Trump’s humiliation would cost us all dearly

Who is winning this war? The honest answer is that it is still too early to tell.

But that hasn’t stopped a welter of commentary to the effect that Donald Trump has made a serious mistake, that he has badly underestimated Tehran’s resilience – as well as its ability to wreak wider economic havoc by blockading the Strait of Hormuz – and that the only victor in the end will be Iran.

This could admittedly still turn out to be true, but at this stage it’s based as much on wishful thinking among the US president’s political enemies as it is solidly grounded in military and strategic analysis.

Whatever the rights and wrongs of the conflict, a growing body of opinion makes common cause with the Iranian regime in wanting to see Trump humiliated. For now, it appears to be very much in control of the narrative – in Europe, the UK and increasingly, even the US.

It doesn’t seem to bother Trump’s critics that any such outcome would be disastrous for America and the wider Western alliance. A humiliated America could mark a tipping point that eventually sees a catastrophic loss of American influence and power.

No one should welcome such an outcome, though it is worth pointing out that American power has survived many such humiliations in the past.

None of this is to argue that Trump’s White House doesn’t thoroughly deserve much of today’s opprobrium.

It has punished allies alongside enemies with economically debilitating tariffs, it has threatened to invade a fellow member of NATO, it has essentially given the thumbs-up to Vladimir Putin’s invasion of Ukraine and it has routinely insulted liberal democracies that are meant to be on the same side.

Trump should not be surprised that he finds himself largely friendless.

What’s more, the quick and easy victory Trump plainly anticipated has failed to materialise and there is now every prospect of becoming bogged down in prolonged conflict.

All this and more is true – but it doesn’t mean Trump is unambiguously heading for defeat. The ultimate winners are at this stage impossible to know. There is, however, already one clear-cut loser: the world economy.

Before the war, it was chugging along quite happily with decent if unspectacular growth, generally falling inflation and the prospect of lower interest rates to come.

Even in the UK, things were beginning to improve after the self-inflicted wounds of the ruling Labour Party’s first year and a half in office.

Claims by Rachel Reeves, the Chancellor, that she had finally succeeded in bringing much-needed stability to the economy and the public finances were not entirely wrong.

Trump’s tariffs and her own growth-destructive tax policies notwithstanding, the economy was indeed beginning to move her way. Now this. It’s the last thing she needed.

For the time being, the damage is on a slow burn. Prices are quite a bit higher, but oil supply is being supported by releases from strategic reserves and increased production in parts of the world unaffected by the Gulf blockade.

Long queues and fuel shortages are already commonplace in parts of the subcontinent, the Far East and South-East Asia, but this seems to be more down to panic-buying than underlying scarcity in supply.

Even so, it is only a matter of time before the full force of the squeeze makes itself felt. We are still heading into the energy price storm, not away from it.

American attempts to sue for peace with a 15-point plan delivered by intermediaries to whatever remains of the Iranian regime only serve to confirm this prognosis. It does not offer a credible way out.

Having survived thus far, there is little reason why Iran’s theocracy would wish to settle on the suggested terms, which amount to unconditional surrender in all but name.

For the moment, the regime’s tail is up. Having survived for many years under the weight of sanctions, the ayatollahs will be confident that their own pain threshold far exceeds that of the world economy in the face of the coming famine in oil and gas supplies.

The regime’s resolve has not weakened, despite the devastation of American and Israeli airborne attacks, but already global economic activity is cracking under the strain.

Overnight, closure of the Strait of Hormuz has transformed economic prospects from the relatively benign to an at-best stagflationary outlook and very possibly, in a worst-case scenario, a deeply recessionary one.

The bottom line is that Trump has dug himself into a hole from which he will find it hard to extract himself. Iran’s stranglehold over the narrow Hormuz waterway means that the US president can no longer simply declare victory and walk away.

To do so without first having won back control of the Strait – and furthermore, without having annihilated Iran’s nuclear capabilities – would be a form of defeat.

He would have achieved nothing beyond demonstrating the immense power the mullahs are able to wield over world affairs by dint of an accident of geography.

This has turned out to be a threat to the global economic order far more potent than any stockpile of enriched uranium. Iran can in no way yet be said to have won the war but it has ensnared the US in a far bigger and more significant conflict than Trump would have wanted or planned for.

The chances of prolonged elevation in energy costs are therefore high. Less alarming outcomes are still possible but even in the event of de-escalation, the threat to Gulf oil and gas supplies from renewed conflict will remain omnipresent.

Most economic calamities, whatever their cause, eventually subside and go away but this one already has the air of a permacrisis about it that will hang like a dark cloud over the world economy for years to come.

The immediate reaction of markets as they absorbed the possible consequences of the Strait of Hormuz closure was to focus on the inflationary impact.

The yield on 10-year gilts (UK government bonds) rose to more than 5 per cent at one stage on Monday, which in most circumstances would have been indicative of extreme long-term inflationary pressures, perceived credit risk, or both.

But as is already being recognised, the recessionary effects of high energy prices may ultimately be the ones with the greater bite – and if that is the case, then rising unemployment will quickly cancel out any second-round inflationary consequences.

The bottom line is that Trump has dug himself into a hole from which he will find it hard to extract himself.

High reliance on gas for electricity generation and domestic heating makes the UK particularly vulnerable to these stresses.

Already very high levels of sovereign debt mean, moreover, that there is virtually no scope for fiscally expansionary countermeasures.

Ergo, it may well be that the next move in UK Bank Rate is down, rather than up as markets seem to expect.

And so to the original question: Who is winning Trump’s war?

It’s not yet nailed on, but the looming spectre of global recession would be an eminently reasonable answer.

Telegraph, London

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