Will the minimum wage raise hurt your savings?

The Democrats First Move

The Democrats will soon be in control of the House and the Senate. I fully expect that one of their first proposals will be one to raise the minimum wage. And it’s very likely that they will get it passed.

Profiting From Market Manipulation

So what does this mean to us as investors? Well, historically, whenever the government decides to manipulate the market, the market is thrown off balance. To get back to balance, money will move from one place to another. And money on the move constitutes an opportunity for investors to get in front of it and make a profit.

So where will the money go when it moves and where will it come from? To figure that out, we can try to work out what the effect of the changes will be on the market. Or we can instead listen for who is in support of this change. Very often those in support will be the ones that benefit.

Who Benefits?

Wal-Mart Minimum Wage Article

That’s an article where the CEO of Wal-Mart states that the company supports an increase in the minimum wage. So it’s very likely that an increase would benefit Wal-Mart. In fact, since the last time the minimum wage was raised in 1996 to the end of 1999, the price of Wal-Mart’s stock went from around $10 to nearly $40 (according to www.bigcharts.com, symbol WMT). In 3 years, the price increased 300%. Not a bad return.

So does this make sense from what we know of economics?

The Economics of It All

Traditional economics says that the increase in the minimum wage should mean fewer jobs available for the lowest wage workers. The idea being that an employer would fire those employees that were not worth employing at the new minimum wage level. But what if instead of firing those employees, the employer just raised its prices?

Who would pay the prices? Traditional economics says that the increase in price would mean a decrease in demand. This however is assuming that the amount of money available to buy the products stays the same. But in the case of Wal-Mart (and many other employers of minimum wage labor), the employee who just got the minimum wage raise is also very likely a customer. So even though the wage worker has more income, the wage worker can still only buy the same amount of stuff. He’s in the same exact spot that he was before.

Inflation!

But the prices have been raised, and they have found support because the wage worker is willing to pay them with the new found income. So now we have inflation.

Who Gets Hurt By Inflation?

Anyone holding dollars.

Say you have $1000 before the raise, and can buy 1000 cans of beans at $1/can. Then the raise happens and the price of beans goes to $2/can. You can now only buy 500 cans of beans. So before your savings could allow you to live for 1000 days on beans, where as now you can only subsist for 500 days.

Where Did the Value Go?

But where did those other 500 days of value go? They weren’t destroyed, so someone else must now have them.

The wage worker is in the same relative situation he was before. He can still earn enough to buy the same amount as he could before.

And the guy that took all his money and bought beans before the raise still has the same amount of beans as he did before. So he’s pretty much in the same position too.

The person that makes out is the person that borrowed $1000 before the raise and bought 1000 cans of beans. Then after the raise, he sells 500 cans of beans at $2/can, getting back the $1000 dollars to pay off the debt. But he still has 500 cans of beans left to do with as he pleases. So that’s where those 500 cans of beans went.

Guess who borrows money to buy beans and then sell them…

Wal-Mart

Conclusion

So my prediction for this minimum wage increase is inflation, which is harmful to dollar denominated savings, neutral to asset owners, helpful to borrowers, and really helpful to owners of leveraged assets (assets purchased with borrowed money).

Thus, it might be prudent to purchase assets with your dollars just to keep them from being devalued. Or you could try to profit by borrowing money to invest. Maybe even to buy some shares of Wal-Mart.

I’ll discuss some options about where to find the money to borrow in the next post.

Let us know your thoughts. Are we off base here or does this make some sense?

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