The U.S. economy currently finds itself in a precarious position, akin to a coiled spring on a global balance beam, poised to react to unfolding geopolitical events. Foreign direct investment (FDI) inflows into the United States recently plunged to a multi-year low. Together with an increase in job churn, this decline is deeply concerning for the country’s economic resilience. As a result, the U.S. shale industry has recently become the world’s largest oil producer. This increase in domestic oil production has done much to lessen the nation’s reliance on imported oil from the Gulf Coast.
This process has dramatically changed what energy security means for the United States. Now, it is no longer held hostage by potential closures of the Strait of Hormuz. These changes are more than cosmetic. Given recent calls from former President Donald Trump for China to purchase this sanctioned Iranian crude oil, it is clear that track and trace capabilities are needed. This statement may sound good, but it seems more like a political play than a diplomatic gesture. It helps put a lid on global oil prices while tackling climbing domestic alarm.
Despite these geopolitical maneuvers, the U.S. has witnessed a troubling decline in FDI, which now covers barely one-tenth of America’s current account deficit. U.S. Federal Reserve Chair Jerome Powell is doing his best to sound measured. He has taken this approach because he wants to “watch the smoke” before taking any decisive action to address economic pressures. Powell’s recent testimony brought more of the same, still stuck in that holding pattern and suggesting that the time to act had not yet come.
Indeed, in recent weeks the widely followed U.S. stock market has soared, propelled forward by what analysts are calling a geopolitical sigh of relief. At the same time, investors have developed a strong risk-on tone. Yet that enthusiasm has recently made an abrupt about-face. Geo-economic indicators point to fiscal breakevens for the U.S. on the ground in Riyadh, Baghdad and Abu Dhabi. This creates a precarious and perplexing economic reality.
The current climate is marked by a geopolitical barbell trade: on one side lies the potential for a peace dividend, while on the other, there is a significant buildup of arms. These artificial dichotomies are affecting market sentiment and investor confidence. As gasoline prices have jumped to over $5 per gallon, the alarming stakes have become clear. This concern is amplified as the nation heads toward a presidential election year when high fuel prices are considered the “political third rail of all time.”