Is the War With Iran Already Changing the U.S. Economy? | Mark Skousen

Will the war with Iran impact the U.S. economy significantly? Our guest today is Mark Skousen. He's here to tell us how he's seeing the U.S. economy getting impacted by the war in Iran and how the U.S. economy is doing in general right now in his perspective. If this war continues, the interest rates have to go up. Why? Because interest rates and inflation move together. If inflation comes down, interest rates come down. But if inflation goes up, interest rates have to go up. Because investors aren't stupid. So government spending has been kind of flat, if not declining. Business spending has been flat, not declining. Only thing that's going up is consumer spending. And if that flattens out, you're coming close to a recession. I'm Siamak, and this is Market Insider. Mark, it's great to have you back on. Welcome back. Well, thank you. It's a real pleasure to be with The Epoch Times. We want to talk to you about economy. Now there is a conflict with Iran. Can you tell us what you are seeing with the economy right now? You know, war is the health of the state. You see a large increase in spending in defense or what we call war spending now. Trump has changed the name to the Department of War, which I think is more accurate. He's going after a lot of different countries right now. I mean, Venezuela, Iran, maybe Cuba, Ecuador. The Trump doctrine is definitely aggressive, going after the tyrants, if you will, the authoritarians, the strongmen outside of the country. And oil prices are rising. So inflation fears are concerning. Wall Street hates inflation. So not surprisingly, we're seeing the stock market pull back as a result of the wars. Now, defense stocks like Lockheed Martin and others, they're doing well, but the markets in general are struggling right now. And they were high priced as it was, so that was an indication. But inflation is a problem. The Fed is going to have a hard time cutting interest rates when inflation flares up like we're seeing right now. And the tariffs, the Trump war on tariffs on foreign imports, that hasn't helped either. And so inflation is a serious problem. This is why gold and silver have done so well, and even Bitcoin recently. Commodities in general are rising. Copper, uranium, aluminum. These are basic commodities that are necessary to build the infrastructure and so forth. And meanwhile, the job market is struggling. We're not seeing job growth like we used to. And a lot of it's due to what I call advanced intelligence rather than artificial intelligence. So that's my definition of AI. I think it's advanced intelligence, but it's making it difficult to create jobs. There's a lot of uncertainty out there right now. So I'm concerned about it. I think it's affecting, it's falling into the political arena. I think the Republicans are going to have a hard time maintaining control of the House and the Senate in the midterms. Trump's polls are dropping. His popularity is declining because he's got a tough job right now going after, I mean, engaged in Iran. There's a lot of question marks there. You're from Iran. You can probably give us some insights as well. But my concern, here's my question to you, Afghanistan and Iraq were disasters. The Americans spent $4 trillion, was in those countries for 10 to 20 years, left with the Taliban in power in Afghanistan and no democracy really in Iraq. How do we know? I think the Wall Street's asking that question. Is this an unending war in Iran? Yes, we got rid of the Ayatollah. But have we replaced the regime that funds terrorism around the world? I think that's a real question that Wall Street, us as investors are asking. What do you think? The difference between Iran and Afghanistan and Iraq is that Iranians are mostly pro-West. Majority of the people in Iran are pro-West. And 90%, 80 to 90% of them don't want the current regime. They don't want to have conflicts. They don't want the money to get spent on Hezbollah, Houthis, conflicts. They want the money to be spent in Iran so that the young people can have good jobs and prosperity could come back to the country. So I personally don't think what happened in Afghanistan and Iraq will happen in Iran because the people are pro-West. In those other countries, a lot of them, the people didn't like the US. If this regime could change and if it's fast, if it can happen fast, then the new group, whoever that comes in charge, they're going to be pro-West and it's going to be a good change for that whole region. So short-term pain for long-term gain is what we're seeing. And of course, we thought the same thing in Iraq and Afghanistan and never achieved it. So you have to admit there's a great deal of uncertainty whether this will, that regime change is possible. It is interesting that, you know, in the 1967 war against Israel, all the Arab states were attacking Israel. Israel was the enemy. Now, Iran, do they have a death wish? They're attacking their own, the other Arab states, Saudi Arabia, Bahrain, even Dubai. They're supposedly going after US bases there, but they're also shooting and hitting hotels and stuff like that. Isn't it coming to the point where the entire Arab world is saying to Iran, enough, we don't want you anymore. So meanwhile, short-term pain with the Strait of Hormuz being closed still, hopefully the US will be able to open that up. But oil prices are continuing to rise. This was one of the success stories that Trump had in lowering oil prices, but now they're going back up. Americans don't like that. You know, they want to see inflation coming down. Let's say this situation ends in Iran. The war part. The war, yeah. And stability comes with the Strait of Hormuz. And the oil is getting exported from all those countries. How long does it take for that to reflect in the economy? Well, the supply, you know, we learned the supply chain, when they're disrupted, when the supply chain is disrupted, it does take a while to recover. You know, when the supply chain was disrupted in 2000, 2001 with the pandemic, it took years for it to get back into action. Now, this is just an oil type of issue, I think. So it might come quicker, whether it comes in time for the elections. I don't know. Venezuela, the same thing. Venezuela is an oil rich country. It's part of OPEC. And meanwhile, they're now trying to open up oil production again in Venezuela, which was virtually destroyed by the socialist regime and nationalizing did not help in that regard. But even though Venezuela oil is now supposedly available, it's just taking a lot longer for heavy oil to be refined and turned into gasoline and so forth. So to the extent that there is war going on, I still think it's going to be pretty disruptive for quite some time. And I think it's a real problem. So the Venezuela example is really good because you got rid of Maduro, you arrested him. We didn't execute them like we did in Iran. Interesting difference. In Venezuela, they haven't made a regime change. They're working more under duress. They're opening up and so forth. I think Iran is a different situation. You have to somehow, it's like a cancer. Yeah, the regime is rotten. So yeah, I mean, how do you get rid of cancer? Well, it takes a while. So Trump is really, it's one thing to stay within your own sphere of Latin America, the Monroe Doctrine and so forth, defending yourself. I would have rather had him go after Cuba before Iran. But the issue is how imminent was the danger with Iran because they've been threatening, they've been promising that they can produce nuclear weapons. I mean, did they really have, were they within months of creating a nuclear weapon? We've heard this for 20 years and I thought we destroyed everything last year, right? So what was the rationale? Was it really imminent fear that, I mean, my understanding is Iran was more interested in attacking Israel than they were attacking us. Well, they're certainly attacking us now, at least the US bases and a few Americans have died. Now it's interesting, they're increasing the troop levels to 50,000 American troops going to the Middle East. But Trump has promised no boots on the ground. So what do 50,000 troops do in the Middle East? Are they all there just on the ships and not actually sending an army into any areas of the Middle East? That seems like an awful lot of troops. I think we're doing this interview at a time when there's a great deal of uncertainty and the markets don't like the uncertainty. That's why I think the markets are struggling and why gold is still, even Bitcoin starting to move and stuff like that. There's a great deal of fear. War is inflationary. War is the health of the state. You get a larger, I mean, people producing products for wartime rather than for peacetime. We have the Taiwan situation. I just read a major article about Taiwan, which produces 90% of our chips, the most advanced chips with Taiwan semi-manufacturing. That is a major source. And despite every effort by Trump and the Biden administration to shift production to the United States, the chip making is 25% more expensive because of our labor costs, environmental issues, just everything in production. The Taiwanese had it down perfect and they had the most advanced chip making. And so NVIDIA and all these companies depend on the production in Taiwan. So China keeps threatening to take over Taiwan, but I'm not sure they're really going to do this. Right now, I think it's more diplomatic to develop a friendship with Taiwan and a gradual, peaceful transition to Taiwan being part of China. I see that actually happening. And my understanding is the new Chinese party, the new Taiwanese party is much more friendly to mainland China. So there may be something there. Now, Mark, do you think this is impacting China and the U.S. position? Well, it's certainly affecting the U.S. because we're now trying, I was recently in Phoenix and that's where a lot of the chip making is being built by NVIDIA and other major Intel and so forth. But it's at 25% more expensive and the chips that they are producing and a lot of the customers or consumers are reluctant to buy the product as they're not sure the quality is as good as Taiwan in doing that. So it's really quite a, you know, we're building all these new factories in the United States. Trump is putting pressure on them with the tariffs and so forth. But you really wonder if the outcome is going to be that good if the cost is prohibitive. It's like at one point Trump said, we need to have all cell phones made in America. Well, if you want to pay $10,000 for your cell phones, then okay, you can have them made in America. They may not be quite as good. But, you know, foreign competition is really on a general basis has been very beneficial. This is why economists such as myself favor free trade as much as possible. And because competition makes better products, it increases the quantity, quality, and variety of goods and services. Take American automobiles, for example. Well, the Fords and GMs of the 70s, the early 80s, they weren't really that good. But because of the competition from Japan and Europe, it was forcing them to improve the quality of their products. And today, a Ford and GM car, they're almost as good as the Japanese car. So we've all benefited from foreign trade. Yes, we've had to change jobs and so forth. But as I tell my students at Chapman University, out of the three factors of production, land, labor, and capital, which is the most flexible? Well, it's labor. You can be retrained. I say by show of hands, how many Americans in this audience have changed jobs? Almost every hand goes up. You've probably changed jobs. We've all had different positions in life. That's part of the dynamic, the creative, disruptive nature of capitalism. We can adjust to it. So we don't have to have the same manufacturing job all of our lives. Now, in terms of what you're seeing in the economy, you mentioned there's a lot of uncertainty because of the conflicts right now. And technology, the AI market is creating a lot of uncertainty. So the job hiring market is really stagnating in this country. And you need a quarter of a million job per month, new job creation per month in order to just keep up with our population growth. Do you see a downturn out there? Yeah, I see a stagflation, if you will. Stagflation meaning slow growth, economic growth, 2%, maybe 1%. Now, I have a statistic that I use. That's above inflation, right? 2%? Right, in real terms, in real terms. So we're used to 3%, maybe 4%. China's used to 5% to 8%. They're not seeing that in China either. There's slow growth all around and inflation is not going away. Since World War II, we've entered a new era of permanent inflation. We may bring the inflation rate down, but it's not going to zero. In fact, the Fed has a policy of 2% inflation rate. So their policy is not price stability. They want 2% a year. And we haven't even reached that and they're cutting rates right now. Cutting rates even though the inflation rate is still above 2%, their target rate. So we're very pro-inflation. We don't want too much inflation, but we don't want zero inflation either. We're trying to get that balance between the two and it's hard to achieve. And with the war going on, war is inflationary. We're seeing it cutting the oil prices, gasoline prices rising. This is affecting all kinds of commodities and retail products and stuff like that. So I don't think inflation is going away. And this is why the midterms favor the Democrats because even though they don't have a very good program to replace the Republican agenda, people are going to vote no. We don't like what's going on. The affordability problem is not going away. Housing prices are going to stay high. Apartment rents, food prices. I mean, when you impose tariffs on food that has to be imported from Mexico, those prices are going to go up. Now you mentioned housing. What are your thoughts on housing? Do you think it will stay the way it is? Because now we're at the record on affordability and some people are arguing if the housing prices might come down significantly. Well, mortgage rates have come down a little bit. Now they're going back up by the way, but they did drop below 5% for a brief period of time. So that means it's a little more affordable to buy a house. But then the housing prices are higher. So what's the difference? The regulatory environment is not good for new housing. You're seeing in California particularly, hardly any new building of homes at all. And apartment buildings as well. You need both. And I think it was a mistake for Trump to deny corporations from buying homes because what are they doing with these homes? Well, they're renting them. Same thing with large apartment buildings. So they're making it more affordable by having them in the marketplace. So I'm opposed to any kind of restriction, but we need to develop... Look, when you build a McDonald's or any fast food restaurant, it's all the same wherever you are, okay? Why can't we do that with housing? Why can't we have homes that you can manufacture but you have all these building codes? We have 50,000 different building codes in America. So you can't have anyone just build homes and just make them available all around the United States. If we did, the housing problem would go away, but we can't. You mentioned the interest rates going back up. Can you tell us about the interest rates and what are your thoughts on the national debt and the interest rates? Yes, so these are two big factors that are keeping interest rates higher because when you have to refinance the treasury, $7 trillion this year, just to refinance, roll over the national debt, the national debt continues to rise. Trump, as one of the campaign promises, he said that we would eliminate the national debt. Trump has always been a big spender and he likes debt. If you look at his business, he built his business on debt. So I don't think he cares about the deficit particularly, but when we're at close to full employment, it's not growing very fast, but unemployment's going up a little bit, but it's nowhere near a recession and you're running a $1.5 trillion deficit, maybe even more with this war going on, which is very expensive. Drones are fairly cheap, but the missiles, those are blown up, they're never gonna be used again and they cost millions of dollars. And he wants to raise the defense budget from $1 trillion to $1.5 trillion. I mean, that's gonna increase the debt right there. So the treasury has this huge obligation of selling all of this debt to the general public. Institutions and so forth. And they're competing. These interest rates are competing with dividends. So I think they have to, if this war continues, the interest rates have to go up. Why? Because interest rates and inflation move together. If inflation comes down, interest rates come down. But if inflation goes up, interest rates have to go up because investors aren't stupid. They don't wanna buy stuff where they lose their purchasing power. And if inflation is six, seven, or 8%, and you're only getting 4% on treasuries in nominal terms, you're losing money every year. So to compensate for that, treasury has to pay higher interest rates. You mentioned recession is, we're not in recession. Is there any chance of us hitting recession? Do you think we're well above the threshold where we'll be close? I look at total spending in the economy. GDP itself has been fairly positive. Not much of an indication of recession. But if you look at gross output, which includes the supply chain, well, it's only growing at 1% to 2%. So we're not that far away from a recession. And in fact, B2B spending, business spending has been flat for the last year. Really hasn't been going up. This economy has been a consumer driven economy because under the Biden administration, they gave away a lot of money and individuals had a lot of money to spend and they're still spending it. But I think that's coming to an end. I think tightening the belt is going to be an essential feature in the next, because of the affordability problem and the fact that, you know, how many Americans live paycheck to paycheck? Well, it's over 50%. It's really quite dramatic. So in order to protect yourself, you're going to have to start saving money and pulling back on unnecessary consumer spending. So if you look at GDP statistics, government spending has been flat, if not declining, because the Trump administration has fired a lot of workers and tried to squeeze the budget item. Defense spending is an exception, but everything else, I mean, government agencies, I talked to government agencies, their budgets have been cut. They've had to lay off workers and not replace them. And so that squeezes the budget. So government spending has been kind of flat, if not declining. Business spending has been flat, not declining. Only thing that's going up is consumer spending. And if that flattens out, you're coming close to a recession. So I call it stagflation, a stagnating economy with inflation on top of it. And you wonder how long the stock market can continue to do well. What's driving the stock market higher is technology. The technology has been beneficial to our economy in terms of increased productivity, the AI revolution is very positive. What's happening in robotics, other technologies has been very beneficial. And they've been able to survive despite the Trump tariffs, which just raise costs. It's not beneficial to do that. I'm raising some serious issues that suggest that maybe stock markets selling at very high multiples I've said time and time again, the technology stocks should fall in half and still be overvalued. So it's not the dynamics is the technology. We're in a golden era of technology, but we were in the 1920s also. We had all kinds of new technologies and development of automobile industries and appliances and radio communications. It was a new era. It was called the new era. And it ended up in the 1929 crash because of some fundamental weaknesses in the economy. I think we're in the middle of that as well. So we have more room to grow. I'm over optimistic. I'm still fully invested, but I'm well diversified. So in addition to stocks, no bonds, but stocks and technology and financials and utilities, I also have commodities, gold, silver, uranium, nuclear power is a great alternative. So I'm actively invested in there. So we've done well over the last couple of years. Markets struggling right now. Even commodities are struggling right now. So you're cautious in a sense. Cautiously optimistic, still fully invested, but taking advantage of dividend paying stocks. So I earn money while we wait to see what happens in the economy and this war and the elections. So there's a lot of uncertainty and negatives are starting to pile up in the U.S. economy. You mentioned the elections. How would the elections impact the economy if the Republicans lose and Democrats win? Well, what's going to happen, in my opinion, and this has historically been the case at midterms, the opposition party gains and the incumbents lose seats. And I think that the House and the Senator, especially the House, is very close. And so it wouldn't take much for the Democrats to take over. And then that's the end of any kind of legislation getting through that Trump wants to do. Now, he still has executive order power and stuff like that. The Democrats may want to impeach the president again for who knows what. There's always plenty of things to choose from, but it's going to create a lot of situation where the market, you're not going to see much change in tax policy, in government spending policies because of a mixed government. You don't have one party in power anymore. So actually the stock market has done fairly well during that time period because you can't do much damage to the economy. When you have a veto power and that sort of thing going on. So if the technology is allowed to continue to work and war is minimized, the stock market could continue to move back up. Do you have any advice for people that are seeing all of this in terms of their investments and also in terms of potential jobs? Don't quit your job because it's going to be hard to find another job. So you want to hold on to your job as much as possible. Do whatever it takes to stay with the job that you have. My students have a difficult decision because it's hard to get a job right now. The job offers are considerably slower. I mean, Goldman Sachs comes to Chapman every year and they said, we're only hiring 1% of the people we interview, 1%. So I mean, that's not a good outlook for our business type people. And you want to cut back on consumer spending. You need to pull back and you need to build a savings program and have a well-diversified portfolio. Maybe keep some cash in there because I think the market's going to struggle. So you need to be a more conservative investor and a more conservative consumer. Mark Skousen, economist and author, it was great to have you back on Market Insider. My pleasure, take care. What do you think about the conflict with Iran? Do you think it's going to impact us negatively or do you think this is going to be better in the long run for us economically? Make sure to comment and let us know. I'm Siamak, this is Market Insider. We'll see you next time.