Economists warn that stock market bubbles are more fragile than a repeat of the oil crisis of 50 years ago.

Podcast: David Lin

Compiled & edited by: Yuliya, PANews

With the Strait of Hormuz, a vital waterway, strangled, oil prices have surged, and the world is trembling, waiting for a repeat of the "Great Depression of 1979."

Don't be fooled by appearances! Johns Hopkins University professor Steve Hanke poured cold water on the panic in his latest podcast: the real crisis isn't in oil prices, but in the Federal Reserve's out-of-control printing press and the shaky overvaluation bubble in the US stock market. Furthermore, this episode also discusses the current stock market bubble risks and the impact of war, as well as the far-reaching geopolitical and global implications of the Iran-Iraq War.

PANews has compiled and edited the transcript of this interview.

A repeat of the 1979 oil crisis? The actual risk is lower.

David: Are we on the verge of a repeat of the 1979 "Oil Crisis 2.0"? Looking back at 1979, the crisis began when the Iranian Revolution disrupted oil production in one of the world's largest exporters. The sudden drop in supply tightened global markets, causing oil prices to soar. In the United States, the immediate impact was gasoline shortages, with long lines at gas stations across the country and fuel rationing in some states. Rising energy prices pushed up prices throughout the economy, prompting the Federal Reserve to raise interest rates sharply to control inflation . That crisis also accelerated the establishment of the Strategic Petroleum Reserve (SPR) in the United States.

Today, markets are once again reacting to geopolitical risks. The Strait of Hormuz, located between Iran and Oman, is the world's most important oil passage, through which approximately 20 million barrels of oil per day (about one-fifth of global consumption) flow. With the strait closed due to the conflict involving Iran, oil prices have surged. Steve, welcome back to the show. How far are we from a second oil crisis like those seen in nearly 50 years? What's next?

Steve Hanke: It's a pleasure speaking with you, David. To provide some background, let's briefly recap the history. My first teaching position was at the Colorado School of Mines, one of the world's top mining schools. In the late 1960s, specifically 1968, I taught my first course in oil economics there. That same year, I edited a book called *The Political Economy of Energy and National Security*, which discusses the very topic we're talking about now. Later, in late 1985, I developed a basic model of OPEC, predicting its collapse and oil prices falling below $10 a barrel. This did indeed happen in 1986, and oil prices fell as predicted. At the time, I was working at the Friedberg Mercantile Group in Toronto, and based on my analysis, we held a very large short position, ultimately accounting for over 70% of the short positions in London light diesel contracts.

If we compare the current situation with that of 1978-1979, I believe the potential risk of disruption today is actually lower than then . There are several reasons for this:

• In 1978, Iran accounted for 8.5% of global oil production, but now they account for only 5.2%.

• In 1978, the Middle East accounted for 34.3% of global production; now it has fallen to 31%.

• The United States accounted for 15.6% of global production in 1978, and now that figure has risen to 18.9%. Our dependence on foreign production has decreased.

• Most importantly, our "oil intensity" (the amount of oil consumed per unit of GDP) has dropped dramatically from 1.5% to 0.4%.

Oil Market: Supply Shocks and Policy Responses

David: Treasury Secretary Bessant said a couple of days ago that the government will issue a series of announcements. Gasoline prices have already soared to $86, and if the situation isn't resolved quickly, prices will rise even higher. The government clearly doesn't want gas station prices to rise. Besides implementing price controls, what else can the government do to stabilize gasoline prices for Americans?

Steve Hanke: If price controls are implemented, there will be long lines at gas stations because demand will exceed supply. If there is no intervention, the market will clear itself automatically, but prices will be higher.

The quickest way to resolve the current shortage is to lift sanctions against Russia, allowing the massive "shadow fleet" anchored at sea to unload and sell its stored Russian crude oil. In fact, the United States has already begun to shift course, allowing some Russian oil to flow to India.

David: How will America's allies react to the easing of sanctions against Russia? And how will this affect the war in Ukraine?

Steve Hanke: Europe is being hit hard by rising energy prices. Due to European sanctions against Russia, coupled with the bombing of the Nord Stream 2 pipeline, natural gas supplies from Russia to Europe have been significantly cut off. As a result, Europeans have had to buy liquefied natural gas mainly from the United States, which costs about three times as much as Russian gas. So they are now in a very difficult situation, backed into a corner.

I think the idea of ​​turning to Russia might be a compromise they've had to "swallow." Of course, I've advised against imposing any sanctions from the beginning . I'm a free trader, and I dislike sanctions, tariffs, or quotas anytime, anywhere.

David: Do you think the Strategic Petroleum Reserve (SPR) will eventually be used? Isn't that exactly the scenario the SPR was designed to address in the 1970s? The Department of Energy currently reports that there are approximately 413 million barrels of oil in the SPR.

Steve Hanke: They can do that, and that's definitely its purpose. It will help. You have to remember a rule of thumb: for every $10 change in crude oil prices, the price of gasoline at gas stations changes by about 25 cents . Right now, as we're talking on March 6th, gasoline prices in most parts of the U.S. have already risen by about 50 cents. That's a big problem. War comes with all sorts of costs: the direct military costs of burning ammunition and fuel, the economic collateral damage we're discussing, and the extremely high loss of life (most of which are innocent civilians killed). Not only that, but Iraq and Kuwait have recently been forced to shut down their largest oil fields because storage tanks are full and the straits are closed, preventing shipments. Shutting down oil fields carries the potential for equipment damage and high maintenance costs.

The truth about inflation: Money supply, not oil prices, is the key.

David: Let's return to the topic of inflation. You just said that rising oil prices won't cause inflation because inflation is caused by the expansion of the money supply. But prominent macroeconomic commentator Mohamed El-Erian argues that the more a conflict spreads, the greater its impact on stagflation in the global economy. Can you explain why high oil prices won't immediately trigger inflation?

Steve Hanke: There are many false narratives in the newspapers about "rising oil prices leading to severe inflation." Rising oil prices simply mean that the price of oil, natural gas, and their derivatives is rising relative to all other commodities, but it does not mean that we will face overall inflation.

The best example is Japan :

• During the 1973 oil embargo, oil prices soared. The Bank of Japan responded by increasing the money supply to accommodate the price increase, resulting in Japan not only facing a relative rise in oil prices but also severe inflation.

• However, during another oil crisis in 1979, the Bank of Japan refused to compromise by increasing the money supply. As a result, oil prices in Japan rose, but without accompanying inflation.

Inflation is always a monetary phenomenon. You have to pay attention to the money supply. The reason I believe the US cannot bring inflation down to its 2% target is because broad money supply (M2) is accelerating, bank lending is increasing significantly, bank regulation is being relaxed, and there is political pressure to lower the federal funds rate. More importantly, the Federal Reserve stopped quantitative tightening (QT) last December and started quantitative easing (QE), meaning the Fed's balance sheet is effectively expanding again.

David: The U.S. economy unexpectedly lost 92,000 jobs in February, and the labor market does look weaker. Will the Federal Reserve slow its pace of interest rate cuts due to the current rise in oil prices?

Steve Hanke: No, I think they'll be keeping a close eye on the job market. By the way, this is largely thanks to Trump's tariff policies. Tariffs were touted as creating manufacturing jobs , which is what he's been telling us. But in reality, manufacturing lost 108,000 jobs last year. Tariffs are killing jobs. If you look at the overall nonfarm payrolls data, almost zero jobs were created last year, and only 181,000 jobs are projected for 2025, compared to a whopping 2.2 million in 2024.

Therefore, this "tariff man" is destroying the job market . You can't just listen to the media narrative; you have to look at the real data. This leads to my "Hank's 95% rule": 95% of what you read in financial media is either wrong or meaningless.

Stock market bubbles are more fragile

David: You mentioned at the beginning of the show that the current stock market is in a bubble. How much exposure do the companies in the major indices have to oil prices? Why does the stock market fall when oil prices rise?

Steve Hanke: Obviously, companies that use oil directly or indirectly (such as airlines or logistics freight companies) are hit harder.

However, from a macro perspective, the price-to-earnings ratio (P/E) of the stock market was 8 times in 1978-1979, while it is now as high as 28 or 29 times.

This means that the market today is much more fragile than it was in 1978. When a market is in a bubble phase, it is always vulnerable to external shocks.

The war between Israel and the United States in Iran is causing enormous wealth destruction, not only in terms of the direct military costs of ammunition and fuel, but also in the negative wealth effects of the financial market turmoil. If the stock market bubble does burst, people's wealth will shrink. Those who have made money in the stock market and maintained the extremely high level of consumption in the United States will see their wealth diminish, and they will begin to cut back on spending, such as postponing the purchase of a new car for a year or two. This negative effect will ripple through the entire economy.

De-dollarization Misconceptions and Lessons from Hong Kong Currency

David: The South Korean president announced the establishment of a 100 trillion won stabilization fund to address soaring energy prices. Asian countries are highly dependent on oil imports; will their fiscal intervention affect the dollar? Everyone is talking about "de-dollarization"—is it really happening?

Steve Hanke: There are two flawed narratives about the dollar : "selling off America" ​​and "de-dollarization." These are utter garbage.

If you look at the net investment flowing into the US increased by 31% year-on-year last year, with funds continuously pouring into the country. The US dollar is very strong against the euro (the world's most important exchange rate). In fact, the dollar strengthened further after the outbreak of war.

People who talk about de-dollarization don't look at the data at all. Whether it's official data from the U.S. Treasury or data from the Bank for International Settlements, it proves that the narrative of "de-dollarization" is basically nonsense.

David: Central banks in Asian countries (such as the Philippines and Indonesia) have been forced to pause interest rate cuts due to the threat of high oil prices, causing their currencies to weaken. If you were an advisor to the central banks of these oil-importing countries, what would you advise them to do?

Steve Hanke: Stay calm. In a place like Indonesia, you absolutely cannot loosen monetary policy, or the rupiah will be severely damaged. These countries' currencies are very sensitive to interest rates.

Speaking of Indonesia, they wouldn't have this problem today if they had adopted my advice from when I was President Suharto's chief advisor (to establish a currency board system). If the Indonesian rupiah were fully backed by the US dollar and traded against it at a fixed exchange rate, it would become a clone of the US dollar, just like the Hong Kong dollar.

Looking at Hong Kong, the Hang Seng Index was one of the few markets to rise today (March 6). The Hong Kong dollar, issued by the Monetary Authority and backed by 100% US dollar reserves, maintains a fixed exchange rate of 7.8 Hong Kong dollars to 1 US dollar. The Hong Kong dollar is essentially a clone of the US dollar, so it doesn't suffer from currency devaluation.

Strategic Risks and Uncertainties for the United States in the Middle East

David: China estimates that 40% to 50% of its crude oil imports pass through the now-closed Strait of Hormuz. While they still have the Strait of Malacca as a route, their crude oil supply will certainly be impacted. How do you expect China to respond or intervene?

Steve Hanke: China will try to do what all the Gulf states, Turkey, and Russia want to do—they all want to stop this war. I don't think China will just watch Iran fall; I think they will take all necessary measures to maintain the regime.

David: Do you think this conflict could spiral out of control and escalate into a global war outside the Middle East? The Iranian Foreign Ministry has stated that they are prepared for an American invasion should US ground forces intervene.

Steve Hanke: In my opinion, it's out of control. There's a lot of speculation right now about whether the Iranian Kurds stationed in northern Iraq will become US proxy ground forces; the situation is very unclear. We're currently in the "fog of war," relying on secondary data for speculation.

In a recent, excellent interview, my old friend, Prince Turki Al-Faisal, former head of Saudi intelligence and former ambassador to the United States, said: "Trump had no idea what he was doing while running this war. It's one thing for a blind person to guide another blind person, but when a hallucinator guides a blind person, you're in big trouble."

David: What is America's ultimate goal? The Supreme Leader has been assassinated, most of the commanders of the Iranian Revolutionary Guard have been eliminated, and regime change appears to be underway. Why continue?

Steve Hanke: You're making it sound like regime change is easy to succeed. According to Lindsey O'Rourke's 2018 book, *Hidden Regime Change*, about 60% of all regime change attempts the United States has participated in since World War II have completely failed , while the others have left behind a thoroughly chaotic mess. The history of regime change proves it to be a completely disastrous policy.

The United States has been drawn into a policy doomed to failure; don't listen to the rhetoric of Washington politicians. Trump's goals keep changing, but he will ultimately do what Israeli Prime Minister Netanyahu tells him to do.

David: Is this related to containing China? The US first controlled Venezuela's oil (a friend of China and Iran), and now it's trying to take over Iran completely, control the Strait of Hormuz, and thus cut off China's oil supply?

Steve Hanke: There's no doubt China was affected, but that's secondary. As John Mearsheimer points out in *The Israel Lobbying Group and American Foreign Policy*, the Israel Lobbying Group wields immense influence in Washington, and they got Trump involved. Netanyahu has wanted to destroy Iran for 40 years . Israel could never do that alone; it's a massive American operation. Essentially, the US is fighting for Netanyahu.

David: So what are the strategic benefits for the United States?

Steve Hanke: The benefits are minimal, but the costs are enormous. Besides the economic and military costs, there are huge political costs. The American public is very resentful of this, and I believe the Republican Party, led by Trump, will suffer a crushing defeat in the midterm elections.

In the long run, the impact will be devastating. Contrary to American political propaganda, the assassinated Supreme Leader will become a martyr for the Muslim world. This means that in the foreseeable future, the Muslim world will almost inevitably become an enemy of the United States. We are creating a massive number of enemies for ourselves.