The Minimum Wage Trap

By Scott GardnerWe are on the precipice of a significant stimulus rollout that has the potential of upending the economy as we know it.In 2008, the government didn’t have the tools to respond to a fast-moving economic issue and subsequently reacted too slowly to prevent significant economic damage from the sub-prime mortgage meltdown.By 2020, the government learned from that experience and had the tools to react at an appropriate speed to buoy the economy from last year’s all-stop reaction to COVID-19.With the latest stimulus proposals, the government is poised to oversaturate the economy with money, resulting in a bull market for stocks and real estate and higher inflation (more expensive goods).Oversaturating an economy with ‘free money’ certainly keeps the economic machine working, but it has the effects of causing inflated markets to expand into bubbles and other markets to become inflated—in other words, everything gets more expensive.When an economy is flush with cash, it generally leads to inflation. The Fed has the responsibility to control inflation and the growth of the economy by manipulating the interest rate. As the economy responds to cheap cash and liquidity, the Fed is forced to increase interest rates to prevent inflation.Now, there has been a lot of talk about increasing the minimum wage to $15/hour. While it sounds like a kindness, if the government tacks on a $15/hour minimum wage to this economic oversaturation scenario, the cost of goods and inflation will be augmented significantly which will hurt the very people intended to be helped.The better solution to increasing the minimum wage is to give free trade schooling to anyone living below the poverty level so that they have the skills and abilities to get out and stay out of poverty.With the latest round of government stimulus, I believe it will cause most markets to overheat and will force the Fed to increase interest rates to prevent the entire economy from overheating. When this happens, it will have an immediate slowing effect on the hottest markets.So, I recommend to everyone that you use this time to bolster your personal finances, create a personal financial plan, and invest wisely.