One of the biggest financial news item for today was the Congressional Budget Office's release of employment forecasting numbers, which focused on the impact
a proposed hike in the minimum wage would incur on the labor market. It was stated that a $10.10 minimum wage would allow 16.5 million workers to have higher wages but at the expense of 500,000 jobs. Curiously, a $9.00 minimum wage, an -11% reduction, would only cost 100,000 jobs, or an 80% positive impact. The math could be excused, I suppose, since the CBO admitted to using a controversial methodology that incorporated assumptions over hard quantification into their forecasting model. As reported by CNBC, the margin of error was extremely wide, between zero and a million. 

The minimum wage debate of course has been roaring for quite some time now,
exacerbated by select controversies such as McDonald's patronizing remarks to
its low-wage workers that suggested returning gifts for cash and eating less,
amongst several other hot tips. At the heart of the debate is the concept of
whether people should have a right to maintain a minimum lifestyle through
working in non-skilled manual labor positions : the proponents of the minimum
wage (usually the non-skilled workers themselves) say that they cannot move
ahead in life and stay afloat of current liabilities without an increase in
wages. The opponents (the rest of us) say that increased wages increases costs
for businesses, resulting in both lower job opportunities and higher consumer
prices. 

What are they complaining about? The federal minimum wage was increased from
$4.75 in 1996, during the hey day of the American economy, to $7.25 in 2009,
amidst the greatest crisis in modern financial history. This is nearly a 41%
increase, essentially a 3% annual raise for doing nothing other than receiving a
decree by fiat. Government always rewards mediocrity but that's a different
story for another day. 

It is true that the minimum wage, as an entity unto itself, is in a pretty
plum position. It always receives public attention, has powerful friends and
even more powerful sentiment leverage (the classic proletariat struggle). This
all leads us to one conclusion : the minimum wage can only go up. No
presidential administration has the willpower, nor the clout, to reduce
wages. At best, capitulation in the form of the status quo is the most we
would ever see in terms of contrarianism. 

But why couldn't the minimum wage be reduced? This is the missing key to the
debate : so long as the entire nation is embroiled in a bifurcated battle, the
puppeteer that controls the framework of the discussion is hidden in plain
sight. While the 41% increase in the minimum wage from 1996 to 2009 is
mathematically valid, using 1996 dollars, the value of the minimum wage has only
increased a pathetic 11.5%. The classic divergence, get people to look one way
to disguise the truth in the other, is clearly evident. 

The reality is that the federal minimum wage would need to be increased to
$15 just for non-skilled laborers to maintain the lowest threshold of the
American lifestyle, which includes calories, a used car, and an apartment in a
sketchy part of town. There would be very little room for medical expenses,
other insurance fees, and a sliver of discretionary funds. Retirement and
college tuition for the kids? Fuggedabout it! 

The general question is, aren't we all victims of inflation, which amounts to
usury by the Federal Reserve? How many middle-class Americans truly feel better
off now than they were even a few years ago? We're an optimistic bunch, that is
for sure, but even a Tony Robbins session won't mitigate the hidden (ignored?)
damage that was done to millions of portfolios over the last decade.  

Even though the direct means and the specific dialogue are different, the
struggle regarding the minimum wage is our struggle. You just need to peek
behind the door to see it.

A day after one of the worst sessions of the year, the stock market took a decidedly more aggressive tumble, with all three major indices absorbing 2% losses. On paper, this doesn't sound like much, and it really isn't. Technical analysts (known by the term "technicians") will cite the psychological impact of losing the 1,800 point threshold for the S&P 500, and the 16,000 mark for the Dow Jones. While trading behavior does indeed have a psychological (some might say psychotic) element, the above concern is merely semantics. We could easily recover those metrics, just like we know that eventually, the bathroom door will open : the more pertinent question is, how long can I hold it?

For the American economy, this is a very complicated and bifurcated answer. The common criticism that is cited within the duality of our entire political spectrum (we only have two parties that have a realistic chance of winning meaningful elections...really!?) is the national debt, which stands somewhere north of $17 trillion...I lost count. Though it is a serious burden, it's not the worst nightmare scenario for our policymakers and their think tanks ; our debt is mostly comprised of public debt, which in accounting terms, is an asset owed to the people of the United States. Contrary to internet conspiracy theories, doom and gloom hucksters, and The Second Coming of Christ (Revised Edition) movement, China is the largest holder of U.S. Treasuries amongst foreign entities. As a total amount, this is a minority allocation of America's debt. Besides, given the superiority of our military, I doubt that anybody is going to collect on us.

No, the real problem is the American consumer and their illiquidity. People are so cash-strapped that only those with cash (comprising a smaller and smaller percentage) are spending. And when consumer spending goes down, corporate revenue goes down. And when corporate revenue goes down, earnings goes...up?

Ah! This is where things start getting interesting. The Wall Street jargon is that we are still in the midst of a great bull market and that the current correction is a perfect buying opportunity. Implicit, and in the case of famed analysts such as Jeremy Siegel, explicit in the aforementioned marketing message is that markets are undervalued. We are told that markets are steadily holding at around a 17 P/E ratio, hardly a measure of irrationality.

But since we have incontrovertible proof that Americans are not spending, where is the engine that is used to justify such an "undervalued" P/E? Company executives undoubtedly recognize the deflationary nature of the current economy and have taken appropriate action, whether that be cost-cutting or corporate mergers. Applying these tactics can certainly boost earnings even when industry share as a concern of totality shrinks, but it also raises the question of how long the cannibalization can last?

As we have seen on Red Friday, the answer is "not long." Other companies will do better, sometimes extraordinarily so, against the mainstream competition. But by and large, the economy faces a reconciliation of all the accounting tricks that have gone uncontested. At some point, Peter will get pissed and will take his money from Paul.

It's an inevitability that will have consequences for the unprepared.