"The Strait of Hormuz and the Domino Effect"
by John Wilder
"When I was younger, I was reading the book "Liar’s Poker" by Michael Lewis. In the book, the author related the story of how he was on the trading desk when news of the Chernobyl reactor meltdown hit. His co-worker, a seasoned trader who’d seen it all, looked at Lewis and said two words: “Buy wheat.”
The reason was simple. Ukraine was the Soviet Union’s biggest supplier of wheat. Now, radioactive wheat would have sounded cool in the 1950s. Imagine the cereal ads: New Atomic Pops™: NOW FORTIFIED WITH GAMMA RAYS! The seasoned trader, however, knew there was going to be a shortage of wheat on the world market since the RDA of uranium isotopes has been decreased under the Make America Healthy Again agenda rolled out. But Chernobyl happened. The consequences? One event, one domino, and the price of bread halfway around the planet starts twitching like a tall tweaker on Tang™. That’s how fast these things move when the stakes are real.
In a more serious world where consequences were to be a thing that actually happened, I’d bet on a huge economic tidal wave incoming from the current Israel-America-Iran War. Ten to twenty percent of the world’s daily oil supply is stuck behind blockades. To top it off, 14% of Qatar’s liquefied natural gas production is offline, and won’t be able to be repaired until 2029 or 2031. Then, the Strait of Hormuz: closing, re-opening, closing again like a game of “duck, duck, missile” has already tumbled a lot of dominos.
Right now, the Strait isn’t exactly a freeway. Tankers are rerouting, insurance rates are through the roof, and every time someone blinks the flow sputters. One day it’s open enough for a few supertankers to sneak through. The next, it’s blocked again and prices expand like Madonna’s face after whatever it is she’s injecting into it.
Those first dominos are easy to spot, and they were the subject of a recent post. Fertilizer production is down because natural gas is the key feedstock, so (domino falls) food prices are headed up. Gasoline, jet fuel, and bunker fuel costs are up, so (domino falls) transport prices are up, too. Trucks, ships, planes, and everything that moves stuff from farm to factory to your grocery shelf gets more expensive. Freight rates for everything from soybeans to sneakers start climbing. Those are the obvious ones.
But dominos don’t stop at the first few if there are more in line. Before the big inflation wave really crashes ashore, weird things start happening in the markets. Gold is up on good news and down on bad news. Same with silver. Why? Because these are assets (at least the paper versions that pretend to be gold and silver) that people can sell fast and clean to cover margin calls, and other ways that they’ve leveraged the market. Each domino leads to other consequences.
What are the downstream consequences? Political unrest? Certainly. We’ve seen it before. We’re seeing it now. When food prices spike, people in places that were already living on the edge don’t write polite letters to their congressman. They take to the streets. Empty bellies and expensive diesel have a way of turning into pitchforks and torches. And what about a complete redo of the world economic stage? Yeah, that’s a hell of a big Twinkie®, er domino. But, it’s looking more likely every day.
Here’s the part that should keep you up at night if you’re the kind of person who still believes in fairy tales about “the system.” In a world where almost any country can convert whatever Christmas wrapping paper they crank out of their printing presses into any other currency almost instantly, why does the world need the dollar? I’ve been asking this question forever on this blog.
I have absolute certainty that the dollar is the same as a cryptocoin made by Algerian, Albanian, or Albigensian pirates: it’s a meme. It’s just a meme that everyone has bought into for 100 years or so. If I can dump the Zimbabwe Zloty straight into Seychelles Shekels, well, no need for dollars as the go-between as I trade my diseased goats for your rotten cocoanuts. No need at all.
Marco Rubio even let the cat out of the bag the other day when he said that in the future the United States wouldn’t be able to put sanctions on countries anymore because other countries wouldn’t be using the dollar very much. Now that’s a huge domino! It was going to happen. There was no way the world was going to forever let the United States print dollars forever and have people send us stuff like oil from the Orient or gold from Germany or PEZ® from Paraguay while we shipped them electronic representations of paper money that was now just too expensive for us to bother to print.
We’ve seen this domino before. A nation that ceases to be a nation and starts to become a financial entity is toast. One example was Spain. They pulled in all that New World gold, let their economy wither, and offshored the real work to places like the Netherlands because they could not ditch the Dutch. For a while it looked like Spaniards were on top of the world. Then the Indians who gold ran out, and the bills came due. The final nail in the coffin of Spain, which had been declining for hundreds of years? When it ceased to be a military power that anyone noticed. The Spanish-American War was that moment for Spain. In the end, I think the Spanish were tired of being Spain since it was so much work, and were more than happy for Great Britain to take the helm.
But that was then. Now Great Britian looks more like Spain circa 1870. The Royal Navy has more admirals (40) than total warships (25) and only six plausibly active surface warships. Guess that Britannia shan’t be ruling the waves of anything larger than a hot tub anytime soon.
Most of the time, nothing happens. Markets drift. Politicians talk. Central bankers print and pretend. Then that domino hits, and it happens all at once. One day the system is humming along on just-in-time deliveries and faith in the reserve currency. The next day the Strait is blocked for real, fertilizer plants shut down, grocery shelves get spotty, and suddenly everyone remembers that energy isn’t optional and cold showers suck. Energy is the blood in the veins of the whole machine.
When the price jumps, everything else has to adjust: wages, rents, retirement plans, and government budgets. The dominos don’t ask permission. And here’s the part nobody wants to say out loud: the United States has been running on cheap energy and the dollar’s special status for eighty years. Both of those props just got kicked. Hard. The reset isn’t coming in some distant future. It has already started.
The only question is how many more dominos have to fall before everyone admits the board has been tipped and the Monopoly™ pieces are stuck in the Cheez-Whiz™ covered Rice Krispie® treats. In the end, dominos don’t care. They just fall. One after another, faster and faster, until the structure is gone. When the last domino drops, the only thing left is whatever you built that wasn’t made of paper and promises. And sweet, nutritious, gamma rays! Remember, Kim Jong Un and Dominos™ have a lot in common: they can both make a crispy Hawaiian in less than thirty minutes."
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