Global Economic Crisis

Sheldon Filger-blogger for GlobalEconomicCrisis.com

Economist Nouriel Roubini has written an article for Project Syndicate that looks at the probable scenarios for the trajectory of the Israel-Gaza war, and their likely consequences for the global economy. Bottom line: Roubini thinks that economists, investors, and markets in general are underestimating the risk factors of a worst-case spillover of the Gaza conflict.

Roubini assigns a 35% probability that the Gaza war is transformed into an all-out regional war, with Iran unleashing its proxies against Israel and its U.S. ally. Ultimately, in this scenario, Israel attacks Iran’s nuclear facilities, with American support.

What are the economic implications of such a scenario? A geopolitical shock similar to the oil shock of the 1970s. This would result in global stagflation, with Europe and China in particular being vulnerable. Ironically, the United States would suffer economic dislocation somewhat less, as it is now the number one oil producer in the world, a sharp contrast with the 1970s. However, a regional war in the Middle East would create further political instability in the U.S., with negative economic implications.

Essentially, Nouriel Roubini is warning that global markets are only pricing in a 5% probability of a worst-case scenario, where 35 % is more realistic. This unwarranted optimism, posits Roubini, leaves the global economy highly vulnerable to the worst possible economic consequences.