To try and summarize:
1. Strait closure
2. Oil prices rise sharply
3. Net importers of oil (Europe, Asia) get pressured into wider current account deficits (due to worsening terms of trade)
4. Either, they sell some of their fx reserves, or they require more foreign credit (by definition, as the other side of their CA deficit) to fund their larger energy import bills
5. If they sell their fx reserves (like US Treasuries), this puts downward pressure on UST's/upward pressure on UST rates
6. At the same time, GCC oil exporters suffer a (huge) decrease in dollar revenues due to the Strait closure= petrodollar recycling (credit, mainly to US) shrinks instead of rises so they turn from creditor to debtor (Kuwait ended up in -245% current account, in early 90s)
6. "Higher rates one place, lead to higher rates everywhere" = everyone issuing more and more debt into constrained demand/liquidity = higher rates/lower prices of that debt
7. Higher rates everywhere lead to higher cost of credit
8. Higher cost of credit tighten financial conditions, slow growth, and raise debt-service costs- pushing already indebted economies toward BoP crisis
9. Slower growth = recession = worsening of fiscal deficit = even more debt must be issued *and purchased by someone*
10. If supply of debt outpaces demand, debt prices must fall/yields must rise
Doom loop, without liquidity injections
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