TWENTY MINUTES INTO THE FUTURE? Niall Ferguson: Brace Yourselves. A Recession Is Coming.
Investors should be used to the whiplash by now. The pattern ought to be familiar: The president makes a bold pro-Israel military move in the Middle East. Israel’s principal adversary retaliates by restricting the flow of oil through the Persian Gulf. The economic consequences look so grim—the nightmare combination of stagnation and inflation—that the president hastily switches to diplomacy.
I want nothing to do with the juvenile journalistic debate about whether, by postponing on Monday his threatened attacks on Iranian power plants, Trump “chickened out” the way he rolled back the tariffs in April last year—the way he always chickens out. Please. He doesn’t always chicken out. He carries out roughly half of the threats he makes, which is a pretty effective strategy in game theory, so long as your adversaries are risk averse, which most of them are. Trump most certainly is not. (When the guy who used to run George Soros’s hedge fund says that Trump has “a very high risk tolerance, much higher than mine,” that’s telling you something.)
The reason the pattern of the past four weeks should be familiar is that something very similar happened in 1973–74. The catalyst was Richard Nixon’s decision to airlift a colossal military aid package to Israel—the counterpart to Operation Epic Fury in 2026. Nixon wanted to tilt the balance of power in the Middle East decisively in Israel’s favor following the Arab states’ surprise attack on Yom Kippur, October 6. The retaliation took the form of oil price hikes by the Middle Eastern oil producers, culminating in an embargo on oil exports to the United States imposed on the orders of King Faisal of Saudi Arabia on October 17. The ultimate effect was to nearly quadruple the price of oil on the world market.
Nixon, Kissinger, and other senior officials in the administration had been warned that this might happen. As Martin Indyk showed in his excellent 2021 book, Master of the Game: Henry Kissinger and the Art of Middle East Diplomacy, they had ignored those warnings. Kissinger was dismayed at the situation he now found himself in. As he complained to his staff on October 26, in the 19th century, the Western powers would simply have invaded Saudi Arabia and carved up its oil fields. “The idea that a Bedouin kingdom could hold up Western Europe and the United States would have been absolutely inconceivable,” he fumed. Defense Secretary Jim Schlesinger even drew up a plan to occupy the Arabian oil fields “as a last resort.”
Stunned by the economic consequences and their likely political costs, Nixon instructed Kissinger to get the embargo lifted. The secretary of state made his first trip to Riyadh on November 8. For all Kissinger’s skill as a negotiator, and for all the shuttle diplomacy he undertook, it took more than four months to get the embargo lifted, on March 18, 1974. By that time, the energy supply shock had been enough to push the U.S. economy—and much of the rest of the industrial world—into recession. Is something similar happening right now as a result of Trump’s war?
Related: “Goldman Sachs just bumped its U.S. recession probability to 30% from 25%, underscoring how quickly things are moving.”