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Monday, November 05, 2007

Economic Death Spiral

Well, our economy's still doing well, as it has been for the last four years. So long as you ignore the anguished screams of financial companies, the GDP, productivity etc. are decent.

We're undermining ourselves with our shoddy education and the apparent desire of all Americans to be actors and buy XBox 360s and Mustangs, but whatever.

What is shocking to me is how quickly the effects of the minimum wage hike have rippled. So far, it has increased from $5.15 to $5.85. That's about a 14% increase, and we should expect a corresponding devaluation of the US's currency of 12%. This is based on the theory that the value of labor is not influenced by the arbitrary number the government slaps on it; Minimum wage workers will still get paid the minimum wage, but redefining the minimum wage redefines the currency, since the currency floats.

This theory is supported by the fact that the dollar has fallen ~7% against the Euro since the minimum wage hike passed. It has fallen ~6% against the Japanese Yen. Even China has started boosting the value of the Yuan, against which the Dollar has lost ~3%. The Yuan is tied to a basket of foreign currencies and it's not useful for this sort of analysis, but it is of note that the Chinese don't have faith in the dollar any more.

http://www.x-rates.com/d/JPY/USD/graph120.html (graph updated daily)

I'm not a huge fan of floating money; it would make more sense to tie it to a basket of commodities or just to use stock certificates as currency. THAT would be entertaining.

The dollar dropping may have benefits; I'm not thrilled, but whatever. The biggest problems associated with this devaluation are:

1) The cost of oil has increased significantly. A 10% drop in our currency results in an 11% increase in oil import prices.

2) If foreign investors in T-bills bail out, then the US Government will be essentially bankrupt. That's not likely to happen catastrophically for investment purposes, since no one really expects a long slide. However, since China holds so many bonds as a way of controlling their currency value, anything that makes them revalue the Yuan means X hundred billion dollars of bonds that won't be rolled over, which results in higher interest rates with potentially disastrous results on the US economy. The easy solution would be to cut USGOV spending on nonessential things like the Department of Agriculture, but that's not going to happen in a presidential election year. With our current slate of politicians, spending cuts are beyond laughable.

I'm a little pleased at seeing my theory, aka "Economics as it is understood by everyone" pan out.


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