The Munk Debates Podcast - Munk Members-Only Pod: Episode 41

Episode Date: October 15, 2021

This is a sample of the Munk Members-Only Podcast. The program provides listeners with a focused, half-hour masterclass on the big issues, events and trends driving news and current events. The show features Janice Gross Stein, the founding director of the Munk School of Global Affairs and bestselling author, in conversation with Rudyard Griffiths, Chair and moderator of the Munk Debates. This week's Munk Members podcast explores three stories in the news. Talk of rising inflation was everywhere this week with an above-consensus CPI print in the U.S., soaring energy prices and a major Canadian bank CEO highlighting the growing risk of “sticky” inflation building across the economy. Are we in the early moments of a sustained upswing inflation? Or, are the deflationary forces stalking the global economy before COVID what lies in our mid-term futures? – Czech voters went to the polls this week and removed their populist, incumbent Prime Minister. Is this a sign that populism in on the wane in Europe? – And, Canada will see the swearing in of a new cabinet later this month. What can we expect in terms of players and personalities? Is there any reason to hope our political culture could allow for some strong voices and personalities in the country's next cabinet? Janice and Rudyard discuss it all. To access the full length episode consider becoming a Munk Member. Membership is free. Simply log on to www.munkdebates.com/membership to register. Under your membership profile page you will find a link to listen to the full length editions of Munk Members Podcast. If you like what the Munk Debates is all about consider becoming a Supporting Member. For as little as $9.99 monthly you receive unlimited access to our 10+ year library of great debates in HD video, a free Munk Debates book, monthly newsletter, ticketing privileges at our live and online events and a charitable tax receipt (for Canadian residents). To explore you Munk Membership options visit www.munkdebates.com/membership. This podcast is a project of the Munk Debates, a Canadian charitable organization dedicated to fostering civil and substantive public dialogue. More information at www.munkdebates.com.Become a Munk Donor ($50 annually) to get 72-hour advanced access to the full length editions of Friday Focus and Munk Dialogues. Go to www.munkdebates.com to sign up. Hosted on Acast. See acast.com/privacy for more information.

Hi, Monk podcast listeners. The following is a sample of the Monk members-only podcast. To access the full-length edition of this episode and all of our regular Monk members-only podcasts, go to our website, www.com, and register for membership. Membership is free, and it's available for you right now at www. Monk Debates.com. Hope you enjoy the program. Hello, Monk members. Rudyard Griffiths here, your host and moderator of these are regular Friday Monk members only podcast. On this episode, as always, we will be in conversation with Janice Groh Stein, the founding director of the Monk School of Global Affairs and internationally renowned author, scholar. We're going to spend the next 30 minutes or so with Janice talking about some of the

big issues and ideas in the news in the last week, hopefully leaving you with some new insight and analysis. Janice, great to be in dialogue with you. So nice to see you, Rudyard, and we never seem to get a quiet week, do we? We don't. In fact, I was kind of hoping one time we would roll around to our Friday taping and I would be struggling for stories. That might be a sign of a world returning to some normalcy, but alas, that is not the case. Janice, I want to begin with the, you know, the heating up of a debate about the future course

of inflation. As you know, over the last six to eight months, there was a kind of argument of a cup half empty in terms of the threat of inflation to our economies, to our pocketbooks, to our economic recovery. This week, a couple of key developments, a big IMF report coming out, reducing the rate projections for global growth in part on the basis of the threat of rising prices and its effects on everything from consumer spending to manufacturing to supply chains. we then had a surprise higher than expected CPI, Consumer Price Index report out of the U.S., a 5.5%, so half a percentage point increase in a single month,

which brings the rate of inflation in the United States up to almost 6% year to year. And then finally, CEO of RBC, interestingly, kind of taking a shot at Tiff Mecklin in the central bank saying, you know, look, this is not temporary. Talking to our customers, we are now seeing inflation becoming embedded in their manufacturing and other kind of processes and the central bank needs to kind of step up here

and move from a position of maybe some passivity, a watching brief to something potentially more active vis-à-vis inflation policy. What's your take on all these data points as we link them together? You're right to point to this thread Rudyard because there clearly is a change in the tone. It's not often somebody like Dave McKay would come out, as you said,

and challenge the governor of the Bank of Canada. Effectively, St. Jim, you're wrong. Inflation is embedded, prices are rising. And we don't really see an end to this. So let's take a step back what's driving this, Rudyard. Originally, it was a demand shock, which the pandemic created. as all of us went home and couldn't spend any money, and our savings account are glutted with money,

at least some of us, because we couldn't find it very much to spend on. But now we're dealing with something else, which are supply jocks, and that's coming out of pandemic-related supply disruptions. It's happening in China. It's happening in Vietnam. There will not be the same amount of toys in the stores for Christmas this year.

Put those two to go. a lot of money that is looking for opportunities to be spent and limited supply. And you get what David McKay is really talking about. Wages are creeping up. Prices are going up, especially energy prices and gas. People are beginning to feel that. And so I understand why this looks like embedded inflation. And that's the big line of debate. What is Tiff Macklin saying? Nope. Hold on. These are the aftershocks of the pandemic.

When global supply chains unblock. Things will ease out. Everything's in line with our forecast models. Of course. He said, nothing going wrong here. And really, interestingly enough, I know how critical you are of that view, Roger. But if you actually look at the chairman of the Fed in Washington, he is even more vociferous than Tiff Maclin, that this is not

embedded. These kind of masters of the universe, these central bank chairs, of course, want the world to unfold as they think it should in line with their policies and their preferences. I think what suggests to me, though, that they are losing control of inflation is the numbers out of the United States, there was an incredible amount of inflation growth in rent. Rent makes up one-third of the consumer price index. It's very sticky. We know it takes a long time to go away. And guess why rents have gone up so much? It's because the central banks artificially suppressed mortgage rates to record lows in response to the pandemic and then

kept them at record lows for the last 18 to 20 months. What did that do? Well, it forced a lot of people who were previously, you know, renting to now compete with a dwindling housing stock as people use these ultra-low interest rates to snap up family properties, those people that could afford it. Usually the wealthier, more affluent in our society. So I think it's very interesting at this moment that we start to reflect a little bit that these actions that these banks took, these central banks took early on, which seems so. essential and I agree that they were but their inability to pull back from those actions over the last really now two years has increasingly baked into the cake the very inflation that they don't want and I it by final point in this is I just love how that old true truism about economics there is no free lunch

whatever you do comes back and bites you we have not suspended the laws of physics, you know, with our economic policy out of these central banks. Stuff happens. For every action, there's an equal and opposite reaction. And it'll be fascinating to see them how long they can continue to walk this narrative of, hey, people, nothing to see here, carry on, we're okay, we've got this, it's transitory, when all the signs are that it's not transitory. Well, that's a really great point, Roger, because by the spring, which is what we're hearing, the chairman of the Fed, say in the United States, and Tiff Macklin, you know, as long as the forecasts come in with our models, we're okay, but we're closely monitoring. But by the spring, I think we're going to know a lot more. Let's talk just about one big macro issue that could really drive embedded inflation as you're talking about it, labor shortages. And these labor shortages are not

only a function of income support payments as people would like to believe it. As soon as we pull back those income supports, everybody will be back in the labor market and wages will come down. There are a result of something deeper. There is a demographic drive behind this. We have aging workforces all over the developed world and in China. And that is a structural driver of inflation that federal, you know, that the that central bankers are going to just have to deal with over the next decade, frankly,

unlike anything we've ever known in the past. One other big driver here, you think the housing market is bad in the United States, and you do, and you think it's bad in Canada, where it is a larger and larger part of our economy, as we know. Take a look at China, which has a housing market that some people estimate as 30 to 30, to 35% of their economy. It's astonishing, Roger. And we have real estate developers that are on the verge of collapse

because China's doing what you think they should do. They are deleveraging their housing market. And yet that is what is sending shutters through global markets, global stock markets. So this is a hard act to get right, frankly. Yeah, and I don't think we in the West here want to end up in the situation. situation that China is in now by allowing these kind of comfortable model-based assumptions to

guide our economic decision-making because the world, unfortunately, has a way of intervening. And if we've learned anything from the debacle in Afghanistan, I think Janice is that elites, you know, can get it wrong. They got it wrong in the great financial crisis. A lot of them in different countries got it wrong in terms of their response to COVID. And to assume that the these central banks are somehow insulated from elite incompetency and an over-reliance on modeling and this view that the world can be tractable, that it can be measured, decisions can be precise. I think it's Larry Summers or someone else, you know, has regularly equipped, you know, that the national economist, you know, Bureau in the United States, the big forecasting agency,

has never once predicted a U.S. recession. So I think that's a really valid point. Let's take this all with a bit of a grain of salt. We're not as omnipotent and in charge as we might like to think we are. And I would just say to listeners, you know, be prepared. Don't assume that all of this is going to be like a Simone Biles, you know, triple, quadruple backflip with a six and a half degree rotation, landing perfectly on Chairman Powell or Tiff Mecklin's right foot.

I don't buy it. You know, you're absolutely right about that, Roger, but let's also take a moment to sympathize with these central bankers. We have relied on them for the past 12 years to pull us out mistakes. They did not make that governments made, frankly, and the private sector made, because the private sector certainly starting with a great financial crisis, Started all this with very, very low mortgage rates that were frankly dishonestly framed.

So probably you and I would both agree that they have, they are now the last resort. We are looking to them to steer the economy. That's not what central banks are for. That's not what their original role was. That's what governments did. And they're probably not stepping up to the plate the way they need to. Well, Jess, this would be my final point on this topic before we move on. What's interesting, though, is this time governments did step up.

You know, remember after the great financial crisis, there was a lot of debate. Why aren't governments coming forward with major fiscal packages, major bailouts, central bankers around the world were griping about this because there was this kind of cult of austerity that had hung on, especially in Europe? Well, guess what? Governments did step up massively in terms of blowing out their... their balance sheets going heavily into debt to provide a massive fiscal response. What did the central banks do? Did they calibrate their strategy?

Did they pull back on their excessive bond buying, their suppression of interest rates? No, they didn't. They actually dovetailed their policy in tandem with the massive fiscal expansion. So you have a monetary and a fiscal expansion at the same time. And then you have people scratching their head saying, well, why are we getting inflation? It's like if you create more of something, it's generally worth less. And now you have that classic condition of too many dollars chasing too few goods and services.

Two few goods out of China, two few services out of a smaller labor force that you just talked about. I'm not an economist, but to me this isn't really that hard to understand. What's really hard, and we will continue this over the next six months, because this is going to unravel or unfold, depending on how you think about this. we'll know a lot more, but it is really hard to calibrate policy. And when we know, Rudyard, central banks move too late, always. They were too long for indicators and governments move too late. And that's why we get these overcorrections.

And by the way, coordinating between the two of them really hard, really hard. Okay, listeners, let's take a quick break. We'll be back on the other side with our second topic. You're going to want to stay tuned for this one. We're going to go deep into the heart of your. to get a sense of where the battle between populism and institutionalism is at come October 2021. Back in a moment. You've been listening to a sample of the Monk Members Only podcast.

To access the rest of the episode, consider becoming a member. Membership is free and available at www.wmunkdebates.com. Once you've joined as a member, go to your membership profile to access the rest of this episode and all of our monk members' podcasts. Thanks for listening.