The Podcast of the Lotus Eaters - PREVIEW LIVE： Realpolitik #40 ｜ The Economy Will Break with Dan Tubb

00:00:00.000 Hello and welcome to another episode of RealPolitik. I am your host Firas Maudad and I'm joined today

00:00:18.780 by Dan and we're going to be talking a little bit about the economic impact of the war. I know

00:00:25.720 you've done some great work about this shall we start with a brief recap as to yes please

00:00:31.240 i'd like the i'd like the update as well yes okay so uh the first thing that i want us to look at

00:00:37.840 is the iranian rate of missile fire and drone fire and it seems to have stabilized they seem

00:00:47.160 to be able to fire as many missiles as they want to they've moved from the very high intensity

00:00:53.520 phase in the first couple of days of the war to a sort of sustained engagement rate and so you see

00:01:00.240 some days it drops to 50 other days it goes to 63 but this is the moving three-day average and you

00:01:06.740 see some stability there you know they're doing enough to keep the united states busy

00:01:13.000 and to deplete missile interceptors and so on can i ask a question on behalf of the audience on that

00:01:19.000 one yes i mean i i appreciate that it's quite high at the beginning and presumably that's because

00:01:24.060 you have those targets that you really want to hit yes on day one and then everything else is

00:01:29.340 by definition a lower a lower tier target because you otherwise you would have hit it on day one

00:01:33.300 yes but is is the rate that they're doing now presumably the rate that they think they can

00:01:38.120 sustain over the long term which could be many many months owing to the fact that they got an

00:01:43.820 open supply line to Russia and Kazakhstan and therefore they feel confident that they can just

00:01:49.180 maintain this consistently. Yes and but there's another element to it which is that if you looked

00:01:55.220 at the Houthi war versus Saudi Arabia 2015 to 2022-23 the Houthis kicked off with a huge number

00:02:03.820 of or with a decent number of ballistic missiles then these tapered off and were replaced with

00:02:08.560 cruise missiles so they can diversify their firing depending on need because the cruise missiles

00:02:16.120 are actually harder to detect intercept etc so they could fire more of those so you could see

00:02:23.760 a similar shift in the iranian approach right okay and trump is threatening to blow up everything

00:02:31.000 important in iran and the iranians are threatening to do the same uh basically blow up everything in

00:02:37.620 the region uh relating to oil and gas and desalination and things like that uh the

00:02:44.140 interception rate of missile strikes is falling and so the israelis are able to intercept less

00:02:52.660 of iran's missiles even though they're firing a much smaller number and that's so i'm saying

00:02:59.500 that right so they started off being able to intercept 95 it fell to 75 now it's about half

00:03:05.500 they're intercepting yes well that doesn't sound good for them no no and so the iranian strategy

00:03:12.080 is to sort of wear down the interceptors and then maybe they escalate maybe they fire new

00:03:17.760 kinds of ordinance etc well the story that i had heard early on and i don't know if this is just

00:03:23.160 a story or what but that they were using up the old stock of missiles initially and the newer

00:03:30.000 stuff hasn't been touched so i don't know whether that is just psychological warfare on the iranians

00:03:34.880 behalf or whether they're holding back this newer stuff if it exists to fire the americans at the

00:03:40.860 point where they try and land troops so they are using some of the newer stuff now and in some

00:03:46.760 videos you see the missile sort of accelerating as the interceptors come towards it because it's

00:03:53.220 equipped with a second engine that gives it a boost so this is where the first engine gets you

00:03:58.320 into the hyperbolic arc and then as you come down the second stage fires it's got two engines

00:04:03.260 and that one is to is to outfox the yes the interceptors yes okay yes and so you need to

00:04:11.260 fire fewer of those to have an impact well and you need to fire more interceptors if you want

00:04:16.340 to take it down they need to fire more interceptors at it and what they're doing is sort of wearing

00:04:20.860 down the interceptors and what we've seen is that the iranians have obviously threatened to blow up

00:04:27.060 everything important in the gulf like desalination and power and things like that they're also

00:04:32.020 hitting some of the energy in a more sustained way. That's a different story here. But what we

00:04:40.540 are seeing is that they're hitting the pipeline in the UAE that goes from, that bypasses the

00:04:49.400 Strait of Hormuz, that goes from Abu Dhabi to Fujairah, meaning that they can do the same to

00:04:54.640 the Saudi pipeline, which the world is increasingly relying on because now it's operating at full

00:04:59.920 capacity seven million barrels of oil per day okay and the other one that down the one that

00:05:05.940 just cuts out the straight that's like three one one and a half million okay one and a half okay

00:05:10.780 so that's a fairly minor one and they've already hit it and they've already hit it and in the past

00:05:15.100 in 2019 the houthi hit that other saudi one meaning that they could easily do it and now

00:05:21.280 they've joined the war but they haven't yet shut down hormuz uh sorry babel mandab the red sea

00:05:26.900 And so we're in the situation now where if the Americans exit the war tomorrow, it means that the Iranians control the Strait of Hormuz and the Houthi control Bab al-Mandab, meaning that the United States is no longer the guarantor of the security of global trade, meaning that there is no reason to use the American dollar as a result of that.

00:05:54.420 so they guarantee open shipping lanes yeah they make everyone use the dollar that relationship

00:06:00.280 breaks down one way it breaks down the other yeah i mean i'd push back to a small extent because

00:06:05.020 i mean certainly the reason we started using the dollar globally in the first place was was because

00:06:08.940 of shipping lanes and then it became entrenched through the um petrodollar by saying to the house

00:06:14.900 we keep you in power forever if you sell um energy in in dollars i mean it has evolved to an extent

00:06:22.160 because now there is such a depth of liquidity in the dollar market

00:06:25.820 that that is probably the primary reason why you use it.

00:06:32.880 However, just because it's grown to that point

00:06:35.300 and it has that depth of liquidity and it's a sort of trusted market

00:06:38.240 and all the rails have been built around it,

00:06:40.300 if you go around removing the underlying cause for it in the first place,

00:06:45.380 there's nothing to stop a new currency coming along

00:06:48.240 or a new alternative coming along.

00:06:50.160 Or barter.

00:06:50.860 Or barter, yep.

00:06:52.160 that replaces that underlying logic

00:06:54.860 and then starts to grow while the dollar shrinks.

00:06:57.460 So I don't think it's an automatic knockout,

00:06:59.900 but you're certainly creating the conditions

00:07:01.680 for something to replace the petrodollar.

00:07:04.300 Right.

00:07:05.140 And so the nature of the war has changed.

00:07:08.420 Well, I mean, and what you're talking about there

00:07:10.240 is if the Houthis control the Red Sea

00:07:12.820 and the Iranians control the Straits of Hormuz,

00:07:15.720 you've effectively birthed a new regional energy hegemon.

00:07:20.820 Yes.

00:07:22.160 Yes.

00:07:23.100 Which was just, I mean, it was just the Americans before. 0.89

00:07:26.060 So the whole purpose of American policy in the Middle East outside of Israel was to make sure that no singular player controlled all of that energy.

00:07:36.760 And so if the Iranians control both passageways, both waterways, they are de facto that energy hegemon. 0.91

00:07:45.180 And that means that between them and Russia, they set the oil price for the world as part of OPEC+. 0.90

00:07:51.120 And all of the other Arab players from Iraq all the way through Kuwait, Saudi, UAE, Oman, they have to listen to what Russia and Iran decide, essentially.

00:08:08.860 So this has shifted the objectives of the war fundamentally and made its impact a lot bigger.

00:08:19.400 I mean I wasn't entirely clear what the objectives were at the beginning but best I can tell the

00:08:25.120 objectives now are to avert us to back where we were the day before the war yes yes and now they're

00:08:35.160 going to send in ground troops and after they send in a small number of ground troops it's going to

00:08:39.660 grow and then it grows and then it becomes who knows I mean the Iranians as you said uh the 1.00

00:08:48.160 iranians don't have to win a single battle to actually win the war well this is the thing some

00:08:53.400 of our american friends sometimes forget it's it's not that we're saying that we like the irgc of

00:08:57.480 course we don't obviously and it's not that we're denying the fact that america has the strongest

00:09:02.560 military but america had a significantly stronger military than the vietnamese and the americans in

00:09:07.820 the vietnamese war uh won every single battle even during things like the tet offensive which

00:09:13.640 were a massive coordinated strike really put pressure on the americans the americans still

00:09:18.580 won every single battle vietnam won yes because the wind conditions were asymmetric and it was

00:09:25.640 the same in afghanistan it was the same in iraq it was the same in algeria between the algerians

00:09:31.700 and the french the wind conditions are different from who blows up most things and kills most

00:09:39.100 people um and so this is the the new reality but sort of going to the economics of it all

00:09:47.980 uh expectations of hikes across all central banks from germany united states bank of england and

00:10:01.540 Japan. And it seems that as per the episode that you did on the economic impact of the war and

00:10:09.700 brokonomics, we are getting to a stage where the interest rates are reaching an unsustainable

00:10:19.480 position for countries like Britain, Japan, United States, and probably the EU. Could you

00:10:29.460 yeah help us think about this a little bit better yeah i mean absolutely so look essentially that

00:10:36.420 as these yields go up the cost of the government borrowing money goes up yes um of course these

00:10:44.180 all of these i mean all of these governments here what have we got uk japan us and germany all of

00:10:48.780 them have considerable borrowing yes um the the us uh i believe largest in absolute terms with the

00:10:54.640 japanese uh relative to their economy um there was low expectation that any of this debt will

00:11:01.220 ever be paid back but the core thing is rolling it yes whenever it comes up so depending on the

00:11:07.380 the general blend of debt that you've got um you might be rolling it every five to five to ten years

00:11:13.500 um bear in mind the last time that a lot of this stuff a lot of this debt was taken on would have

00:11:19.940 been the covid crisis yes where um rates were fairly low and actually the the largest stock

00:11:26.480 of it would have built up um in the in the post 2008 period when again rates were pushed to

00:11:31.860 basically nothing yes so it made it very affordable for governments to have large debts because

00:11:37.040 it doesn't matter how much debt you've got if you're paying zero percent on it it's it's not

00:11:41.840 really your concern i mean you are you or i could have a trillion in debt if we're paying a zero

00:11:45.640 zero percent rate on it um the problem is is when that rate starts to tick up from zero to you know

00:11:51.880 one two three four and you keep going up now the the numbers that i sort of put on this is that

00:11:57.440 the for example the us 10 year um they started below four percent um on this period um then

00:12:06.180 they're now up they're just about to touch four and a half percent um why is that significant

00:12:13.380 One, like I say, the U.S. need to spend considerably more money rolling over their debt, which means they have a lot less money to spend on everything else.

00:12:22.180 It's now bigger than the Pentagon's budget.

00:12:23.940 Indeed, yes.

00:12:24.600 Yes.

00:12:26.160 But also, because the U.S. dollar is basically the risk-free rate for every other investment, that's why the stock market is falling.

00:12:34.940 because if you're going to get four and a half percent for investing in u.s treasury

00:12:40.700 which you are taught to believe in finance is a zero risk implements whether it whether it is or

00:12:47.300 not but i mean the u.s would have to default for you in order to not get your money back

00:12:50.820 if you're going to get four and a half percent free everything else needs to give four and a

00:12:58.280 half plus a risk premium yes and so when the interest rates are falling other investments

00:13:04.140 look good because well what have I what's the rate I've got to beat zero percent so if something's

00:13:10.100 offering me six or seven percent return over the long term well fine I'm obviously going to take

00:13:14.180 that because it's six or seven percent better if it's six or seven percent now and you can get four

00:13:19.420 and a half percent for free the risk premium just isn't enough you say well why would I why would I

00:13:25.640 take that additional risk for for investing in that and so that is causing the price of everything

00:13:30.700 to fall in order to get back the risk premium on top of whatever it is you're investing in which

00:13:36.300 which isn't which isn't bonds right so um i mean the us 30 year for example that's already gone

00:13:43.260 over five percent well i say already gone over it's almost well last time i looked yet which

00:13:48.000 was friday afternoon it was almost exactly on five percent yeah and and and it's a real problem

00:13:53.640 because Western governments believe

00:13:58.980 that even though they've taken on massive debts,

00:14:01.660 they can kind of get away with it

00:14:03.180 because they can grow their way out of it.

00:14:05.020 Yes.

00:14:06.020 The reason they love thinking

00:14:07.800 that they can grow their way out of something

00:14:09.400 is because the only other way to do it

00:14:12.620 is to raise taxes or to cut spending.

00:14:15.300 Politicians, for political reasons,

00:14:16.680 are completely allergic to that.

00:14:18.480 In the US, it's particularly bad

00:14:20.020 because so much of their spending

00:14:21.540 is written into statute.

00:14:23.260 it's written into law um congress has passed bills saying that you will spend this much money

00:14:28.100 on medicare for example or medicaid um and whole bunch of stuff in fact i think one of the few

00:14:33.100 areas that they don't have written into law is the military spending yes which is the bit

00:14:36.940 discretionary yes which is a bit they actually need now so um as as you as you push up on this

00:14:45.300 you're necessarily constrained on doing everything else that they do so basically for every investment

00:14:50.980 project that you consider it has to have a much higher rate of return yes every financial

00:14:56.800 instrument that you want to buy every structure have a higher every other return yes all of the

00:15:02.560 world the rest of the world's bonds have to have a higher return than the american treasury yield

00:15:08.920 yes otherwise why would you take the risk and you would stay with the american bonds and how

00:15:15.040 how do you make those how do you make those returns higher on something like a stock if if i

00:15:20.920 was selling my stock and it had you know my discounted cash flow model suggested that you

00:15:25.240 get a six percent return on this going into the future and my stock was valued at a thousand

00:15:29.900 dollars per share and the rate was zero well now the rate's gone to five percent um there's only a

00:15:37.200 one and a one point five percent risk premium so my stock has to go from a thousand down to a little

00:15:42.280 over 500 yes in order that the rate of return on that stock is now getting back to that higher level

00:15:47.960 yes um and so it drives by definition a stock market crash which drives a stock market crash

00:15:54.740 yes and the second point i was making there is that because um uh because because these yields

00:16:01.740 are being um compressed on the um on on on the government side um they they can't sell the notion

00:16:11.740 but they're going to grow their way out of their debt pile because you know growth in um you know

00:16:18.700 nominal growth you're gonna it's extremely hard to argue it's over five percent yes i mean i would

00:16:24.220 argue it's a lot lower than that but you could at least make the argument that it's okay it's it's

00:16:28.380 in the four to five percent range once you take inflation into account um once you go over five

00:16:33.660 percent of the cost of debt there is no possible argument that you're growing your economy out of

00:16:39.420 this debt trap you are quite clearly in a debt trap the debt is going to rise because the debt

00:16:45.020 is rising at the coupon rate the rate the the demand on the bond yes and your economy is growing

00:16:50.680 at whatever it's growing when one is clearly higher than the other well all that's telling

00:16:54.800 you is is that in the future this debt number is going to go ever upwards meaning it's going to

00:17:00.880 crowd out everything else you are in a debt trap that you can't get out of so the five percent in

00:17:04.980 the u.s really does matter and of the 30 year they're already at it and on the 10 year where

00:17:09.740 most of the borrowing lives you're four and a half right and so at the same time you have the

00:17:16.360 japanese yields touching two percent and yields for britain touching nearing six percent and so

00:17:24.700 this is a story that's repeated globally yes it isn't in fact just an american story it's a global

00:17:31.440 story and you see the expectations there that okay you're going to have to raise interest rates now

00:17:37.080 and that tanks all growth as a result but at the same time you're doing this while facing a

00:17:47.220 um you're you're doing this while facing well obviously the rise in borrowing costs that we're

00:17:53.260 talking about but a pretty much an explosion in natural gas prices yes obviously oil prices

00:18:03.180 obviously uh fertilizer is shutting down because of the gas shortage and so you see india and

00:18:12.300 bangladesh their fertilizer plants are either shutting down or partially shutting down

00:18:17.860 and you are seeing that combination of food inflation and fuel inflation that also drags

00:18:27.420 down growth and so raising interest rates now to control inflation

00:18:32.140 sticks you in the debt trap at a time when people are facing real energy and food shortages

00:18:40.760 yeah so so what i did in that previous that brokonomics episode um which actually i i filmed

00:18:45.880 it a week ago but it's coming out tomorrow so people are actually watching this today before

00:18:49.100 it comes out yeah um but you know i i picked 12 numbers which are kind of crucial for the system

00:18:54.340 the um the u.s treasury 10-year um the uk 10-year the japanese bond now the interestingly the

00:19:02.160 japanese have got a lower sensitivity at two percent there's reasons for that it's because 1.00

00:19:05.620 they buy back their own debt yes and the uk is a little higher because we're used to slightly

00:19:09.200 higher rates we don't get quite the privilege that the u.s gets um but then i went on to talk

00:19:13.660 about um brent brent oil and and really the the benchmark there for when things start breaking is

00:19:19.960 120 and the reason is is because up to 120 you kind of just absorb the price because it's within

00:19:27.340 the normal range i mean maybe if you're sri lanka or something you're going to you're going to be in

00:19:31.660 trouble but for most of the first world economy you're not you're not going to be in trouble at

00:19:34.640 120 you're just going to have to compress your margins or whatever it is to get get there when

00:19:40.040 you get over 120 you the the mechanism that's used in order to ration the the stock is going to be

00:19:47.680 demand destruction yes and the higher you go over that so so the system will equalize there probably

00:19:53.560 will be um for this foreseeable future for you know western countries there will be enough oil

00:19:59.120 but it gets there by rendering so many things uneconomical that you have to you basically have

00:20:06.120 to stop doing them that's what demand destruction means is is that the the ability to produce things

00:20:10.320 you you simply turn them off because they're no longer viable basically if you have a chemicals

00:20:13.900 plant or a car factory or whatever it is uh you can figure out a way when oil is in the 100 to

00:20:22.720 120 uh dollar range but beyond that actually you're better off shutting down that chemicals

00:20:30.820 plant or shutting down yeah it's a broad rule of thumb because of course every business will be

00:20:35.220 different but but yeah certainly you're comfortable under 100 um you start to get uncomfortable over

00:20:40.360 100 and 120 yeah you what you are you are just going ahead and shutting things down right um

00:20:45.720 if you go much higher than that if you get into because i i hear that the british government from

00:20:50.460 leaks that i've heard they're planning for a number of scenarios and the mid-range is that if

00:20:55.920 this carries on much longer the oil is going to hit 150 and that is still the mid-range it could

00:21:01.260 go as high as 200 yes now at that level um they're almost certainly going to have to step in

00:21:06.960 yes and it's going to be things like four-day work weeks three-day work weeks yes um

00:21:12.740 in fact we're already seeing it with some countries so

00:21:16.580 i think pakistan egypt um pakistan thailand the philippines and now south korea is talking about

00:21:25.800 doing some kind of lockdown and limiting people's ability to drive and things like that

00:21:31.040 Yeah. So you're seeing the beginning of this kind of locking down people in place. But then what that also does is that, especially in the West, it places more people on benefits and it reduces the government's tax revenues, meaning that the debt trap actually accelerates.

00:21:50.340 Because when you shut down a factory or when you announce some kind of energy lockdown and you're only going to be allowed to work if you're in an essential service, whatever that's defined as, well, what does that do?

00:22:04.820 That means that a lot more people become unemployed.

00:22:07.900 And so the government has to spend more on unemployment benefits.

00:22:13.020 Yes.

00:22:13.140 and then as these businesses close the government takes less in tax revenues yes and so the budget

00:22:21.960 deficit the amount of money that the government is spending beyond what it is taking increases

00:22:27.880 and so the amount of debt is pushed to increase yes so this kind of thing when you say debt trap

00:22:33.860 debt debt trap what you mean is that this mechanism is self-reinforcing yes and the more you go down

00:22:39.620 that route the bigger the problem that you're facing yeah i mean i wouldn't linger on this a

00:22:43.900 lot for long but i mean the whole the whole kensian model uh was that you had these automatic

00:22:50.040 stabilizers yes so when the economy is good everything going fine but okay when the economy

00:22:54.300 starts to turn off people start getting welfare and that puts money back into the system because

00:22:59.140 he had an upside down model of how the economy works that puts money back into the system

00:23:02.560 and because because basically they thought that demand was the limiting factor yes in reality

00:23:07.500 demand is unlimited it's supply that is limited but yeah so they've basically built the system

00:23:13.460 so every time there's a downturn yeah more money gets pushed in but the other part of Keynesian

00:23:19.100 even Keynes himself said is well when you're running a surplus when times are good you need

00:23:23.320 to be taking that money aside and building up a reserve so that you can then deploy it when times

00:23:28.480 are bad and then it balances out and smooths over the period what they actually do is they run at

00:23:32.800 absolute zero when times are good because they assume they're always going to be good and because

00:23:37.100 basically if you don't spend the money somebody else will come along and promise to spend it for

00:23:40.620 you and then you'll get voted out of office so they always run things at the absolute margin

00:23:44.860 so when you do get into a hard period they've basically got no choice but to take on debt

00:23:48.880 if you enjoyed this piece of premium content from the lotus eaters

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The Podcast of the Lotus Eaters - March 31, 2026

PREVIEW LIVE： Realpolitik #40 ｜ The Economy Will Break with Dan Tubb

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