Category: Economics

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Graph of the spot price for West Texas Intermediate crude oil, showing the recent spike

For no reason I can understand, markets seem to think that (with the cease fire with Iran) things are going to return more or less to normal, more or less immediately. This is false. It is not just false, it is so far from the truth that I don’t understand why way more people aren’t panicking.

There are so many problems with oil supply delivery right now—so many more than just the Strait of Hormuz. A lot of oil and gas production infrastructure is gone. A lot of oil and gas distribution infrastructure is gone. Even where the production infrastructure is still there, since there’s no way to ship out what is produced, production is being shut in. Production that has been shut in will take weeks to get started again. And it won’t be started again until it can be delivered.

At the same time, shipments of oil and gas that came out through the Strait just before it was closed, are probably only now reaching their destinations—meaning that it is only now that refineries are finding themselves without their next input for refining. The refining facilities are going to have to shut down. And just like the production facilities, it will take weeks to get them started again. And they won’t be started again until the people who run them foresee reliable, steady deliveries of crude.

These effects are already obvious in the observed spread between spot prices (the cost of a barrel of crude to be delivered right now), which are high (although not as high as I think would make sense), and futures prices (the cost of a barrel of crude to be delivered in a month), which are also high (but not nearly as high as I think would make sense).

The same is true (with various differences in details) with helium, nitrogen for fertilizer, aluminum, and who knows how many other commodities that used to come though the Strait.

This all matters because the knock-on effects are going to be huge. Higher fuel prices—much higher, and for much longer than the markets are currently anticipating. Higher food prices, due to the shortage of fertilizer reducing food production, especially of corn—which is a major input to both meat production and to ethanol production, meaning another way it feeds-through the higher energy prices. Higher helium prices feed through to shortages of computer chips—which were already under strain due to AI-related data-center demand.

In the background of all these are Trump’s tariffs from a year ago, the impact of which was eased in many different ways (the pause, various rate cuts, firms stocking-up ahead of the imposition of the taxes, the supreme court decision ruling that the worst of them were illegal), all of which delayed the main impacts for months. For some reason, the markets seem to think that those impacts would quit showing up in comparison to the year-ago numbers (since the tariffs were announced one year ago), but in fact are probably only now fully showing up in reported numbers.

My take on all this is that every aspect of the economy is going start getting bad, and then going on getting worse. The getting-worse phase will go on at least for months and months, and very possibly for a year or two or three.

Inflation spiked up to 3.3% last month, but that is only the start. That’s just the energy-price spike. As soon as those effects feed through to other prices, they’ll all go up. And as soon as those high prices start forcing people to cut back on other spending, we’ll see at least a recession, and very possibly worse than that. And that’s all before actual shortages or fuel and food start impacting every aspect of people’s lives.

Oh, and as I’ve said before: Don’t imagine that having some idea about what things are going to be higher-priced or in short-supply gives you the sort of insight that will let you invest to make money off these circumstances. The real-world impact of these things are going to be chaotic enough that any particular investment could go very badly wrong, even if your understanding of the general direction of events is correct. And, of course, the government is going to trying to protect their supporters (oil companies and tech billionaires, mostly) so they may well be bailed out. Any investments that suppose that things will go badly for them in particular may well go spectacularly awry.

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Recent news is that a contingent of ground forces have arrived in Iran. The markets still seem expect that Trump will chicken out (which seems likely) and that things will return to normal in the Gulf (which seems very, very unlikely).

My most hopeful guess at this point:

  1. Trump chickens out, declares victory, says we have a deal with Iran, and pulls out.
  2. Europe and Asia make a deal with Iran that conditionally opens the Strait, with Iran deciding who can transit, and collecting large tolls.
  3. Europe and Asia start getting deliveries of oil and gas and fertilizer and helium. Because of the gap already embedded in deliveries, prices spike up in the meantime.
  4. Because the U.S. is an oil and gas exporter, our prices spike up less (but still spike up, because there’s a global market), and reduced supply of fertilizer and other things from the Gulf means other prices spike up as well, producing an inflationary recession that rivals the worst of 2008 and 2020.

All my other guesses are similar, except that my scenario is preceded by a step 0 in which a bunch of U.S. soldiers and marines are killed while failing to reopen the Strait.

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I’ve known since before the inauguration that the economy was facing stagflation. The tax cuts would boost the deficit, raising interest rates. The tariffs would boost prices, producing inflation. Both those things, plus forcing out immigrants, would tank the economy, producing stagnation (at best), yielding stagflation.

I wrote about this more than a year ago, in Our new upcoming stagflation. We are now seeing it, even before the war started.

I’m actually a little surprised we didn’t see it sooner. I credit the delay to a few things. First, Biden had left the economy in really good shape. It took a lot to tank it. Second, even though it seemed to us that Trump was “moving fast and braking things,” it’s just hard to move that fast on things like tax cuts, imposing tariffs, and deporting migrants—even if you’re willing to break laws to do it faster, these things take time. Third, Trump always chickens out, so we didn’t get the threatened tariffs on schedule; we got watered down tariffs after a delay.

However, the stagflation is here. Check out this graph of Real GDP. As you can see, in Q4 it had fallen almost to zero. The economy wasn’t shrinking, but it was stagnating.

A graph of Real Domestic Product with the last data point showing a growth rate of barely above zero.

At the same time, inflation had quit coming down. Here’s a graph of Core PCE, the Fed’s preferred inflation index. After getting down almost to 2% (the Fed’s target) about 8 months ago, it reversed course and has been bumping along close to 3% since then.

A graph of Core PCE with the last data point only a little below 3%

I think all of these things were about to get worse. Even with the Supreme Court’s ruling that a major part of Trump’s tariffs were illegal, there were plenty of others that aren’t going away. The tax cuts are still in place. Immigration has virtually come to a halt, many immigrants have been detained or deported, and any sensible foreigners with skills that they can apply elsewhere are fleeing the country.

So: Stagflation was already here. But things are about to get much, much worse, because now there’s a war on.

That has already spiked up oil prices. Those won’t feed immediately into Core PCE (which excludes food and energy prices), but will feed in over time, because higher energy prices make everything we produce more expensive. And, of course, wars are fantastically expensive, meaning that the deficit will blow out way worse than it was already going to, which will lead to higher interest rates (soon) and higher taxes (later).

Oh, and don’t expect AI to save us. If you listen to the business news, you know that the only reason the economy isn’t in much worse shape is that businesses have been paying huge amounts on AI infrastructure. As I wrote in my AI bubble post, I think a large fraction of the data centers and model training that that money got paid for will turn out to be worth much less than was paid for it.

So, where are we? Well, about where I thought we’d be, as far as the economy goes—in a modest stagflation that could be fixed pretty quickly, at the cost of a substantial recession, if the Fed had the guts for that. Except that now we’re in a war too.

I can tell you how to arrange your finances to survive a stagflationary period, but I can’t tell you have to survive a war. Wars are very bad, much worse than recessions.

If you know how to survive a war, let me know. If not, good luck.

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A pretty good recent episode of Gil Duran’s Nerd Reich podcast had an odd hole in it.

In the one I’m talking about, the one with Quinn Slobodian, Quinn explains that there’s a reason the many efforts to create a seastead, charter city, network state, and such never go anywhere: They’re unnecessary.

[Y]ou don’t actually need to create a new polity to have your own sense of entitlement and privilege reinforced in every imaginable way, and to have your own economic comfort facilitated by the institutional arrangements of the state in almost every way. With some creative accounting and some use of offshore havens and trusts and so on, you can really game the whole thing very well already, right?

Having said that, they do talk a bit about why, given that there are already tools to protect your property and money (freeports, trust, special economic zones, and the like), anybody would work so hard and spend so much money to create an actual place that’s outside the control of any government. They don’t quite come around to answering that question, which I think is unfortunate, because I think they both know the answer.

The people pushing these efforts want serfs.

They don’t want workers who can join unions. They don’t want software engineers who hesitate to create autonomous munitions or tools for surveillance capitalism. They don’t want maids or pool boys who feel free to resist their advances.

They want the right to be mean to people, in a situation where the people have to just take it.

That’s what places like Próspera offer that you can’t get from a family company incorporated in a special economic zone.

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Okay, this is really, really good. About writers and writing (via @doctorow).

Makes me want to write some proletarian literature.

Characters in proletarian literature are often misled into believing that their individual flaws account for their miserable conditions, but then encounter a union organizer or a wise old Wobbly who tells them the truth, setting fictional men and women on the revolutionary path.

Source: Go Left, Young Writers!

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This is exactly right, and we’re all going to suffer for it (along with all the other things we’re going to suffer for because of Trump).

The best summary of Trump’s trade “philosophy” comes from Trashfuture’s November Kelly, who said that Trump is flipping over the table in a poker game that’s rigged in his favor because he resents having to pretend to play the game at all.

Source: Pluralistic: Trump and the unmighty dollar (26 Jan 2026) – Pluralistic: Daily links from Cory Doctorow

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A graph showing a line that goes up to the right, with a big drop in April 2025 that is quickly reversed

There’s a broker offering a new product, that I’d have been all over 30 years ago. I think they’re calling it a “generated asset,” where they create a personal stock index just for you (based on a prompt to an AI), and then create an imaginary index fund for that imaginary index, and then (I assume) invest in the underlying stocks on your behalf.

Of course, you could do that yourself, but it would be awkward, probably expensive, and definitely fiddly, with a need to track the index over time.

So, instead of that (I assume), the company just promises to pay you the value of your index, and (I assume) hedges its promise by holding the underlying shares—and since this synthetic investment is a service, they can lump all these promises together and invest in all the underlying shares, and be generally sure that their hedge will be close enough that even very large stock moves won’t cost them more than investors are paying for access to this service.

As I said, I’d have been all over that 30 years ago. Now, not so much. I’ve gotten lazier and more conservative with my investments as I’ve gotten older.

But it did make me think what I’d want to invest in, if I were to create a synthetic index, and it occurred to me that the companies that are putting the least amount of money into AI crap will do much better over the next few years. So I asked confer.to if it could give me “a list of large corporations ordered by how much they talk about AI in their reports to investors.”

Sadly, the answer was no:

Based on the available data, I can’t provide a specific ranked list of large corporations ordered by how much they discuss AI in their earnings reports. While the information confirms that AI is a major topic in 2025 earnings calls across the S&P 500, the detailed company-by-company ranking you’re looking for isn’t publicly available in the sources I checked.

Here’s what we do know:

  • AI is a dominant topic: In Q3 2025, “AI” was cited on 306 S&P 500 earnings calls, the highest number in the past decade.
  • Significant increase: This is a large jump from the five-year average of 136 mentions and the 10-year average of 86.
  • Sector leaders: The Information Technology (95%) and Communication Services (95%) sectors have the highest percentage of companies mentioning AI.
  • Market impact: Companies that mentioned AI in their Q3 2025 calls saw a higher average stock price increase (13.9%) compared to those that didn’t (5.7%) since the end of 2024.

While sources like Yahoo Finance and MacroMicro track the overall trend and volume of AI mentions, they don’t publish a specific, ordered list of corporations ranked by the frequency or depth of their AI discussions in earnings reports.

This type of granular, ranked data is typically compiled by specialized financial data and analytics firms (like FactSet, which provided the data to Yahoo Finance) and is often part of a paid subscription service.

Perhaps the specialized AI tool that this broker uses to create its imaginary indices has access to the fine-grained data about AI mentions in earnings calls with investors. But I don’t care enough to go to the trouble of looking.

Poking around at the St. Louis Fed’s Fred graphing tool (to come up with a graphic to include for this post), though, led me to the graph at the top, which is of the “Nasdaq Global Artificial Intelligence and Big Data Index,” which “is designed to track the performance of companies engaged in the following themes: Deep Learning, NLP, Image Recognition, Speech Recognition & Chatbots, Cloud Computing, Cybersecurity and Big Data.”

So one option to get what I want would be to just go short on that index.

I don’t think I’ll do that either.

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Turns out Cory Doctorow and I think a lot alike about the AI bubble, but he also has stuff to say about how to speed along the popping of the bubble, which would be a good thing. (Bubbles that pop sooner do less damage when they do.)

so I’m going to explain what I think about AI and how to be a good AI critic. By which I mean: “How to be a critic whose criticism inflicts maximum damage on the parts of AI that are doing the most harm.”

Source: The Guardian

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This article, which had a really annoying headline, turns out to have some really great thinking.

In particular, the political perspective it is describing has more than a little overlap with the stuff I was writing about in my articles at Wise Bread.

An economic vision that … encompasses antimonopoly policies, right to repair and regulatory changes to smooth the path for people to start businesses, buy and work land, even build their own houses and invent things.

Source: NYT

Steven suggested that I should revisit my Wise Bread posts. There’s a lot of useful stuff there. It was stuff that had seemed a bit less relevant over the last few years (I started writing in June of 2007, right at the start of the Great Financial Crisis, and carried on for 10 years.) But with government having gone all-in on fascism, racism, and gangsterism this year, a lot of those themes are feeling much more on point than they had for a while.

So I think I’ll do that. A lot of my Wise Bread posts still feel just right. On a few, my perspective has changed a bit. I’ll write some new posts to talk about what’s changed.

Stay tuned.