So this isn’t blind optimism. But it is mindful optimism.
It’s Easter, and I need a relaxing break.
With the possible exception of the PM, the Finance Minister, the Energy Minister, and the local oil company bosses, no one involved in writing or reading this column has any control over how good, bad or ugly things get from here.
If any of the above is reading: hi … and good luck.
But let’s face it, there is an event horizon over which no one, not even United States President Donald Trump, has any clear visibility.
Two variables make it impossible to forecast with any confidence.
One is the timeframe.
Yes, Trump declared a great victory and suggested the war is in its last few weeks in his big speech.
Far be it from me to suggest that this might be bluster, or that the US President is prone to pulling abrupt U-turns, but I still don’t think we know when this conflict will end.
And even if the US pulls back on schedule, we have no guarantees about the reopening of the Strait of Hormuz.
My assumption since the beginning has been that the US will declare some sort of victory and step back after several weeks.
But it is likely to leave an awful geopolitical mess for the rest of the world to clean up.
Europe and other players reliant on the Strait will have to engage diplomatically with Iran.
We might see the Strait being tolled or the Iranian oil embargo lifted permanently.
All of that will take time.
So that’s variable one. Let’s call it T.
The other variable is the extent of the physical supply shortfall we face until such time as the Strait reopens.
I’m sure there are plenty of urgent and innovative plans being enacted to mitigate the supply shock, with various deals being done by the major refining nations.
I heard the PM say nations like South Korea and Singapore were out there hustling. And now our guys are out there hustling too with their oil tickets and whatnot.
But we have no insight into the success major refining nations are having individually, let alone any kind of aggregate number for where the final global shortfall is about to land.
So let’s call that variable X.
Those two unknown variables make predicting the economic fallout highly fraught.
They mean that forecasters have to rely on assumptions.
They have to apply value judgments based on things like how they interpret Trump’s foreign policy ramblings, or how they read the history of modern Middle East conflicts.
Donald Trump has declared a great victory and suggested the US war against Iran is in its last few weeks, but there is some scepticism. Photo / Getty Images
Or, how optimistic or pessimistic they are about the ability of markets to absorb shocks. Or, ultimately, their confidence in humans to adapt.
The best we can do is model scenarios based on assumptions.
Which means we all have a choice about the lens we apply to variables X and T.
So with all that in mind, as promised, here are three things to help you feel calmer about the crisis this Easter morning.
Markets will get bored with the war
Pie Funds founder and chief investment officer Mike Taylor said that to me last week.
It might sound cynical, but I found it heartening. It’s born of experience.
Geopolitical events seldom derail the global financial system. The reasons for the 1929, 1987 and 2008 meltdowns were far more esoteric.
The Ukraine war rattled markets with a major supply shock in early 2022.
The war didn’t end, but by September 2022, markets got bored and continued on their merry way.
Or to put it another way, investors decided the shock was priced in and moved on.
Brent crude spiked to US$139 a barrel in March 2022. So far in this crisis, it has been as high as US$119.
It was back below US$100 by August 1.
Perhaps things will be worse this time. There are some good arguments as to why they could be.
But looking at some historical context is a reminder that they always pass.
Monetary policy works
There isn’t much in the economic toolbox that really works to control the world’s chaos.
But strong monetary policy is something to be thankful for.
It’s like the Force (from Star Wars).
The good news is that the Reserve Bank (the Jedi in this scenario) has room to move – in both directions.
There’s no doubt it faces a dilemma.
The surge in oil prices will both cause inflation, as higher costs flow through the economy, and disinflation as they hit consumers in the pocket and curb demand.
Economists expect the RBNZ will sit back and wait to see what the net impact is before moving the Official Cash Rate (OCR).
Rates are probably heading up; that was on the cards before the oil shock.
At 2.25%, the OCR is still set at a stimulatory level to help boost economic activity.
It could rise to 3.25% and still be considered a neutral rate.
But if the world really did plunge into chaos and depression, there is room to cut further.
Milton Friedman, whose theories underpin our monetary policy system, famously said: “Inflation is always and everywhere a monetary phenomenon.”
Supply shocks move prices, but they are temporary.
Meanwhile, the real cause of inflation is money supply. And that’s something where we do have some control.
We are not at war.
No one in New Zealand is at risk of being bombed. Our sons and daughters aren’t being sent to the front line anywhere.
What we face here is disruption and inconvenience, not an existential threat.
That might sound glib, but let’s keep it in perspective.
We might be in for a weird old time in the next few months. There might be fuel restrictions. Our plans to fly might be curtailed.
The unforeseeable bit is right in front of us, and that is worrying.
But this is temporary. I think we can look through it with some confidence.
We have a few days here to pause and remember how lucky we are in this country. Let’s not waste them.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
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