Today is: Bring Your Lunch to Work Day. I hope you remembered to pack some leftovers.
Well, it’s not officially Bring Your Lunch to Work Day. But unofficially, it is, since America’s fast-food workers have announced plans to walk off the job in protest against the wages their employers pay. Those who flip burgers and deep-fry chicken nuggets are demanding a wage increase to $15 an hour – what they deem a livable wage in modern America. I’ll leave it up to McDonald’s and Papa John’s to figure out if such a set of skills demand that kind of paycheck.
But that’s beside the point. A much bigger front is exposed in this picayune skirmish over low-income wages.
The key reason inflation has not rooted in America, despite the best efforts of the Federal Reserve to manufacture rising prices through dangerously unconventional monetary tinkering, is because zero wage pressure exists in the labor market.
Wages in our (once) great nation stagnated years ago and have actually retreated. Median income for the average working family is down a bit more than 12% since 2000. That’s a function of globalization and the fact that American labor has priced itself out of the market for many tasks. Jobs vanished because Koreans and Mexicans can make cars cheaper, the Pakistanis and Cambodians can make clothes cheaper and the Indians can handle customer complaints cheaper. Problem is, the skills that are easily exported aren’t easily transferable to many other occupations here at home. So, we end up with a nation of displaced workers whose only viable career path in many cases is in the service sector, where the supply of help outstrips demand, which, in textbook fashion, keeps a cork on wages.
But what happens when that cork pops off? What happens if Burger Nation successfully pressures employers for $15 an hour instead of the $7 to $10 that workers generally earn now? Well, three things I can think of, and none of them are particularly good.
The Law of Unintended Consequences
First problem: The army of fast-food workers has more money to spend.
That’s not bad in and of itself; we all want more money to spend. But in classical economic terms, more money chasing the same supply of goods leads to rising prices for those goods. That trickles through the system as persistent inflation.
Second, if workers making $7 to $10 an hour suddenly earn $15, those who were making $15 will demand $20. And those making $20 will demand $30. You get where I’m going … and we’re back to more money chasing the same supply of goods, or persistent inflation.
And then there’s problem number three: As consumer activity picks up because of all this added income in workers’ pockets, loan and mortgage demand legitimately ramps higher. Bankers being bankers – i.e. incapable of controlling their most basic urge to screw up a good thing – they will begin to lend out all those dollars the Fed has pumped into the system. And, once again, we have more dollars chasing the same supply of goods … and, repeat after me, persistent inflation.
The banks at the moment have no compelling reason to lend. Demand is slack since chastened consumers have been in retrenchment mode in the wake of the housing/debt crisis, and interest rates are nothing anyway. So, banks can actually earn more just by letting all those Fed dollars flow back to the Fed and earn interest, which explains why banks have about $1.8 trillion sitting on reserve at the Fed, up from $2 billion in 2008. (That’s a gargantuan jump, the equivalent of turning $100 into $90,000.) It’s a perverse trade, but incredibly logical … take money from the Fed to buck up the economy, but instead of lending into the economy you just give the money back to the Fed and capture a safe, assured rate of return without risks of lending to a bunch of deadbeat borrowers. Brilliant!
But with higher salaries will come increased demand for borrowing. Bankers will see all the fees they can collect, and the higher interest rates they can charge, and they will have every reason to pull money out of the Fed and give it to the deadbeats who proved the first time around that they can’t manage money.
And suddenly the genie that some of us have been talking about throughout the Fed’s Quantitative Easing campaign will escape the bottle – that genie being all the money the Fed has been printing but which hasn’t really made it into the economy.
A Remedy for Runaway Inflation
Rising wages necessarily creates spending and borrowing demand, and some of that $1.8 trillion in excess reserves sitting at the Fed will leak into the system … and we end up with rising prices and a falling dollar since every new dollar entering the economy reduces the value of every existing dollar.
In short, we end up with double-barreled inflation: rising prices for goods and services, and rising prices on all the foreign goods we import, since when the dollar is falling it takes ever-more greenbacks to buy the same amount of foreign currency necessary to buy some foreign-made widget.
It’s clear from the stories I read that Burger Nation doesn’t realize the predicament it’s in, nor does it understand the law of unintended consequences. Push on a balloon in one spot, a bulge appears elsewhere … which is to say that the status quo with consumer prices today will not be the status quo tomorrow when wages are $15 an hour. Salaries will go up, but so too will consumer prices, and the spending power of $15 will feel exactly like the spending power of $7 to $10 – and workers will have essentially gone nowhere economically, though America could find herself hamstrung by a new financial crisis — runaway inflation.
As wage pressures finally unlock inflation pressures lurking barely below the surface of the economy, you’re going to want a basket of commodities, particularly gold and silver. Both have been unduly downgraded in the past year by hot-money investors who don’t understand the dynamics of gold and just wanted to ride the metal higher. Once inflation pops up in reported numbers, they will be back with a vengeance, and gold will race toward my target price of $2,250.
Buy the physical metal. Buy top-quality miners like Barrick Gold (NYSE: ABX), which are leveraged plays on rising gold prices. Just have exposure to gold somewhere in your portfolio. While there are no broad wage pressures at the moment, the rattlings of Burger Nation are the early signs of a trend to come.
So, take your lunch to work on Thursday – not because America’s fast-food tribe is calling in sick, but because you need to save every dollar you can to buy gold, silver and other commodities that will protect you from the inflation to come.
Until next time, stay Sovereign …
Jeff D. Opdyke
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