May 17, 2024 – After this week's market wrap-up, Financial Sense Newshour speaks with Canadian economist and author, Jeff Rubin, to discuss his latest book, “A Map of The New Normal: How Inflation, War, and Sanctions Will Change Your World Forever.” Jeff concludes his book with a powerful observation: "There is no turning back to the world we once knew. It simply no longer exists." Today, we discuss why that is when it comes to the significant political decisions taking place globally in our world today.
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Transcript
Jim Puplava:
Welcome, everyone, to a special edition of the Financial Sense Newshour. Joining me on the show today is author Jeff Rubin. The name of his book is called A Map of The New Normal: How Inflation, War, and Sanctions Will Change Your World Forever. And, Jeff, I want to begin our discussion with the last sentence in your book, and then we'll work our way back.
Jim Puplava:
But I think this really hits home as we sail farther along this course of seemingly inevitable global conflict and accompanying profound economic change, there is no turning back to the world we once knew. It simply no longer exists. So let's begin with that at the beginning. And I want to talk about your first chapter, the fog of war, and how so much of what we read in the news today is really not as much news as it is more propaganda on both sides trying to get their agenda across.
Jeff Rubin:
Well, you're right. I mean, we saying by we, I mean, you know, North Americans, we think that propaganda is the exclusive domain of authoritarian countries. But in fact, we're quite adept, our governments are quite adept at using propaganda. I know this isn't the first time. The Gulf of Tonkin incident, which was the pretext for American involvement in the Vietnam war, Saddam Hussein's weapons of mass destruction, which was the pretext of an American invasion that killed, what, 100,000 Iraqis.
Jeff Rubin:
And now, once again, the fog of war. If we listen to our media, at least our conventional media, this is a biblical struggle between good and evil. And the leaders of our, you know, enemies are maniacal satanic figures. May I suggest a different interpretation, that this is not a biblical struggle between good and evil. This is more akin to Game of Thrones.
Jeff Rubin:
By that, I mean, you know, the. The attempts of different centers of power for world domination and control. And of course, each of them have their own ideology. In America's case, it spends on defense more than the entire GDP of Africa to defend democracy in the world. In Russia's case, defender of the Slavic people.
Jeff Rubin:
In China's case, for once again, the middle kingdom becoming the center of the world. But in all of these cases, there's no moral higher ground. It's just naked geopolitical ambition.
Jim Puplava:
I want to talk about your chapter. And this was really, as we began this decade, really shook things up. And that was COVID, which first broke the links to the global supply chain. I know I had clients who are dependent on statins and blood pressure medication, and all of a sudden, it wasn't available. And that was.
Jim Puplava:
We're used to having anything we want. We press a button on Amazon, it's on our doorstep immediately. And all of a sudden that sort of got interrupted, right?
Jeff Rubin:
The whole mode of just in time inventory became just too late. And we weren't talking about tennis shoes or lawn chairs. We were talking about desperately needed respirators, vaccines, masks, in the greatest public health crisis since the Spanish flu. So that was the first real assault on globalization, got people thinking, is this really the ideal mode of economic organization? And it got like the Trump administration saying, we've got to become self-sufficient.
Jeff Rubin:
We can't rely on far flung supply chains. But what the pandemic started, sanctions will complete, because sanctions are a far greater lethal threat to global supply chains. And whereas the pandemic was a passing phenomenon, one or two years, sanctions are now part of the new normal.
Jim Puplava:
The other thing too, that came about, and we'll get into this, is the governments in the west, around the globe shut down the economy. We were confined to our homes. I've never seen anything happen like that in my lifetime. But in response, there was massive, massive debt issuance. And of course, we had the theoretical backing for it with MMT, as long as you can issue your debt in your own currency, you don't need to worry about it.
Jim Puplava:
But talk about the massive debt issuance. And I guess the second question, with the massive debt, who was buying it? Because this was QE on steroids.
Jeff Rubin:
Well, you're absolutely right. Deficits exploded the US deficit to 3 trillion. In my country, Canada, the deficit went from 30 billion to over 300 billion as a percentage of GDP. We didn't see these size deficits since World War Two. Now, normally, when that happens, when deficits explode, the cost of borrowing skyrockets.
Jeff Rubin:
It's called the law of demand and supply. And it works, pricing government debt as it does everything else. But that's not what happened this time. The exact opposite happened. Government yields fell to all-time lows.
Jeff Rubin:
A ten-year treasury was half a percent. So you have to understand, I don't know if your audience is fixed income or not, but yields and price are inversely related. So when the yield of a bond falls to its all-time low, the price of the bond is at an all-time high, way above par. So the obvious question, as you alluded to, was, why would pension plans, insurance companies, or retail investors, the people who normally bought government bonds, why would they pay record high prices for bonds that paid record low coupons in the face of unheard of deficits? That didn't seem to make any sense.
Jeff Rubin:
Well, guess what? They weren't the people buying the bonds. So who was buying the bonds? Who was buying the bonds was the central banks. The Federal Reserve board in your country, the bank of Canada in my country, the European Central bank, they were scooping up bonds at unheard of prices.
Jeff Rubin:
And, you know, you talk about new monetary theory. Let me talk to you about old monetary theory. In the words of Milton Friedman, of course, the famous American economist and founder of American monetarism, inflation is everywhere and at all times a monetary phenomenon. And nowhere has that proven more accurate than the fallout of the pandemic, because the explosion in money supply as central banks cranked up the printing presses to get the billions of dollars to buy these government bonds was a powder keg. It was a powder keg just waiting to be lit.
Jeff Rubin:
And the sanctions, in the words of President Biden, the most severest ever imposed in the post war period, blew that powder keg sky high. Because when you sanction the world's largest energy exporter and the world's largest grain exporter, there are consequences for the price of alternative supply.
Jim Puplava:
Most people, when they think of inflation, not what we're seeing today, they think of some kind of shock to the system. I think of 1974, the Arab Israeli war, oil spikes, we saw that happen again in the 2000 decade. We had the second Gulf war, but that's not what happened here. It began, as you just said, explosive money printing, explosive government spending. And the problem that we are having dealing with now, and I wonder if you might address this, is central banks are basically a confidence game.
Jim Puplava:
They want to maintain their credibility. They're inflation fighters, but behind it, they're disguising what they just did. I mean, when the Fed's balance sheet went from four to almost 9 trillion, that's a lot of money.
Jeff Rubin:
That's right. That's a lot of money. Well, you're right about one thing. Central banking is a confidence game. And that's the whole idea behind these inflation targets, which both in your country and in my country is 2%.
Jeff Rubin:
You see, if people believe that the central bank will control inflation, then workers don't have to go on strike for big wage gains to compensate them for increases in the cost of living. And companies don't have to hike up their prices to cover the wage costs that they're now incurring. Everybody believes that there's going to be price stability. But if you don't have confidence in your central bank, then all of a sudden you do go on strike. When grocery prices are rising five times as fast as their 20-year average, and companies are encouraged to raise prices to compensate for them.
Jeff Rubin:
So the question, though is, is the 2% inflation target, which is the inflation target of the Federal Reserve Board, the Bank of Canada, the Bank of England, the European Central bank, the Reserve bank of Australia, is that still a valid target? Because today's economy, the post pandemic economy in today's sanction riddled world, is very different than the economy that the 2% targets were designed for. Are those 2% targets still achievable on a sustainable basis? Because if they're not, why would a central bank sacrifice hundreds of thousands, if not millions, of jobs through policy mandated slowdowns or recessions, to wrestle inflation down to a rate that it can no longer be sustained?
Jim Puplava:
I want to talk about something that came out of the pandemic, and this goes back to supply chain difficulties, because what that did is we begin reassuring, which is the term now Trump addressed, hey, we can't be dependent on one country for everything we get. I can't think of anything that comes from Amazon that wasn't made in China that I get. Let's talk about what that means from an inflationary point of view. Because if we start reassuring building factories here, I think Taiwan semiconductor said their plant in Phoenix, which will be the largest, their rates, it'll cost them double the amount of money to make chips versus what it cost in Taiwan.
Jeff Rubin:
That's right. Maurice Chang said that. Who's the founder of. You're absolutely right. You see, the problem with Fran shoring is that all of our friends, all of America's friends, are like countries like Canada, with wage rates just as high as the United States.
Jeff Rubin:
So if we're going to bring back all this production that used to be in China, and we're going to bring it back either to the United States or places like Australia or Canada or Western Europe, we're going to be paying a lot more for whatever we're replacing, because wage rates are a multiple of what they are in China. That is a good news story for a hollowed out middle class, because we're seeing the return of manufacturing jobs that we thought were gone forever. But it is not a good news story for inflation, because, as I say, anything that we used to get from China that we produce now is going to cost a whole lot more. That's going to be challenging for generations of western consumers who have availed themselves on the advantages of consuming cheap Chinese labor.
Jim Puplava:
You point out in your book Foxcom, which 95% of apple's products are made in China. Foxconn charges a dollar an hour. In California, the minimum wage is 1550 an hour. And if you work in fast foods, it's 20 an hour.
Jeff Rubin:
Right. So if all of a sudden apple can't source its supply lines in China, and, you know, we're sort of heading in that direction. Just this week, President Biden announced a new round of tariffs against China. China's going to retaliate. You can rest assured of that.
Jeff Rubin:
If all of us, if we go to a full fledged economic war here, like the US is having with Russia right now. The fact of the matter is China can live without apple, but can Apple, with its $3 trillion market capitalization, live without China? I mean, Apple is striding a Sino American fault line that soon may become chasm like in proportions.
Jim Puplava:
Something else that worked with globalization. Let's address this. I know we've talked about oil in the decade globalization was possible with cheap oil. Jeff, I go to an organic grocery store if I want to buy a fillet. Now, I used to get them for 26.
Jim Puplava:
They're now 46. However, I can buy Australian beef for 36. How long is that going to last? That you're going to raise beef in Australia, put the beef on a plane, ship it to California, and put it in a grocery store. I just don't see that working right.
Jeff Rubin:
Well, while billions are being spent, if not trillions, on finding an alternative right now, if you want to move goods by any mode of transport, air, marine, truck, rail, you're burning one fuel and one fuel only, and that's oil. And the higher that oil prices go, the more that distance costs money. That was my theme of my first book. While your world's about to get a whole lot smaller because triple digit oil prices meant that it was becoming very expensive to catch salmon in the Norwegian Sea, have it processed in China, and then sold in a supermarket in the United States because you consumed a lot of barrels of oil in making that supply line happen.
Jim Puplava:
And another issue that came about with ESG and of course, the sort of the movement towards green is oil companies stopped exploring. They cut their budgets. I think in the US they were cut by 60%. They began buying back their stock, paying dividends, but they weren't exploring for new oil. And when you stop exploring, and I think the IA just came out with their study last year and saying we need to stop looking for the stuff because we've hit peak demand in oil, I don't see that right now, do you?
Jeff Rubin:
No. Instead, oil demand for oil as the demand for coal is expected to set a new record high this year. Now you speak of the ESG movement. 15 years ago, the ESG movement, which argues for divestment from fossil fuels, would have been the exclusive domain of university pension plans and maybe some religious organizations. Today, it's gone mainstream.
Jeff Rubin:
And what it means is that some of the largest institutions in the world no longer will hold stock of oil companies. So who has filled the gap? The retail investor has enthusiastically filled the gap. But the retail investor is very different than the institutional investor. The institutional investor takes a long-term view.
Jeff Rubin:
And if you take a long-term view, as you point out, it's necessary to reinvest earnings in capex to grow supply, because that's your future. The retail investor doesn't care about the long term. The retail investor just wants to get paid now. So the retail investor demands that the oil company, instead of putting a huge chunk of its earnings into capex, uses that to either buy back its shares or hike dividends or some combination thereof. And that is why we are seeing, with the exception of places like Saudi Arabia and Russia, we are seeing a paucity of investment in capex because it reflects the new ownership base of companies like Exxon.
Jeff Rubin:
And so what does that suggest? Well, that suggests that we're not going to see very robust growth in supply, yet demand continues to expand. That's a recipe for high oil prices becoming very much part of the new norm.
Jim Puplava:
Well, let's talk about this green transition, because essentially my own state, I would equate to Germany, were de industrializing after Fukushima. I think Germany closed down 17 of their nuclear power plants. They shut their coal plants because they were getting cheap Russian natural gas. Well, the Ukraine war and the sanctions changed all that. And Iran blowing up the Nord stream.
Jeff Rubin:
Pipeline sure changed that.
Jim Puplava:
Yeah, and that changed it, too. But right now, they're going back to coal.
Jeff Rubin:
That's right. And not just them. I mean, coal has enjoyed a renaissance all throughout western Europe, which, as you know, was leading the world in efforts to bury coal as a power source in its grid. Well, the opposite has happened, that not only have coal plants that were scheduled to close, not closed, but mothball plants have been reopened. And in fact, in the United Kingdom, for the first time in 30 years, the government has granted a new license for a new coal mine because it's anticipating that the demand for coal from its power sector is going to soar.
Jim Puplava:
So as we're de industrializing my own state of California, where we have power outs, we shut down one nuclear power plant, we shut down our coal plant, and we were going to shut down our last nuclear reactor until somebody told the governor, you do that and you're going to have continuous rollouts. And California faces a problem because we buy our excess power from Arizona, which has two nuclear power plants. But in the next two years, Taiwan, semiconductor, Intel, Apple's factories go online, and that's going to suck every last remaining megawatt of power out of there. So as we de industrialize, how long is it before we start waking up? Germany is waking up.
Jim Puplava:
They're starting their coal plants. You just talked about England is authorizing opening up a coal mine. How long does it take, Jeff, does the price of oil have to get so high in inflation that we do something?
Jeff Rubin:
Well, all of. Well, I don't know about the California issue, but certainly the Germany issue and the EU issue is a direct result of sanctions and economic warfare. Had Germany continued to get over 55% of its natural gas through the Nord stream pipelines and it would have gotten more because the second Nord stream was ready to be opened, none of this would have been happening. But now that those pipelines have been blowing up, I mean, the war in Ukraine might be over in six months, depending on who wins your election. But these shifts in energy flows are long term.
Jeff Rubin:
I mean, Russia is, instead of trying to repair the Nord stream pipelines, they're building new pipelines to China, and Germany is, and Europe is building 13 Lng terminals to receive your LNG from the Gulf coast. These kind of investments in infrastructure lock in the shifts we've seen from sanctions for decades to come.
Jim Puplava:
I want to come back to sanctions because you really spent a lot of time in your book talking about its inflationary implications. And I don't think the financial media really spends enough time or understands it because, for one, the sanctions are almost against one third of the world that are in that coalition that were, I guess, are no longer friendly with the US. And basically when we confiscated Russia's assets, threw them out of the swift system. China and Russia are building a competing system that goes around the dollar, goes around central bank control, and it has accelerated the de dollarization move. So we're going from the petro dollar, we're probably going to the petrol yuan or maybe even petro gold.
Jim Puplava:
Talk about that for a minute.
Jeff Rubin:
Well, the problem against sanctions is that they often boomerang. They're a double-edged sword and they often wound the very countries that are imposing them. And you're quite right. I mean, the sanctions against Russia ended the 50-year reign of the petrol dollar. Up until sanctions were imposed, 95% of Russia's oil and gas exports were in dollars.
Jeff Rubin:
Now they're in rubles. And it's had a domino effect because Saudi Arabia has agreed to accept yuan from its major customer, China. So when the world's greatest energy export, Russia, and the world's greatest energy importer, China, both have de dollarized their energy trade, I think it's fair to say that the era of the petrodollar has come to an end. But in fact, the dollar risks much more than that. Ever since the Bretton woods agreement at the end of World War Two, the US dollar has been the one and only reserve currency in the world.
Jeff Rubin:
And that too is being threatened. Because what President Biden didn't realize when he confiscated the foreign reserves of Russia's central banks was that he was undermining one of the pillars that supported the dollar as a reserve currency. It was opening a new front in economic warfare that had never been done before. And it caught the attention of central banks all around the world, particularly the People's bank of China. Up until then, central banks looked at the US dollar as an insurance policy against financial risk.
Jeff Rubin:
But suddenly, instead of being an insurance policy, it became a ticking time bomb, because a central bank would never know when a political decision would be made in Washington that would confiscate its dollar holdings, and it would have no way of hedging that risk other than by reducing its US dollar holdings in its foreign reserves. And that's exactly what the People's bank of China, China's central bank, and the central banks of most BRIC countries have been doing. If they continue to do that, it's only a matter of time when the US dollar will have to share its crown with other contenders.
Jim Puplava:
Well, as you point out in the bricks, number one, they're probably the most dynamic economies in the globe. If we take a look at economic growth over the last decade, they represent 45% of the world's oil reserves, 60% of the world's natural gas. Their combined GDP is greater than the US, not to mention 4.2 billion people, over half the world's population. And China is still to this day, the epicenter of the global supply chain. I mean, if you take a look, they dominate EV's, they dominate batteries.
Jim Puplava:
I think what was it this week? Biden just put another sanction on Chinese EV's. So, I mean, this is much bigger than most people are really thinking about in terms of the implication of what's going on here.
Jeff Rubin:
See, I don't think people recognize, because up until now, the US and its western allies had unchallenged economic and military power that they could unilaterally dictate security terms for the rest of the world. That is no longer true today, and it will be even less true in the future because there's a lineup around the block of developing countries who want to join BRICs. And as BRICS expands, the scope and effectiveness of western sanctions shrink. I mean, the principal reason why western sanctions have been so ineffective is that because China and India have opened with open arms, welcomed all of those Russian goods that were sanctioned to its vast markets. In the past, the loss of European energy markets would have crippled the Russian economy and by extension the Russian war machine.
Jeff Rubin:
Today, Russia just scoffs it off. Last year, Russia had record energy export earnings even though it can't sell its oil and gas in western Europe or North America.
Jim Puplava:
Thats amazing. In conclusion, I think one of the main points in your book is inflation is here to stay, whether its fiscal dominance, whether its re shoring, whether its energy, whether its sanctions and economic war get used to it because it's not going away.
Jeff Rubin:
Preston that's right. What's happened with inflation, it's like a tumor that starts off in a local part of your body, but metastasizes and spreads throughout your whole body. Well, that's what's happened with inflation. It started off with food and energy prices as a result of the sanctions, but it's metastasized into wages. Wages in the US economy are growing nearly 6%.
Jeff Rubin:
Wages just don't affect the price of oil and food. Wages affect the price of everything. And in the past, when workers would go on strike, employers would simply close the factory and move it to China. That's no longer an option. Now they have to pay.
Jim Puplava:
Well, I want to end as we began with that paragraph. As we sail farther along this course of seemingly inevitable global conflict and accompanying profound economic change, there is no turning back to the world we once knew. It simply no longer exists. Well, and on that, Jeff, I want to congratulate, I really enjoyed this book. Very, very timely.
Jim Puplava:
Here's the book, folks. If you want to know what the future lies ahead of us, it's right here in this book. Jeff, well done, my friend.
Jeff Rubin:
Thank you very much. And thank you for having me on your show.
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