The news from the BBC’s Jeremy Bowen that the US and Iran are inching towards a deal raises an inescapable question: what was the bloody point of it all? For years, we have watched the West’s foreign policy indecision. A costly entanglement in the Middle East, billions spent on military hardware and diplomacy. The market has priced in a certain level of geopolitical risk, but a deal now forces a recalculation of the entire investment thesis behind the conflict.
Let’s start with the bottom line. The war in Iraq, the sanctions regime, the skirmishes in the Gulf. All of that was supposed to deliver a definitive shift in the balance of power. Yet here we are, contemplating a deal that looks suspiciously like the one we could have had a decade ago. The market hates uncertainty, but it also hates wasted expenditure. If this deal goes through, investors will eagerly ask: what was the return on that investment? The answer, judging by the terms being discussed, is a losing one.
Consider the fiscal arithmetic. The US has spent trillions on defence and security in the region. The UK has followed suit with its own commitments. All of that debt must be serviced. If the deal reduces tensions, it might lower the risk premium on oil and stabilise the Gulf. But it also admits that the cost of the alternative was too high. Central banks will note this; they are watching inflation expectations and the yield curve. A sustained peace would be deflationary for oil, yes, but it also removes a key justification for the bloated defence budgets that fuel national debt.
The real story, however, is the signal it sends to markets about resolve. The US has a credibility problem. A deal with Iran, after years of threatening the opposite, is a capitulation of sorts. It tells the world that the West’s willingness to pay for war has a limit. This will embolden other players. Russia and China will see a window to exploit. Capital flight from the region could accelerate as investors reassess the durability of any peace. The dollar might strengthen briefly on reduced risk, but the long-term cost is a loss of strategic influence. That is not an asset that appears on any balance sheet, but it is the most valuable currency there is.
We must also look at the domestic angle. The UK’s fiscal position is precarious. Gilt yields have been volatile, and any whiff of increased spending on foreign adventures will be met with howls from the bond vigilantes. A deal that allows for reduced military expenditure would be welcomed by the Treasury, but the political cost of such a U-turn is immense. The electorate has been sold a story of strength and resolve. To abandon it now smacks of incompetence. That is a risk that cannot be hedged.
Inflation is the silent assassin here. The war years have seen energy prices spike, feeding through to core inflation. If the deal lowers energy costs, it gives central banks room to ease. But that is a double-edged sword. It could also reignite demand and fuel the very inflation they have been trying to tame. The Bank of England will be watching the oil futures curve closely. A sharp drop could be disinflationary in the short term, but if it leads to a surge in consumption, we could be back to square one.
Ultimately, this deal is a repudiation of the entire war effort. It is a statement that the costs exceeded the benefits. For a financial editor who has spent two decades analysing markets, this is the most damning verdict of all. The market will reward the immediate certainty of a deal, but it will punish the loss of credibility. The premium on US treasuries may rise as a result, reflecting a world where the hegemon is not as dependable. And that, my friends, is a cost that will be paid for years to come.
The bottom line: The US-Iran deal closes one chapter but opens another. The question of the war's purpose has been answered with a loss. Now we must calculate the opportunity cost of the next chapter.
