Podcast: David Lin
Compiled & Edited: Yuliya, PANews
Original Title: Economist Warns: Stock Market Bubble More Fragile Than Replay of 50-Year-Old Oil Crisis
Hormuz Strait's Lifeline Cut, Oil Prices Surge, World Trembles Awaiting Repeat of '1979 Crisis'?
Don't be fooled by appearances! John Hopkins University Professor Steve Hanke poured cold water on the panic in his latest podcast: The real crisis isn't oil prices, but the Federal Reserve's out-of-control money printing and the U.S. stock market's precarious high-valuation bubble. Additionally, this episode discusses the current stock market's bubble risk and war shocks, as well as the profound geopolitical and global impacts brought by the Iran war.
PANews has compiled and edited the text of this conversation.
Replaying the 1979 Oil Crisis? Actual Risk
David: Are we on the verge of replaying the 1979 "Oil Crisis 2.0"? Looking back to 1979, the crisis began with the Iranian revolution disrupting oil production from one of the world's largest exporters. The sudden drop in supply tightened global markets, causing oil prices to soar. In the U.S., the immediate effect was gasoline shortages, with long lines at gas stations across the country and fuel rationing in some states. Rising energy prices pushed up costs throughout the economy, and the Fed subsequently raised interest rates sharply to control inflation. That crisis also accelerated the U.S. establishment of the Strategic Petroleum Reserve (SPR).
Today, markets are again reacting to geopolitical risks. The Strait of Hormuz, located between Iran and Oman, is the world's most important oil passageway, with about 20 million barrels of oil (about one-fifth of global consumption) flowing through it daily. With the strait closed due to conflict involving Iran, oil prices have surged dramatically. Steve, welcome back to the show. How close are we to replaying the second oil crisis unseen for nearly 50 years? What happens next?
Steve Hanke: Great to be with you, David. To provide context, let's briefly revisit history. My first teaching position was at the world's top mining school, the Colorado School of Mines. In the late 60s, precisely 1968, I taught the first course in petroleum economics there. That same year, I edited a book titled 'The Political Economy of Energy and National Security,' discussing exactly the topics we're talking about now. Later, in late 1985, I built a fundamental model on OPEC predicting its collapse and that oil prices would fall below $10 per barrel. This indeed happened in 1986, and oil prices fell as expected. I was working at Friedberg Mercantile Group in Toronto at the time, and based on my analysis, we held very large short positions, eventually accounting for over 70% of the short side of the London gasoil contract.
If we compare the current situation to 1978-1979, I believe the potential risk of disruption today is actually lower than it was then. There are several reasons:
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In 1978, Iran's oil production accounted for 8.5% of the global total, whereas now they only account for 5.2%.
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Middle East production accounted for 34.3% of the global total in 1978, but has now fallen to 31%.
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U.S. production accounted for 15.6% of the global total in 1978, whereas now we have risen to 18.9%. Our reliance on foreign production has decreased.
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Most importantly, our "oil intensity" (the amount of oil consumed per unit of GDP) has dropped significantly from 1.5% to 0.4%.
Oil Market: Supply Shock and Policy Response
David: Treasury Secretary [Janet] Yellen stated the other day that the government would issue a series of announcements. Oil prices have already surged to $86, and if the situation isn't resolved soon, they could go even higher. The government clearly doesn't want gas station prices to rise. Besides implementing price controls, what can the government do to stabilize gasoline prices for Americans?
Steve Hanke: If price controls are implemented, gas stations will have long lines because demand will exceed supply. Without intervention, the market will clear itself, just at a higher price.
The quickest way to address the immediate shortage is to lift sanctions on Russia, allowing the massive "shadow fleet" anchored at sea to unload and sell its stored Russian crude. In fact, the U.S. has already begun to shift, allowing some Russian oil to flow to India.
David: How would U.S. allies react to easing sanctions on Russia? And how would this affect the war?
Steve Hanke: Europe is being hit hard by rising energy prices. Due to European sanctions on Russia, coupled with the destruction of the Nord Stream 2 pipeline, natural gas supplies from Russia to Europe have been significantly cut. As a result, Europeans have had to buy liquefied natural gas primarily from the U.S., which costs about three times as much as Russian gas. So they are in a very difficult position, backed into a corner.
I think the idea of turning to Russia might be a compromise they have to "swallow hard" and accept. Of course, I advised against any sanctions from the start. I am a free trader, I don't like sanctions, tariffs, or quotas anytime, anywhere.
David: Do you think the Strategic Petroleum Reserve (SPR) will ultimately be used? Isn't this the exact scenario the SPR was built for in the 70s? The Energy Department currently reports about 413 million barrels of oil in the SPR.
Steve Hanke: They could do that, that is indeed its purpose. It would help. Remember a rule of thumb: for every $10 change in crude oil prices, gasoline prices at the pump change by about 25 cents. As of our conversation on March 6th, gasoline prices in most of the U.S. have already risen by about 50 cents. This is a big problem. War comes with all sorts of costs: the direct military cost of burning ammunition and fuel, the economic collateral damage we are discussing, and the extremely high cost in human lives (most of whom are innocent civilians killed). Not only that, but with storage full and the strait closed preventing exports, Iraq and Kuwait have been forced in recent days to shut down their largest oil fields. Shutting down oil fields carries potential equipment damage and high maintenance costs.
The Truth About Inflation: Money Supply is Key, Not Oil Prices
David: Let's return to the topic of inflation. You just said rising oil prices won't cause inflation because inflation is caused by expansion of the money supply. But prominent macroeconomic commentator Mohamed El-Erian stated that the more the conflict spreads, the greater the stagflationary impact on the global economy. Can you explain why high oil prices don't immediately trigger inflation?
Steve Hanke: There's a lot of false narrative in the newspapers about 'rising oil prices causing severe inflation.' Rising oil prices simply mean that the price of oil, gas, and their derivatives is rising relative to all other goods, but it does not mean we will face overall inflation.
The best example is Japan:
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During the 1973 oil embargo, oil prices spiked, and the Bank of Japan accommodated this price increase by increasing the money supply. The result was that Japan not only faced relative oil price increases but also suffered severe inflation.
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However, by the next oil crisis in 1979, the Bank of Japan refused to compromise by increasing the money supply. The result was that oil prices rose in Japan, but it was not accompanied by inflation.
Inflation is always a monetary phenomenon. You must watch the money supply. The reason I believe the U.S. cannot bring inflation down to the 2% target is that the broad money supply (M2) is accelerating, bank loans are increasing significantly, bank regulation is being relaxed, and there is political pressure to lower the federal funds rate. More importantly, the Fed already stopped quantitative tightening (QT) in December and has switched to quantitative easing (QE); the Fed's balance sheet is actually expanding again.
David: The U.S. economy unexpectedly lost 92,000 jobs in February; the labor market does seem weaker. Will the Fed slow the pace of rate cuts because of the current rise in oil prices?
Steve Hanke: No, I think they will focus intently on the job market. By the way, this is largely 'thanks' to Trump's tariff policies. Tariffs were advertised as increasing manufacturing employment, that's what he kept telling us. But actually, manufacturing lost 108,000 jobs last year. Tariffs are killing jobs. If you look at the overall nonfarm payroll numbers, job creation was almost zero last year, with only 181,000 jobs created in 2025 compared to 2.2 million in 2024.
So, this "Tariff Man" is destroying the job market. You can't just listen to the narrative in the media, you have to look at the real data. This brings me to my "Hanke 95% Law": 95% of what you read in the financial media is either wrong or meaningless.
Stock Market Bubble More Fragile
David: You mentioned at the top of the show that the current stock market is in a bubble. How much exposure do companies in the major indices have to oil prices? Why does the stock market fall when oil prices rise?
Steve Hanke: Obviously, companies that use oil directly or indirectly (like airlines or logistics freight companies) are hit harder.
But looking macroscopically, the price-to-earnings (P/E) ratio of the stock market in 1978-1979 was 8x, whereas now it's as high as 28, 29x.
This means the market is much more fragile now than in 1978. When the market is in bubble territory, it is always vulnerable to external shocks.
The war in Iran by Israel and the U.S. is causing massive wealth destruction, not only the direct military costs of ammunition and fuel but also the negative wealth effect from financial market setbacks. If the stock market bubble really bursts, people's wealth shrinks. Those who have made money in the stock market and are sustaining America's extremely high level of consumption, their wealth will decrease, and they will start cutting back, like postponing buying a new car for a year or two. This negative effect ripples through the entire economy.
De-Dollarization Misconception and Hong Kong Currency Lesson
David: The South Korean president announced the establishment of a 100 trillion won stabilization fund to cope with soaring energy prices. Asian countries are highly dependent on oil imports; will their fiscal interventions affect the dollar? Everyone is talking about "de-dollarization"; is this real?
Steve Hanke: There are two false narratives about the dollar: "Selling America" and "De-dollarization." This is complete garbage.
If you look at the data: net investment flowing into the U.S. increased by 31% year-over-year last year; money is pouring into the U.S. The dollar is very strong against the euro (the world's most important exchange rate). After the war broke out, the dollar actually strengthened further.
People talking about de-dollarization simply don't looking at the data, whether it's official U.S. Treasury data or BIS data, it all proves the "de-dollarization" narrative is basically nonsense.
David: Central banks in Asian countries (like the Philippines, Indonesia) have had to pause rate cuts due to the oil price threat, causing their currencies to suffer. If you were a central bank advisor for these oil-importing countries, what would you advise them to do?
Steve Hanke: Hold steady. In places like Indonesia, you absolutely cannot loosen monetary policy, otherwise the Indonesian Rupiah will be hit hard. The currencies of these countries are very sensitive to interest rates.
Speaking of Indonesia, if they had taken my advice when I was Chief Advisor to President Suharto (to establish a currency board system), they wouldn't have this problem today. If the Rupiah were fully backed by dollars and traded at a fixed rate to the dollar, it would become a clone of the dollar, just like the Hong Kong dollar.
Look at Hong Kong, the Hang Seng Index was one of the few markets that rose today (March 6th). The Hong Kong dollar is issued by a currency board, backed 100% by U.S. dollar reserves, maintaining a fixed exchange rate of 7.8 HKD to 1 USD. The Hong Kong dollar is essentially a clone of the U.S. dollar, so they have no worries about currency depreciation.
U.S. Strategic Risks and Uncertainty in the Middle East
David: China is estimated to have 40% to 50% of its crude oil imports pass through the now-closed Strait of Hormuz. Although they also have the Strait of Malacca route, crude supplies will certainly be hit. How do you expect China to respond or intervene?
Steve Hanke: China will try to do what all the Gulf states, Turkey, and Russia want to do—they all want to stop this war. I don't think China will watch Iran fall; I think they will do whatever is necessary to preserve the regime.
David: Do you think this conflict could spiral out of control and turn into a global war beyond the Middle East? The Iranian Foreign Ministry stated they are prepared for a U.S. invasion if American ground forces intervene.
Steve Hanke: In my view, it is already out of control. There is now a lot of speculation about whether Iranian Kurds stationed in northern Iraq could become U.S. proxy ground forces; the situation is very murky. We are now in the "fog of war," relying on second-hand data for speculation.
An old friend of mine, former Saudi intelligence chief and former ambassador to the U.S., Prince Turki Al-Faisal, recently said in an excellent interview: Trump has no idea what he is doing in executing this war. It's one thing when the blind lead the blind, but when the hallucinating lead the blind, you have big trouble.
David: What is the ultimate goal of the U.S.? The Supreme Leader has been assassinated, most of the Iranian Revolutionary Guard Corps commanders have been eliminated, regime change seems to be underway. Why does it need to continue?
Steve Hanke: You're acting like regime change is easy to succeed. According to Lindsey O'Rourke's 2018 academic book 'Covert Regime Change,' about 60% of all U.S.-involved regime change attempts since WWII have completely failed, and the others left behind a complete chaotic mess. The history of regime change proves it is an utterly disastrous policy.
The U.S. is embroiled in a policy destined to fail; don't listen to the rhetoric of politicians in Washington. Trump's goals keep changing, but he will ultimately do what Israeli Prime Minister Netanyahu tells him to do.
David: Is this related to containing China? The U.S. first took control of Venezuela's oil (a friend of China and Iran), is it now trying to completely take over Iran, control the Strait of Hormuz, and thus cut off China's oil supply?
Steve Hanke: There's no doubt China is affected, but it's secondary. As John Mearsheimer pointed out in his book 'The Israel Lobby and U.S. Foreign Policy,' the Israel lobby has enormous influence in Washington, and they got Trump involved. For 40 years, Netanyahu has wanted to destroy Iran. Israel could never do it on its own; this is a major U.S. operation. Basically, the U.S. is fighting Netanyahu's war for him.
David: So what strategic benefit does this have for the U.S.?
Steve Hanke: Very little benefit, but enormous costs. Beyond the economic and military costs, there is a huge political cost. The American public is very opposed to this, and I think the Republican Party, led by Trump, will suffer a crushing defeat in the midterm elections.
Long-term, the impact is even more devastating. Contrary to U.S. political propaganda, the assassinated Supreme Leader will become a martyr in the Muslim world. This means the Muslim world will almost certainly become an enemy of the U.S. for the foreseeable future. We are creating a huge number of enemies for ourselves.
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