Economists warn: The stock market bubble is more fragile than reliving the oil crisis of 50 years ago

Podcast: David Lin

Compiled & Edited by: Yuliya, PANews

The Strait of Hormuz is being squeezed, oil prices are surging, and the world is trembling, waiting for a replay of the “1979 Crisis”?

Don’t be fooled by appearances! In the latest podcast, Johns Hopkins University professor Steve Hanke pours cold water on panic: the real crisis isn’t in oil prices, but in the Fed’s out-of-control money printing and the shaky high valuations of the stock market. Additionally, this episode discusses the current bubble risks in the stock market, war impacts, and the geopolitical and global consequences of the Iran conflict.

PANews has transcribed and organized this dialogue.

Replaying the 1979 Oil Crisis? The Actual Risk Is Lower

David: Are we on the brink of a “Oil Crisis 2.0” similar to 1979? Looking back, the 1979 crisis started when the Iranian Revolution disrupted oil production from one of the world’s largest exporters. The sudden drop in supply tightened the global market, causing oil prices to skyrocket. In the U.S., the immediate effect was gasoline shortages, long lines at gas stations nationwide, and some states even rationing fuel. Rising energy prices pushed up overall inflation, prompting the Fed to sharply raise interest rates to control inflation. That crisis also accelerated the U.S. strategic petroleum reserve (SPR) buildup.

Today, markets are reacting again to geopolitical risks. The Strait of Hormuz, between Iran and Oman, is one of the world’s most critical oil routes, with about 20 million barrels passing through daily—roughly one-fifth of global consumption. As the strait is closed due to conflicts involving Iran, oil prices surge sharply. Steve, welcome back. How close are we to a second oil crisis unseen in nearly 50 years? What might happen next?

Steve Hanke: Glad to be here, David. To set the scene, let’s briefly review history. My first academic appointment was at Colorado School of Mines, a top mining university. In late 1968, I taught my first course on oil economics there. That same year, I edited a book titled The Political Economy of Energy and National Security, which discussed topics we’re talking about now. Later, in late 1985, I developed a basic model of OPEC predicting its collapse and oil prices falling below $10 per barrel. That indeed happened in 1986, and prices declined as forecasted. At that time, I was working at Friedberg Mercantile Group in Toronto, and based on my analysis, we held a very large short position, eventually accounting for over 70% of the London market’s diesel futures.

Comparing today’s situation with 1978-1979, I believe the potential for disruption now is actually lower than then, for several reasons:

• In 1978, Iran produced 8.5% of global oil; now it’s 5.2%.
• Middle Eastern production was 34.3% of the world then; now it’s 31%.
• U.S. production was 15.6% of global output in 1978; now it’s 18.9%, reducing dependence on foreign producers.
• Most importantly, our “oil intensity”—the amount of oil consumed per unit of GDP—has dropped sharply from 1.5% to 0.4%.

Oil Market: Supply Shocks and Policy Responses

David: Treasury Secretary Yellen recently said the government will issue a series of announcements. Oil prices have already surged to $86, and if the situation isn’t resolved quickly, they could go even higher. The government clearly doesn’t want gas prices at the pump to rise. Besides price controls, what else can the government do to stabilize gasoline prices in the U.S.?

Steve Hanke: Price controls will just cause long lines at gas stations because demand will outstrip supply. Without intervention, the market will clear itself, but at higher prices.

The quickest way to address the current shortage is to lift sanctions on Russia, allowing the massive “shadow fleet” of tankers to unload and sell stored Russian crude oil. In fact, the U.S. has already started shifting policy, permitting some Russian oil to flow to India.

David: How will U.S. allies react to easing sanctions on Russia? And what impact will that have on the Ukraine war?

Steve Hanke: Europe is suffering heavily from rising energy prices. Due to sanctions on Russia and the destruction of Nord Stream 2, natural gas supplies from Russia to Europe have been sharply cut. As a result, Europeans are now mainly buying liquefied natural gas (LNG) from the U.S., at roughly three times the cost of Russian gas. They are in a very tough spot, backed into a corner.

I think their move to turn to Russia is a grudging compromise. I’ve argued from the start that sanctions should not be imposed. I am a free trader and dislike sanctions, tariffs, or quotas at any time or place.

David: Do you think the Strategic Petroleum Reserve (SPR) will eventually be used? Isn’t that precisely the scenario the SPR was built for in the 1970s? Currently, the Department of Energy reports about 413 million barrels in the SPR.

Steve Hanke: They can do that, and it would help. Remember a rule of thumb: a $10 change in oil prices roughly translates to a 25-cent change in gasoline at the pump. As of our conversation on March 6, gasoline prices in most of the U.S. have already risen about 50 cents. That’s a big problem. War brings various costs: the direct military costs of munitions and fuel, the economic damages we’re discussing, and the extremely high human costs—most of which are innocent civilians killed. Moreover, with tanks full and the Strait closed, Iraq and Kuwait have recently had to shut down their largest oil fields, risking equipment damage and high maintenance costs.

The Truth About Inflation: Money Supply Is Key, Not Oil Prices

David: Let’s return to inflation. You said earlier that rising oil prices won’t cause inflation because inflation is driven by expanding money supply. But renowned macro analyst Mohamed El-Erian says the longer the conflict persists, the greater the risk of stagflation globally. Can you explain why high oil prices don’t immediately trigger inflation?

Steve Hanke: There’s a lot of false narrative in the media about “oil prices causing severe inflation.” Rising oil prices simply mean that oil, natural gas, and their derivatives are more expensive relative to other goods, but that doesn’t mean we face overall inflation.

A good example is Japan:

During the 1973 oil embargo, oil prices soared, and the Bank of Japan responded by increasing the money supply to accommodate the price rise, which led to severe inflation. But during the 1979 oil crisis, the BOJ refused to expand the money supply, and although oil prices rose, inflation did not follow.

Inflation is always a monetary phenomenon. You must watch the money supply. I believe the U.S. cannot achieve a 2% inflation target because broad money (M2) is accelerating, bank lending is surging, banking regulation is easing, and there’s political pressure to lower the federal funds rate. More critically, the Fed stopped quantitative tightening (QT) last December and has shifted to quantitative easing (QE), so its balance sheet is actually expanding again.

David: The U.S. economy unexpectedly shed 92,000 jobs in February, indicating a weakening labor market. Will the Fed slow down its rate cuts because of the current oil price surge?

Steve Hanke: No, I think they will keep a close eye on employment. By the way, this is partly “thanks” to Trump’s tariffs. They were promoted as a way to boost manufacturing jobs, which he kept telling us. But last year, manufacturing lost 108,000 jobs. Tariffs are killing employment. Looking at overall non-farm payrolls, jobs created last year were almost zero—only 181,000 in 2024, compared to 2.2 million in 2025.

So, this “tariff man” is destroying the job market. Don’t just listen to media narratives; look at the real data. That brings me to my “Hanke 95% Law”: 95% of what you read in financial media is either wrong or meaningless.

The Stock Market Bubble Is More Fragile

David: You mentioned at the start that the stock market is in a bubble. How exposed are the big indices to oil prices? Why do rising oil prices cause stocks to fall?

Steve Hanke: Clearly, companies that directly or indirectly use oil—like airlines or logistics firms—are hit harder.

But on a macro level, the PE ratio of the 1978-1979 stock market was about 8; today it’s around 28 or 29.

This means the current market is much more fragile than in 1978. When a market is in a bubble, it’s always vulnerable to external shocks.

The ongoing Iran-U.S. conflict is causing massive wealth destruction—not just from the direct military costs of munitions and fuel, but also from negative wealth effects in financial markets. If the bubble bursts, wealth shrinks. Those who profited from the stock market and sustain America’s high consumption levels will see their wealth diminish, leading them to cut back on spending—delaying new car purchases by a year or two. This negative ripple effect can impact the entire economy.

The Misconception of De-dollarization and Hong Kong’s Currency Model

David: South Korea’s president announced a 1 quadrillion won stabilization fund to cope with soaring energy prices. Many Asian countries rely heavily on oil imports. Will their fiscal interventions affect the dollar? There’s talk of “de-dollarization”—is that real?

Steve Hanke: There are two false narratives about the dollar: “selling off the U.S. dollar” and “de-dollarization.” Both are complete nonsense.

Looking at data: last year, net investment inflows into the U.S. increased by 31% year-over-year, with continuous capital inflows. The dollar against the euro—the world’s most important exchange rate—is very strong. After the outbreak of war, the dollar actually strengthened further.

People talking about de-dollarization ignore the data. Official U.S. Treasury figures and BIS data show that the de-dollarization narrative is basically rubbish.

David: Asian countries like the Philippines and Indonesia have had to pause rate cuts due to oil price threats, weakening their currencies. If you were advising their central banks, what would you recommend?

Steve Hanke: Stay the course. In places like Indonesia, you absolutely cannot relax monetary policy, or the rupiah will be severely damaged. These currencies are very sensitive to interest rates.

Speaking of Indonesia, if they had adopted my advice when I was chief advisor to Suharto—establishing a currency board system—they wouldn’t have this problem today. If the rupiah was fully backed by dollars and pegged at a fixed rate, it would be a dollar clone, like the Hong Kong dollar.

Look at Hong Kong: the Hang Seng Index today (March 6) is one of the few markets up. The HK dollar is issued by a currency board backed 100% by USD reserves, maintaining a fixed rate of 7.8 HKD to 1 USD. The HK dollar is essentially a dollar clone, so they don’t face currency devaluation worries.

U.S. Strategic Risks and Uncertainty in the Middle East

David: China imports an estimated 40-50% of its oil through the now-closed Strait of Hormuz. Although they still have the Malacca Strait route, oil supplies will definitely be affected. How do you think China will respond or intervene?

Steve Hanke: China will try to do what all Gulf countries, Turkey, and Russia want—stop this war. I don’t think China will just watch Iran fall; I believe they will take all necessary measures to support the regime.

David: Do you think this conflict could spiral out of control into a broader global war outside the Middle East? Iran’s foreign ministry says they are prepared for U.S. ground invasion if necessary.

Steve Hanke: In my view, it’s already out of control. There’s a lot of speculation about whether Iran’s Kurdish militias in northern Iraq might become U.S. proxies for ground forces. The situation is very murky. We are in a “fog of war,” relying on secondhand data for guesses.

A good friend of mine, former Saudi intelligence chief and former U.S. ambassador Prince Turki Al-Faisal, recently said in an excellent interview: Trump has no idea what he’s doing in this war. When blind men lead other blind men, that’s one thing; when delusional people lead the blind, that’s a big problem.

David: What is the ultimate goal of the U.S.? The supreme leader has been assassinated, most IRGC commanders eliminated, and regime change seems underway. Why keep going?

Steve Hanke: You act as if regime change is easy and guaranteed. According to Lindsey O’Rourke’s 2018 scholarly work The Hidden Regime Change, since WWII, about 60% of U.S. attempts at regime change have completely failed, leaving chaos behind. History shows regime change is a disaster.

The U.S. is involved in a doomed policy—don’t trust Washington politicians’ words. Trump’s goals keep shifting, but ultimately he’ll do what Netanyahu tells him.

David: Is this about containing China? The U.S. first controlled Venezuela’s oil (a friend of China and Iran), and now it seems to be trying to fully take over Iran, control the Strait of Hormuz, and cut off China’s oil supply?

Steve Hanke: Undoubtedly, China is affected, but only secondarily. As John Mearsheimer pointed out in The Israel Lobby and U.S. Foreign Policy, the Israel lobby wields enormous influence in Washington, pulling Trump into the fold. For 40 years, Netanyahu has wanted to destroy Iran. Israel alone can’t do it; it’s a major U.S. operation. Basically, the U.S. is fighting Netanyahu’s war.

David: And what’s the strategic benefit for the U.S.?

Steve Hanke: Very little benefit, but huge costs—economic, military, and political. The American public is very opposed. I believe the Republican Party under Trump will suffer a crushing defeat in the midterms.

Long-term, the consequences are even more destructive. Contrary to U.S. political propaganda, assassinating the supreme leader will turn him into a martyr in the Muslim world. That means, in the foreseeable future, the Muslim world will almost certainly become enemies of the U.S. We are creating a vast number of enemies for ourselves.