Fear is the most powerful weapon in war. Hitler deployed buzz bombs against London in an attempt to destroy resolve and heighten fear during World War II. It nearly worked, if not for the even greater resolve of the British people and their leader, Winston Churchill. 

Fear is such a powerful weapon that nations will go to great lengths in war to manipulate the news reaching the people. During World War I, only Spain had a reliable free press reporting the deadly flu ravaging troops and populations. No army wanted the world to know they were taking heavy causalities from what would later be called the Spanish Flu. Yet every nation, on the battlefield and at home, were taking a hard hit from the disease. The U.S. was particularly hard hit. But when the absence of daily news on the deadly flu was only to be found in Spain, it was felt it the virus originating there. The truth was far from it.

Today we are facing a similar, though less deadly, threat, and the disinformation machine is in high gear. This time the media seems to want fear cranked to the highest level.

 

Washing your hands with soapy water for 20 seconds or longer is the most effective way to prevent the spread of the flu virus, even better than hand sanitizers.

 

Since I have no formal medical training I will leave the medical advice to those qualified to give it. What I can do, as an accountant, is reveal the truth behind the never-ending statistics and how they have been manipulated to scare us at the highest level. COVID-19 is a serious health issue without a doubt. It spreads easy and fast with a heightened risk of death. These simple facts make it easy to scare people into clearing their savings account to stock up on toilet paper and other essentials. 

The level of fear has filled my email box from clients and readers worried about the state of affairs and how it will affect their finances. I have worked hard on social media to provide a steady voice in the whirlwind of conflicting data. It is time I issued a formalized response here to the elevated levels of fear people are experiencing and the risks people face with their investments and personal finances.

Understand, this post is not about specific advice: buy this, sell that. Rather, my goal is to help you control your emotions and control your response to fear mongering and market unrest. That is where real wealth creation finds a home. Buying the right investment does no good if you panic sell before value has been realized. Buying high to sell at a panic low is the surest path to poverty. With new feeds bloated with coronavirus articles it is easy to start thinking the world is about to end. I will show you below, nothing is further from the truth. This has happened before and we know how it ends. (SPOILER ALERT: It will pass and most people will be unharmed. Even the economic damage will be less than expected and will return to normal in a matter of time. It will later be determined that fear caused more damage than COVID-19 did.)

 

A Short History of Pandemics

Human history is filled with pandemics. Until modern times, diseases ran their course with little effective intervention from doctors. Illnesses ran their course and eventually died out. 

The common cold, flu and similar illnesses are also common throughout history. The 1918-19 Spanish Flu was a particularly nasty one. As many as 50 million people died. 

Things were different in 1918-19. World War I was coming to an end. Governments involved in The War to End All Wars kept the flu numbers a secret so as not to encourage the enemy or demoralize their soldiers in the field and the folks back home. Only the free press in Spain reported on the people getting sick and the number dying. That is why some thought it started in Spain, hence the Spanish Flu designation. (It didn’t. It probably started in northern China in 1917.) 

Pandemics of the past, even those from less than 100 years ago, had less economic impact than today. Supply chains now span the globe. Never before have businesses been so integrated and international in scope. Pandemics of the past killed and sickened people; COVID-19 is also wrecking havoc on the world economy.

Until recently, a nasty flu season was the only way anyone knew something was afoot. Modern medicine gives us a jump start on what to expect. We knew COVID-19 was headed our way because China alerted the world to the pending virus. SARS, the Swine Flu and the H1N1 variety of flu in 2009 are modern examples of pandemic scares. Most of these viruses never circumnavigated the globe, dying somewhere along the way.

And we come back to the Spanish Flu. Somewhere between 20 – 50 million people died from that flu. It came in three waves with the second being the worst. Then it just disappeared. Nobody knows exactly what happened, but the flu virus probably mutated again to a less deadly form. Doctors didn’t discover a cure, social distancing wasn’t a thing and unless you were sick in a hospital it was unlikely you were even quarantined.

The Spanish Flu did have one nasty trait that put it into the history books. Normally the seasonal flu kills the old, very young and those with a compromised immune system. The Spanish Flu killed adults in their prime; the people who usually get sick for a week or so at worst during flu season, but almost always recover. 

And that is the first problem with the fear surrounding COVID-19: it generally kills older people, similar to the normal seasonal flu. The very young are spared with only a few healthy adults susceptible. Those over age 60 are at most risk.

 

Unfounded Fears?

COVID-19 is a nasty flu bug for sure. It spreads very easy and has managed to circle the globe rather quickly. It also makes people very sick that normally only get mildly sick from the flu. Older people face a very high risk of death if they contract COVID-19.

The fears are not unfounded, but are exaggerated. The response has been way overblown compared to the risk profile of the disease. Let’s place this into perspective:

As of this writing, 7,158 have died with COVID-19. Read that last sentence very closely as it will be important in a bit. Here are the current numbers

No one is advocating clearing the roads due to the risks of driving. Many still smoke tobacco and eat an unhealthy diet that increases the risk of cancer, heart disease and stroke. Yet, one of the smallest risks of dying to-date is causing a panic.

HIV/AIDS caused fear, but no panic. All the mortality risks listed above are a concern, but not at a level that should be disruptive. So what is causing COVID-19 to create such disruptive panic?

First, when the seasonal flu is with us every year and tens of thousand die from it we adjust to the risk as a normal part of life. COVID-19 is new, novel. Novel in this case means people do not have a natural immunity to the virus yet. 

Second, COVID-19 spreads fast and very easy. People have not had time to adjust.

Third, people who normally do not die from the flu are. Not like the Spanish Flu, but an elevated percentage of healthy middle age people are dying from COVID-19. 

All three combined has caused rampant fear. New, fast and potentially deadly to people who normally do not fear the flu has generated panic. Then people extrapolate the numbers to the entire world population and get dizzy. Except it is a massive misrepresentation of the facts.

 

Misleading Numbers

News reports and press releases from world health organizations are very careful how they word their press releases. Mortality rates are extrapolated by the public from the fancy representation of the numbers, but the extrapolations are far from truth. 

People dying with COVID-19 are reportedly as high as 3.84%. When people read this they think it is the mortality rate. It isn’t.

Not everyone is tested for the virus. Those most ill are more likely to be tested and all people who are reported to have died with COVOD-19 have been tested. (Otherwise how would they know they died with the virus?) This leads to a misrepresentation. If only sick, or potentially sick, people are tested, the number that die from the virus is pulled from a population likely to have contracted the disease. That is like using a test from people likely to have cancer as a representation of the entire population’s cancer mortality risk. The mortality rate for COVID-19 is likely under 1% and even lower for the population at large. Only time will give us an exact, or close to exact, number. Using the data available, COVID-19 is more deadly that the seasonal flu most years, but not anywhere near as deadly as the Spanish Flu.

Another misleading statistic comes from the wording in news reports and press releases from health organizations. They are careful to say someone has died “with” COVID-19 rather than “from” or “because of” COVID-19. This is a serious reporting issue.

Think of it this way. If someone is healthy and contracts COVID-19 they might have mild or no symptoms. But if they die in a car accident before the virus is cleared from their body they died “with” COVID-19. The virus had nothing to do with the death, but is recorded as a disease that the person had when they died. 

It is not uncommon for someone to have several contributing factors to their death. Rarely, if ever, do we medically say someone dies of old age. Instead, we list a variety of ailments that contribute to the final cause of death. Cancer and pneumonia  are common causes of death in people over 80. The flu is also a big contributor. Somehow we can’t bring ourselves to say they just got old and died. We need a reason. And that can lead to problems at times like these.

This counting of every death where COVID-19 is present misrepresents the full facts. The patient may have died from other causes at the same relative time anyway. This happens when people get old, and COVID-19 strikes hard at the old, as do many flu strains. This misrepresentation allows for an inflation of the COVID-19 numbers which heightens public fears.

 

Emotions in Check

People at risk need to take precautions. Because young people can carry COVID-19 without getting seriously ill, it is important to take steps to prevent the virus from infecting older family members inadvertently. That is the real risk with COVID-19; the unknown causing fear.

It is proper to take a break from all but necessary gatherings. The economy will take a short-term hit. It is scary, but not as bad as the media would have us believe. Social media blows it up even worse that the traditional press. Shame on us!

In the modern world this means supply chains will be disrupted. Business will slow and some industries will be very hard hit. The stock market is predicting a doomsday scenario.  It isn’t that bad! For those who are patient and control their emotions, now and in the near future is a good time to increase equity holdings. Keep adding to your retirement plan at work. Dollar cost averaging only works if you keep the regular investments going when the market is down, too.

I know it looks bad right now. Not everyone will contract COVID-19. Most who do will only experience mild illness. The older you are the more important it is to seek medical attention as your mortality risk increases rapidly with age. 

The way the numbers are playing out the number of deaths from COVID-19 will be somewhat higher than a normal flu season. However, the fear it induces will keep more people at home and off the road. It is possible the fewer number of people who die in road accidents as a result may be more than all the deaths attributable to COVID-19. 

That would make this the first flu strain to reduce the number of deaths by a greater number from other causes than those who die from the virus. Technically, a negative death rate. Again, technically, all factors combined, it could be the least deadly flu strain since the invention of the automobile.

It’s all a matter of perspective.

 


 

 

More Wealth Building Resources

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

Does minimum wage cause job loss, inflation? Income inequality is an issue important to everyone. The benefits of increasing the minimum wage are greater than first thought. #minimumwage #incomeinequality #fairwage #workingwageEconomic growth is pushing towards 10 years as of this writing. The 2008-09 recession was deep and slow in recovery. Fewer jobs at lower wages coupled with the long time frame unemployed people had to wait to even get a job at any wage caused tempers to flare. The minimum wage was raised in 2007, 2008 and 2009 to the current federal rate we have today.

Jobs available as the recession eased were not of the same quality as jobs lost. More workers were among the working poor, earning minimum wage or close to it. Eventually a vocal crowd demanded a $15 an hour minimum wage. It all sounded good. And fair to workers making less. Business owners also made powerful points. In the end nothing of consequence came of the movement. The expanding economy lifted wages, nullifying the demands of the activists. Better jobs with higher wages started appearing, too. People used to a higher income had greater opportunity to explore a pay increase at a new employer if their current employer refused..

The issues never went away; they’re just hibernating until the next opportune moment. Many myths cropped up during the debate. Does a modestly higher minimum wage cost jobs? Does it increase automation, eliminating the job completely? Do worker deserve a fair wage? A higher wage than $10 or so?

I did some research to see if the minimum wage causes inflation, another of the complaints against increasing the minimum wage. Of course, most people agree workers should be paid fairly. We all want to earn more for our efforts. Even business owners understand employees need a living wage.

We will explore some of these myths and how they affect your personal finance decisions. As with most issues, the answers aren’t as clear as activists claim; businesses, either. The debate gets steeped in politics when economic matters are considered. This article will explain the truth behind the myths and what government and you can do about it.

First we address the myths.

Myth #1: The Minimum Wage would be $22.50 an Hour if it kept Up With Inflation

At first I accepted this claim at face value. After thinking about it for a while I began to doubt the claim. Protesters claimed the minimum wage would be somewhere in the neighborhood of $22.50 an hour if the minimum wage had kept up with inflation from a certain date. Extraordinary claims require extraordinary proof! Fortunately we have actual data to determine if the minimum wage now is lower than in the past, adjusting for inflation.

I will do the heavy lifting for you. I’ve included links if you wish to dig deeper into how the minimum wage has fared against inflation. We will test this claim by looking back to 2009, 1990 (a date protesters sometimes used in their claim), 1978 (another date used by protesters) and all the way back to the beginning on October 24th, 1938 when the first federal minimum wage was instituted in the U.S.

Disclaimer: Several states have their own higher minimum wage. We are discussing the federal minimum wage only. Minimum wage data was used from the U.S Department of Labor and the Consumer Price Index-U (all urban areas) was used in calculating the inflation adjusted minimum wage.  We will not address salaried workers, restaurant workers or individuals under age 20 first starting a job, all of which have a different minimum wage.

Has the minimum wage kept up with inflation? The answer might surprise you. And if the minimum wage is increased at the right time is sparks economic growth while crushing deflation. An honest day's pay for an honest day's work. #work #wages #minimumwageAdjusted Minimum Wage from 2009: The current federal minimum wage is $7.25 an hour. There are other rates based on age and occupation. To keep this post brief I will focus on 1938 Act until 1978 where I use the all nonexempt workers rate.

The federal minimum wage was last increased, effective July 24th, 2009. The CPI index stood at 215.351 in July of 2009. The latest reading for June 2018 is 251.989. The index has increased 36.638 points since the last minimum wage increase, or about 17%. If the minimum wage were indexed to inflation the minimum wage would now stand at $8.48 per hour. My guess is that in the near future the federal minimum wage will be increased to $8.50 – $9.00 per hour. This would accurately reflect the increase in average consumer prices over the time period.

So, the argument the minimum wage should be $22.50 doesn’t work calculating from 2009.

Adjusted Minimum Wage from 1990: The minimum wage was increased on April 1st, 1990 to $3.80 per hour. The CPI was 128.9. The CPI increased 123.089 points since April 1990, or a 95.49% increase. Adding 95.49% to the then minimum wage of $3.80 gives us $7.43 an hour, pretty close to the current minimum wage. Maybe we need to go back further.

Adjusted Minimum Wage from 1978: The minimum wage was increased at the beginning of 1978 to $2.65 an hour. The CPI stood at 62.5 in January, 1978. This is an increase of 189.489 points or 303%. Increase the then current minimum wage of $2.65 by 303% and we get $8.03 an hour. Hmmm. Maybe we need to go back all the way to the beginning.

Adjusted Minimum Wage from 1938: The first federal minimum wage in the U.S. began October 24, 1938 at $.25. Yes, that is 25 cents an hour. The next year they raised it to $.30 an hour. We will still use that original minimum wage starting point to determine if the minimum wage is worse today than it was in the past.

The CPI stood at 14 in October of 1938. The index has climbed an additional 237.989 points since. The CPI is a whopping 18 times what it was in October 1938! This means the original minimum wage, adjusted for inflation was {drum roll}: $4.50 an hour.

Oh-oh. The claim minimum wage should be over $20 an hour now doesn’t hold up. But this isn’t the only myth batted around.

Myth #2: Increasing the Minimum Wage Causes Job Loss

This scare tactic crops up every time a minimum wage increase is mentioned. As you can see from Myth #1 above, the minimum wage has been a minimum burden on business since the beginning. Since 1938 technology and productivity have increased massively. If business can’t keep up with the barely minimal minimum wage increasing at somewhere in the vicinity of the inflation rate, business needs to do something else.

Does increasing the minimum wage cost jobs? Well, business tells us if we increase the minimum wage business will automate the jobs away, eliminating the entire labor cost. McDonald’s and Wal-Mart gave us this song and dance. For the record, in the last 10 years Wal-Mart has replaced a large percentage of cashiers, requiring customers to check themselves out. McDonald’s is replacing workers fast with automated order taking (similar to Wal-Mart’s check-out kiosks) and cooking robots. The minimum wage remained static for a decade and automation happened anyway! The minimum wage had little to no bearing on that corporate decision; finding qualified workers willing to work at minimal wages was.

Of course, the economic professor in me says that when prices increase, demand drops. It’s Macro Economics 201 (or is it 202, it’s been a long time since my college course). A higher minimum wage does reduce jobs minimally! Wages tracking inflation is NOT a REAL wage increase. So what is business talking about? They’re talking about maximizing profits on the back of minimum wage workers. I get it, but it’s still a myth jobs are lost when wages increase. Higher wages increase inflation, not demand for labor. Demand for labor is based on economic conditions.

Myth #3: Workers Paid Minimum Wage Aren’t Getting a Working Wage

Even business owners agree a person should be paid a reasonable wage for their labor. The question revolves around “working wage”. Are workers paid near minimum or minimum wage paid a working wage? Well, I’ll be the first to admit $7.25 an hour isn’t a lot and lacks the motivational ability to move the crowds. For young people starting out its fine, but even then, what’s the motivation to perform maximum when the pay is minimum? Just asking.

But the minimum wage isn’t the only source of income for these workers. The tax code provides an Earned Income Credit for workers with low income. The EIC is a refundable credit and tax-free to the recipient. Many states also add to the federal Earned Income Credit.

All this combined is still hard time. Full-time (40 hours per week) at $7.25 an hour is only $290 per week. Ouch! Payroll taxes take 7.65% off the top. Good thing there is an Earned Income Credit! This equates to $15,080 a year without a pay increase in site.

I never said it was pretty. Then again, the minimum wage was never called a working wage (unless they said it back in 1938).

The Federal Reserve’s Money Printing Problem

Now we can put some of this knowledge to work.

Interest rates peaked well into the double digits in the early 1980’s. Rates have steadily declines, with only temporary increases, since. Anyone under age 35 has never lived through a serious increase in inflation and/or interest rates! This is nearly two generations who have never experienced how bad, bad can get.

We've been looking for income inequality in the wrong place. The minimum wage can level the playing field, even for those earning much more. Equal pay for equal work. The minimum wage and inflation are a correlation. #inflation #wages #minimumwage #equalpay #equalrights #equalopportunityFrom the early 1980s until the mid-2000s the Federal Reserve was able to nudge the economy along by lowering interest rates through a variety of lending facilities. The Great Recession which started in 2008 brought interest rates to zero and the economy still only limped along. The solution the Fed settled on was Quantitative Easing where the Fed bought up massive quantities of Treasuries and mortgage securities. The buying was in the trillions! The Fed balance sheet swelled from around $800 billion to the $4.5 trillion neighborhood. And they couldn’t get a pulse from inflation no matter how many smelling salts were used.

I’ve argued in the past on the reasons why all the money printing around the world didn’t cause runaway inflation. In short, much of the newly created money never entered the economy. Money center banks and central banks around the world stuffed their vaults with digital cash. It made the books look better so banks could lend if necessary. The result? The economy limped slowly out of the Great Recession in fits and starts, but finally grew to record length proportions. It’s been a long recovery and new heights have been reached.

But interest rates are still very low. If another recession arrives (some might say we are due), the Fed will not have much room to maneuver. If they try the old “print more money” strategy used last time it could compound the issues.

This is where the Fed and elected officials need to review the data for additional options. And I have a powerful one.

Getting Inflation (and Economic Growth) the Federal Reserve Wants without Printing More Money

The chart you see in this section I put together with data from the U.S. Department of Labor, the Bureau of Labor and Statistics and InflationData.com. When I asked the question: Does increasing the minimum wage cause inflation? I had to dig further than the available charts. It was necessary to determine if there was a correlation between inflation and the minimum wage. If there is a correlation the monetary and fiscal implications are significant. It also effects personal finance decisions in a serious way.

This exercise is more than a macro-economic research project. If a correlation exists, the Federal Reserve and Congress will want to act appropriately in the future. It also means everything we know about the rate of the minimum wage is wrong!

If you examine the chart closely there does appear to be a modest correlation between a minimum wage increase and the rate of inflation. However, the correlation isn’t clear. In the 1970’s, the increasing minimum wage supported inflation rather than lead to inflation. In the Great Recession it seems like the minimum wage increase had no effect at all.

In the same way astrophysicists glean the data for a slight wobble in a star to determine if a planet orbits said star, I had to push away all the noise and look for a wobble in the inflation data. Productivity, Fed policy and economic conditions provided plenty of background noise to distract for the data. But I did find a wobble.

Raising the minimum wage at the right time benefits workers and employers. A fair wage,a working wage is vital to a strong economy. The $15 minimum wage movement was right, even if their timing was wrong. #$15anhour #workingwage #inequality #wages #salary The minimum wage was instituted during the tail end of the Great Depression. Adjusted for inflation, the first federal minimum wage was around $4.50, but a year later it increased to an inflation adjusted $5.40 an hour. This new minimum wage was started in what many call the second Great Depression. From 1929 to 1932 the economy collapsed at a rapid pace. Recovery was incomplete by 1937 when the Fed started raising interest rates causing the economy to once again slow and the stock market to decline hard.

Then we get a new minimum wage in 1938 and prices start to climb. The data used in the chart only includes average inflation for each year. The data detail (found using the link above from InflationData.com) reveals a more immediate response. The chart makes it look like the minimum wage could have caused some inflation, but in reality World War II had a lot to do with the price levels at the time.

Deflation was a serious issue early in the Great Recession. Prices were actually declining! Inflation is bad, but deflation makes it incredibly hard to spur economic growth since waiting to purchase a good or service is likely to be cheaper tomorrow.

The Fed had its hands full with declining prices, high unemployment and the banking industry in ruins. Interest rates dropped to zero percent. Some countries experimented with negative interest rates to no avail. The economy was growing at an anemic pace (still declining in some countries) with virtually no inflation. Creating massive quantities of new money didn’t do the trick hoped for. It in the end did save the day, but at what cost. The next time we need help from monetary policy we are out of bullets. Do we keep creating more money? How far do we push the economic system out of balance? What if we can’t kick the can further down the road?

The wobble is in the data! Increasing the minimum wage does cause mild inflation very quickly. Unfortunately, the lift is short lived. But it is another planning tool for the government and a key point you, kind readers, need to understand.

The minimum wage was increased during the Great Recession and it kept prices stable. Only after the wage increase subsided into the past did prices start to fall. The printing press was all we had. Even in the second leg of the Great Depression the new minimum wage didn’t harm the economy. Few jobs, if any, were lost. Prices started to increase, encouraging demand and production, creating even more jobs.

Armed with this information the government should avoid raising the minimum wage during economic “good times”. Rather, when business says they can least afford it is when it needs to be done. Inflation is sparked by demand. Since the minimum wage is increased after long periods of flat lining, the increase tends to be a larger than average percentage. People earning minimum wage spend all their paycheck and quickly. The added demand encourages more production and helps reduce deflationary pressures.

How does this affect you? Well, the best time to increase the minimum wage is when the most people need it. Myth #2 is clear; increasing the minimum wage reduces very few jobs. Business can afford an increased minimum wage during an economic slowdown. It’s been done before without serious disruption. It also lays the foundation to renewed economic growth and increased business profits. It’s in business’s best interest to raise the minimum wage as the economy begins to cool. This encourages more demand while spurring mild price inflation; a catalyst encouraging continued growth.

You can use this information in your personal finance decisions as well. An increase in the minimum wage will increase business activity, a good sign for investors. If everyone digs in their heels and refuses to increase the minimum wage when this data suggests its value, get ready for a long economic war with no winner until somebody blinks.

 

 

More Wealth Building Resources

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

A cost segregation study can save $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here.