Today's number: 218. That's how many decibels of sound a pistol shrimp produces when it snaps its claw. That makes it one of the loudest animals in the world, even louder than Alex Jones.
Welcome to Prof G Markets. I'm Ed. It is January 14th. Let's check in on yesterday's market vitals. Major indices fell from recent highs. Treasury yields declined after the latest inflation report. More on that later. Oil prices rose on Trump's comments on Iran. We'll get to those in a moment. And finally, JPMorgan shares dropped 4% after fourth-quarter investment banking fees missed expectations. Okay, what else is happening?
President Trump announced a 25% tariff on any country doing business with Iran. Trump wrote that the order is, quote, "effective immediately" and that the decision is "final and conclusive." However, the White House has not yet explained how the tariffs would be enacted or by what authority. It appears the move is a response to the Iranian government's violent crackdown on protesters, which has resulted in thousands of civilian deaths. In a Tuesday morning Truth Social post, President Trump said he has canceled talks with Iranian officials, and he's urged Iranians to, quote, "keep protesting and take over your institutions." The protests began in late December as inflation and Iran's collapsing currency, the rial, made everyday goods unaffordable. They've since gained momentum, morphing into wider demonstrations against the Iranian regime. Okay, here to explain the economic situation in Iran and what these tariffs might mean for the country, we're speaking with Maurice Obstfeld, former chief economist for the International Monetary Fund and senior fellow at the Peterson Institute for International Economics. Maurice, thank you for joining us again on Prof G Markets.
We've seen this crackdown from the Iranian regime. Then we see the tariffs announced from Trump. Just as a beginner, what is actually happening in Iran? What are these protests about? And what is the economic situation over there?
Well, the economic situation has obviously been grim for many years with ongoing sanctions. When Trump came into office, he rescinded some of the very mild waivers that Biden had issued in order to promote nuclear talks, and so that intensified the pressure. Furthermore, we've seen the Iranian regime weakened geopolitically over the course of the year with Israeli and U.S. strikes, with the evisceration of Iran's proxies abroad, and that too has harmed the economic situation. So as a result of that, you know, what we've seen is the government basically trying to pay its bills by printing money. That sparked inflation. It sparked a huge depreciation of the Iranian currency — a huge, I should say, an accelerating depreciation. So over the last year, the currency fell by more than 80%. It fell by around 16% in December alone. Last year's inflation rate, we believe, was above 50%. This year, it's bound to be higher. So all of this has spilled over into frustration in the streets, starting with economic demonstrations but then building up into a much wider conflagration that spread across the country, including outside of the main urban areas, and reflecting a lot of frustration with the regime, with the corruption that people see, with the trampling of basic freedoms. And it looks like this is much more significant than the 2022 demonstrations and probably the most severe threat to the regime internally since its beginning in 1979.
It seemed like everything reached a tipping point in December, or at least last month and the last few weeks or so. Seems like a lot of this is economic — the hyperinflation you mentioned, also the collapse of the currency. What triggered this outburst that we've seen in the past month or so?
It seems to be really tied to the currency and the effect on inflation and what that's doing to just the cost of living. There's also been severe infrastructure crises, which I think are also contributing. The crisis over water availability has really been a severe problem, and that, you know, historically throughout the Middle East, throughout the earth, droughts, shortages of water lead to severe social dislocation. So it's not really surprising that all this is coming to a head, and the country, the regime, have both been under extreme economic and geopolitical pressure. And suddenly, sometimes you just see these explosions. You know, some smaller demonstration can metastasize, not unlike what we saw on a much larger scale in Eastern Europe in 1989. Again, there were pent-up economic frustrations, pent-up frustrations about corruption, and then you get an explosion.
So then we see this violent, violent crackdown from the Iranian regime — civilians murdered, many have died — and then in response, tariffs. It seems like that has been the response from Trump. He's talked about the violence that we're seeing, and he said, and in addition, we're putting this 25% tariff on Iran and also anyone who does any form of business with Iran. What do we know about the tariff? What do you make of this policy?
Well, the administration is also supposedly considering military options, and not clear what those are. But, you know, the tariff has been the all-purpose Trumpian response to everything he doesn't like. So to some degree, I think they get discounted by the markets and even by some of the targets at this point. You know, the tariffs are supposed to fall on U.S. imports from countries that, quote-unquote, do business with Iran. The major trading partners for Iran are China first and foremost, but also the UAE, Turkey, Iraq. And, you know, we have substantial trade with both Turkey and the UAE. We've been negotiating trade deals with those countries, as with China. We depend on Turkey as a regional and NATO ally. We depend on the UAE as a geopolitical ally in the Middle East. So the betting is probably that either these countries will cut off trade with Iran, pressuring the regime — which I very much doubt can happen in a short time horizon — or that these countries will pressure the Iranian regime to go easy on the protesters, which I also think is not very likely to happen. The Iranian regime is fighting for its life. So I see these as being mostly performative. You know, the countries know at this point, everyone knows at this point that there are deals to be made. The use of tariffs for posturing is a standard part of Trump's toolbox. So, you know, at this point, we have to see what exactly is imposed, what is involved, and what ends up sticking. But I don't think it's going to have much impact on the situation on the ground in Iran. The regime is not looking at these and saying, you know, "Oh my God, we better negotiate or go easy on demonstrators." I think they're much more worried about the military threats that the U.S. could deploy.
Yeah, it seems that, as you say, tariffs are a form of threat, and then also military action are a form of threat. To use those two threats in the same sentence seems a little bit pointless. One of them is far more severe than the other. I assume that the tariffs are therefore just kind of pointless in that sense.
Well, they're more severe, but they also inflict self-harm on the United States. They implicate trade deals that are, you know, sort of in progress. I mean, you make a deal with Turkey, say, you negotiate for many months, and then suddenly you say, "Well, actually, you know, we're not going to respect that deal because, you know, we need to — because you're trading with Iran, and Iran is being horrible to its people." But, you know, it was known that Turkey was trading with Iran. This isn't news to anyone. So, you know, the governments that have made trade deals can rightly say, "Okay, well, you know, why didn't you bring this up in the first place?"
We'll keep following this. I'm sure we'll probably have you back on to keep discussing this. What do you think happens next, if you had to make predictions about how this will start to play out at this point?
Well, as I said, I don't think the tariffs are really going to be a material factor in all this. I think the big uncertainty is if and when the Trump administration will use some sort of military intervention, and what that will be, and, you know, what sort of destabilizing effects it can have on the ground, and whether it'll bring the regime around or just induce them to attack American assets that are nearby, which some in the Iranian hierarchy very much would do. You know, Trump has clearly been flexing his military muscles on the global stage and seems somewhat intoxicated with that. So it wouldn't surprise me to see some sort of military strike. You know, the question is, does a one-time action, as opposed to some sort of sustained military pressure, actually have a big effect on the situation there? Sustained military pressure would raise questions by Trump's MAGA base in the U.S. about what is he doing.
Is there anything that we could predict about what will happen in markets if we see some sort of military action? Do you think that this would be a particularly explosive event for markets? Or perhaps it's already kind of assumed that we're going to get violence. It could affect oil prices.
Oil prices have already factored that in to some extent. I don't see big regional geopolitical spillovers. You know, Russia, China are not going to come to Iran's defense in this situation. They'll make noises about it. So I think it would probably end up being a fairly contained event. You know, the question is, would it actually make things better in a sustained way, bring down the regime? And if the regime is brought down, then what's the plan for the day after? And I don't think there's a plan for the day after. This could become — you know, the Middle East is already a fragile place, and there are unintended consequences from, you know, dropping matches onto the tinder.
Okay. Maurice Obstfeld, former chief economist for the International Monetary Fund, senior fellow at the Peterson Institute for International Economics. Maurice, as always, I appreciate your time. Thank you.
It's been a pleasure, Ed. Thank you.
