Prominent economist and investor Nouriel Roubini told CNBC that US President Donald Trump is likely to escalate the war with Iran, putting the country at risk of “1970s-style stagflation” if things don’t go as planned. Speaking with CNBC’s Carolyn Ross on Friday at the Ambrosetti Forum in Cernobbio, Italy, Roubini, who is known for predicting the 2008 global financial crisis, rejected the notion that President Trump is “desperately looking for an exit” to end the war. Markets have expressed optimism about the possibility of resolving the dispute in recent days. “People are saying they want this war to end because it’s hurting the economy, it’s hurting growth, it’s hurting inflation, it’s hurting the midterm elections, which is low in the polls,” he said, referring to November’s parliamentary elections. “But if you think about it, the damage has already been done. If a ceasefire happens on Iranian-style terms, he will look like a loser. His credibility will suffer and he will certainly lose the election,” Roubini said of Trump. “My argument is that, counterintuitively, he will decide to escalate.” “He intends to escalate by working with Israel, the Iranian leadership and the military to seize Kharg Island and continue bombing it,” he said, outlining a scenario in which “everything goes well. Perhaps this escalation could prolong the war a little longer, but then there could be regime collapse.” This could mean oil prices could rise in the short term, but the regime change that President Trump has called for in Iran could result in “a better situation for the world in terms of geopolitical stability,” Roubini said. But he warned of another scenario in which, after President Trump’s actions escalate, “If Iran is able to continue its blockade of Hormuz and attacks on Gulf oil facilities, we end up in a 1970s-style stagflation.” “I think at this point he’s going to escalate. From his perspective, the value of the option of winning the war makes it worth taking that risk,” he said. On Thursday night, President Trump announced that the moratorium on attacks on energy facilities would be extended for another 10 days to allow talks toward a peace agreement. President Trump said the moratorium would expire on April 6, adding that “talks are ongoing and…are progressing very well.” The latest information comes as the United States sends thousands more troops to the Middle East. Roubini said Friday that his base case is a slowdown in economic growth, not stagflation or recession, but told CNBC that markets were too optimistic about President Trump’s desire to quickly end the war. “If there is an escalation that doesn’t end quickly, it becomes an either-or situation. If you escalate, you win, and that’s better for the world and for the market in the long run.” “But if we don’t escalate and win, we will end up with the stagflation of the 1970s. So the question is whether the market is pricing in the tail risk of ending in a long war with shocks like the 1970s, and then having stagflationary effects on the world. This is not my criteria, but it’s probably a tail risk that the market is not fully pricing in at the moment.” No octopuses this time? Roubini noted that the Nasdaq Composite Index is trading near correction territory as bond yields around the world rise rapidly. But while market pressures have previously forced Trump to “essentially back down and bow out,” Roubini argued that the current situation could be different. “The problem is that if he resigns now, he will lose credibility. He lost the war. The current government is in power. He will[then]lose the election,” he told CNBC. “So I think the only option left for him at the moment is to escalate, because if he escalates, there are world situations where the (Iranian) leadership is quite likely to collapse, and Iran’s performance in the midterm elections is not too bad. If it stops now, he will definitely lose.” In that sense, market discipline is not as much pressure on him because he has to bet everything on tail risk. ”
