The Divergence between National Security Experts and Financial Markets: Implications for Global Stability and Economy

National security experts and financial markets seem to disagree about what comes next in the recent escalation of tensions between Iran and Israel, and the question of who is ultimately to blame comes with real consequences, not only on the unstable Middle East, but also on the global economy and the stability of its Financial regime.

The phrase “New Middle East” has appeared frequently in the national security camp’s description of the fallout from Israel’s attack on the Iranian consulate in Syria earlier this month, but to be more precise, the two sides crossed over. on many lines, and both countries attacked him. each other directly for the first time in history.

Despite this, the markets’ reaction was relatively calm and controlled. Instead of bolstering market returns from a prolonged rise in geopolitical threats and the greater, unexpected risk of a large, prolonged rise in oil prices, traders were quick to ignore the trends. original in many cooling asset prices. This includes oil, the most sensitive international benchmark so far, as it ended trading last Friday below levels recorded before Iran’s response to the Tel Aviv attack on the consulate.

The consequences of the divergence between the views of the market and experts can go beyond regional stability, and the issue is directly linked to four issues discussed by the International Monetary Fund this week, which ‘ consider them important for the well-being of the global economy. and financial stability.

While the global economy may face a temporary bump, its vulnerability will not allow it to deal with a major economic shock, especially since a further round of military escalation between Iran and Israel would undermine low growth and global weakness, which will put pressure on goods. inflation is going to rise at a time where inflation of services is still Not only that, it will put demands on the financial and monetary authorities, who have satisfied a lot of political flexibility and have little room for action.

At the same time, the spread of this stagflation shock exacerbates economic and financial imbalances, leading to pressures on the global system.

First, two engines of global growth, the European and Chinese economies under pressure, will suffer a considerable shock, as they are highly dependent on imported energy.

Second, US inflation is becoming harder to come down at a time when progress towards reducing price pressures has been disappointing this year, which will be a further source of discouragement. more to the Fed’s early rate cuts.

Third, a stronger US dollar will reap greater benefits, weakening trade and financial intermediation.

Finally, risk premiums increase as economic and geopolitical conditions deteriorate, which in turn leads to higher borrowing costs 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, all of which indicate a major shift in the dynamics between these two countries. More importantly, this has changed the relatively stable imbalance, in which both sides were willing to launch direct attacks, and instead turned into an unstable and unpredictable imbalance, in which precedent is set and both sides have more reasons for tension.

When comparing the markets’ reaction to the views of most national security experts, I can’t help but be reminded of the story of the frog in the boiling water.

There is no doubt that the latest round of conflict between Iran and Israel crossed many lines and raised the temperature of geopolitical tension in the region for a long time. However, it seems that the markets want to ignore this issue, because they feel comfortable that things have not yet reached the boiling point, and this is represented by great human losses and material damage in these rounds of revenge, a point would be on him. caused severe economic and financial imbalances, and this response may have been mild when considering that it is an area prone to errors in judgment, understanding to enough on opponents, as well as accidents in the application.

Dean of Queen’s College, University of Cambridge, and advisor to the Allianz and Gramercy groups