Economic and Financial Threats to the US and Global Economy

The global economy is in a state of unprecedented vulnerability confronted by a range of threats. The US economy is confronted by similar circumstances. A real danger is that one threat can create a domino effect. The central feature is confidence by investors, but also consumers (eg in China where consumers are on a ‘spending strike’ causing deflation).

The limits to macro forecasting are to forecast the general direction of the business cycle but it is not possible to forecast the specific timing of events. That being the case, we might speculate as to a range of possible outcomes.

We can focus on causal relationships, and these are based on logic. The only valid approach to forecasting is to develop scenarios ‘what if’ and choose the scenario we think is most realistic and likely to occur. This is subjective ’forecasting’ It has been argued that in Economics, there is no such thing as macroeconomics because all relationships reduce to demand and supply, which is microeconomics. The global oil crisis I thank can be evaluated in these terms.

Military action in the Middle East is constraining oil supplies which are affecting the global economy, esp Asia, through the availability of oil, gas, fertilisers, sulphur and other commodities (and imports of food and other stuffs to some Middle Eastern countries). Availability means reduced supply and (all other things equal) this pushes up prices. It also affects expectations of the future. Eg. how high will prices go? When will they come down? How long? Should we buy? Should we invest? The list goes on. The immediate issue for business is commodity availability plus expectations.

Oil is the one commodity which directly affects the whole global economy; interest rates can also have this effect, but it is indirect and transmitted from one country to another, ie financial contagion. ‘Oil ‘refers to petrol ,diesel and aviation fuel. All industries using these products will be affected.

Reduced availability and Increasing oil prices will have a wide range of effects, including:

Oil

• Consumer goods directly as higher prices to consumers
• Consumer goods indirectly through increased costs of production, esp transport and global chains eg shipping costs and diverse industries like fishing where fuel is a large element in total cost of production
• Producer goods – higher costs of production
• Consumer’s real incomes will fall
• Income inequality will lift
• Government revenue collections through excise duties will decline,

Fertilisers Availability and Prices

• Farmers will consider planting decisions, planting less will impact food prices

Petro Chemical and Sulphur Availability and Prices

Some businesses will fail, going into receivership or bankruptcy, reducing production and supply, others businessmen will have negative expectations. The Executive Director of the International Energy Association EA (IEA) speaking at the National Press Club in Canberra on 23 March 2026 stated this oil crisis is far more severe than in the 1970s (1973 and 1979), plus restrictions on Russian exports of gas and oil, Combined.

In the longer term oil availability and price of oil will be a longer term factor as oil extraction, refining and transport infrastructure will take time.

Conclusions:

An increase in rates of inflation, globally, coming directly and indirectly and affecting all countries is inevitable.

Reinstatement of oil production infrastructure will take longer and further constrain oil supplies. This points to continuing inflation.

Reducing household incomes (and expenditure capability), business failures, and negative expectations – all leading to reduced output, point to global recession.

The combination of rising inflation and recession is referred to as stagflation.

In addition, the USA is confronted by a range of threats which are particularly acute for the US Government. The U.S. Federal government is already operating with the highest ratio of Sovereign Debt to GDP outside of WW2, and faces a big blowout of sovereign debt from

1. Military action
2. Reduced taxation
3. Revenue from tariffs not covering thee outlays.

Bond markets are nervous and the USD is being carefully watched, the USD will inevitably depreciate further.

Higher interest rates to bring inflation are under control are inevitable, and demand for bonds may soften. Where is an investor to allocate their capital during these turbulent times? Good thing we’re investing for years and not days.

Source: Doug Murphy, Former Economics Lecturer QLD University of Technology and University of QLD (also my Dad).

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