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Jeff Opdyke is the Executive Editor at The Sovereign Society. Jeff has been investing directly in the international markets since 1995, making him one of the true pioneers of foreign trading. His passion is finding the renegade plays “on the ground” in overseas markets, and uncovering those... More
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  • Higher Minimum Wage Leads To Inflation 0 comments
    Aug 1, 2014 9:02 AM

    The story we're fed in America today is that a minimum wage hike will stimulate the economy, appease the underpaid masses and bolster the middle class.

    But none of that is true. While it may raise the income threshold to accommodate what we consider a suitable standard of living, it'll raise everything else right along with it.

    For the last several years, the econo types, the media types and the Bureau of Labor Statistics types have been downplaying inflation. It doesn't exist, we're assured, typically with a supercilious "you don't really understand economics like we do" attitude.

    Of course, they never care to qualify their remarks with asterisks denoting that the government has, numerous times over the years, recalibrated the calculus used to calculate the inflation rate.

    When cost-of-living-adjustments in the various welfare and entitlement programs are tied to changes in the rate of inflation in the Consumer Price Index, it does D.C.'s check-writers a world of good to keep the official CPI as low as possible, even as real inflation rages.

    And it is raging.

    Chipotle, Hershey, Dunkin' Donuts, The Cheesecake Factory, Starbucks, Smucker's - and I'm sure others will follow along soon enough - have all recently raised prices on their products (products that minimum wage earners just so happen to spend a larger portion of their income purchasing).

    I don't care that the official June CPI came in at a 2.1% annualized rate. I've seen the effects of the real rate in my own life, and those who believe in the official rate have the same grip on reality that my son had when he thought Scooby was a real pooch.

    My homeowner's insurance is up double-digit amounts.

    My cable TV bill is up mid-single digits.

    My utility rates are up. The water and sewage went up. The pest-control and termite contracts are each up nearly 10% this year. Milk is way up. The price of beef is higher. And thanks to our presidential administration, even my health insurance rates are costlier.

    About the only cost that hasn't changed is my mortgage …

    But the government has conveniently calculated that metric into the matrix of inflation. The CPI, upon which they base it, is cleverly contrived to herald those fixed costs while undermining the ones that constantly fluctuate - all in an effort to make inflation appear lower than it actually is.

    You see, "shelter" accounts for 32% of the CPI, the largest individual category in the index. Two-thirds of the country owns a house, the great bulk of which are owned outright or by way of a fixed mortgage rate - meaning, the single biggest category of the index (which, as I've explained, is an artificial calibration designed by the government) barely budges.

    Meanwhile, food and energy costs, which are rising dramatically, are considered "volatile" items because they bounce around so much, and so they're disregarded in the calculation of the core index.

    And that "core CPI" - it's based on fixed costs like housing that rarely change for the vast majority of people, while food and energy costs that everyone pays (and which, combined, are 24% of the index!) are cast aside because they vary too much. How convenient!

    All of which shows you that "official" rates and government statistics are perversely manipulated.

    The Source of Our Nascent Inflation … and Your Salvation Against It

    John Williams, one of the rogue econo types for whom I have great respect, has been tracking the inflation rate as the government used to report it. He runs ShadowStats, a website that provides "analysis behind and beyond government economic reporting." According to John, if Uncle Sam used the same CPI calculation he employed in 1990, readings today would be near 6% - triple the current.

    And if our good Uncle deemed legitimate his 1980 calculus, the June CPI reading would be hair below 10% - five times the level given by the modern, adulterated calculations.

    But even though those calculations are manipulated, they nevertheless show that inflation is resurgent today. After months and months of readings that were negative, flat or up no more than 0.2%, the so-called CPI All Urban Consumers reading is consistently showing year-over-year changes in inflation of 0.3% and 0.4% - or an annualized rate of 3.6% to 4.8%.

    Why is this happening, particularly given that the Fed is actually taking money out of the system now (anti-inflationary) instead of flooding it with even more dollars (inflationary)?

    It's simple - higher minimum wage leads to inflation.

    Consider all those efforts in the last six months or so to boost minimum wages. The National Association of Business Economists reported this week that the share of U.S. companies raising worker pay has more than doubled in the past year to 43 of the firms surveyed. More people earning more money means more money chasing generally the same amount of goods - the classic formula for inflation.

    Companies are now raising prices because demand allows them to, and wage pressures require them to in order to maintain profit margins for owners and shareholders.

    Which means those minimum-wage workers will very soon discover that their new minimum wage has them pretty much in the same bind as their previous minimum wage …

    Which is why addressing America's issue with income inequality through minimum-wage increases will never succeed. Raising the minimum wage doesn't get you a middle class. It gets you inflation.

    And we are now getting what we're sowing.

    Today's investment takeaway: The dollar faces renewed headwinds as wage-induced inflation emerges … which means renewed vigor for gold, since gold and the dollar move in opposition. Own bullion; it's cheap. Own major gold producers; they're cheaper. Own pre-1933 collectible gold coins; they're safe from potential confiscation.

    Until next time, stay Sovereign …

    Jeff D. Opdyke
    Editor, Profit Seeker

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

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