Prominent economists have warned for years that the low-volatility era of the 2010s has given way to a more fractured era, defined by trade wars, real wars and recurring supply shocks that policymakers are poorly equipped to manage.

• The Iran war leaves little doubt that this analysis is correct.

Why it matters: The war is pushing up energy prices and rattling markets — something that central banks can't neutralize with an interest-rate tweak.

• If these types of disruptions persist through the 2020s, policymakers face harsher trade-offs, higher volatility and a global economy that's structurally less stable.

Driving the news: Fallout from the Iranian conflict is playing out in financial markets — the S&P 500 tumbling 2%, crude oil spiking 8%, and more — after President Trump signaled a potentially protracted war.

• "We're already substantially ahead of our time projections. But whatever the time is, it's OK," Trump said yesterday, adding that the U.S. was willing to do "whatever it takes."
• Those comments came before reports of a potential blockade in the Strait of Hormuz, a critical passageway for tankers carrying about a fifth of the world's oil supply.

Flashback: It raises the risk for the type of supply disruption that has repeatedly been threatened by a slew of shocks over the past six years.

• It's more difficult for central bankers and fiscal policymakers to counter events that are sudden, external and unpredictable — a feature of a more "shock-prone economy" that European Central Bank president Christine Lagarde has warned about, including in a speech in 2023.
• "[W]e may be entering an age of shifts in economic relationships and breaks in established regularities. For policymakers with a stability mandate, this poses a significant challenge­," Lagarde said in a speech at the annual gathering of central bankers in Jackson Hole, Wyoming.
• "In the pre-pandemic world, we typically thought of the economy as advancing along a steadily expanding path of potential output, with fluctuations mainly being driven by swings in private demand. But this may no longer be an appropriate model," Lagarde added.

The intrigue: The Iran war is colliding with a once-in-a-generation technological shift.

• A prolonged conflict would threaten energy supplies, potentially scrambling the very foundation on which the AI boom rests. No one knows how the forces will interact.
• "A renewed burst of inflation — akin to what we saw in 2022 and 2023 in the fallout from the Russia-Ukraine War — could upend global growth this time because of the dependence of the AI-based growth technologies [that] depend upon cheap energy and electricity," Thierry Wizman, a rates strategist at Macquarie Group, wrote in a client note.

Financial markets are pricing in a big hit to the European economy from oil disruptions, paired with a general aversion to risk and higher inflation in the U.S.

Driving the news: The S&P 500 was down 2.5% mid-morning today after (bizarrely) rallying yesterday afternoon. European stocks were down much more, with the Euro Stoxx 50 down 3.8%.

• That reflects a steep rise in Brent crude, the global oil benchmark. It was trading at $84 a barrel in late morning, up from $72 on Friday.
• West Texas Intermediate crude was at $77 a barrel, up from $67 Friday.

The intrigue: Treasury bonds continued selling off as well, with the 10-year yield at 4.07%, up from 3.96% Friday.

• As we reported yesterday, the surge in Treasury yields despite geopolitical strife is a sign that the standard flight-to-quality behavior that normally appears at times of crisis is not intact.
• Rather, investors appear to see an inflation boost due to higher energy prices as a key driver of Treasury pricing — including the possibility that it will make the Federal Reserve more reluctant to cut rates this year.

Of note: The dollar index was up 1.04% this morning and is up 1.8% so far this week.

• That reflects a belief that U.S. assets are a safer bet than European equivalents, which are more reliant on Middle East oil.