the U.S. to buy oil. Trump has frequently bragged about empty tankers rushing to U.S. ports. This is great for the oil industry. It can even be helpful in disguising what is really happening with the U.S. economy as growth in the oil sector shadows losses elsewhere. Therefore, Trump can tout increased U.S. petroleum exports and point to economic growth that is very unevenly spread but reasonably good in the aggregate to present a fairly rosy picture of what is happening. In fact, Trump may be so pleased by benefits to the U.S. oil industry from the Middle East situation that he may even be somewhat reluctant to resolve it. To the contrary, he might see it to be in the U.S. interest to continue to drag things out. Oil industry executives may be issuing warnings about depleted reserves, but make no mistake about it; they will continue to benefit if prices double when the reserves are empty.

But the reality is that oil corporations seeing record profits is of no help to most Americans. The average American derives no benefit from increased oil profits. To the contrary, they are contributing to those profits with every gallon of gas they purchase. Trump can say whatever he wants about how great he believes the U.S. economy to be, but Americans know what prices they are paying at the gas pump and grocery store. But I simply don't believe this matters to Trump. He has picked a side and that side is not with the average American. Rather, he is aligned with the super wealthy and with corporations. As long as they are making money — and it certainly seems as if they are — Trump is satisfied. The rest of us can suck it.