The oil shock has not arrived, and the stock market bubble is already hanging high
podcast:David Lin
Compiled & organized by Yuliya, PANews
Original title: Economists warn: the stock market bubble is more vulnerable than the oil crisis that occurred 50 years ago
The Strait of Hormuz has been destroyed, oil prices have exploded, and the whole world is shaking and waiting for the “1979 crisis” to be repeated?
Don't be fooled by appearances! Johns Hopkins University professor Steve Hanke threw cold water on his latest podcast: the real crisis is not oil prices, but the Federal Reserve's uncontrolled money printing machine and the crumbling overvaluation bubble in US stocks. In addition, this issue also discussed the risk of the current stock market bubble and the impact of war, as well as the geopolitical and global impact of the Iran war.
PanNews has compiled the text of this conversation.
A repeat of the 1979 oil crisis? Actual risk is lower
David: Are we on the verge of repeating the 1979 “oil crisis 2.0”? Looking back in 1979, the crisis began when the Iranian Revolution interrupted oil production in one of the world's largest exporters. The sudden drop in supply tightened the global market, causing oil prices to soar. In the US, the immediate impact was the shortage of gasoline, with long queues at gas stations all over the country, and fuel rationing in some states. The rise in energy prices boosted the price of the entire economy, and the Federal Reserve then raised interest rates sharply to control inflation. That crisis also accelerated the pace at which the US is building a strategic oil reserve (SPR).
Today, the market is reacting once again to geopolitical risks. The Strait of Hormuz, located between Iran and Oman, is the world's most important oil channel, and about 20 million barrels of oil (about one-fifth of global consumption) flow through it every day. As the strait was closed due to the conflict involving Iran, oil prices soared sharply. Steve, welcome back to the show. How far are we from repeating the second oil crisis that has not been seen in nearly 50 years? What's going to happen next?
Steve Hanke: Nice to talk to you, David. To give some context, let's review history a little bit. My first teaching position was at the Colorado School of Mines, one of the world's top mining schools. In the late '60s, in 1968 to be exact, I taught my first petroleum economics course there. In the same year, I edited a book called “The Political Economy of Energy and National Security” (The Political Economy of Energy and National Security), which discussed exactly what we are talking about now. Later, at the end of 1985, I established a basic model for OPEC (OPEC), predicting that it would collapse and oil prices would fall below $10 per barrel. This did happen in 1986, and oil prices fell as scheduled. I was working for the Friedberg Mercantile Group in Toronto at the time, and based on my analysis, we had a very large short position, which eventually took over 70% of the short share of light diesel contracts in the London market.
If we compare the current situation to 1978-1979, I think the potential risk of damage today is actually lower than it was then. There are a few reasons:
In 1978, Iran accounted for 8.5% of the world's oil production; now they only account for 5.2%.
Production in the Middle East accounted for 34.3% of the world in 1978, but now it has declined to 31%.
The US accounted for 15.6% of global production in 1978; now we have risen to 18.9%. Our dependence on foreign production has decreased.
Most importantly, our “oil intensity” (that is, the amount of oil consumed per unit of GDP) has dropped dramatically from 1.5% to 0.4%.
Oil Markets: Supply Shocks and Policy Responses
David: Treasury Secretary Vincent said two days ago that the government will issue a series of announcements. Currently, oil prices have soared to 86 US dollars. If the situation is not resolved soon, oil prices will be even higher. The government clearly doesn't want gas station prices to rise. In addition to implementing price controls, what else can the government do to stabilize gasoline prices for Americans?
Steve Hanke: If price controls are implemented, gas stations will have long queues because demand will exceed supply. If there is no intervention, the market will automatically clear out, but the price will be higher.
The quickest way to address the current shortage is to lift sanctions against Russia and allow the huge “shadow fleet” anchored at sea to offload and sell its stored Russian crude oil. In fact, the US has begun to pivot, allowing some Russian oil to flow to India.
David: How will America's allies respond to easing sanctions against Russia? How will this affect the war in Ukraine?
Steve Hanke: Europe is being hit hard by rising energy prices. Due to European sanctions against Russia and the bombing of the Nord Stream 2 pipeline, gas supplies from Russia to Europe have been drastically cut off. As a result, Europeans are forced to buy liquefied natural gas mainly from the US, which costs about three times that of Russian gas. So now they are in a very difficult situation and are being forced into a corner.
I think the idea of moving to Russia is probably a compromise where they have to “pinch their nose and swallow it.” Of course, from the outset, I recommended that no sanctions be imposed. I'm a free trader, and I don't like sanctions, tariffs, or quotas anytime, anywhere.
David: Do you think strategic oil reserves (SPR) will eventually be used? Isn't this the exact scene SPR had to deal with when it was established in the 70s? Currently, the Ministry of Energy reports that there are approximately 413 million barrels of oil in the SPR.
Steve Hanke: They can do that, and that's really what it's for. This would help. There's a rule of thumb to keep in mind: for every $10 change in crude oil prices, gasoline prices at gas stations fluctuate about 25 cents. At the moment of our March 6 conversation, gasoline prices in most parts of the US have already risen by about 50 cents. This is a big problem. War comes with all kinds of costs: the direct military cost of burning ammunition and fuel, collateral damage to the economy we are talking about, and extremely high loss of lives (mostly innocent civilians who have been killed). Furthermore, Iraq and Kuwait have been forced to close their largest oil fields in recent days because storage tanks are full and the strait is closed to export. Closing an oil field could result in potential equipment damage and high maintenance costs.
The truth about inflation: money supply is the key, not oil prices
David: Let's go back to the topic of inflation. You just said that the rise in oil prices will not be the cause of inflation, because inflation is caused by the expansion of the money supply. However, the famous macroeconomic commentator Mohamed El-Erian said that the more the conflict spreads, the greater the impact of stagnation on the global economy. Can you explain why high oil prices don't immediately trigger inflation?
Steve Hanke: There are a lot of false stories in the newspapers about “rising oil prices will cause serious inflation.” Higher oil prices simply mean that the prices of oil, gas, and derivatives are rising relative to all other commodities, but that doesn't mean we will face overall inflation.
The best example is Japan:
During the 1973 oil embargo, oil prices soared, and the Bank of Japan adjusted to this price increase by increasing the money supply. As a result, Japan not only faced a relative rise in oil prices, but also experienced severe inflation.
However, by the time of another oil crisis in 1979, the Bank of Japan refused to compromise by increasing the money supply. As a result, oil prices in Japan have risen, but not accompanied by inflation.
Inflation has always been a monetary phenomenon. You have to keep an eye on the money supply. The reason I think the US cannot reduce the inflation rate to the 2% target is because the broad money supply (M2) is growing at an accelerated pace, bank loans are increasing dramatically, bank regulations are being relaxed, and federal funds interest rates are facing downward political pressure. More importantly, the Federal Reserve stopped quantitative austerity (QT) in December of last year and began quantitative easing (QE) instead, and the Fed's balance sheet is actually re-expanding.
David: The US economy unexpectedly lost 92,000 jobs in February, and the labor market does seem to be weakening. Will the Federal Reserve slow down the pace of cutting interest rates due to the current rise in oil prices?
Steve Hanke: No, I think they'll keep an eye on the job market. Incidentally, this is much “due” to Trump's tariff policy. The tariffs were originally advertised to increase employment opportunities in the manufacturing industry, which he has always told us. But in reality, manufacturing contracted 108,000 jobs last year. Tariffs are killing jobs. If you look at the overall non-farm payrolls data, there were almost zero jobs created last year. Only 181,000 jobs were created in 2025, up to 2.2 million in 2024.
So, this “tariff man” is destroying the job market. You can't just listen to media stories; you have to watch real data. This led to my “Hank's 95% Law”: 95% of what you read in financial media is either wrong or meaningless.
The stock market bubble is more vulnerable
David: You mentioned at the beginning of the show that the current stock market is in a bubble. How much are the companies in the big indices exposed to oil prices? Why does the stock market fall when oil prices rise?
Steve Hanke: Obviously, companies that directly or indirectly use oil (such as airlines or logistics carriers) have been hit harder.
However, from a macro perspective, the price-earnings ratio (PE) of the 1978-1979 stock market was 8 times, but now it is 28 or 29 times higher.
This means that the market is much weaker now than it was in 1978. When the market is in a bubble zone, it is always vulnerable to external shocks.
The war between Israel and the US in Iran is causing huge wealth damage, not only the direct military costs of ammunition and fuel, but also the negative wealth effects of financial market setbacks. If the stock market bubble actually bursts, people's wealth shrinks. Those who make money in the stock market and maintain a very high level of consumption in the US will shrink their wealth, and they will begin to cut expenses, such as putting off buying a new car for a year or two. This negative effect will affect the entire economy.
De-dollarization Myths and Hong Kong's Monetary Implications
David: The President of South Korea announced the establishment of a 100 trillion won stabilization fund to deal with soaring energy prices. Asian countries are highly dependent on oil imports. Will their fiscal intervention affect the dollar? Everyone is talking about “de-dollarization”, is this true?
Steve Hanke: There are two false narratives about the dollar: “selling off America” and “de-dollarizing.” This is complete rubbish.
If you look at the data: Net investment inflows into the US increased 31% year over year last year, and capital is constantly pouring into the US. The dollar is very strong against the euro (the most important exchange rate in the world). The US dollar actually strengthened further after the war broke out.
When people talk about de-dollarization, they don't look at data at all. Whether it's official data from the US Treasury or data from the Bank for International Settlements, they prove that the “de-dollarization” narrative is basically nonsense.
David: Central banks in Asian countries (such as the Philippines and Indonesia) had to suspend interest rate cuts due to oil price threats, causing their currencies to suffer. If you were an advisor to the central banks of these oil-importing countries, what would you suggest they do?
Steve Hanke: Keep your ground. In a place like Indonesia, you must never relax your 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 adopted my proposal as President Suharto's chief adviser back then (establishing a monetary bureau system), they wouldn't have this problem today. If the Indonesian rupiah is fully supported by the US dollar and traded against the US dollar at a fixed exchange rate, it will become a clone of the US dollar, just like the Hong Kong dollar.
Looking at Hong Kong, the Hang Seng Index is one of the few markets that rose today (March 6). The HKD is issued by the Monetary Authority and is backed by 100% of US dollar reserves, maintaining a fixed exchange rate of HK$7.8 to USD 1. The Hong Kong dollar is essentially a clone of the US dollar, so they don't have to worry about currency depreciation.
US strategic risks and uncertainties in the Middle East
David: China estimates that 40% to 50% of its crude oil imports will go through the now closed Strait of Hormuz. Although they still have the Malacca Strait channel, crude oil supply will definitely be hit. How do you expect China to respond or intervene?
Steve Hanke: China will try to do what all the Gulf countries, 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 take all necessary measures to maintain this regime.
David: Do you think this conflict will get out of control and turn into a global war outside the Middle East? Iran's Ministry of Foreign Affairs said that if US ground forces intervene, they are ready to face an American invasion.
Steve Hanke: In my opinion, it's out of control. There is now a lot of speculation about whether the Iranian Kurds stationed in northern Iraq will become US proxy ground forces. The situation is very vague. We are now in the “fog of war,” and we can only speculate on second-hand data.
An old friend of mine, Prince Turki Al-Faisal (Prince Turki Al-Faisal), a former Saudi intelligence chief and former ambassador to the US, recently said in an excellent interview: Trump had no idea what he was doing when carrying out this war. It's one thing when a blind person guides a blind person, but when a hallucinator guides a blind person, you're in big trouble.
David: What is America's ultimate goal? The Supreme Leader has been assassinated, most commanders of Iran's Revolutionary Guard Corps have been eliminated, and regime change appears to be underway. Why does it need to continue?
Steve Hanke: You're acting like regime changes are easy to succeed. According to Lindsey O'Rourke's academic book “Covert Regime Change” published in 2018, about 60% of all regime change attempts the US has participated in since World War II have completely failed, while others have left a complete mess. The history of regime change proved that this was a completely disastrous policy.
America is caught up in a policy that is doomed to failure; don't take the rhetoric of Washington politicians. Trump's goals keep changing, but he will eventually do what Israeli Prime Minister Binyamin Netanyahu tells him to do.
David: Does this have anything to do with containing China? The US first controlled oil from Venezuela (a friend of China and Iran); is it now trying to completely take over Iran and control the Strait of Hormuz, thereby cutting off China's oil supply?
Steve Hanke: There's no doubt that China has been affected, but that's only minor. As John Mearsheimer points out in his book “Israel Lobbies and American Foreign Policy,” Israeli lobbies have great influence in Washington, and they have involved Trump. For 40 years, Netanyahu wanted to destroy Iran. Israel will never be able to do this on its own; this is a large-scale American operation. Basically, the US is fighting for Netanyahu.
David: So how does this benefit the US strategically?
Steve Hanke: The benefits are minimal, but the costs are huge. In addition to economic and military costs, there are also huge political costs. The American public is very disgusted by this, and I think the Republicans led by Trump will lose fiercely in the midterm elections.
In the long run, the impact is even more devastating. Contrary to American political propaganda, the assassinated Supreme Leader will become a martyr in the Muslim world. This means that in the visible future, the Muslim world will almost certainly become America's enemy. We are making a huge number of enemies for ourselves.
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