The Middle East war is widening, but it may be better than the alternative: new inflationary pressure from a shadowy fundamentalist militia 8,000 miles from American shores.Thank you for reading this post, don't forget to subscribe!
US and UK forces finally struck Houthi forces in Yemen on January 11, in response to at least 27 Houthi attacks on commercial ships sailing in the Red Sea, between North Africa and Saudi Arabia. There were legitimate military reasons for the retaliatory strikes, given that the Houthis have targeted US and allied forces, including Israel. But there was also a powerful economic stimulus: Attacks on commercial ships had sent shipping costs rising and inflation threatened to rise again, just as the Biden administration looks to finally be able to overcome the biggest obstacle to President Biden’s bid for a second term. Used to be.
The Red Sea is an important shipping lane because the Suez Canal, at its northern end, connects the waters connecting western markets with routes to the Indian Ocean and Asia. Ships unable to cross the Red Sea had to make a very long and expensive voyage around the southern tip of Africa. About 15% of world trade passes through this region.
The Iran-backed Houthis began firing on some of the ships after Israel invaded Gaza following a Hamas attack on Israel on October 7. The Houthis say they are targeting ships carrying goods to Israel, but they have also targeted ships with no apparent connection to Israel. Until the January 12 attacks, US forces were playing mostly defense, shooting down Houthi missiles and drones and, in one case, sinking three boats that fired on US helicopters.
The Pentagon says US and British forces attacked 60 Houthi positions in 16 locations using more than 100 bombs and missiles. The aim of these strikes was to disable the Houthis’ ability to launch further attacks on commercial ships. The Houthis say attacks will continue. President Biden says if they do, US forces will hit more Houthi targets.
Biden and his security team have been understandably reluctant to widen the Middle East war. But now they have. Going after the Houthis puts the United States in a kind of proxy war with its supporters in Iran, raising concerns about a slippery slope that could bring the two powers into more direct conflict.
Yemeni protesters loyal to the Houthi movement take part in a protest organized in Sanaa, Yemen, on January 11 against Israel’s ongoing war on Gaza and threats from the US and Britain. (Photo: Mohamed Hamoud/Getty Images) (Mohammed Hamoud via Getty Images)
Yet Biden clearly felt he had no choice but to respond to the Houthis’ aggression, and economics may be just as big a reason.
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Houthi attacks on shipping had begun to attract the attention of investors as they were raising shipping rates, potentially increasing costs just as inflation was finally tapering off.
“The crisis in the Red Sea is exerting pressure on the global economy,” Fundstrat Global Advisors wrote to clients on Jan. 12. [Red Sea] Could support global supply chains and raise prices of manufactured goods at a critical moment in the fight against inflation.
Just before the US retaliation, the World Bank warned that Houthi attacks “have already begun to disrupt key shipping routes, straining supply networks and raising the possibility of inflationary disruptions… “. Energy supplies may also be significantly disrupted, leading to increases in energy prices.
Large shippers such as Maersk and Hapag-Lloyd have begun taking costly alternative routes, with the more than 2,000 ships that normally pass through the area seeking another way. S&P Global Commodity Insights reports that since Israel invaded Gaza and the Houthis began firing, the cost of shipping containers affected by the blockade has increased 600%.
These types of warnings are a red alert in the Biden White House, given that inflation has been Biden’s public enemy No. 1. Biden’s approval rating fell as inflation increased in 2022 and 2023, falling to a very weak 40% or even lower. There has been good news on inflation, with the latest reading for December showing the annual rate of price rise falling from a peak of 8.9% in 2022 to just 3.4%. Most economists believe inflation will continue to decline and return to a comfortably normal zone within 12 to 18 months.
But Biden cannot take any risks.
His approval ratings have failed to recover as inflation remains low, and some polls show Biden losing to his potential Republican rival, Donald Trump, in the 2024 general election. The Biden administration is aggressively looking for ways to bring more oil to global markets to help drive down gasoline and energy costs. And they have [silently] This was applauded as US energy production reached new record highs, knowing it would help prevent drivers from revolting over higher gas prices.
Biden is making every effort to lower prices, for example, by promoting his plan to lower drug and health care costs and boost affordable housing. No president can do much to control inflation, which in recent cases has been largely caused by Covid-era distortions in supply chains and spending patterns. The economy needs to adjust itself, with the help of the Federal Reserve raising interest rates, which reduces demand. Yet Biden is clearly willing to help wherever possible.
Lending a hand when it comes to oil prices: President Joe Biden (AP Photo/Stephanie Scarbrough) (Associated Press)
Houthi attacks may have the opposite effect. Oil prices rose nearly 1% on news of strikes amid widespread war-related concerns that could disrupt the flow of oil. The big question for the markets is what happens next. Some analysts believe Western attacks on the Houthis could backfire, raising the profile of a rebel group desperate for attention – and creating further pretexts for Iran-backed terrorist attacks on Israel and its allies. . The nightmare scenario would be direct action from Iran that would prompt retaliation, which could throw energy markets into disarray, which both Biden and Tehran would probably want to avoid.
On the other hand, decisive US-UK military action could end Houthi attacks, no matter how loudly the Houthis denounce the West and promise more destruction. Cruisers who are avoiding the area will be the first to decide whether it is safe to return to the water. If things settle down, shipping rates will go down and another fear of inflation will subside.
However, it’s a good bet that there will be other fears as well.
Editor’s note: There will be no Bidennomics column on January 19 as the author will be on vacation. If you sorely miss our weekly Bidenomics update, feel free to complain here,
Rick Newman is a senior columnist yahoo finance, Follow him on Twitter @rickjnewman,
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