Economist warns of financial crisis risks from oil and AI

Financial markets are showing signs of strain reminiscent of periods preceding past crises, according to Guardian columnist Larry Elliott. A combination of soaring oil prices, a global bond sell-off, and warnings from artificial intelligence industry leaders are creating a volatile mix this September.

Market pressures and geopolitical risks

Oil prices have risen to more than $100 a barrel in recent weeks, heightening fears of persistent inflation and potential interest rate hikes from central banks. The increase is linked to the ongoing war in Iran and market skepticism over former US President Donald Trump's claims that a deal to reopen the Strait of Hormuz is imminent. While the closure of the strait has had a less severe impact than initially feared, the sustained high cost of petrol and diesel is also attributed to a global shortage of refining capacity.

Simultaneously, a sell-off in government bonds worldwide reflects growing investor anxiety. Elliott notes that the recent bond buybacks by the US Treasury, intended to reduce pressure on mortgage rates and consumer debt, signal how nervous the Trump administration is about current market conditions.

The AI factor and stock market fragility

The intervention by AI bosses calling for a slowdown in the industry's development has rattled Wall Street, testing the belief that technology stock growth has no ceiling. Elliott argues this warning was spectacularly ill-timed from a market perspective. Trump's rejection of tighter AI regulation, partly driven by US-China technological competition, adds to concerns. With US midterm elections approaching, Elliott suggests the president is motivated to prevent an AI-led stock market bubble from bursting.

Financial markets now look as fragile as they have been since September 2008, the columnist states.

Lessons from 2008 and political responses

Elliott draws parallels to the 2008 crisis but highlights crucial differences. The 2008 crash stemmed from banks overexposing themselves to US real estate, whereas banks appear less exposed now. He contends that while some tech investments may be based on unrealistic profit assumptions, AI is likely to have a positive long-term economic impact, unlike the pre-2008 housing investments.

He warns that if a financial crisis turns into an economic slump, orthodox policy would be abandoned, with central banks halting rate hikes and finance ministries no longer prioritizing deficit reduction. The recent US Treasury bond buybacks are presented as a precursor to more vigorous intervention in a full-blown crisis.

In Britain, Chancellor John Healey faces pressure to raise taxes or cut spending in the upcoming budget. Elliott criticizes this approach as self-defeating, arguing it contradicts Labour leader Andy Burnham's call to rectify 40 years of neoliberal economics. He points to support for re-industrialization at the recent TUC conference in Brighton, where unions like Unite, RMT, CWU, GMB, and Equity demanded a more interventionist economic strategy.

Elliott concludes that complacency is a danger, and while current tensions may subside, planning for a potential financial meltdown remains sensible.