Brad Setser on the War in Iran and the Future of the US Dollar

SPEAKER_2 (0:02)

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Tracy Alloway (0:18)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:22)

And I'm Joe Weisenthal.

Tracy Alloway (0:24)

Joe, it is April 15th.

Joe Weisenthal (0:26)

Yes.

Tracy Alloway (0:26)

Happy Tax Day to all who observe.

Joe Weisenthal (0:29)

I'm so annoyed, I'm just speaking of taxes. I'm pro-taxes, but I just had an email with my accountant. Anyway, I'm in a bad mood.

Tracy Alloway (0:36)

I'm pro-taxes, I resent the fact that we have to actually file them in this massive bureaucratic exercise every year. But anyway-

Joe Weisenthal (0:44)

This has nothing to do with what we're talking about.

Tracy Alloway (0:45)

Well, okay, taxes, financial flows of a sort.

Joe Weisenthal (0:50)

Well, taxes create demand for currency, core MMC principle right there.

Tracy Alloway (0:54)

There we go. Well, let's see. It is April 15th. The situation in Iran still highly uncertain, very fluid, but we have seen higher oil prices in general. We've seen people getting oil from new sources, new parts of the world, and we've seen a lot of people reaching back to the 1970s oil shock as a sort of historic analogy for what we might be experiencing now.

Joe Weisenthal (1:19)

Right. Absolutely. I mean, obviously, again, in the context of today, April 15th versus say a version of this conversation that we might have even had two weeks ago, things are a little bit calmer right now, but we absolutely do not know that they're going to actually have a durable ceasefire and so forth. Obviously, oil prices have come down. Nonetheless, it's a pretty big oil jump from where we were say in the middle of February. Even at that point, oil prices might have been pricing in some sort of Iran war premiums. It's even further jump from that. So yes, we've had this really big oil shock. In addition, we might have some sort of shift in the global balance of power, particularly if Iran is a toll keeper in some way of the Strait of Hormuz.

Tracy Alloway (2:04)

This is exactly it. One of the reasons I mentioned the 1970s oil shock is because that moment is very intertwined with financial history and the development of the financial system itself. And we've done a number of episodes on the history of petrodollars and euro dollars. We had a great series with Josh Younger before. And so I think when you have a moment like this, where people are bringing up those analogies and we can get into whether or not those are the correct analogies to make, it kind of generates this longer term discussion about what the financial system is actually going to look like and where financial flows are actually going to go to.

Joe Weisenthal (2:43)

Totally right. And you know, one of the things that I'm thinking about, like some of our old conversations like we used to have with Zoltan Poser, for example, and it was like, you know, one of the things that connected dollar dominance was this idea of, well, the US Navy is what policed the high seas and made global trade flow and stuff like that. If that is under question of whether the US actually can keep ships going in the way they were, how does that change the equation? What if it happens to be the case that to go from one place to another, you need to pay in Chinese Yuan instead of dollars? All kinds of interesting things that arise about the relationship between power and currencies at a moment of crisis. Right.

Tracy Alloway (3:24)

And if you're paying for oil in Yuan, does that mean that you're going to save that money in non-dollar reserve assets? Or are you just going to put it right back into treasuries? All right. There are a lot of questions that we have about this current moment. Obviously, everything's still highly uncertain. But who do we call when we're trying to untangle uncertain global flows? One man, and that is Brad Setser. He is, of course, the Whitney Shepardson Senior Fellow at the Council on Foreign Relations.

A man who holds the title of Most Odd Lots Appearances, I think, at this point.

Joe Weisenthal (3:57)

What we love about Brad is there has never been a crisis in which he doesn't have some relevant expertise to bring to bear.

Tracy Alloway (4:04)

That's right. Brad, welcome back to Odd Lots. Thanks so much for coming on.

Brad Setser (4:07)

Oh, no. Thanks for having me back.

Tracy Alloway (4:09)

So why don't we just start with that historic analogy, the 1970s oil shock. Lots of ink currently being spilled on whether or not that's the correct parallel for our current crisis experience. But in your view, how much does this particular oil shock resemble that of, I guess, 50 years ago now?