The Agenda with Steve Paikin (Audio) - Is Canada Heading Toward a New Economic Normal?

Episode Date: May 28, 2024

High inflation, supply chain disruptions, war and a potential geopolitical reshuffling have thrown Western democracies out of order. In his new book, Jeff Rubin, former chief economist for CIBC World Markets, writes about what the world will look like under these pressures. It's called, "A Map of the New Normal: How Inflation, War, and Sanctions Will Change your World Forever."See omnystudio.com/listener for privacy information.

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have all thrown Western democracies out of order. In his new book, Jeff Rubin, former chief economist for CIBC World Markets, writes about what the world will look like under these pressures. The book is called A Map of the New Normal, How Inflation, War, and Sanctions Will Change Your World Forever. And it brings Jeff Rubin back to our studio here in Midtown Toronto. It's great to see you again. Great to be back.

How you been, Jeff? I've been good. Good. Glad to hear it. Let's do a little excerpt from the book, and then we shall chat. Shelton, if you would, the graphic, please. In the past few years, the world has had clear signals of what the new normal is going to look like. The shift to a new normal is a shift to war. In the past few years, we have seen the conflagration of old frictions escalate into open

military conflict. But this has been preceded by other modes of warfare, economic, cyber, diplomatic, and most obviously, informational. Okay, let's start there. How do you know that what you are describing as the new normal is in fact that, as opposed to sort of a short-term burst of misery which we're going through right now? Well, I think it's important to differentiate between cause and effect. I mean, the war in Ukraine, for example, which was the original catalyst for this, may well be over. I mean, pending the election results, it could be over in six months. But that's not going to change the economic warfare. It's not exactly like sanctions are going to be dropped against Russia or China. And, you know, if you look around the world, it's not just Ukraine. There

are many fault lines. The Straits of Taiwan could blow up at any time. Gaza is a new front line. And there may be other front lines. But what we're talking about is the collision of two tectonic plates. And they're going to continue to collide. And where they collide is going to create a lot of economic buckling. And it's that economic buckling that brings that war front home to you. Characterize those two tectonic plates. Well, I mean, through most of the post-war period, there's been one global power, a hegemon in the view of some. OK, and that's been the United States. And the United States and its Western allies have enjoyed such overwhelming military and economic power that they can basically dictate terms to the rest of the world. And now that's being challenged,

not only by America's traditional adversaries, Russia and China, but by increasing number of economic heavyweights who are aligning themselves with America's opponents and calling for a change, a new world order where there's a multipolar world instead of a unipolar world. And what that means is a more equitable division of power and influence. OK, but I remember when Ronald Reagan was president, as you do, too. And people would say America is spending as much on defense as the next 10 countries combined.

They still are. I was just going to say. And I read in your book that they still are. So really, what's changed? They are spending, nothing has changed with America. It's what's changed on the other side. I mean, if you look at the last 20 years, the four fastest growing economies, China, Russia, India, Brazil, number five is Saudi Arabia, and they just joined. The U.S. is a distant 12th. So now, at least in economic terms, the U.S. is being challenged

in a fashion that it has not been challenged for the last century. Let's go back to the Russia-Ukraine war for a second here and talk about the sanctions. Because, you know, if you look at the whole globe, not that many countries are actually participating in these sanctions. So, Sheldon, I'm on page two at the top. Let's do this quote here from Jeff's book. Today, you write, sanctions tend to be seen as a diplomat's Swiss army knife, more of a peaceful tool than a weapon. Sanctions are announced as a means to bring wayward nations to their senses.

Those who impose them can say, at least we didn't go to war. But history shows us that sanctions are war. They are every bit as lethal. OK, follow up on that. Well, they have been. lethal. Okay, follow up on that. Well, they have been. I mean, the sanctions in World War I, over three quarters of a million Germans died of starvation, another 300,000 in the Ottoman Empire. However, today it's a little bit different. Russia does not stand alone. You know, the effectiveness of Western sanctions diminishes as the scope of BRICS grows.

And Russia and China and India have welcomed with open arms all the Russian goods that have been sanctioned in Western markets. So instead of, you know, the loss of European energy markets would have brought Russia to its knees. Last year, Russian energy export earnings set a record high. Having said that, do you agree that Western nations, those who are participating anyway, should have brought sanctions against Russia for its illegal invasion of Ukraine? Well, I guess that depends on whether you think this is just Putin's war, or what the other 144 million Russians think about NATO doubling its size after Gorbachev was given assurances that that would not happen. So it really depends on your view of history.

But whether you think it was justified or not, the fact is, it is what it is. And those sanctions not only have failed to stop the Russian war effort, those sanctions has boomeranged. Those sanctions are a double-edged sword, and they have wounded the very countries that have imposed them. So let's follow up on that. You think the sanctions have actually had a more deleterious effect on the countries imposing them than on Russia? That's right. Because when you sanction the world's top energyasure that a very large country has illegally invaded a very small country, and if sanctions are, at the end of the day, not the way to go, what should they have done? Well, they're doing what is probably, from their perspective, the best, a proxy war.

Because in a proxy war, your men and women don't come back in body bags. And that has a huge difference on public acceptance of the war. They're using Ukrainian troops as fodder. And as I say, that's preferable to American troops. But, you know, is that really that sustainable? I mean, that war could be over in six months. But what I'm saying is the sanctions stay. The military conflict may be over. The economic warfare is just beginning. And we saw that with President Biden announcing new measures of economic warfare against China with crippling tariffs.

Let me talk about two other tectonic plates with you, and that is climate change and energy. Which one, in your view, should take precedence right now in terms of government? Well, it doesn't matter which one, in my view, should take precedence. What matters is what has taken precedence. say next to energy prices themselves, our efforts to mitigate climate change have been a principal casualty of the sanctions war. Because whether we're talking about the coal renaissance in Germany, or whether we're talking about kiss zero emissions vehicle targets goodbye because those electric batteries made in China now have 100% tariff. What we found is that economic security has superseded our concerns of the environment. When people question, as they did in Germany, whether the power will come on when they flip

the switch or whether they'll be able to heat their homes in the winter, the environment quickly takes a back seat. What's your view on whether Germany and or Japan should have foregone nuclear power? At a time that they've just lost 55% of their energy from Russian gas supply, I think it's ridiculous. I think it's because the alternative, Steve, to closing down that nuclear power wasn't windmills or solar power. It was reopening mothballed coal plants. And it's not just Germany. In the UK, for the first time in 30 years, the British government has given a permit for a new coal mine to be developed because they're anticipating very strong future demand for coal as a power source. Do you understand this reticence by some governments to get into the nuclear power business? Oh, I understand it very

readily, and it has been cost. But let me just point out that who is the biggest builder of nuclear power plants? By a country mile, Russia. And they're building them in the developing world. So the point I'm trying to make is, Steve, if we're concerned about BRICS power that they have over fossil fuels. BRICS meaning Brazil, Russia, India, China, Saudi Arabia, Iran. And, you know, the lineup goes around the block of countries wanting to join, including Mexico. OK, if we're worried, you know, about that, just think of how much more control those countries will have if, in fact, we do decarbonize our economy? Where are all those electric batteries made? Where are the

rare earth elements that go into making all of these semiconductors come from? And so we're going to have to choose. Right now, President Biden is perfectly willing to sacrifice his environmental goals in the name of economic warfare. As the consequences of climate change become more extreme over time, the question will be, will future administrations in Washington make the same choice? Throughout your life and my life, the West has unambiguously been the economic powerhouse of the world, leading the economic order, if you like. Do you see us inexorably now coming to a time where the West is fading and Asia is rising?

Absolutely. Absolutely. I mean, on purchasing power parity, China's probably already bigger than the U.S., but even measured in U.S. dollar terms, within this decade, China will have a larger economy. Now, here's the question you've got to ask yourself. The Chinese and American economies are roughly equal, but U.S. defense spending is four times as much. Who do you think in the future will have more room to ramp up their military spending?

Well, China will have more room because the U.S. is already pretty much at the top of its game. The U.S. spends on defense more than the entire GDP of Africa. Is that done to preserve world democracy or are there other forces at play? We had an interview with a guy named Parag Khanna. Uh-huh. And I think he was in Singapore at the time.

He's a big thinker. And he had, well, on the notion of Asia as the new rising powerhouse of the world, he had this to say. Sheldon, if you would. There's, again, a literal answer and maybe an intellectual answer. The literal answer to what or who is the future of humanity is literally is Asians because the majority of the human population is Asians who live in Asia about five billion of them and the further you look in the future Steve as you as you know the world population is peaking and actually going to decline relatively soon so the share of the human population that is Asians in Asia grows

does not recede so we can be, and I enjoy that very much. However, the literal answer to the question, who is the future of humanity, is Asians. He's an interesting guy to ask that question to because he's born in India, but educated in the United States and the United Kingdom. So he has this very, very global view of that question. And I guess my follow-up question for you is,

the scenario as he plays it, is that something we ought to necessarily fear? Well, first of all, I don't think it's just Asians, okay? I think it's BRICS and all the countries that want to join BRICS. And they will have not just over half of the world's population. They will have GDP much greater than that of the G7. They will control almost half of world oil reserves and over two-thirds of natural gas reserves. So they are a force to contend with. Whether we

should fear that or not, we should see the world as it is, because right now it's difficult to see things through the fog of war. But, you know, I think we'll recognize that there'll be pros and cons. And you say, well, what are the pros? Well, as we replace offshoring with friendshoring, we're going to discover that jobs that we thought were gone forever, those high-paying manufacturing jobs that hollowed out the middle class, guess what? They're coming back. And, you know, wages are growing at 6% now in the U.S. because you just can't close the factory and send the production back to China. you just can't close the factory and send the production back to China. Now, the other side of that is that everything that we make here that we used to get there is going to cost us a multiple

of what we used to pay. And we're going to have to get used to it because for generations, we've lived off the avails of cheap Chinese labor and probably everything that we consume pretty well. That's not consistent with the new world of friendshoring. If friendshoring is the way and offshoring is no longer the way, is that a world we should prefer? Well, if you are in the middle class, the hollowed out middle class, this is a reprieve that you would have never gotten in globalization. Like in my last book where I questioned that, I would be called a Luddite. That globalization was not only preferable, but inevitable. Well, we saw even during the economic lockdowns, those supply chains, they weren't as inevitable as people thought. But that was a blip

compared to what sanctions are. That was a black swan event, whereas I'd argue economic warfare is the new normal. OK, but again, we lost a huge. I mean, you talked about it in The Expendables, that book that brought you here the last time, where there's this whole chunk of North American middle class life that essentially disappeared because of globalization. And what has happened to those people? Well, for one part, you know, many of them have decided Donald Trump is their voice because he promised to sort of bring back that kind of life. Should we, I want to go at this again, should we prefer a world where those higher paying manufacturing jobs, admittedly, which may cost us more as consumers,

become a feature of our lives compared to this enormous group of people who feel they have no future. I mean, that sounds like a better way to go, doesn't it? Well, it depends who you are. But you mentioned Donald Trump brought in those tariffs. You probably recall, Steve, how people like Joe Biden and the Democrats and all the business media said, oh, those tariffs, they're a ridiculous idea. They're not going to do anything. They're just going to bring back inflation. And guess what? When Joe Biden became president, not only did he not rescind a single tariff, but he doubled down and raised them. So all the goalposts have moved when our concept of normal changes.

Yeah, we had a nice little sparky conversation about this last time. My hunch is, and again, I don't know, I'm just, my hunch is people had fewer problems with Donald Trump's policies and more problems with the fact that he's a disgraceful horse's ass. That's a separate, I'm interested in the policies and I'm just pointing out the inconvenient truth that the policies that were once so condemned have been adopted. And in today's world, I say, I don't think it's going to matter whether Donald Trump or Biden wins the election. I don't think it's going to matter whether Donald Trump or Biden wins the election. I mean, it might matter for Ukraine, but sanctions and tariffs, they're here to stay in either outcome.

OK, so let me ask you, if if Trump, boys, a lot of handicapping going on now for what's going to go down in November. If Donald Trump wins the election in November, what do you think changes in terms of America's relationship with China? Nothing. A lot might change with what happens in Ukraine and maybe even in Estonia, Lithuania, Latvia, and NATO may be reconsidered. But in terms of the conflict between China and the United States, nothing will change because that conflict isn't about Taiwan. That conflict is basically Game of Thrones, the pursuit of global power. Well, OK. OK, let's go with that.

Conflict. You call it a conflict. Like right now, there's no shooting going on between China and the United States right now. And that's a good thing. Are you comfortable calling it a conflict as opposed to a rivalry, which may be more accurately? No, I would say, Steve, that a rivalry was the old world order. And after all, it was it was Bill Clinton who wanted China to be admitted to the WTO. Yeah. OK, this is not rivalry. This is warfare. OK, when you sanction by that, I mean, you close your market to the goods of the other country, and of course, the other country reciprocates.

That's war by any other name. It's by any other means. You added that important caveat at the end, because it's not war. Nobody's being shot. No, but it's a war that comes home to you, and it comes home to you. And it comes home to you every time you can no longer buy something that was once made in China, and now it's coming from

a friendly country. And that's why wages are growing at 6%. Look what's happened to grocery bills. Look what happens to energy bills. So all of a sudden, workers now have bargaining power and they have much to catch up and they're catching up in a hurry. And what's interesting is that we haven't seen a level of strike activity in decades. And despite that, unions are enjoying one of their greatest levels of popularity with the general public than they have in years. Six, seven percent inflation will do that to you. It'll do it. Yeah. If if all right. If you say there's not going to be much of a change in American policy vis-a-vis China, regardless of who is the president, they're both going to go for tariffs. They're both going to go for a more muscular strategy as it relates to China. Is there an alternative approach that you think could

deliver more benefits? You know, the big, remember I said that sanctions are a double-edged sword? Well, I'll give you an example. Confiscating the Russian central bank's foreign reserves has brought to an end the 50-year reign of the petrol dollar. Similarly, there are other things at stake. At stake is whether the U.S. dollar will continue to be the unrivaled reserve currency of the world, which bestows enormous benefits to the U.S. economy and the U.S. taxpayer, or whether, perhaps, the People's Bank of China, with the largest foreign reserves in the world, noticed what happened to the Russian central banks.

There's no way a central bank can hedge that risk of all of a sudden Washington confiscating the dollar assets, except in one way. Don't hold dollar assets in your foreign reserves. And if they sold off those assets... Then all of a sudden, the dollar wouldn't be the single reserve currency of the world. You know, in the 19th century,

the largest capital exporter was the UK. The pound was the reserve currency. In the 20th century, it was the US, which was the largest capital exporter, and the dollar was the reserve currency. In the 20th century, it was the U.S. which was the largest capital exporter, and the dollar was the reserve currency. Guess who the largest capital exporter today is? China. I'm going to go back to Russia for a second here. The Russian economy, I think, is about the size of Texas, right? This is not... Oh, I beg to differ. Again, Steve, the fog of war. The Russian economy, on a purchasing power parity basis,

just exceeded the size of Germany. And in the last 20 years, as I noted, even measured in U.S. dollars, Russia, next to China, has been the fastest-growing economy. Now, Russia is a small economy compared to the United States. The ruble may become the petrol currency, but it's never going to become the reserve currency because the economy is not big enough. The Chinese economy, that's a different story. No, for sure. But again, back to Russia, do you think the Russians can throw their weight around internationally given that, okay, depending on how you want to measure it, and I've heard this

expression before, and so have you, Russia is an oversized gas station, essentially, that is an economy the size of Texas. And guess who said that? Remind me. It was John McCain. And, you know, he's always been a Cold War warrior, so that doesn't really surprise me. If it's a gas station, it's the biggest gas station in the world, because the largest energy exporter just happens to be Russia. It's true that the Russian economy is not of the same dimensions of the U.S. economy. But as I pointed out, Russia's not fighting this battle alone. It's got some pretty powerful friends. And if anything, battle alone, it's got some pretty powerful friends. And if anything, these sanctions have done the opposite of what Kissinger got Nixon to do. Nixon went to China to drive a wedge

between Russia and China. These sanctions have brought Russia and China together in a way that they've probably never been before. In our last minute here, I want to talk about the subtitle to your book. I know you've got to sell books, and I know provocative titles are where it's at. But your subtitle is How Inflation, War, and Sanctions Will Change Your World Forever. Jeff, forever is a very— Forever is a long time. It's a long time. But I guess what we're trying to convey here is that this is not an ephemeral black swan event.

This is an enduring thing. You're absolutely right. In the eternity of time, there is no forever. But again, this isn't to differentiate it with the pandemic, which was traumatic, but fleeting. This will not be fleeting. Well, you always give us a heck of a lot to think about when you write your books. Well, thanks very much. And this is number five for you? That's right. So maybe in a couple of years, I'll write another one and I'll come back on the show.

We would be delighted to see you then. A map of the new normal, says Jeff Rubin. How inflation, war and sanctions will change your world. Maybe not forever, but for a heck of a long time anyway. Thanks, Jeff. Good to see you again. My pleasure. Take care.