The Iran Deal and Global Markets—Connected?

  Tuesday, 25 August 2015 | As the United Nations prepares to lift sanctions against Iran for its weapons-grade nuclear program, the prospect of an economic crisis hit yesterday in markets around the world. Is there a connection?

Yesterday saw almost every market teeter on the brink of free fall. Economic fears were triggered by China's ongoing failure to prevent a sell off. In spite of yet another infusion of cash to undergird its markets, The Washington Post reports that "Chinese stocks recorded their biggest slump in eight years during what [its] media dubbed 'Black Monday.'"

 Other markets around the world immediately followed suit. Russia's ruble fell against the US dollar while, for its part, the US Dow Jones Industrial Average fell by more than 1,000 points before rebounding to close down by a loss closer to 600 points. Markets in Germany, France and the UK joined the downward roller coaster.

Steps being taken behind the scenes to thwart a global collapse are unseen and mostly unknown. The likelihood, however, is that, like China, governments are pumping cash into their markets to keep them from sinking like so many stones.

Apart from all the intricacies and drama, the question at hand is this: Is there a link between today's global downturn and the deal with Iran?

US Secretary of State John Kerry thinks so.

In an interview two weeks ago today, Kerry asserted the connection, predicting the possibility of a related economic crisis. In an interview with Sir Harold Evans, Editor in Chief of Reuters, Kerry scorned the financial savvy of those who oppose the pending agreement with Iran. According to Kerry, opponents insist that, if necessary, the United States by itself should reject the deal and reinstate sanctions against Iran. Moreover, Kerry said, they propose "secondary sanctions" against US allies who refuse to do the same.

"Are you kidding me?" he scoffed. "The United States is going to start sanctioning our allies and their banks and their businesses because we walked away from a deal and we’re going to force them to do what we want them to do even though they agreed to the deal we came to? Are you kidding?"

Turning to business leaders and finance reporters attending the interview, he continued, "That is a recipe very quickly, my friends, businesspeople here, for the American dollar to cease to be the reserve currency of the world—which is already bubbling out there. And if the United States were to behave that way, not only would we have lost [our allies] with respect to the sanctions, but we will lose their support if we have to use military action."

In other words, according to Kerry, it the US Congress fails to ratify the agreement with Iran, America will face an economic disaster, and lose the ability to defend itself.

Setting aside the issue of self-defense, there is a well-established connection between market confidence and market strength. In a world where the value of national currencies is solely based on the emotional security of its users, loss of confidence can easily cause a "run on the bank." Instead of withdrawing deposits from banks, when today's investors lose confidence, they sell paper securities—stocks, bonds and currencies—and put them into tangible assets, things like precious metals and diamonds.

According to Kerry, failure to ratify the agreement with Iran is, or will be, the likely cause of a loss of confidence by investors around the world. But if in fact there is a connection, it is probably the other way around.

The prospect of an agreement with a militant, belligerent Iran that allows its weapons-grade nuclear program to remain intact is just as likely, if not more likely, to cause a crisis of confidence. Accordingly, investors are apt to rush out of paper markets, acquiring tangible assets in order to construct financial shelters in the face of an increasing likelihood of Middle East, and maybe global, war. Perhaps that is what they are doing now, in such a time as this.

Source: (Bridges for Peace, 25 August 2015)

Photo Credit: Katrina.Tuliao/wikipedia.org

Photo License: https://commons.wikimedia.org/wiki/File:Philippine-stock-market-board.jpg

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