Predicting the shape of economic recovery

The recession is over. Right? Well, that leaves more than a few questions, doesn't it?

Yes, it is good news that growth instead of decline is expected this quarter, and the market and real estate numbers are certainly looking hopeful. But what about those unemployment numbers and our misbehaving Canadian dollar, which at $.91 U.S. is crazy high even though we're supposedly at the economic bottom?

I seek out Canadian economist Jeff Rubin to get beyond the ABCs now that "U," "V" and the dreaded double-dipping "W" are no longer letters but the shapes of predicted economic recovery.

He's just back from his investment bank breakup tour for Why Your World Is About To Get A Whole Lot Smaller (Random House). You get a hint of how far he's stepped away from his former life at CIBC World Markets from the small phrase "The End of Globalization" on the book's cover. Always expect more than a mouthful from this investment guru.

We talk about how things add up that don't mix easily, like oil and water, prices and jobs. But first I have to get the skinny on how this former chief economist is finding his untethered life on the other side of the banking biz.

Rubin is done with mincing words. "It became increasingly apparent long before I left that CIBC World Markets was not really the appropriate platform for the kind of research I was doing. It wasn't something they wanted to be identified with in any shape or form, and that's fine, because I really don't want to be identified with CIBC in any shape or form. So it was a mutual divorce."

Hey, that's pretty harsh. It's not like Rubin's tough prophecies aren't good news for his former specialty area, Canada's oil patch. "We don't talk now," he says.

Wow. Rubin gets the big kiss-off even though he sees nothin' but hefty oil prices ahead. But you can see why he's unpopular when he explains that the costs of getting that oil out of the ground will just keep blowing up the global economy.

While Rubin agrees that some kind of recovery is coming, he says just about everyone's got the scenario completely wrong.

"Right now," he says, "the great boogeyman for the Bank of Canada, the Federal Reserve Board, the Department of Finance, the U.S. Treasury is 1990s Japanese deflation. I think that is one huge head-fake. In the world that I see, we're going inflation, not deflation at all. So if you're asking what that new world will be like, well, it will be the opposite of the world we know."

Inflation will come not only from the cost of oil rising to the rafters, but also because the more local economy that will result will produce more expensive goods.

Rubin says we take for granted our globalized economy where cheap transport has meant we shed manufacturing jobs, and wages didn't move much but stuff got cheaper. With $200-a-barrel oil on its way, he predicts we'll start replacing those imports locally, meaning there will be more jobs. But the costs of goods we grow and make ourselves will be much higher.

"We're going to get all those jobs back that we thought were gone forever, but we're going to find that things are starting to cost a lot more money," he says.

On top, there will be a price tag for carrying a petro currency in our pockets, he says. It's all about the cost structure needed to keep the tar sands flowing, which will drive the price of a barrel from the current relative high of $70 up past three digits within the next 12 months.

That's the part of Rubin-omics that gets under the skin of the investment bank crowd. He doesn't think green consciousness is going to restructure the global economy, but he's still betting his futures in book sales that changing oil prices will.

"Hey, it's a recession, and oil is $70 and the Canadian dollar is 92 cents," says Rubin. "Gee, I wonder what happens when commodities recover? The Canadian dollar is going to be a premium currency against the U.S., and people have got to get used to that whether they like it or not. It's not going to mean shit what Flaherty or the Bank of Canada says, because unless they can affect the price of oil, they will not be able to affect the appreciation of the Canadian dollar."

"That doesn't mean much in Fort McMurray, because it doesn't matter if the Canadian dollar is $1.20 against the U.S. They still have to buy the oil, right?"

"But they don't have to buy a whole lot of other stuff that's made in Canada."

Okay, that's more rough going for Ontario's pulp and paper, for example. But there is an upside to his prognosis. We'll cut down fewer trees, and we won't be burning carbon like we do now. It's not politics that will drive this, he says, but prices. Prices are to Jeff Rubin what class struggle was to Karl Marx. They determine the course of history.

"The same economic forces that brought tangerines in from Chile and took all our steel industries to China are going to bring them back, cuz instead of oil being $20 a barrel, it's going to be $200. And that changes the entire economics of where we get our steel from and what kind of food we can afford to eat."

While that sounds like good news, there is a big hurdle to clear first. Rubin says we're going to bust the economy again and again unless we figure out how to use less oil. "What we can do is make sure that peak oil doesn't mean peak GDP," he says.

"We've got to find a way of using less energy. And believe me, that ain't hard to do for us. Just like people in Saudi Arabia and Venezuela think they've got a god-given right to consume as much cheap oil as they bloody well feel like, so do people in Toronto feel that they've got a god-given right to consume as much cheap electricity as they bloody well feel like, because we're only 90 miles from Niagara Falls. What's the solution? Higher prices."

But for all his disdain for politics, Rubin is a big fan of pricing carbon, but not because of oil, which he thinks will price itself high with no help at all. It's coal that he feels needs a political pricing push.

"We're going to come to the conclusion that it doesn't make a whole lot of sense for us to pay three times as much for our electricity because we replaced it with natural gas, while China's built 800 coal plants. And while we can't stop them, what we can and will do is charge them a carbon tariff," he says.

But Rubin doesn't stop his price crusade there. He sees a price on water as the next natural frontier. "Right now, you pollute 125 gallons of water to produce one barrel of synthetic oil. What do you pay for the water? You pay nothing." On this issue he feels as far ahead of the curve as he felt nine years ago talking about triple-digit oil prices.

So what's the economy upshot? Don't worry too much about the job market, but get ready for inflation (driven by higher prices for just about everything), and don't forget, that means high interest rates, too. I know he's left the biz behind, but I push for Rubin's investment advice.

"If you want to borrow, do the borrowing now, because later it's going to cost you more and will be harder to get."

And start planning to live more like a European and less like a Texan.

CHOICE RUBINISMS

• "The $6 billion of food China exported to the U.S. brings a whole new meaning to having your Chinese food delivered."
• "The solution is not figuring out how to power a car with cow shit. The solution is finding a way to get it off the road."
• "Believe me, $2-a-litre gasoline is going to do more for reducing carbon emissions then all of the Kyoto Accords in the world."
• "The issue for Albertans is do they want an area the size of Florida to become a tailing pond so some sucker can fill up his tank in Chicago at $7 a gallon?"
• "Maybe we won't have three flat-screen TVs in our homes. Maybe we'll just be able to afford one because it's now being made in Kitchener."
• "The reason we're not going to eat tangerines from Chile isn't because of the carbon trail -- it's because we're not going to be able to afford them after the fuel costs."

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