TEHRAN- In this exclusive interview with Tehran Times, Tuomas Malinen, Finnish economist, CEO of GnS Economics, and associate professor of economics at the University of Helsinki, examines the global economic consequences of the recent Israel–U.S. attack on Iran. Known for his work on financial instability and macroeconomic cycles, Malinen argues that the escalation represents a systemic shock extending far beyond the West Asia. He highlights rising risks in energy markets, supply chains, inflation, and sovereign debt stability. According to him, prolonged instability in the Persian Gulf region, a key energy and geopolitical hub, could intensify global uncertainty and weaken already fragile economic growth prospects worldwide.

The following is the full text of the interview:

You often connect geopolitical conflicts such as the Iran–Israel–US tensions to global economic instability. In simple economic terms, what is the mechanism of transmission from a regional war to a global recession?

The mechanism naturally depends on the region under conflict. In the Middle East, more specifically the Persian Gulf, the mechanism naturally involves petrochemical flows. What we, as a world, are currently facing is a never-before-seen breaking of supply chains related to oil, natural gas, fertilizers, different types of industrial gases (like helium), and eventually metals and minerals, whose mining relies on the petrochemical products flowing from the Gulf.

Very few understand, but the global economy has been under constant resuscitation since the emergence of Covid-19 in early 2020. In actuality, the global economy has never recovered from the Great Financial Crisis of 2007-2009.

Since 2009, for example, the global balance sheet of central banks has grown by USD 20 trillion, a growth of around 130%. The debt-to-GDP ratio of China currently stands somewhere above 300%, while in 2009 it was in the vicinity of 150%. No one knows exactly how much debt China holds, because there are only 'guess estimates' on the size of her shadow banking sector. We assess that China’s true debt-to-GDP ratio is somewhere between 500% and 600%.

Moreover, just in early December, the central bank of the United States, the Federal Reserve, started yet another asset purchase (QE) program of short-term U.S. Treasury debt to ease stress emerging in the repurchase (“repo”) markets. This is a sign of existing and serious fragility, which the energy shock is very likely to rip fully open. My analysis indicates that the stress in repo emerges from the private credit sector.

Essentially, of the two main drivers of the world economy, the U.S. is a bloated financial behemoth, depending on surpluses from the rest of the world (e.g., the petrodollar) to sustain its finance-driven economy, while China is highly, or extremely, indebted.

Considering the above, the energy shock emerging from the Middle East is likely to bring not a recession, but a global economic depression. In other words, the utterly reckless war of President Trump is about to annihilate the world economy.

From your perspective as a macroeconomist, is the Iran crisis primarily an energy-price shock, a financial-system shock, or a confidence shock? Which one dominates and why?

The “Iran crisis” will start as an energy-price shock, which is yet to fully manifest as countries are burning through their petroleum reserves. This applies especially to the U.S., which looks to drain from its already-low Strategic Petroleum Reserve to increase its exports and to support the global economy. I cannot think of a more reckless strategy to cover up repercussions of their catastrophic mistake to start a war against Iran.

That said, we also need to acknowledge that the war is likely to serve a purpose in the 'grand strategy' to sustain U.S. hegemony by making countries reliant on U.S.-controlled energy. This is an extremely desperate and destructive strategy for the world.

Hence, what is also emerging is a confidence shock. People around the Western world are losing trust to the U.S. as our “leader.” The long-term repercussions of this to the U.S. are likely to be dire.

A financial crisis, which is likely to morph into a “systemic crisis,” is likely to emerge last. This is because there are several support mechanisms, which operate mostly through the central banks, that major countries can enable to sustain their financial sectors. However, in the face of the approaching (gigantic) economic shock, such mechanisms are likely to prove insufficient to sustain western economies.

In other words, we are likely to face a collapse of the Western and global economies due to the “Iran shock.”

We can see first an epic financial collapse followed by a “financial lockdown," where people are not allowed to withdraw their money from banks nor are major asset managers allowed to sell their holdings. Central bank digital currencies (CBDCs) are likely to be unleashed as a remedy for the financial crash. 

You have highlighted the importance of the Strait of Hormuz. How do you assess its role in today’s economy: is it a temporary vulnerability or a permanent structural weakness in the global system?

This depends on two things.

1) How other countries treat Iran.

2) How Iran treats the Strait.

I would find, e.g., a system where Iran uses tolls to access the Strait to cover the damages of the war. In the West, we all allowed the war to come by supporting Israel and the U.S. So, it would seem only fair that we cover its costs.

However, if Iran were to use the Strait as a permanent 'piggy bank' to finance its government expenditures. This would be rather questionable, and it would set a dangerous precedent for international trade, which relies on unobstructed access to many straits across the world. This would be likely to turn other countries against Iran possibly leading to a prolonged conflict.

Many analysts argue that oil shocks today are less dangerous than in the 1970s due to diversification and reserves. Do you agree, or do you believe modern supply chains are actually more fragile despite technological advancement?

Well, the counterargument to this is, what do we do when reserves run out and diversification into what, exactly?

Reserves are limited, and we have conflicting information about how long it will be before major Western countries run out of reserves. Most estimates suggest that this happens during the summer, e.g., in Europe.

I would argue that the only thing that has somewhat “diversified” is the car industry. We have electric cars, which at the first stages cushion the oil shock. However, as essentially everything in our modern economies depends on petrochemical products, there is no de facto diversification, but only “diversified-dependency.”

In your posts on X, you have referred to sanctions and blockades involving Iran as part of a broader system of economic pressure. From a macroeconomic standpoint, do you consider sanctions primarily a tool of strategic containment, or do they function as a source of systemic instability for global markets?

Like I describe above and below, they are both a tool of strategic containment for Iran but also a source of systemic instability for the rest of the us.

In your analysis of geopolitical fragmentation, you have suggested that a sustained Iran–Israel–US confrontation could reshape the global financial architecture. In this context, do you expect such a conflict to accelerate the process of de-dollarization, strengthen regional trade blocs, or deepen financial decoupling between Eastern and Western economies?

In the Weekly Forecast Special Issue of GnS Economics, published on March 12, we dealt with the issue of the petrodollar and de-dollarization in detail. In the report, we for example noted that:

The petrodollar system effectively became the source of the forever-wars of the U.S., because keeping it alive meant keeping U.S. ‘boots on the ground’ globally. To fund all the military bases, the U.S. needed to create a lot of credit (money). So, essentially, there was a never-ending loop, where the war machine required money to feed the global demand for the USD to provide the security to guarantee the reserve currency status of the U.S. dollar. Effectively: money for safety for money. Rinse and repeat.

We could change the second-to-last paragraph to: money for war for money.

When the full repercussion of the war in the Middle East starts to become visible, I am rather certain that anti-U.S. attitudes will start to grow very rapidly globally, but also within the U.S. President Trump promised to end the U.S. war machine, but the complete opposite is occurring. There’s nothing left from the MAGA movement but hardcore fans.

Where I am getting with this is that the war is likely to start de-dollarization at three levels.

First, if Iran pushes the U.S. out of the Middle East and if the Strait remains under de facto Iranian control, there will be a forced movement out of the petrodollar (assuming that Iran keeps on collecting the tolls for some time). Secondly, as the safety the U.S. provides has come under (serious) scrutiny, countries across the globe are likely to start to search for regional partners in safety and in finance. Both of these developments would (will) start to erode the role of the dollar as the global reserve currency.

Thirdly, a movement to end foreign wars is likely to emerge in the U.S. in ferocity not seen since the Vietnam War. When the inflation gets out of hand again, most likely in the fall, and when the true costs and casualties of the war will emerge, the anger of U.S. voters is likely to reach unprecedented levels. President Trump’s administration could even face rebellious movements. A political shift in the U.S. is emerging from the war and ‘smart control’ of the SoH.

The process, the war and other actions of Iran have put in motion are gradual but most likely fundamental on a global scale. They include de-dollarization and “regionalization,” but only if Iran holds her ground. I hope Iranians do, because the other option is Balkanization and eventual "Libyalization.”

The East and West divide will occur only if people allow the globe to be divided into two blocks, again. There’s no need for it, but the ‘powers that be’ are likely to seek it to continue to wage ‘forever wars.’

Do you think the global system can absorb repeated regional wars without entering a permanent crisis regime?

This is an interesting question. Economic and practically all kinds of crises are such that they are eventually solved by ordinary people with or without the help of governments. Left alone, people find ways to resurrect their economies from practically every non-existential shock. Studies have found that empathy and communal activity significantly increase when a major shock occurs. People do not turn into a robbing mob, but the opposite; they often come together to support one another and engage in cooperative efforts to rebuild their communities.

In a way, we are already in a “permanent crisis regime.” Crises have followed each other in a consecutive manner for over six years, starting from the emergence of Covid-19, which originated, most likely, from a lab in Wuhan, China.

What has kept the global economic crisis from emerging, fully, are the massive resuscitation measures adopted across the globe, some of which I detailed above. When the economic hit from the war starts to manifest, most likely during or immediately after summer, we can expect those measures to go into overdrive soon after. There would be yet another crash-bailout combination we have seen repeatedly since 2008.

These bailout measures, central bank, and government interventions damage the economy by distorting the price discovery and capital allocation. They have now continued for so long in the West that I don’t think we live in a market economy anymore. Just ask yourself, like I noted above, why does the financial plumbing of the “greatest economy” (the U.S.) need continuous financial support from the central bank?

The U.S. economy is on the verge of a collapse, which the war shock is likely to ignite. Then the Trump administration has just two options: let the economy collapse or print (money) like crazy and start wars all over the world. You can take an educated guess of what he’s likely to choose.

So, the answer is no. The world economy cannot cope with these continuous wars, but it would not have (most likely) coped without them either. Most of the Western economies (+China) are heavily indebted, with economic momentum sustained only through continuous stimulus.

Then the question becomes, can the permanent crisis regime adopted across the Western world survive without continuous wars?

I think it cannot.