0:00 An economic tsunami is sweeping across the world. That's the direct result of course of the war on Iran launched by the US and Israel which has plunged not just the region but the world into ever growing turmoil. Just how big a disaster is approaching us. Just how bad are things going to get. Um who's profiting out of this crisis out of war and where next? Um I'm really delighted to be joined by the brilliant um economist in fact professor of economics at University of Massachusetts Amhurst um Isabella Vber whose work I have been following for a long time. Great to speak to you. How you doing? >> Thanks so much for having me Owen. Um I'm great but I wish the word was in a
0:46 different state. >> Yeah strong same. Strong same. just just g give it to us straight just how bad on an economic level is this how how big a catastrophe is is about to hit all of us >> yeah so I think tsunami is is the right word um and we are a bit like in this moment you know when you can see the tsunami wave already coming but it hasn't quite hit the shore yet um so we are like kind of in this between moment um I've been comparing it also to the moment right in in the beginning of uh uh 2020 when we already knew that co was around the Wuhan outbreak was happening, but it hadn't quite um interrupted uh most of our lives in the west um yet. Um so it's that that kind of a moment. Um how bad exactly it will become of course
1:31 depends on how long this war will last. So the most effective thing to stop the tsunami is to stop the war. Um nevertheless, there's already a lot in the pipeline. Um and uh uh basically what we see is that um around 10% of um global oil supply is missing. But it's not just about oil. It's also about LG, about NAFTA, a key feed stock for plastics, um helium, which is a key input for computer chips. Um uh fertilizers, um uh um and the list goes on. Aluminium, um as a very energyintensive metal. So it's all this upstream stuff. Um not just oil and gas, but all that upstream stuff that is basically in everything. Um you just pulled out your water bottle, which I see has some plastic on it. Um so it's like you know like literally everything
2:17 um in packaging, in industrial processing um in in in transportation um uh uh uh uh um uh um uh infrastructure and so on. Um computer chips, we already saw last time around um during COVID what the shortage meant, right? It affected um electronic gadgets from lawnmowers to um uh uh drones, right? Like from the least high-tech to the most high-tech stuff. Um all of them run on computer chips. Um so it's even not just you know kind of the the physically um uh uh uh uh intense stuff like uh you know stuff that has a lot of aluminium a lot of plastic in it but it's really also the the electronic um equipments that we all rely on. So the tsunami is huge um but it's hitting the world um in
3:04 in an asynchronous way. um Asia depends um much more directly on um oil and gas exports um and also um fertilizer exports and so on from from the Middle East. Um which means that there we see the effects um first. Um but since these are global markets um the reshuffleling um will mean that um the shortages um uh uh will will be um uh uh spreading um from from the region's first hit um to other regions of of the world um in in in in an unequal kind of fashion. But nonetheless, I think sooner or later it's going to um hit everyone. The price response um is already here. Um so the price response is pretty immediate. Um and the prices that we see um are extremely volatile for anyone who has been following the oil price. I mean,
3:51 you could like literally see in lifetime how it's been shooting up and uh falling down and shooting up again in response to whatever Trump um said last. Um so this reflects the uncertainty. We know that it's huge but it's very difficult to know exactly um in which ways it is going to play out and the the markets are simply in in turmoil in terms of the kind of practical impact for whether you'll be a German or a Brit or an American. What does that mean? What does it mean in terms of you know I guess inflation? How bad could that get in terms of interest rates in terms of jobs? you know you name it in a kind of practical sense what are people looking at
4:36 >> yeah I mean in terms of inflation we have already seen first effects in the euro zone right um just to give you an example for Germany inflation's up to two um 2.7% which I mean is a is a clear jump um compared to the expectations that we had um but this is not just a German story um so far um this inflation basically comes directly from the um effects on on energy prices and prices at the pump um but um as these um shocks that I've been talking about um across a whole range of what we have been calling systemically significant um sectors um uh uh uh is is is running through the supply system. It will um spread across um different sectors. It's important to remember that this like the ways in which these prices are pushed through
5:21 the through production networks is not um uh uh by force of nature but it's actually by um force of uh corporate price setting. Um and what we have seen in the last um uh crisis is that um corporations are very quick to um pull prices up um when input prices go up. In fact um some of our research on what we call sellers inflation where we analyzed um uh uh hundreds and thousands of um earnings calls um the the calls where large corporations report um to their um uh uh uh investors and analysts and and and and financial commentators. um uh that um corporate executives have often perceived um cost shocks like the ones that we are observing right now um as good news in the in the last um crisis
6:09 because it presented an opportunity to raise um prices in ways that at least protects margins. And if you protect your margin um when costs go up, this means that you're actually making more profit. But the assumption here is that the volume isn't collapsing too much. Um, if you know you end up producing only 50% of the stuff that you produced before and you have a very high margin on it, your profits might still be going down. But if the volume um is is not affected too much and the the margin um is is protected and the costs go up, um that actually means that you can make more profits. That's a bit like um you know, you pay the same um uh agency fee um uh uh whether you buy an expensive or a cheap house. um and in one case the broker gets a lot of money and in the
6:55 other case um he gets not that much money. So in the same way like when the input costs go up and you protect your margin if you think of this as like kind of a percentage fee um then um uh that that actually um can go up. So this means that yes, we are we are looking at um a a severe inflation um risk um but it's it's an inflation risk that um is likely to again be a very unequalizing kind of um inflation risk um unequalizing through the profit channel because um we expect major major windfall profits um in in the fossil fuel industry. We already see the stock market indices for um fossil fuel companies going through the roof. I mean literally like a vertical line shooting shooting up um um uh um which which
7:41 means that there is a massive massive win for a profit expectation in the market. So it's not just us researchers looking at this thinking that there's going to be a massive win for a profit. Um and then through the mechanisms that I just talked about, I expect that the corporate sector as a whole will be pushing this cost pressure on to consumers and ultimately um to workers. So that um through the profit channel there's a massive um um uh uh redistribution effect where um uh one part of of of the corporate sector, the fossil fuel sector will have massive windfalls. the rest of of the corporate sector um is pretty well positioned to push off the the the the the cost and pressure that they face and then the rest of us basically um pick up the
8:27 bill. There's more unequalizing effects in this because the poorer you are, the more you spend on energy, utilities and the basic stuff you can't do without. Um which means that um there's also an unequalizing effect um from the side of consumption baskets. So um lower income folks are going to see heavier cost burdens while getting basically nothing um uh from the windfall profits. We have done research on the last um round of windfall profits in 2022 and we found that in the United States 50% of the windfall profits went to the top 1% um and uh uh uh the bottom 1% um uh sorry the bottom 50% only got 1% of the profits. So um it's extremely unequal
9:13 whereas those bottom 50% are carrying a much heavier um cost burden. So that's I mean just in terms of inflation but I think it's important to look at inflation not as this you know homo homogenizing force but it's actually a very unequalizing force. Um now looking at um uh the the magnitude of the supply shortfall in the energy market, some have compared it to 2020 and what happened during COVID saying that um basically um uh to to get to that level of um uh uh reduction in energy um consumption that we need to have to um uh match the the now um uh declined supply. um we would have to reduce um economic activity in ways similar to the
10:00 COVID um 2022 shutdowns. Now this is of course very significant and would mean that on top of inflation you would have a major recession. Um uh uh which um then um of course um has implications for the labor market which has implications for the ability of workers to um uh push back against these cost cost burdens by um asking for higher wages. Um and of course has implications for I mean basically means that there will be less growth. Um which again has implications for fiscal revenues um uh and uh uh and and and and will will have immediate pretty immediate effects on on the balance sheets of states. >> I should by the way also say Isabelle I should have said this at the beginning.
10:45 It has a book coming out called um anti-fascist economics which is coming out later this year with Alan Lane. The same people penguin that is who's is publishing uh my book the fall of the west in October. You can pre-order both of those if you like. Um, just in terms of just how, for example, if this war ended today, which it's not going to do, but if it did, we'd still suffer huge economic effects, which would last. I mean, what what if, you know, use that as a baseline, what if it went on for another month? I mean, basically, the longer it lasts, the worse it gets. Um I am not myself an oil trader or someone from the commodity markets, but what I read um from people um in the commodity markets is that shortages could hit um Europe um as soon
11:32 as um in in middle or late April. So that's like a couple of weeks out, right? This is just from the facts that we have already faced. Um which means that um uh uh basically actual physical shortfall of supplies um could could become an issue. Of course, the question at the end of the day is who is snapping up the global supplies, right? And what we have seen um in in in recent um days and weeks is that Asia that has been hit first um has been paying um uh I mean outrageous prices um for um for oil um and has basically been um uh rerouting um uh uh uh oil exports from the United States to several Asian countries um uh for example, predominantly Singapore. um uh by by outbidding Europe. Now um on my
12:20 mind kind of the worst outcome of this war is um you know Asia Asian countries outbidding Europe and then Europe striking back by outbidding Asia and then um getting ever higher prices and the um American big oil companies um making ever more windfall profits while um uh the inflation burden crushes um uh uh uh the already um strained real wages of of the working class in in in Europe and um crashes um the the the the livelihoods of literally millions of people in in in Asia, including folks like the Fissurers in in the Philippines that already are um uh no longer able to buy gas, run their boats and are already, you know, kind of on a shoestring who have no savings, whose
13:06 livelihoods are already um at the brink as as we speak. >> I mean, this comes after relentless crisis. you mentioned COVID that obviously had huge economic consequences and which were very politically consequential um and you know we've had you know we had the financial crash in 2008 and then we never actually recovered from that and had asterity and all all the consequences I mean just with and then there's you know people talking about an AI bubble for example um and you know issues general with the financial system just with all of that together I mean isn't that that's what this also makes this such a big crisis because it's all lots of things on top of each other. >> Absolutely. Um and of course the AI bubble is another thing that I haven't mentioned yet, right? I mean the energy
13:52 intensity and the reliance on computer chips makes AI incredibly um vulnerable to the shock that is coming at us. Um now some of us might think that it's not a terrible thing if AI bubble burst but the the fallout from it could also be quite major. um uh by and large since you mentioned the stock markets I would say that we have seen major um increases in stock evaluations for as I've already mentioned fossil fuels but also stuff like fertilizers where prices are shooting up and um uh uh basically food supplies are getting um increasingly vulnerable um but overall the stock market reaction has actually been somewhat muted in in in relation to the proportion of of the crisis that is coming at us and I think part of it.
14:37 This might be that um uh in in previous crises um the stock market has learned that um those crisis ended up not being as terrible for companies as it as it looked at at the first um uh at the first site. Um yes, this comes on the back of of major major crises, but it also comes at the back on the back of um uh uh like long run trends in stagnating living standards for the majority of people. long run trends in stagnating um uh uh real wages um long run trends in in in in in massive increases in in corporate um power and corporate concentration. Um and each of these crisis has just a kind of accelerated um the the these these tendencies that were already there. Um if you um take for
15:23 example the um uh uh overall profit margins in the United States as like kind of an indicator of um how well um uh uh uh corporations um are doing. Um then we are at record highs for non-financial um profit margins that spiked um during the COVID um inflation crisis and just stayed up there thanks to Trump's um policies. At the same time, the labor share in the economy in the United States um has been going down like basically as an inverse development of of of those profit developments. So um it's a crisis um but um it's not a crisis for everybody. Um these crisis have actually been um uh quite quite profitable um for for um good chunks of of of the corporate um sector. So, it's
16:09 a crisis of of inequality at the end of the day. And I think it's also a crisis of of um democratic states um and and their ability to um shield citizens um and protect their most basic material needs. Um and um uh I think during co we have seen um uh quite activist um state policies. Um, and this time around, um, uh, uh, I mean, we would need a similar level of determinedness, um, but paired, um, with policies that are actually also willing to, um, uh, not just, um, give out lumpsum payments, but, um, go up against, um, some very powerful, um, corporate interests, um, such as win for profit taxes, such as price stabilization measures that actually stop um, uh, uh, th those prices from,
16:55 uh, shooting in in the ways in which we have seen them shoot. Um and um I I don't really see the willingness um to do that. And on top of it, I mean, we have seen what happens on bond markets like the bond yields have been going up very rapidly um which um uh uh uh makes it more difficult for states to um uh uh mobilize the fiscal firepower in the ways in which it did last time around. I'm not saying it's impossible that I'm not being defit here, but it it creates a a more challenging um situation. So, and and on top of it, of course, it's not just a crisis of of the economy, it's also a crisis of the world order really, right? Um, so um I mean you you you said that um your book is on the fall of the west. So, I've been thinking of this crisis actually as like kind of a culmination point um in in in in in
17:43 the changing um uh uh status of of the United States in relationship to the rest of the world. And I think Europe and the UK has to think very hard how they position themselves in in in this um new new brave world that that we are looking at. Finally, I mean the threat of fascism is obviously on your mind um and it's on my mind as well. Um I mean just I mean what's your fear in terms of where this could lead politically and what is the answer? What should we be arguing for which is a credible coherent alternative uh to a broken economic model which is now again going to you know we're going to see because of illegal war we're
18:29 going to see hideous consequences for people. So what you know what what's the threat but what also what what what can we do about it? >> Yeah. Um so I personally don't really see how European democracies um can survive um the threat of the rise of the extreme right when centrist governments are complicit in this illegal war which is an illegal war that is crushing our economies in ways that um uh are that is extremely unequal um as I've tried to um establish. So it's um basically um adding fuel to fire in the cost of living crisis. Um but also it's it's like really um increasing the sense of
19:15 chaos, the sense of insecurity, the sense of lack of agency, the sense of um uh uh like kind of the world is just breaking down and there's nothing that we can do about it. Um which all of these these developments um uh really um end up helping um the extreme right. Um we see this in poll after poll that um people who voted for the extreme right um uh see their own financial situation as insecure. Um uh uh which doesn't mean that they necessarily are already unemployed or are already poor if you want so but they they feel um that they are insecure. They feel threatened. They feel um like the cost of living crisis is is coming at them and um the kind of um stability and certainty that they were accustomed to is is no longer
20:00 there. Um so I think the threat is is very real. So in that sense I think it's a kind of a choice of no choice for European governments to um uh not join this war to um uh uh not make military infrastructure available um to to the United States um and um uh to to really take a very clear stance um against um this war. Um uh um it's a war that is incredibly unpopular on top of it. And we we cannot um uh uh leave I mean when I'm saying we here I really mean like Democrats in the broadest sense. I don't think we can leave the anti-war stance um to to the extreme right. Um so I think basically we see now that um peace peace politics and and the question of
20:46 war peace is an affordability issue. um uh like there's no no um solution to the cost of living crisis when you let these kind of wars um uh uh rip apart um your economies and and and societies. Um but of course beyond that um we we do need economic measures. We have talked about how much is already in the pipeline. So even if the war was to stop tomorrow um a a policy intervention would be necessary. On my mind this policy intervention should be um multilateral. I know I know that I know this sounds almost naive in the year 2026, but um uh I mean looking at at at how this really is is an inflation crisis unleashed um by by a war that many countries don't want anything to have to do with really.
21:34 Um, I think the the best response will be for Europe and um the UK and um Asian countries um to cooperate um and uh basically defend a price ceiling um instead of pri paying these um outrageous prices um for oil and also gas um uh uh that is exported um from the United States. Um that that would be I think an a first important step. Um uh in addition I think it would make um a lot of sense um to impose winfall profit taxes. We had those windfall profit taxes um in the UK and in Europe in the last energy crisis. They could be implemented pretty much tomorrow. I mean those are on the books. We can debate whether they have been perfectly designed or not and so on. But um uh the the the swiftness of intervention really
22:21 matters here. Um because uh if companies have an expectation that um windfall profits are going to be taxed away, they will try to or at least there's some incentive to avoid windfall profits. Um whereas if if there's no such um such tax inside, then um there's uh only incentive to reap as much windfall profits as you can. Um that's the second layer that I would recommend. But then as a third layer, we also have to think about um uh what can be done at the at the retail level. what can be done for consumers directly. Um, Luxembourg has a price stabilization scheme for gas at the pump where the state basically um controls this the the the price at the pump and then adjust it o over time. Um uh that I think is is a reasonable model. But given that we are looking at
23:07 um a threat of physical shortages, it's not going to be enough to just you know keep the price of uh of gas at the pump down and then like just have people keep driving as much as they want to. Um, we also need um uh uh uh policies that make um uh public transport basically I think free at this point. Um we need policies that incentivize um biking. I know this sounds a bit like you know a hippie response in the middle of a crazy crisis but um I I do think that there is a lot of scope for people to switch to these alternative means of transportation and um if economists say that you have to rely on high prices um so that people don't drive. I mean at the end of the day I would say that the relative price is what matters. People look at how much does it cost me to take the tube um or bike and how much does it cost me to
23:52 drive. Um and if taking the tube um is free and biking gets you a bonus um then that relative price um is is right um uh uh generally speaking and in this crisis even more. But also for utilities um in Germany I I advised the German government last time around 2022 where we designed what um we call in technical terms a nonlinear price scheme. So basically the the the the the the basic allowance that people need to heat and cool their homes to have um uh to have um gas for cooking and so on um is is stabilized. Um uh but if you consume beyond such a basic allowance you have to pay higher prices. With that you achieve two things. On the one hand, you
24:38 uh create um uh security for people that they can't pay um for the basic need um uh stuff that that they have to fulfill. Um but at the same time, you keep an incentive to save um uh those scarce resources um at the margin. Um unfortunately, I mean, depending on how much longer this um war lasts and um how how severe it gets, I think that we also have to think about fair rationing protocols. No one wants to talk about rationing. It's one of the ugliest economic policies. Uh not, you know, I don't find it nice either. Um but uh I think the the the the the ugliest form of rationing is um is um rationing by price explosions. Um so if you just like let the prices go through the roof, it
25:23 means that basically only rich people can afford um these these basic resources um essentials um that everybody needs, which is the least fair um form um that we can think of. And given the crisis of um of of democracy, I think this is not only um like you know unfair in a in a in an abstract sense but also presents a very um uh real threat um to to the organization of of of our societies. Um so that that is something that I think governments have to think about um and be prepared. Um uh um that and that is not only about um uh uh consume you know like who gets what in terms of final consumption that is also about how can you make sure that
26:10 basic infrastructure services um have the energy that they need. How can you make sure that um the the the this the potentially scarce aluminium goes into solar panels and uh wind farms instead of luxury um cars. um you know like kind of I mean uh in the in the context of of the green transition in the context of um securing um critical infrastructure um and and the working of critical supplies um uh uh those need to be um uh need to be secured and from the last energy crisis um I was absolutely blown away by how little capacity the German state had um in determining for example what kind of stuff needs to um uh uh uh uh keep up so that we have clean
26:56 drinking water. I mean stuff like that, right? Which, you know, gets you into the details of critical infrastructure. But we have relied so heavily on markets and privatized companies and uh um uh uh privatized um services um in in recent decades that uh state capacity has eroded very dramatically and it's a tall order to um recreate that in a short on on the like shortrun scale that we are looking at in this crisis. But um basically you have to start doing this um on day one hoping that you won't need it. But it's like you know like a fire drill um where you do the exercise um because it makes sense to be prepared um but and you hope there will never be a fire but if there's a fire you know what you're doing and right now I think that the likelihood of a fire is already very
27:42 high. So it's really the last second to um come up with such emergency protocols. We didn't talk at all about hunger. Um, and I mean that's a question that is not top of our mind um living in the UK or Europe even though food insecurity did increase in the last crisis. But um in the previous um uh world food price crisis um uh that that that came in in the wake of um uh uh the Russian attack on Ukraine um uh um we have seen that 10 years in the progress in the fight against global hunger was erased um within the span of just about a year as a result of these price explosions. At that time we didn't have any physical shortages on the global level. This time around we are looking at fertilizer prices that are so high that um uh significant um parts of of
28:30 the farming u uh uh population might decide um not to plant or plant different stuff. Um but also it might uh uh uh there are already like kind of physical limitations in the supplies of fertilizers. So in other words, um this time around there could be actual physical um u supply shortfalls um uh for basic food staples um which means that this crisis um uh is already costing um many lives in the Middle East. But um is very is unfortunately quite likely um to cost um uh uh uh many many lives um uh uh uh and and and undermine many many livelihoods um across the world um uh uh uh due to to to the threat of hunger. The World Food Program estimate that 45 million people could um newly um uh be um uh uh uh be
29:18 um uh under threat of my my nourishment be affected by hunger. So, I just wanted to put this in here because I feel like um only worrying about us not being able to drive as much kind of misses a bit the the the the bigger picture and and and also the extreme inequalities between how this affects the global south and the global north. >> Really searing and shocking stuff and a massive wakeup call for all of us. Um, I think people are in the breaks position without quite knowing what exact impact is heading in their direction and we need to be prepared because we're in the middle of of a grave great crisis. Um, please like and subscribe. Leave your thoughts, comments, do share the video. But honestly, Isabella, absolutely fascinating. Do buy also pre-order book of course, anti-fascist economics. Uh,
30:04 but honestly, really appreciate it. Thank you. >> Thanks so much for having me.
