For this week’s newsletter, we highlight international developments and financial discussion that exemplifies the changing world in which we live. First, we examine Iran’s response to the Israel’s Damascus strike against the backdrop of the suffering of Gazans. Then, we bring up a discussion of whether the global financial system has changed for the better, or if it still exhibits structural weaknesses. We then move to Ukraine’s dire situation in its struggle against the Russian invasion. To end this week, we touch on India’s political and economic future, with elections coming up soon.

Iran Responds to Israel’s Attack While Palestinians Suffer

The Middle East Could Still Explode: Iran and Israel May Not Be Finished

Ali Vaez, Foreign Affairs

Retaliation or de-escalation? Israel’s dilemma after Iran’s attack

Louis Imbert, Le Monde

The Road to Famine in Gaza

Neve Gordon & Muna Haddad, The New York Review

Iran’s response to Israel’s attack on Tehran’s Damascus consulate came in the form of over 300 drones and missiles launched directly from Iranian territory. Despite Israel and its allies shooting nearly all incoming missiles and drone downs, the attack still has the potential to further threaten the region. Iran’s longstanding strategy of funding an ‘axis of resistance’ – AKA various Islamist militia groups around the Middle East – continues to disrupt the region, and Tehran’s burgeoning nuclear program is still seen as an existential threat by Israel. Israel, in response, has operated covertly in Iran, targeting nuclear facilities, scientists, and more. Despite the animosity, neither side wanted hostilities to erupt into full-blown war. However, Hamas’ October 7th attack on Israel, along with Iran-backed militia groups’ support of it, changed the relationship. Israel’s Damascus strike may have pushed Tehran to embrace confrontation, such as the recent retaliatory attack. Despite very little damage being done to Israeli forces, if Israeli officials decide to respond in kind, the situation could quickly spiral out of control – a consequence that nobody would profit from. Prime Minister Netanyahu is being pressured by his right flank to follow up on the attacks, and there may be incentives for him to instigate a wider conflict to stave off a political loss once violence calms down.

A violent escalation would prove disastrous, perhaps most of all to the Palestinian people. Since Hamas’ October 7th attacks, Israeli officials have carried out a campaign of deliberately sieging Gaza – cutting it off from basic essentials, including water, electricity, and food to the strip’s civilians. Many analysts believe that this official Israeli policy – namely the intent to deprive Gaza of essentials and a willful disturbance or blocking of humanitarian aid – is a crime against international law. Since the attacks, Israel has likely killed over 32,000 Palestinians, around which 13,000 were children. Almost 2 million people have been displaced in the Strip. Meanwhile, humanitarian aid workers have been killed in the midst of the conflict, adding to the misery and international outcry. Experts say that Israel’s ‘sieging’ of Gaza is part of a longstanding policy to use food insecurity as a weapon against Palestinians, a policy that has seen Israel repeatedly and systematically damaging the Strip’s agricultural potential, restricting fishing, and decreasing the access to drinkable water. The Strip’s future is still unclear, but more likely than not, the region’s recovery will take years, if recovery is even possible.

Has the Global Financial System Changed for the Better?

The overlooked threats to the global financial system

John Plender, Financial Times

What eight centuries of data tell us about interest rates

Gillian Tett, Financial Times

Is the Boom-and-Bust Business Cycle Dead?

Talmon Joseph Smith, The New York Times

Since the 2008 financial crisis, several attempts have been made by regulators to address the fragility of the global financial system. And yet, as some experts argue, the fragility still exists. Stricter rules haven’t stopped institutions from taking risks, as shown by the high-profile bank failures early last year. Traditional banking is being overshadowed by less regulated institutions (such as shadow banks and private equity), while public and private debt is soaring to new levels. Many investors expect central banks to rescue markets in distress, which may encourage even more risk-taking. At the same time, rising public debt alongside high interest rates may undermine the safety of assets such as US Treasuries. The myriad of weaknesses in the global financial system warrant a major, fundamental series of structural reforms. Related to this fragility is the fact that recent reports of still-hot inflation spooked markets, causing many investors to now expect rate cuts to be delayed until November, which could have significant consequences for financial markets worldwide. Some researchers believe that it’s worth looking at historical data of interest rates, even going back eight centuries. The pattern they found was striking: long-term interest rates seem to have steadily declined since the first sovereign debt was issued. Despite a few upticks during major financial crises, the trend points to a long-term decline in the value of money. In the long-term, the researchers argue, interest rates are likely to continue their downward trend, with the recent period of high rates acting as a sort of offset for the near-zero interest rate period of the early 21st century.

Countering the worries that the financial system is due for a shock is the prospect that global markets have fundamentally changed in the last 40 years. It is a historical fact that major economies across the world have experienced near-regular upswings and crashes in economic performance. However some experts are questioning if the traditional business cycle has come to an end, at least in the US. Several factors have contributed to this idea, including the minimized role of cyclical industries, such as manufacturing and agriculture, in the US economy, which has seen consumption spending making up two-thirds of the economy. Since the 1980s, the US has only experienced four recessions with an average lifespan of nine months against periods of economic growth averaging 104 months. Improved data on supply and demand has alleviated the risk of inventory mismatches, which can cause mass layoffs. However, there is still reason for skepticism. Recessions are sometimes caused by factors unrelated to financial markets (such as Covid’s disruption), and asset bubbles can still cause downturns. On the political front, intensifying gridlock may stall policy that would support the economy, which has the potential to prolong future downturns.

Ukraine at a Crossroads

What happens if Ukraine loses?

The Economist

US Frustration Mounts as Ukrainian Weapon Stocks Run Out

Jennifer Jacobs, Alberto Nardelli and Peter Martin, Bloomberg

Russian Attacks on Ukraine Stoke Fears Army Near Breaking Point

Natalia Drozdiak, Peter Martin, and Kateryna Chursina, Bloomberg

Ukraine is currently facing a critical juncture in its conflict with Russia, as its military efforts are nearing a breaking point. Facing a dire shortage of ammunition and manpower, along with gaps in air defense, Ukraine is at its most fragile in almost two years of war. There is a looming risk of collapse in Ukrainian defenses, which would give the Kremlin an opening to make a major advance for the first time since the initial stages of the conflict. Given these concerns, the Biden administration is increasingly frustrated by delays in funding Ukraine. There is no “Plan B” aside from the $60 billion in military aid tied up in Congress. European leaders are urged to use profits from $280 billion in blocked assets to issue bonds for Ukraine, a move resisted by states like France and Germany. Urgent responses are also needed to fulfill Ukrainian requests for more Patriot air-defense systems from European stocks.

A Ukrainian defeat would not only be devastating for Ukraine but also a humbling blow to the credibility of the West, particularly America and Europe, which have supported Ukraine both morally and militarily. Such a defeat would raise questions about the West’s ability to defend its interests and stand up against aggression. The European Union would feel the brunt of the humiliation, and its “slow but steady” support for Ukraine would come under severe scrutiny. Populists and Putin supporters within the EU could use this as an opportunity to undermine the EU’s credibility, potentially leading to internal divisions and recriminations. Meanwhile, the geopolitical fallout of a Ukrainian defeat would depend on the shape of any peace settlement. If Russia controls not just eastern territories but the whole country, the EU would share a longer border with the aggressor, potentially leading to further attacks or attempts at conquest. The future shape of the EU, including its promise of enlargement to Ukraine and the western Balkans, would be affected, leaving these regions in limbo.

India’s Election and Economic Aspirations

What You Need to Know About India’s Upcoming Elections 

Dan Strumpf, Bloomberg

How India Can Take China’s Growth Crown 

Dan Strumpf, Anup Roy and Abhishek Gupta, Bloomberg Economics, Bloomberg

India, the world’s largest democracy, is gearing up for elections as Prime Minister Narendra Modi seeks a third five-year term. Scheduled in seven phases from April 19 to June 1, with vote-counting on June 4, the elections will determine all 543 members of the Lok Sabha, India’s lower house of Parliament. Modi’s main opposition remains the Indian National Congress, led by Rahul Gandhi, which has formed an alliance with over 20 smaller parties to challenge the ruling Bharatiya Janata Party (BJP). Despite facing criticism for economic challenges and accusations of undermining secular traditions, Modi maintains strong popularity, with around 80% favorability. If Modi secures a third term, his government aims to elevate India to the world’s third-largest economy by 2030. 

Modi’s aspirations may become a reality as India’s economy is poised to become the world’s next growth driver, challenging China’s dominance. With a booming stock market, increasing foreign investment, and new trade deals, India’s youthful market of 1.4 billion people presents immense potential. Despite its $3.5 trillion economy being dwarfed by China’s $17.8 trillion behemoth, India could overtake its neighbor as the global growth engine by 2028. If elected, Prime Minister Narendra Modi’s government plans to continue focusing on infrastructure development, workforce skill expansion, urbanization, and attracting more factories to achieve his goal. However, India faces challenges such as poor infrastructure, education, red tape, and a lack of skilled workers, which hinder its growth compared to China. Nevertheless, India’s manufacturing sector, supported by Modi’s incentives, is attracting global companies like Apple and Samsung. If India can address its challenges and capitalize on its opportunities, it may just take China’s “growth crown,” and emerge as a leading economy.