Trump threatens tariffs as renewed conflict, soaring debt, AI frenzy put markets in red

(Originally published June 29 in “What in the World“) Another day, another ceasefire exchange of fire.

The U.S. and Iran resumed attacks and counterattacks, as the U.S. retaliated for Iran’s attack last Thursday on a cargo ship with two days of weekend strikes against Iranian air defenses and communication facilities in two Iranian port cities on the Strait of Hormuz and Qeshm island. Iran responded with attacks on U.S. bases in Bahrain and Kuwait.

Trump’s 60-day ceasefire agreement seems largely in tatters, despite the U.S. allowing Iran to resume oil sales and making other concessions to secure peace talks and open the Strait. Talks, however, look set to resume after a brief suspension and a shift in venue from Switzerland to Qatar. Traffic through the Strait, meanwhile, remains at roughly a third pre-war levels and Japanese shipping operator NYK’s CEO said traffic is unlikely to rise to even half normal flows until the threat of mines is eliminated.

Not only do Iran’s renewed assaults belie Trump’s claims that its military has been destroyed, but they also suggest that Tehran, as Texas A&M University Associate Professor and Rice University fellow Mohammad Ayatollahi Tabaar posited earlier this month, has deduced that conflict is preferable to diplomacy. Maintaining control over the Strait ensures that Tehran holds the West hostage over oil supplies. It also, according to Tabaar:

“…seems to be helping Tehran increase its international power. By striking Arab states that host American bases, Iran has succeeded in driving a wedge between U.S. officials and their Persian Gulf partners, who desperately want a lasting settlement. By closing the Strait of Hormuz, it has forced a collection of countries around the planet to acknowledge its power and negotiate over the fate of their ships…. The Islamic Republic’s strategy, then, is not merely to survive and outlast the United States… Instead, it wants to fundamentally alter how Tehran is dealt with by the United States, U.S. allies, and indeed, the wider world. It aspires to be a pole in a multipolar order, and it believes that the war is helping it achieve that goal.”

Against this backdrop, the Bank for International Settlements warns that supply chain disruptions, rising inflation, and record levels of government debt are raising the risk of stagflation. They’re also creating a dangerous global financial mix made more combustible by something it has been warning about since at least last year—an enormous buildup of leveraged bets by hedge funds in the market for government-bond derivatives. The stock market is similarly being inflated by massive amounts of debt. The amount of cash investors have borrowed from brokers to buy stocks rose 51% in May from the same month a year ago, to $1.4 trillion. More investors are also pouring funds into exchange-traded funds that borrow against their cash to buy stocks.

And what might set off this fireworks factory of risk? The BIS says to look no further than AI:

“The current surge in capital expenditure could prove unsustainable if supply bottlenecks restrain production. Intense competition for market leadership may fuel overinvestment further, as seen in previous innovation waves, increasing the risk of a sharp reversal if AI payoffs disappoint.”

Already, data centers grinding out AI slop are straining the U.S. power grid, the head of the country’s largest utility warns. U.S. power prices have climbed 7% in the past year and U.S. power demand is forecast to rise another 39% by 2035.

Trump, however, has returned to an old diversion—trade. Over the weekend, he threatened to impose new, 100% tariffs on imports from any European country imposing a digital services tax on U.S. companies operating there. Austria, France, Italy, and Spain already levy such a tax, and Belgium is considering one. The levies are essentially sales taxes on digital-services revenues, designed to recapture taxes multinational firms avoid by booking profits in low-tax jurisdictions such as Luxembourg. Trump’s threatened tariff would essentially scrap a new trade deal with the European Union that sets tariffs on many EU imports at 15%.

But Americans have more than higher prices for fuel and European pharmaceuticals to worry about ahead of their 250th independence celebration this weekend. Even as a record heatwave in Europe that has contributed to 1,300 deaths moves east, a summer heat wave is spreading across the central and eastern United States, bringing heightened risks of wildfires, severe thunderstorms and floods.