Jobless, Because of Minimum Wage
Research for Online Investors

by John Dalt

7/13/09

Unemployment will probably jump over 10% before the recovery begins replacing jobs faster than eliminating them.  What if we have a jobless recovery?  The Wall Street Journal has a good article on the ramifications of continued high unemployment.  Evidently, it is a question that Fed Chairman Bernanke has on his mind; it came up during a meeting with Sen. Richard Shelby this morning.

Will employers be slow to re-hire?  Peter Gutmann, economics professor of Baruch College of New York’s City University believes “double digit unemployment could be with us for some time.”  This may mean lower interest rates according to Richard Hoey, chief economist at the Bank of New York Mellon.  Lower rates are good for capital-intensive businesses.  The article supposes that some sectors will do better than others in a jobless recovery.  People have to eat and buy staples.  Hello Kroger, McDonalds and Wal-Mart.

Peter Schiff of Euro Pacific Capital wrote a great article on the Minimum Wage increase to $7.25 per hour set to take effect on July 24.  His article is titled, “Employment: Minimum Wage, Maximum Stupidity.”  Mr. Schiff is a great investor, and is quick to gouge the government’s eye over dumb policies.  A wage hike could not come at a worse time for the economy.

Minimum wage laws are frequently debated in the context of a “living wage”, but most minimum wage employees live at home with their parents.  This more likely should be called a ‘training wage’ when young people take their first job, and gain skills to advance in the labor pool.

To quote Mr. Schiff, “In a free market, demand is always a function of price: the higher the price, the lower the demand. What may surprise most politicians is that these rules apply equally to both prices and wages. When employers evaluate their labor and capital needs, cost is a primary factor. When the cost of hiring low-skilled workers moves higher, jobs are lost. Despite this, minimum wage hikes, like the one set to take effect later this month, are always seen as an act of governmental benevolence. Nothing could be further from the truth.”   Read the rest of his article on minimum wage, it is worth the time.

The FDIC closed the Bank of Wyoming this weekend, which is the 53rd bank this year.  The FDIC is down to $13 billion in assets.

When I was in the heavy construction business, we used CIT Financial for leases on heavy equipment purchases.  I enjoyed a good relationship with their representative, and while the paperwork was exacting, the money was always available.

CIT has $2.1 billion in loans that mature this year, and over $10 billion maturing in 2010. They should qualify for FDIC guarantees on their debt because of ownership of an industrial bank.  This was the same avenue GE Capital used to gain FDIC backing for 1 out of every five dollars the FDIC ensures.

The FDIC will not back CIT’s borrowing.  Maybe they did not give enough money to Oh! Bama like Jeffery Immelt, CEO of GE.  He also serves as a White House advisor, and owns a television network that praises all things Oh! Bama.  He reportedly made a call to CNBC with instructions to quit criticizing Oh! Bama’s policies last spring.  This morning Moody’s downgraded CIT’s debt twice.

The hearings for Sonia Sotomayor to join the U.S. Supreme Court began today.  She is as close to a lock as you can get.  The Democrats have 60 votes, they could put your neighbors dog on the court if he didn’t bark until after the hearing.  She has a compelling story, so did others that the dems didn’t even give the courtesy of a hearing.  She has worked for the Puerto Rican Legal Defense and Education Fund backing ACORN initiatives.  She has been reversed four times out of six by the Supreme Court.  Welcome to the new majority!

“Experience should teach us to be most on guard to protect liberty when the government’s purposes are beneficial.
The greatest dangers to liberty lurk in insidious encroachment by men of zeal, well meaning but without understanding.”

---Louis D. Brandeis—1928—Supreme Court Justice

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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