Right at the start of August, three countries in the Middle East region – Pakistan, Saudi Arabia and Turkey – came together to sign the Mecca Joint Defence Agreement. Similar to NATO’s article 5, this states that any attack on one will be considered as an attack on all three and be met with a joint response.
The Americans have relied on Pakistan to mediate with Iran, while Saudi Arabia is America’s largest trading partner in the region, and Turkey is a crucial member of NATO. But essentially, this agreement signals that they have lost confidence in the US, and that the US is losing control in that region. President Erdogan of Turkey has floated the possibility that other nations in the region might also join the Mecca agreement, explicitly naming Egypt.
Much of the impetus for this comes from the ongoing conflict that the US has started with Iran, but is unable to finish, and which is causing a great deal of economic pain to other countries. And the longer the war continues, the greater the risk of a realignment of power within the region that might lead to other conflicts.
And Israel’s actions – which amount to a general land grab – in Gaza, the West Bank and Lebanon also play a part. This has led to horrified reactions from the European nations that really want to support Israel but no longer feel they can. And it has blown apart the US president Donald Trump’s Abraham Accords concept that was meant to bring more stability to the Middle East followed by plenty of lucrative building contracts. For its part, Israel cites the security threat from Hamas and Hezbollah, both of which are funded by Iran, which appears to have achieved its aim of leaving Israel isolated and vulnerable.
There are also signs of strategic stresses in the Asia Pacific region that will worry both the South Korean and Japanese governments. The US Navy’s poor management of the rotation of ships engaged in the blockade of Iran has forced a redeployment of a carrier from the Pacific, depleting the US Navy presence in that region. The US has also curtailed planned war games with the South, calling into question America’s commitment to South Korea’s defence. Trump has explained this through his admiration of the North Korean dictator Kim Il Sung, though others have questioned if the US has the military resources to both defend the Pacific and fight in the Middle East. Naturally the North Koreans, who have undoubtedly benefited from Russian missile technology, have taken advantage of this to test more missiles.
The strategic dangers and risks of a third world war are obvious. Russia has threatened to expand the war in Ukraine further into Europe and has routinely brake-tested defence response times across Europe, the Baltics and Scandinavia. At the same time, this war is linked to the conflict in the Middle East through Iran, and to the tensions in the Pacific through North Korea, with China waiting in the wings to take advantage. Throw into this the various mutual defence pacts that may or may not be honoured and we have all the ingredients for a very bad outcome.
In the meantime, the US has announced an economic D-Day against Iran, with Treasury secretary Scott Bessent threatening ‘the single greatest financial offensive ever’, though Iran has already withstood decades of US-led sanctions. If anything, this initiative simply confirms that the US has failed to break the deadlock either militarily or diplomatically.
As part of this initiative, the Americans have threatened punitive sanctions against other countries trading with Iran. That would lead to a showdown with China, which is opposed to the US sanctions and imports significantly amounts of Iranian oil. China is more than capable of standing up to America, as it made clear in last year’s trade war though would probably prefer to avoid further turmoil.
The latest economic figures from China’s National Bureau of Statistics showed that its economy is continuing to falter, with both industrial output and retail sales falling in July. There is still growth in the Chinese economy but it is not at anything like the speed that we have seen in the past. Li Qiang, premier of China, has said the solution is to push more exports to make up for weak domestic consumption, with the state news agency Xinhua reporting him telling a meeting of China’s state council: “We should actively stabilise external demand, expand mutually beneficial international economic and trade cooperation and promote balanced trade development.”
Nor is America immune from the economic fallout of war with Iran with increasing prices for gasoline, which is now over $4 a gallon on average. There are also concerns over America’s Strategic Petroleum Reserve, which holds crude oil in some 60 underground salt caverns at four sites across Texas and Louisiana. Experts have warned that continuing drawdowns from this reserve risk damaging the geological structure of these caverns.
The US national debt has now passed $40 trillion, double what it was in 2016 at the start of the first Trump term. According to the Congress Joint Economic Committee this debt is rising by about $90,000 every second, or $7.8bn a day. The Congressional Budget Office is forecasting that this debt will hit $64tn by 2036. For now, US national debt is 126 percent of GDP, which is far higher than average, but America has more leeway than other countries because of the size of its economy and the fact that the dollar is seen as the world’s reserve currency. The debt has pushed up interest rates and this is filtering down into the broader economy to American consumers. In response, the US Treasury has attempted to buy back some of this long term debt to lower the yield rates but this has had only limited effect, with rising inflation now seen as a further risk.
This high American debt also has a knock-on effect on other economies, since there is a finite amount of money available for international borrowing. There is an additional squeeze due to the huge borrowing from tech companies to fund the AI boom. The result is higher yield rates with all the governments attempting to reengineer their long term borrowing. Some European countries are particularly vulnerable, such as France, with Britain and Italy also badly exposed. Spain’s solution has been to relax its immigration rules so that there are now more people paying tax, neatly spreading the debt burden, which is expected to fall below 100 percent of GDP this year.
Nonetheless, the ongoing US adventure in the Middle East is leading to rising inflation around the world, closely followed by increases in interest rates to counter that inflation. And at some point, the combination of a high debt ratio to GDP plus high interest rates and high inflation will spook the bond markets and lead to another global market crash. Nobody knows where the breaking point is so the longer the conflict goes on, the more nervous the market will become, pushing up borrowing costs elsewhere. Then again, a resolution to the conflict would immediately cool down the situation so no one is panicking at this stage. That’s still to come later in the year.
Nessan Cleary 
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