HARPER: THE REAL COLLATERAL DAMAGE OF A US-IRAN CONFLICT

"The great Bilderberg secret of 2019 had to do with why, suddenly, the Trump administration has decided that it wants to talk to Iran `with no preconditions.'

"It all has to do with the Strait of Hormuz. Blocking the Strait could cut off oil and gas from Iraq, Kuwait, Bahrain, Qatar and Iran – 20% of the world’s oil. There has been some debate on whether this could occur – whether the US Fifth Fleet, which is stationed nearby, could stop Tehran doing this and if Iran, which has anti-ship missiles on its territory along the northern border of the Persian Gulf, would go that far.

"An American source said a series of studies hit President Trump’s desk and caused panic in Washington. These showed that in the case of the Strait of Hormuz being shut down, whatever the reason, Iran has the power to hammer the world financial system, by causing global trade in derivatives to be blown apart.

"The Bank for International Settlements said last year that the `notional amount outstanding for derivatives contracts' was $542 trillion, although the gross market value was put at just $12.7 trillion. Others suggest it is $1.2 quadrillion or more.

"Tehran has not voiced this `nuclear option' openly. And yet General Qasem Soleimani, head of the Iranian Revolutionary Guards Corps’ Quds Force and a Pentagon bête noire, evoked it in internal Iranian discussions. The information was duly circulated to France, Britain and Germany, the EU-3 members of the Iran nuclear deal (or Joint Comprehensive Plan of Action), also causing a panic.

"Oil derivative specialists know well that if the flow of energy in the Gulf is blocked it could lead to the price of oil reaching $200 a barrel, or much higher over an extended period. Crashing the derivatives market would create an unprecedented global depression. Trump’s former Goldman Sachs Treasury Secretary Steve Mnuchin should know as much.

"And Trump himself seems to have given the game away. He’s now on the record essentially saying that Iran has no strategic value to the US."

--- Pepe Escobar, Asia Times, June 5, 2019

__________________________________________________________________________________

Well it may not be a sure thing that you can "take to the bank," but Pepe Escobar may be right.  Is anyone in their right mind prepared to run the risk of a new global economic and financial catastrophe triggered by a war between the United States and Iran?  Undoubtedly, many war games have been played in recent months on just how such a war would proceed.  Recent US public leaks of cyber attacks against Iranian computer systems associated with their radar and air defenses raise the question of US capabilities to strike targets inside Iran.  But IRGC has vast numbers of fast boats capable of swarming US Navy vessels, commercial tankers and other ships transitting the Straits.  The likelihood of a panic on derivatives markets associated with oil price spikes is real.  So Pepe is probably addressing the BIG collateral damage associated with the creeping steps towards a new Gulf War.

In the next few days, President Trump will be in Osaka for the G-20 meeting.  He is set to meet with Russian President Putin and Chinese President Xi Jinping, among other world leaders.  No doubt the prospects of a new Gulf War will be high on the agenda in those private talks.  No doubt the economic consequences will be on the minds of all those leaders.  Talk about a "lose-lose" proposition.

 

Comments

[JJackson]

I am confused by Iran's position which I see as very restrained.
Based on the premises that any kind of conventional, economic or cyberwar would be lost and that the loby's hold on the US body politic is such that the current economic, cyberwar and attempts at regieme change are never going to stop. My advice would be try and build a dozen nukes and get them on rockets, invite the Chinese and Russians to inspect one to prove you are for real (I suspect they have all the knowedge required but pl and others probably here probably know far more about their capabilities). Step two anounce the straights are closed until the sanctions are lifted. Nogotiating with the US without teeth is a waste of time.

[The Beaver]

Harper

another article along the same line of thought:
https://www.strategic-culture.org/news/2019/06/23/provoking-iran-could-start-a-war-and-crash-the-entire-world-economy/

Our current geopolitical environment requires the careful and considered attention of relevant heads of state. The repeated meetings between Putin and Xi Jinping indicate that Russia and China are actively preparing for any eventuality. The closer we get to economic collapse, the more tensions and chaos increase around the world thanks to the actions of Washington and her close allies.

Xi Jinping and Putin, who have inherited this chaotic situation, have met at least a dozen times over the last six months, more recently meeting at least three times over two months. The pressing need is to coordinate and prepare for what will inevitably happen, once again trying to limit and contain the damage by a United States that is completely out of control and becoming a danger to all, allies and enemies alike.

Just have to watch what transpires in Osaka next.

[Christian J Chuba]

Iran is looking for palatable ways to push back against the U.S. This is a novel approach ...

Iranian Parliament Presents Bill to Collect Toll from Vessels Passing Strait of Hormuz
http://en.farsnews.com/newstext.aspx?nn=13980404000726

"A bill has been provided by the lawmakers which requires the government to receive expenses for providing security to vessels, either military or non-military, in the Strait of Hormuz from them," Hossein Ali Haji Deligani, a senior legislator, told FNA on Tuesday.

They later mention Trump's lament that we spend all of this money protecting other people's oil, so I don't know if Iran is serious or just taunting us. Pompeo would scream and call this extortion and it is pushing it but we are quite the extortionists as well.
We tell India, don't buy Iranian oil buy our oil or else ..., same with the EU and Russian NG vs our Freedom LNG, Turkey and the S400, ...

The only possible way I could see Iran actually doing this would be if they offered premium protection for tankers that used their territorial waters in exchange for a fee vs take your chances if you don't. Yeah, that is extortion but what would the U.S. do? It's not like we would covertly damage Saudi or Kuwaiti tankers in Iranian waters, can't see that. Oh and we would look incompetent if tankers on our side of the of the 'Arabian Gulf' kept having minor accidents. That is a very dangerous game.

I guess desperate times call for desperate measures. We shall see.

[blue peacock]

Harper

IMO, Pepe Escobar trends towards hyperbole. Stress and liquidity issues in derivatives markets are the least of the worries. The Fed, ECB, BoE and BoJ can always open an unlimited repo window for worthless collateral. They'll be doing that with a high probability in any case since we already see growing stress in the offshore eurodollar market since the middle of last year and that has nothing to do with the Gulf. Just look at the movement in the yield curves in the past year.

As Col. Lang has noted here in the past, the Straits of Hormuz can't be blocked forever. At some point in the war, Iran will be overwhelmed. The question is how long does it take the US military to bring sufficient assets to bear to totally destroy all Iranian air defense and gain complete air superiority? What military damage can Iran and its allies inflict before that? Iran must know that its air defenses & offensive missile capability will be overwhelmed eventually, so its strategy must be to inflict maximum damage right at the very beginning. The major Saudi & Gulf oil installations are all within strike distance of Iranian missiles. So are US military bases in Qatar, Oman and Iraq. The straits are narrow and could be heavily mined requiring time to clear. The war will also naturally extend into conflict with Israel & Hezbollah and will require the intervention of the US military to suppress fire. How much heavy bombing capacity does the USAF have?What happens to the Green Zone in Iraq? What happens to Russian assets in Syria who will be in a total war zone with Syria, Lebanon & Israel?

Clearly, not only will oil prices skyrocket but also tanker insurance until Iran, Hezbollah & Syrian missile strikes are completely suppressed. Then it will take time to clear the straits of mines and debris. And of course the rebuilding of Gulf oil installations. Asia is particularly vulnerable as Russia could be a swing supplier to Europe. But what will Putin demand? The one thing is certain I believe, the US will become a pariah nation as the sentiment on the streets around the world will see the US as the primary instigator of global instability. They see the long arc of US interventions that have consistently created instability and don't buy easily into our propaganda. I also believe the Vietnam era protests and civil disturbances will be small relative to what we'll get with the wider ME war as it will provide a focal point for opposition to Trump. This would be a godsend for the NeverTrumpers. And those that supported Trump in the last election on the basis of his criticism of military interventions will abandon him. I agree with Tucker Carlson, it would be the end of the Trump presidency.

[Chris]

China needs the straight open. Not necessarily the US. Trump is already alluding to other countries protecting their own interests.

[Fred]

JJackson,

"anounce the straights are closed until the sanctions are lifted."

That's going to do great wonders for the Iranian economy. Of course American extortion - by Trump - is bad! Unlike Iranian extortion like you recommend.

[Harlan Easley]

"Is anyone in their right mind prepared to run the risk of a new global economic and financial catastrophe triggered by a war between the United States and Iran?"

Israel is prepared for others to run that risk for them. Of course you could argue they are out of their minds.

[Walrus]

Blue Peacock is close. If Iran decides to fight, they don’t have to close the Straits, the insurance industry will do it for them. War risks insurance will not be commercially available at any price. The solution to that is for the U.S. Government to underwrite the necessary insurance not only for the tankers but the crews and associated people. This has been done before.

But that only covers one aspect of the financial side... The derivatives trade has losers......and winners, and the winners aren’t going to let the losers off the hook, and Uncle Sam can’t fund that transaction. As for mining and clearing, I don’t know for sure but I think I recall that a weeks orgy of mining with high tech stuff could take all of NATOs mine countermeasures resources some years to clear.

......And all this is assuming that Russia, China and perhaps others decide not to add their little cup of gasoline to the fire.

[O'Shawnessey]

Maybe Hormuz is better seen as symbolic of generalized disruption of oil flow due to collective military action. How long can the BIS/FED zombie economy stay on its feet with $200/bbl oil? $300/bbl? My guess is: Not very bloody long.

[william chandler]

It is the ADELSON Administration . .... Bought and PAID FOR.
Remember how "rich" Trump was "self funded" and therefore could not be influenced by contributions?"! Well $259 million bought him. Those funds came from Sheldon and Miriam Adelson, Paul Singer and Bernard Marcus, donors who have made no secret of their desire for the United States to destroy the Islamic Republic. Adelson, who alongside his wife Miriam are the biggest donors to Trump and the GOP, contributed $205 million to Republicans in the past two cycles and reportedly sent $35 million Trump’s presidential bid.
Sheldon Adelson BRIBED Trump and the Republicans .... This does not include the "favorable and unusual" so-called loans granted Kushner and ?Trump? who is notorious for being in financial difficulty and is desperately hiding his taxes. Trump has lots of energy for defending his tax returns but very little for defending Our borders. Trump's lawyers will appeal and fight this tooth and nail for his Taxes. But when some P.O.S. "judge" treasonously rules against defending this Nation's borders from Invaders Trump just shruggs and submits. Makes empty threats about where to put the Invaders, and goes back to putting ISRAEL FIRST.
63,000 American Citizens have been murdered by ILLEGALS since 9/11.... and tRUMP is worried about Iran because Israel TOLD HIM TO. tRUMP is pissing all over Americans ..... so, yes, there IS TRUTH to that dossier.
Trump has diverted American resources to granting Sheldon Adelson's every wish for a FOREIGN nation.
Trump has NOT fulfilled his DUTY and Promises to the American People as he has focused on Israel.
Trump is attempting to embroil this Nation in a foreign war through blatant LIES.
FIRST Trump claims scuba divers planted 90lb. Limpet mines 12 feet up the side of a ship while bobbing in the water!
SECOND Iran shoots down US drone. I am surprised more are not shot down. Usually the US uses them against defenseless enemies, but that is apparently not the case with Iran. What if Russia starts flying drones over OUR coastline?
America-"I'm not touching you, I'm not touching you, I'm not touching you .... MOMMY! Iran HIT ME!".
Why would we be SPYING on open water??? The debris was in Iranian territory ..... it did not WALK there.
CURE: Trump, Adelson, Kushner, Pompeo, Bolton, need to go on trial for treason.

[Cortes]

Great historical precedent, so it’s just “Back to the Future”:

https://en.m.wikipedia.org/wiki/Sound_Dues

[JJackson]

Fred true but if they just accept having their economy trashed I see no way out for them at least if they do close the straights the problems they cause for the rest of the world may lead to pressure for an equitable resolution as it stands things will just go from bad to worse for their people. Their problem is how to get some teeth with out the US realising what they are doing while they are growing thier gnashers. At least north Korea has the option of a plan B they would be crazy to trade that away. This can not have been missed by all the other countries that are in danger of US inspired regieme change.

[Fred]

"CURE: Trump, Adelson, Kushner, Pompeo, Bolton, need to go on trial for treason."
Nancy O Nancy where is that impeachment vote!

"defenseless enemies" That sure beats the other kind.

[Norbert M Salamon]

I would expect that the following news of Russia's statement in Jerusalem is most reverent to Iran/US "war vs peace" issues:

http://smoothiex12.blogspot.com/2019/06/pretty-clear-and-without-double-meaning.html#disqus_thread

[blue peacock]

"The derivatives trade has losers......and winners, and the winners aren’t going to let the losers off the hook, and Uncle Sam can’t fund that transaction."

The Fed made Goldman Sachs whole on the underwater AIG CDS. Mark-to-market was abandoned. The Fed could accept any collateral no matter how worthless to provide liquidity as the lender of last resort.

There is a lot of hyperbole on the derivates markets. Most derivatives traders have hedged positions. The primary issue in all financial crises is liquidity. There's no bid. And most funding takes place in short duration markets. Liquidity in offshore eurodollar markets have been waning for over a year now. Take a look at SHIBOR for example. Significant stress in Chinese banking system. A war with Iran that leads to a ME conflagration will drive a scramble for liquidity and least risk collateral in an already stressed liquidity environment. The inter-bank market could freeze temporarily. T-Bills are at the apex.

Don't get me wrong. Central banks are trapped. They have no choice but to keep expanding balance sheets to prevent the gargantuan credit edifice from imploding. Note Draghi's statements last week. Yes, at some point we'll hit the psychological tipping point. When is the open question? It could be momentarily or in decades.

[Seamus Padraig]

I would certainly abandon him. No doubt about that!

[Jim Ticehurst]

Good Discussion I cant Imagine a Nuclear War anywhere around the Middle East..Far East or Europe..Just desire for the Option..Even Israel has gone Conventional every time...and I would always look at that Option..Logistics and Resources with everyone..over there China has been busy backing up their SecurityWith Control of Resources...Roads..Bridges..Trains..etc They have a backdoor all the way from Pakistan into China.Africa..The Suez...The Americas,,Its all in The Art of the Deal..or Luck..to have any Pawns on the Table..The Asian Dominos are falling..Game play..Bartering..Negotating..All Things Persian..In my Study of Ancient Civizlations..and Culture..Sumerian ..(Funny..Full Circle now) I found that Wine Making began in Armenia..Thank you..Noah..

[JamesT]

I think Walrus is on the money. As he points out - for every player with a hedged position there is someone providing that hedge and thus exposed to loss.

The Big Short provides the most accessible explanation of derivatives that I have ever seen:
https://www.youtube.com/watch?v=EEXTqtH-Oo4

So there are oil industry equivalents of CDO's - that is, derivatives linked to the price of oil. If the price of oil goes up, some people win and others lose. If the price goes really high in a short time those losers will lose big and nobody (not even the US govt) will be big enough to cover their loses. Would the US govt really be willing to pay to bail out German, Japanese, and French banks even if they had enough money to do so? I don't think so.

There is a lot of hand waving about derivatives - but I think Pepe's core thesis actually holds up. Much to my surprise.

[LondonBob]

True most derivatives are hedged and it all cancels out with your book ideally market neutral, but having worked in the area you did get strange contracts done at strike prices where you would think the price will never hit, presumably the client is hedging something, such as $200 oil. The Investment Bank just takes a fee without any concern they would have to pay out, but if they did have to the notional value would wipe the bank's capital out. Any price spike would also be difficult to hedge. The real issue would be the loss in confidence of the financial system as you wouldn't know who was solvent and the economic impact of $200 oil, it would be far worse than 2008.

[Harry]

Why not forego the nuclear option which is a sin, and head straight for the Straights. The Iranians know that if you want to hurt America you aim for its pocket. Which appears to be what they are doing.

It doesnt serve them to admit their plan. But they are probably doing their best to discretely harm shipping.

[Harry]

Force Majeure?

Losers often whine. It wouldn't surprise me if there was an attempt to suspend trade to prevent losses being recognized till the US has subdued Iran

[Christian J Chuba]

Thanks for the historical read, the Danes did have a good run, 1492 - 1857 but I can see how a mandatory 2% cargo tax would lead to wars. If Iran overplays it, it would be them closing of the Strait of Hormuz and would put us on the brink of war they don't.

I do see a possibility for them if they do a light version of it. They could apply this only to traffic in their territorial waters and also offer it as on optional service for Gulf States that want their protection in international and their own sovereign waters. I could see Qatar going for it if their fee was reasonable. I could see Iraq and maybe another Gulf state accepting it as well. The U.S. would threaten those states with sanctions but that would strain those relationships.

If the tanker attacks were false flags it would discourage future attacks because it would make us look incompetent if we can never catch Iran in the act on our side of the fence. It's a dangerous game but we are breathing down their throats, don't see how they can avoid danger.

[joanna]

The Fed made Goldman Sachs whole on the underwater AIG CDS.

explain. Incidentally the same passage drew my attention.

[Harper]

Thank you all for thoughtful comments. I believe the collective wisdom of the responses underscores my essential point: An eruption of deeper conflict in the Gulf will have potentially grave collateral consequences. Another major financial disruption at this point would be worse than 2008. At that time, the center of the crisis was the United States. European crisis came on a year or so later and remains unresolved. Between oil flows from the Gulf, still-unresolved US-China trade disputes, Fed and ECB already returning to QE, the scope of the economic consequences of a disruption, even temporary, of global oil and gas flows would be severe. Not the end of the world, not the first step towards nuclear Armageddon, but severe.

Just means that all concerned parties should thing through a net assessment of the consequences before falling into a step-by-step escalation.

[JJackson]

That is a hell of a gamble without a trump card to play (no pun intended). If they - or the Houtis - do escalate the danger of passing through the straights to a point where it is causing significant pain and the US decides to stop them militarily they will come off much the worse. The Saudis and some US Gulf bases may not fare well but ultimately you can not win against the American military if they decide to go Desert Storm on you. It is not a gamble I would take unless I did have a weapon of last resort sufficent to make my opponent rethink over running my country.