Predictions for 2014: We’ve Got A Turd In The Punch Bowl

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In my last blog post, Echo Bubbles in 2014, I discussed how responding to popped bubbles with a loose monetary policy only serves to reflate more bubbles. The more liquidity injected into the system, the more intense the ballooning.

Since 2008, the Federal Reserve has injected around 4 Trillion of liquidity into the U.S. market. 2.3 Trillion has gone towards Treasuries, to keep demand high and interest rates low. 1.6 Trillion has gone to banks in the form of asset purchases. The Fed has been offloading Mortgage-Backed Securities from banks in order to provide liquidity, and eliminate exposure to housing volatility.

What happens when 1.6 Trillion is injected into our fractional-reserve banking system and real interest rates are negative? Incentivized speculation leading to all-time asset highs, stock market highs, Emerging Market (EM) liquidity, price inflation, etc.

In late 2013, The Fed recognized that it’s balance sheet was growing monstrous, it’s policy was only enriching Wall Street, and unemployment was moving towards 6.5%. The Fed reacted by tapering it’s QE program from 85 billion, to 75 billion, and now 65 billion. With these events in mind, here are my predictions for 2014: 

These will largely begin this year and continue out into 2015.

  1. Lack of Participation: Unemployment missed target in January and was largely attributed to cold weather (even though outdoorsy construction jobs gained). In the unemployment rate calculation, The Bureau of Labor Statistics doesn’t include people who are no longer looking for work. Isn’t that amazing? So if someone gave up searching for a job, and now lives off of the public dime, they are not factored into the unemployment rate. So the really unemployed aren’t counted as unemployed. That’s like not including people over 400 lbs as obese because they are morbidly obese. A better economic indicator is Labor Participation, which hit 35-year lows with a reported 91.8 million people not in the labor market as of January, 2014My Prediction: That number will grow to over 108 million by January, 2015.
  2. Labor Statistic Obfuscation: and yet, when the government doesn’t count non-participants as unemployed, they are able to pad the employment rate dramatically. Even with around a third of the entire population removed from the Labor market, by the miracle of statistical conflation, we’ll see unemployment rates around or below 6.5% for all of 2014.
  3. Food Stamp-ede: But you can’t have it both ways. The Administration will suffer from record Food Stamp Participation when they conflate unemployment rates with lack-of labor participation. Last reported near 47 million partipantsfood stamp participation will hit all times highs with over 60 Million Americans buying government-subsidized high fructose corn syrup products. Don’t worry, Obamacare’s got ‘em covered. I mean do worry, because you’ll be paying indirectly for mandated health services you didn’t need, never wanted, and were forced to buy.
  4. Retail Slides, Moves Online: What hasn’t QE propped up? The middle class. Who buys cheap chinese goods that keep the consumer-economy going? The middle class. With wages and wealth being eroded by an inflationary monetary policy, we can see why retail has recently slid so hard. As if retail didn’t have enough problems getting customers in the door, they’re getting squeezed even harder by government-caused inflation and government-mandated wages. On one end there’s rising cost of goods, rising energy costs, and rising price per square foot in rental space. On the other end, they’re getting rising health care premiums and a populace-driven minimum wage hike. Retail is usually a first rung for youth entering the job market. The minimum wage hike will move the overall pay-scale upwards (if new person makes $10.10, an experienced person now has to make more than that). Good thing they can just increase the price tag… Wait, the middle class loosing jobs and having it’s purchasing power transferred to the politically well-connected might undermine that plan. Maybe that’s why JCP, Sears, Abercrombie, Aeropostale, Best Buy, Radioshack, Target, and the like have all undertaken major downsizing. In 2014 and 2015, we’ll see massive retail misses, closings, major bankruptcies (JCP), and buy-outs. Labor substitution methods, like the robotic warehouses of Amazon, will see wider adoption as retail looks to cut their overhead.
  5. Housing Tanks: Instead of letting housing prices deflate and become affordable to the masses, The Federal Reserve policy has been to purchase them from banks at around 40 Billion per month. This takes the toxic asset off of the bank balance sheet and puts it on The Fed balance sheet. If they can’t unload them at the overvalued purchase price (if it wasn’t too high, the banks would have sold them), then who do you think will be on the hook to cover the losses? Congratulations American taxpayer, you now own 1/6th of a dilapidated house. What happens to housing when it sits empty? It deteriorates. 10.3% of U.S. housing is vacant because the government didn’t want housing to find it’s bottom after the crash. Too Big To Fail Banks would have failed and we can’t have that for our best campaign donors. Unfortunately, when the middle class’s purchasing power gets eroded, and student-loan debt becomes a lifetime burden, people can’t afford housing prices that are propped up by Fed policy. The same policy that enriches Hedge Fund Managers and Bank CEOs. Too bad they only need a few houses each (one for vacation, one for the mistress, etc). As a perverse side effect of QE stimulus, Investment Funds like Blackstone were able to get housing deals while borrow at record low rates. Say hello to the new Fund Lords for the upcoming rental-economy. My prediction: housing will miss month after month with the polar vortex no longer to blame.
  6. Tuition Forgiveness Gets Serious: Tuition forgiveness gets serious legislation proposals in the form of tuition freezes and debt-to income repayment plans. Nevermind that the near infinite supply of government loans is what drove up the price in the first place. Loans that are given without risk analysis or repayment analysis. With youth unemployment on the rise, college has become the new first “job rung” in order to delay actual joblessness. What would happen if government got out of the student loan business? Probably the same thing that happened with car ownership, computer ownership, cell phone ownership, and tuition before the government got involved: it becomes affordable. Sure, rich kids will still drive daddy’s BMW but at least poor kids will have a Ford. There’s something to be said for graduating without a life-time of student debt.
  7. Channel-Stuffed Automakers Get In A Wreck: With channel-stuffing at an all-time high, car dealerships will be looking to store their inventory in the Denny’s parking lot next door. For consumers, this will be great as rock-bottom prices will go even lower. For the auto industry, the silver lining will turn red as margins are crunched in order to move two-year old inventory. In Q2 of 2014, look for insane car deals and even lower auto manufacturer evaluations after channel-stuffing turns into BOGO for the dwindling middle class.
  8. Emerging Market (EM) Crises Goes Full Blown: The new Fed Chair, Janet Yellen recently indicated that they will continue with the taper for QE. They have already reduced it from 85 to 65 billion per month in the last few months. When you take an economy off it’s life support, the first thing to go are the extraneous limbs. The Fed-pumped liquidity that has found it’s way into the riskier emerging economies (Asia, Eastern Euro Block, South America) will be running for the door when future liquidity begins to dry up. You can’t throw no money after bad money and expect growth or to sell out to some greater fool. Besides the taper, giant retail closings will slowly narrow our 500 billion year-over-year trade deficits with China, drying up their cash reserves even more. Expect a full-scale bailout in Asia during 2014. A few of them. The Eastern Block and sections of South America are already imploding. Risk off.
  9. China vs. Japan Heats Up: That’s not Fukushima radiation they’re getting all hot and bothered over, it’s a series of uninhabited islands that offer relatively little in terms of natural resources. The Senkakus battle between China and Japan is steeped in history and represents a proxy power-match more than a real threat. In bad economic times, superfluous threats can escalate very quickly. Unfortunately, both Japan and China are about to face some very real economic turmoil. The former has adopted a bulked-up QE program that has been causing price inflation. Meanwhile, China has been experiencing a liquidity problem that was referenced above. In addition, they have a massive amount of shadow-banking debt that is just about to dry up. The entire world is about to find out how much China has over-expanded. My Prediction: These two will be fighting over these islands (and others) in a game of escalated war posturing throughout 2014. NBD. The IMF should just come in and buy the islands to pay off both sides.
  10. Tapered Taper: When the conflated labor statistics and lack of growth “catch up” to the taper timeline (even though they were already horrid during last round of QE), the QE taper will be reversed. If they’re stupid, they’ll call it QE again and everyone will know that it is a failed policy. If they’re smart, they’ll figure out a better euphemism for government inflationary stimulus. How about “trickle-down inflation.” No, that doesn’t sound appealing. Wait a second. Obama’s new MyRA plan can keep demand high for Treasuries while the government starts a New, New Deal to “create” jobs. That’s more like it. Since The Fed can’t come out and directly say that QE is a huge failure that robs the middle class, and since the U.S. economy is propped up on it, the government will do what is politically expedient: keep over-stimulating while blaming the 1% and capitalism. They’ll need to hide it a bit better so expect to see more bond buying out of Brussels and London. They buy our bonds, we’ll buy their bonds, everybody lends a hand, arm, and foot—of the proletariat—in order to keep the game going.
  11. The New, New Deal: Obama will announce a massive government spending program on infrastructure. This is geared more towards the elections in November 2014 or might even be towards the end of 2015 (for the 2016 elections). Nevermind that doing so transfers wealth from the middle class to the politically-well connected (Big Labor) through inflation and future taxation. And nevermind that government doesn’t know how to value a project because it doesn’t run on a voluntary market system with profits (consumer value) and losses (consumer doesn’t value). With the help of QE, government spending has been at an all-time high and yet, we’ve seen the widest gap in wealth inequality. The New Deal? For the middle-class, it will continue to be the New Steal.
  12. Bitcoin: Is tough to predict. It’s been widely speculated that the U.S. government will eventually try to prohibit, hijack, or regulate bitcoin. If they regulate it to death or ban it, then obviously the evaluation will be much lower than what I predict. I don’t think they’ll do that because Bitcoin is providing an opportunity for wealth creation, in an economy that will soon be lacking in both wealth and opportunity. Bitcoin cuts costs when governmental policies are creating more. Innovation in logistics, automation, and globalization have been driven by entrepreneurs responding competition and governmental regulatory policies. Customers always want the most value for their money, that’s why Wal-Mart exists. Whether a consumer is purchasing Chinese crap from Wal-Mart or a company is purchasing Chinese labor from Guangdong, economizing value is part of the human genome. This is a good thing because it leads to more efficiency. Bitcoin adds to this efficiency by lowering fees by cutting out the middleman: the bank. Bitcoin also replaces the financial sector with an open platform that entrepreneurs can compete in. After the Goxing that just took place, I predict that Bitcoin will rebound off of $580 and end up around $800 on average for 2014. I predict that it will see turmoil throughout the year but no major governmental policy against it (besides uninformed grandstanding). As a result, it will shoot up in Q3 and Q4 as adoption spreads in the e-commerce sector. It will be a few overnight booms from big-box announcements that will drive the price up over $1200, which will raise the mean for the year to $800. This should be multiples higher, but governments around the world have cut bitoin off at the knees by segmenting it from financial institutions, or outright banning it. They don’t want a currency that they can’t control. You can’t inject 4 trillion in liquidity if you don’t own the printing presses. You also have to tax the people to pay for budget-deficits, rather than inflate.
  13. Silver and Gold: A steady climb until beginning of Q3 when the economic turd rises to the top of the punchbowl. Fixed statistics, hedonics-based CPI, and conflated labor can only fool for so long. Silver will go from $20 to at least $28. Gold will go from $1330 to at least $1550. This comes on the heels of the discovery of massive manipulation in the gold price. If the Fed tapers the taper, inflation concerns will become mainstream and precious metals will be purchased as the usual hedge. If the Fed continues to taper, the faux economy will collapse from lack of QE and money will shoot to safe assets. Since historically-safe Treasuries will have real negative rates (thanks to the Fed, ECB, and London keeping demand artificially high), investors will look to gold and silver as an inflation-protected asset during economic turmoil.

Boom and Gloom

If it looks like doom and gloom, it pretty much is. But that’s a good thing. Since we’ve gone completely off the gold standard in 1971, we’ve seen an ever-expanding monetary policy (chart below) and the gradual erosion of the middle class. In the past few years, more wealth than ever has been transferred to the government and politically well-connected (banks) through the creation of new money via debt instruments. In an attempt to deficit spend while avoiding taxation, the government has gutted the middle class through inflationary policies.

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Savings is the delayment of present consumption for future consumption. Deficit spending borrows our future would-be consumption so we can consume now. Deficits add interest, which curtails future consumption even more. All of the fractional-reserve monetary expansion in the world cannot change the mathematics. New money only serves to erode old money, temporarily prop up markets, and transfer wealth.

We need a contraction, it’s the medicine to overexpansion. We need to deleverage and clear out the waste and asset over-evaluations so we can figure out what really has value instead of following the new money. We need to stop inflating away the middle class’s fixed savings and wages. There’s a difference between earning money in a free market, and getting money in a crony capitalist system. We need to get back to the free market.

In 1920s, the US faced a horrible recession. In response, the government cut spending and did very little to interfere. The recession abated in six months and was altogether over in a year. Today, we’re drunk on monetary punch and we keep drinking more to delay the massive hangover that awaits us. Pretty soon, we’ll be at the bottom of the punch bowl and we’ll find out that there was a turd in it the entire time.

Echo Bubbles in 2014

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Fudgamentals

The story every year is follow the money. Normally, this would mean in-depth analysis of company fundamentals and management, trends, and disruptive technologies. To the contrary, in the last few years, fundamentals haven’t mattered near as much as fiscal policy. When the world’s reserve currency is taking part in one of the largest monetary expansions ever (3.5 trillion on balance), economic analysis doesn’t really matter. What matters is where that money goes and what bubbles inflate as a result.

Past Stimulus: Negative Interest Rates

In 2013, The Federal Reserve directed nearly half a trillion to the Too Big To Fail banks through the asset repurchase program under Quantitative Easing (QE). A little more than half a trillion went to U.S. Treasuries under the same program.

The Treasuries money inflated debt demand by providing a constant buyer: The Fed. This kept interest rates low so the government could continue to debt spend at the high rate it’s become accustomed to since 2008. Don’t curse Obama though, curse Greenspan. After the dotcom mini-bubble of 2001, Greenspan dropped the Fed Funds rate from 6% to below 2% in under a year. When there should have been a contraction from over-investment, Greenspan incentivized more spending. 

The dramatic drop in the Fed Funds Rate resulted in an effective negative interest rate when compared to CPI. In essence, if you had put money into a savings account, you would have lost wealth as price inflation outpaced your interest. The negative rate becomes intensified if you consider real housing inflation versus the Government’s concocted version (HPI vs. OER). Chart Below.

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So if people are de-incentivized to save their money, then what do they do with it? They speculate. Padded by other factors, the artificially-low rates spurred massive speculation in the housing sector, as highlighted by the squared sections of the chart. This eventually lead to the bubble that burst in 2008.

Since then, private spending has stagnated as debt-per-citizen levels have soared to 51.5k. Obama’s massive spending is doing what post-housing-bubble consumers can no longer do: prop up bad bubbles. Interest rates alone used to suffice. Now, personal debt-to-income ratios are too high to secure a loan, so the government props up the market by doing what it does best: spending more.

Same Bubble, Different Central Banker

You can see in the chart above that “stimulating” growth after a bubble only serves to create an Echo Bubble. It’s like trying to cure a hangover with shots of tequila. It happened after the dotcom bubble and it’s happening again now.

In 2006, the monetary torch was passed from Greenspan to Bernanke. Not to be overshadowed by his predecessor, Bernanke sunk interest rates to all-time lows and inflated monetary stimulus to all-time highs.

With the American consumer tapped out on debt, who will be the greater fool to buy up overpriced assets? Enter the Fed. Since 2008, the Fed has injected 3.5 trillion dollars in monetary stimulus called Quantitative Easing. Not only is Fed policy encouraging massive speculation with effective negative interest rates, it’s inflating the monetary supply in order to do so.

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QE: Re-inflating Bubbles and Concentrating “New Wealth”

The problem with QE is that the ensuing inflation transfers wealth away from private savings and wages to the banks and politically well-connected. If I print a bunch of new money and loan it to my friends, they benefit by spending that money first. Prices haven’t reacted to the increased supply of money so they can purchase assets at lower than the future market value. If I trade this money for toxic assets, like Mortgage-Backed Securities (MBSs), then I’ve done my friends another favor by liquidating their bad assets. This is exactly what the Fed has done for Too Big To Fail Banks.

QE to banks resulted in a ballooning stock market, funneled through a spoon-fed financial sector. Triple-digit Price-to-Earnings ratios for “hot” (unprofitable) companies has become the new normal. This has created a windfall of bonuses for corporate CEOs, whose company evaluations were artificially boosted by easy money. Money that was searching for any return in the land of negative real interest rates.

The already-wealthy benefited from stock market inflation by owning the majority of U.S. stock and company assets. The bankers and hedge fund managers earned major commissions on the massive influx of cash. Can you guess who didn’t benefit? The middle class and the poor, whose wages are the last to see the boost from inflation.

The Cliffhanger: 2014

So what happens in 2014? To understand that, you have to understand where the 3.5 Trillion in extra liquidity has gone, what it has propped up, and what monetary policies the Fed will resort to when their plan doesn’t work. I’ll be covering that in my Predictions for 2014 post next time.

Hulk-Smashing Bitcoin Haters at Business Insider (Part III: Bitcoin Lowers Fees)

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In Hulk Smashing Bitcoin Haters at Business Insider (Part II: Bitcoin Protects Liberty)I countered Jim Edward’s claim that Bitcoin created “boss-class criminals.” I argued that boss-class criminals arise from a black market, which develops as a result of the State prohibiting a good that the public deems valuable. Since there is no legal recourse, the market actors resort to violence. There were boss-class criminals before Bitcoin, and as long as the State continues the War on Drugs, there will be boss-class criminals in a digital-currency world.

Jim’s next claim was just as misguided: "There is no compelling reason for ordinary people to use it [Bitcoin].”

Bold claim Jim. Let’s do some merchant math to see why, despite being a non-State currency in it’s infancy, Bitcoin has already been adopted by tens of thousands of merchants.

…the Bitcoin equivalents of Paypal, BitPay, announced last week that it has now processed over $100 million in BTC transactions in 2013, has increased its merchant base to over 15,500 approved merchants in over 200 countries, but most importantly, has seen a surge in the number of merchants using its BTC payment pricing plan, by 50% since October while the volume of transactions has tripled. - Zerohedge, As Bitcoin Transaction Volume Triples Since October, Europe Prepares To Regulate, Tax The Digital Currency

$100 million is a lot of Bitcoin volume for merchants in 2013, especially when that doesn’t include processing behemoths like Coinbase (18000+ merchants). That seems at odds with Jim Edwards claim that “there is no compelling reason for ordinary people to use it.”

The Simple Math

Let’s do the basic arithmetic to see why Bitcoin is so attractive for merchants. A merchant can accept Bitcoins for no processing fees. If they want to change Bitcoins into their local currency, they can do the first million for free. After that, they pay 1%. Credit card processing averages around 3%. 1% is less than 3%, netting the business a savings of 2% of revenue when customers use Bitcoin.

If we delve into the border-crossing powershoppers and the booming international e-commerce space, there’s absolutely no comparison. The borderless Bitcoin destroys all competitors at 1% local currency withdrawal rate. Credit cards aren’t even close with 3% fees piled on top of 2% currency exchange fees. That’s a 4% savings when customers use Bitcoin.

Now if you blog for Business Insider, you should know a little about business. When a company is able to reduce costs through technology, they can offer a better product for the same price, or the same product for a better price. Integrating Bitcoin allows for either option because it reduces overhead costs in payment processing. Consumers will gravitate to merchants with lower prices, like Overstock, who already accepts Bitcoin.

As the ecosystem grows past it’s infancy, the user friction for Bitcoin will diminish. Shopify is already offering native Bitcoin integration and Magento has Bitcoin payment extensions.

What About Safety?

As a programmable currency, Bitcoin can have almost every bonus of today’s financial system - insurance, fraud-protection, escrow, fail-safes, etc, which makes general adoption even more compelling. All of the things that worry Bitcoin detractors are opportunities for entrepreneurs to create solutions. Just like seatbelts and airbags in cars or virus protection with computers.

With an open Bitcoin protocol, companies can compete for market space, which drives down prices. The fact that Bitcoin is entirely digital means much of it can be automated via programming, lowering costs for consumers even more. If some services are too expensive, the consumer or business can opt out. Right now, individuals and businesses have no choice if they wish to partake in e-commerce. Bitcoin creates a choice, eliminates fees, and can be programmed for financial services. That is why Bitcoin is useful to ordinary people.

Bitcoin Gox-Blocked: Not Too Big to Fail

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Transaction Malleability: Don’t Feed The Scapegox

Today, one of the largest bitcoin exchanges went dark. Mtgox had previously reported a bitcoin “malleability problem" that was somehow only affecting their exchange. As it turns out, the ability for transaction IDs (TXIDs) to be changed was a well-known feature of bitcoin (for crowdfunding, escrow, etc), not a bug.

Because of its mutability, Garzik says that the main purpose of the TXID was never to act as a primary or definitive way for bitcoin wallets and other second-layer protocols to track transactions. Rather, transaction IDs were designed as an easy reference for support services. “[Processors] will issue this transaction ID, and if you have an issue with the transaction, you can call the support desk and tell them if the transaction didn’t arrive.” - David Z Morris, Cryptocalypse now: Bitcoin’s issue with ‘transaction malleability’

Unfortunately, the Mtgox software dubiously tracked the transactions using only TXIDs instead of using more robust methods. In the last few weeks, this had caused a run on the Japan-based exchange as account holders rushed to liquidate their bitcoin positions. Demand fell causing an aggregate price drop across all exchanges.

This wasn’t the first gox-block. The bitcoin giant has had a dismal trading history resulting in price-crashes and exchange halts. They often employed extended withdrawal times, sometimes up to three weeks. With clear alternatives like Coinbase, BTCe, Kraken, and Bitstamp, Mtgox was never a viable contender for my money. Given these flaws, I wouldn’t trust them with my magic beans let alone a few thousand dollars.

More Circle Knee-Jerking

The resulting bitcoin downward price trend has caused many to take notice. Bitcoin-opposers are coming out of the woodwork. Now that Mtgox is insolvent, many are claiming that bitcoin itself is insolvent, or at least deeply flawed. The mistake of this logic is the fallacy of composition. There is a difference between an exchange and bitcoin itself.

For example, just because Bernie Madoff ran a ponzi, doesn’t mean that the USD was insolvent. Just because Mtgox dubiously relied on TXIDs to match up withdrawals, doesn’t that mean btc itself is broken. This can be clearly demonstrated by pointing to the several thriving exchanges that are all still running.

Too Big To…Oh Shit!

It is interesting, that in a non-state-backed currency, we are experiencing a Too Big To Fail entity, failing. That’s the part I love. No bailouts for one of the largest market holders. No political connections usurping bad business practices. No blindly advocating future moral hazard. Those who had an account at Mtgox, and those who were invested in Mtgox, lost their money, not the public at large. Private profits, private losses. Much better than the private profits and public losses that the current U.S. monetary policy has been employing.

Due diligence and personal responsibility will trump moral hazard in the long run. People forget that even with the FDIC, your deposit is an asset on a bank’s ledger. The Cypriots found this out the hard way last year. The FDIC couldn’t possibly fund a gox-type run on banks, it’s just a there to maintain confidence. Papering over a problem will only lead to that problem going unchecked and being magnified in the future. By experiencing the Goxplosion and knowing a bailed out is not forthcoming, consumers and exchanges have had to prioritize the issue:

But for those with better practices, transaction malleability has turned out to be a non-issue. Bitstamp, BTCe, and other operators that had halted trading to assess their systems were able to reopen within hours. Others avoided even brief problems. Among these was the bitcoin-based foreign exchange service Kraken, whose staff on Feb. 11 cheerfully tweeted: “Kraken halts nothing! Because planning. Carry on :)” -David Z Morris, Cryptocalypse now: Bitcoin’s issue with ‘transaction malleability’

What Doesn’t Kill You…

With any new, non-State currency there will be bumps in the road. Bitcoin is still just a toddler, growing pains are inevitable. In a market cut off from the political expediencies of the vote-buying State, the pain experienced by those bumps will lead to a more robust ecosystem. Hopefully regulators will express their knee-jerk reactions through their propaganda and not their pens. To them I say, “There’s no bailouts here. This isn’t the currency you are looking for.”

Not-So-Big Mac: Debunking the Australian Minimum Wage Myth

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Myth: Australia’s minimum wage of $16 only results in a marginal price increase, which is usually cited by comparing the Big Mac Index. Therefore, the U.S. can dramatically raise minimum wage with only a marginal rise in prices.

Let’s ignore the fact that the minimum wage outlaws labor between two consenting adults below a certain rate-per-hour floor. Let’s ignore that it has been increased 19 times in the past. Let’s even ignore that the reason it keeps needing such an increase is because of a government monetary policy that inflates away savings and wages. The Australian Minimum Wage Myth still fails to do one thing, factor in the costs.

Koala Costs

If I have a Koala-cuddling business that makes two million in revenue, you might say, “Nice job Mate! The business is having a Hugh Jackman. Glad I invested!” Then I tell you that my operating costs are four million. You immediately want to boomerang me in the back of the head. What did you learn that made you change your tune? That you must factor in costs.

So what are the costs of the Australian minimum wage? The cost-of-production theory of value states that since wages are factored into product costs, they are positively correlated with product prices. The Austrian theory says that higher wages reduce supply, increasing the marginal utility of the product, and therefore, increasing the value proposition that the customer may find favorable. With either theory, higher wages lead to an increase in price, so costs are transferred to the consumer.

So the question isn’t one of direction, it’s one of magnitude. How much do prices increase? Well, since we’re not going to be eating Big Macs for every meal, or living in a Big Mac, or using it to heat our homes, we should probably look at other costs of living. Luckily, we have Numbeo.com, who has an impressive resume for economic statistics.

Looking at Numbeo’s comparison between the U.S. and Australia, we find that:

  • Consumer Prices in Australia are 41.37% higher than in United States

  • Rent Prices in Australia are 58.27% higher than in United States

  • Restaurant Prices in Australia are 44.95% higher than in United States

  • Groceries Prices in Australia are 27.45% higher than in United States

  • Local Purchasing Power in Australia is 21.73% lower than in United States

Here’s the interesting part: Australian’s average monthly disposable income after taxes is only 14.75% more than the U.S. With a 41% increase in consumer prices, Australian’s monthly disposable income purchases 33% less than that of their U.S. counterparts.  

Not-So-Big Mac

To make matters worse, the Australian Big Mac is 20% smaller than the U.S. Big Mac. With that downsize, the Little Mac is still priced 18% higher than it’s U.S. counterpart ($4.94 vs. $4.20). Since cost of food is usually 32% of fast food sales, we can hypothesize that the Australian Big Mac would cost $5.26, or 25% more than the real Big Mac. Looks like everything isn’t bigger Down Under, except the bill. And Foster’s; you could punch a crocodile in the face with that can.

Comparing Apples to Papayas

Comparing minimum wage between two countries is usually dubious. The countries will have different tax laws, business structures, natural resources, locations, regulations, levels of corruption, monetary policies, military sizes, subsidies, etc.

Minimum wage raise advocates ignore country differences and try to compare Big Macs without looking at relevant living expenses. By only focusing only on a faulty Big Mac comparison, they’re missing the cost of having a high minimum wage that manifests in higher consumer prices. When we compare a wider swath of people’s actual expenses, we see that Australia is one of the most expensive countries in the world. So don’t be fooled, the myth that a $16 minimum wage results in only a slight cost-of-living increase is wrong. Myth debunked.