Government Lending

War with Iran threatens U.S. economy

Credit already has tightened and consumers could “turn cautious,” Wells Fargo says

After Friday’s U.S. drone strike that killed Qasem Soleimani, Iran’s top general, economists are warning the widening conflict could threaten the U.S. economy.

“A lasting conflict would have wide-ranging implications through broad economic and financial shock that significantly worsen operating and financing conditions,” Moody’s said on Monday.

Wells Fargo economists said credit already is tightening “modestly,” even without an escalation.

“Stock markets have weakened since Soleimani’s death, and credit spreads have moved out,” Wells Fargo economists said in a report on Monday. “These moves represent a modest tightening in financial market conditions that, if sustained, could impart some headwinds on the economy. In addition, American consumers and businesses could potentially turn cautious.”

The drone strike resulted, at least initially, in a bump down in mortgage rates as investors competed for bonds perceived as a safe haven, compared to stocks.

An ongoing conflict would reduce the chance of a hike in the Federal Reserve’s benchmark rate in 2020, the report said. However, many economists had already speculated a rate hike this year was unlikely because the Fed will try to refrain from taking action in the months preceding a U.S. presidential election.

“We have been forecasting that Fed will keep rates on hold for the foreseeable future,” the Wells Fargo report said. “Although it would be premature to expect a Fed rate cut based on what has happened to date with respect to the Iranian crisis, the uncertainty that it raises makes us feel more confident in our view that the FOMC will not be hiking rates anytime soon.”

The 2003 War in Iraq was billed as a swift win by the U.S. as our superior military forces rolled across the desserts to vanquish Saddam Hussein’s army. More than one U.S. politician promised: “We will be welcomed as liberators.”

While the U.S. economy initially rallied, going from 2.9% growth in 2003 to 3.8% in 2004, it fell for the next five years, ending in a recession.

Almost 17 years later, the U.S. is still bogged down in Iraq, and the military death toll has continued to mount, even after a ceremony was held in Bagdad on Dec. 15, 2011, to mark the official end of the war.

The number of U.S. soldiers killed in Iraq stood at 4,506 and the total injured at 32,291 as of Dec. 30, according to the Department of Defense. Civilian deaths have exceeded 600,000, according to The Lancet, the U.K. medical journal.

In many ways, the situation in Iran is a more serious threat than Iraq. For one, the country is four times bigger than neighboring Iraq and it has a larger military force.

For another, Iran has restarted a nuclear program that was on hold before the Trump administration’s 2018 withdrawal from an international treaty known as the Joint Comprehensive Plan of Action.

At the time, President Donald Trump promised to negotiate a “better deal,” but it never happened.

So, while the invasion of Iraq was premised on the threat of weapons of mass destruction that were never found, Iran has a documented nuclear program it has now restarted. Plus, it has an established arsenal of ballistic missiles designed to carry nuclear warheads.

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