"Doombot" Rubin: Trump is more likely to escalate the Iran situation rather than choose to back down

Famed economist Nouriel Roubini, known as the “Dr. Doom,” has offered his latest view, saying that U.S. President Donald Trump is more likely to choose escalation in a conflict with Iran in pursuit of victory rather than give in and take the risk of falling economic outcomes and diminished regional influence.

On Friday, the former White House economic adviser said in an interview at a meeting of economists and business leaders: “My baseline assessment is that the probability of escalation is greater than 50%. The likelihood of losing after escalation is lower than the likelihood of winning after escalation, but it is still an exceptionally risky choice.”

Roubini is known for having issued pessimistic warnings at a critical moment during the 2008 global financial crisis, and this time he has delivered a comparatively more moderate judgment about the U.S.-Israel war with Iran.

He said: “If the United States and Israel choose escalation, the most likely outcome is the collapse of the Iranian regime, bringing better results in the medium term—even if oil prices rise in the short term. Therefore, both Trump and Israeli Prime Minister Benjamin Netanyahu have incentives to escalate the conflict and seek victory.”

But some analysts also believe that the United States and Israel have already lost the initiative in the war. After airstrikes early in the conflict dealt severe blows to bases and vehicle-mounted launchers near the Persian Gulf coast, Iran has shifted to firing long-range missiles and drones from deeper within its territory. Even in limited numbers, these weapons have still helped Iran achieve its goals—prolonging the conflict, raising the economic costs for the Gulf oil-exporting countries and the United States, and surviving to fight another day.

“They don’t need to do large-scale synchronized barrages like they did at the beginning of the war, but they also don’t have to,” said Joseph Votel, a retired U.S. general. “What they really need to do is get some of the missiles to penetrate defenses, and they’ll get enormous returns.”

In addition, Iran has already effectively taken control of the Strait of Hormuz, and the U.S. is simply unable to change that reality in the short term.

On Friday local time, Iran and Israel continued to exchange missile strikes. Reports said that the United States and Israel carried out airstrikes on Iran’s Khuzestan steel plant and its Isfahan Mubarak steel plant, and the power plant配套 with the Mubarak steel plant was also targeted.

Later on Thursday, Trump again postponed the deadline he had set, demanding that Iran agree to reopen the Strait of Hormuz, or else face strikes on its power facilities.

Roubini warned that the continued conflict would shock the global economy. He pointed to tail risks: if the United States and Israel escalate the conflict, “further Iranian attacks on oil facilities could turn the situation into something like what happened in the 1970s.”

The U.S. war with Iran has prompted countries to scale back their economic growth expectations while preparing for upside inflation driven by energy.

He said: “Even if the war ends tomorrow, oil prices won’t return to the levels before.” However, he added that an oil price increase of 10% to 15% is not a catastrophic event.

As oil and gas costs rise and economic confidence indicators fall, countries including Germany and Italy are重新评估 their growth outlooks. Last week, the European Central Bank also delivered a more pessimistic assessment of the euro area’s economic outlook.

When asked about the impact on monetary policy, Roubini said the European Central Bank is likely to raise interest rates “in April, or even possibly in June,” and the Bank of England would take similar action.

Roubini also noted that the U.S. Federal Reserve may find itself in a bind. Policymakers could be forced to raise rates to avoid the risk of inflation expectations getting out of control.

He added: “In 2022, the Fed acted too slowly in raising rates, and it almost damaged its credibility.” He also mentioned leadership changes, saying that Kevin Warsh will succeed Powell as Fed chair in May. “A new chair can’t ruin their own reputation at the beginning of their term,” so they may have no choice but to raise rates.

(Source: Caixin)