Friday, May 29, 2009
USPS Forever Stamps as Inflation Hedge?
I'm going to be at the Mises Circle in Dallas (or is it Fort Worth?) this weekend, so blogging may be sparse. In the meantime, can somebody convince me why I shouldn't buy $1000 worth of "Forever" stamps from the Post Office?
Absolute worst scenario, Krugman is right--and yes, that would be the worst scenario for me--and we are stuck in Japan mode for a decade. OK no big whoop, I never have to buy stamps during that period. Sure I would regret having sunk so much cash into that many stamps, but if it comes down to it, I could sell them to my neighbors and friends at a slightly reduced price (after explaining my foolishness). You might ask, "How many letters do you plan on mailing?!" but I think I could slap a bunch of them on regular packages too. So instead of paying $4.95 for them to ship a book the next time someone wins a , I can instead buy my own generic envelope and slap a bunch of stamps on it, right?
On the other hand, suppose my predictions about massive price inflation come true. Then I'm sitting pretty because (a) I have completely hedged one of my recurring business expenses and (b) Paul Krugman would have been ridiculously wrong. Those two together might make $8 milk (which you need to buy online because of the price controls) almost tolerable.
The only major flaw I see in this is the possibility that the Post Office doesn't honor pre-2010 Forever stamps at par, because "obviously we need to adjust for the 20% inflation that kicked in." So if we really did get hit with heavy inflation, I might start unloading my Forever stamps (to neighbors etc.) at a nice discount from their point of view, so I lock in most of my gain before the Post Office debases them.
Absolute worst scenario, Krugman is right--and yes, that would be the worst scenario for me--and we are stuck in Japan mode for a decade. OK no big whoop, I never have to buy stamps during that period. Sure I would regret having sunk so much cash into that many stamps, but if it comes down to it, I could sell them to my neighbors and friends at a slightly reduced price (after explaining my foolishness). You might ask, "How many letters do you plan on mailing?!" but I think I could slap a bunch of them on regular packages too. So instead of paying $4.95 for them to ship a book the next time someone wins a , I can instead buy my own generic envelope and slap a bunch of stamps on it, right?
On the other hand, suppose my predictions about massive price inflation come true. Then I'm sitting pretty because (a) I have completely hedged one of my recurring business expenses and (b) Paul Krugman would have been ridiculously wrong. Those two together might make $8 milk (which you need to buy online because of the price controls) almost tolerable.
The only major flaw I see in this is the possibility that the Post Office doesn't honor pre-2010 Forever stamps at par, because "obviously we need to adjust for the 20% inflation that kicked in." So if we really did get hit with heavy inflation, I might start unloading my Forever stamps (to neighbors etc.) at a nice discount from their point of view, so I lock in most of my gain before the Post Office debases them.
Comments:
i swear i was thinking about exactly this, today when i was at post-office. The way things are going, "forever" anything is a good deal.
# posted by 
: May 29, 2009 at 12:55 AM
: May 29, 2009 at 12:55 AM 
Bob,
I think you are forgetting the political risks. If price controls were too tempting in the 1970's on various items produced by the private sector, do you think that the government would let stamp prices soar in the event of hyperinflation? Maybe, maybe not.
I think you are forgetting the political risks. If price controls were too tempting in the 1970's on various items produced by the private sector, do you think that the government would let stamp prices soar in the event of hyperinflation? Maybe, maybe not.
Bob,
Like anonymous, I was also thinking about the same thing.
Further, i don't think you would have to lay them off on friends. I'm guessing a stamp dealer would probably give you the then current face value, or very close to it.
It might be a better alternative than holding TIPS securities or cash.
And if it catches on, the market will become much more liquid, a kind of poor man's gold
Like anonymous, I was also thinking about the same thing.
Further, i don't think you would have to lay them off on friends. I'm guessing a stamp dealer would probably give you the then current face value, or very close to it.
It might be a better alternative than holding TIPS securities or cash.
And if it catches on, the market will become much more liquid, a kind of poor man's gold
The only major flaw I see in this is the possibility that the Post Office doesn't honor pre-2010 Forever stamps at par, because "obviously we need to adjust for the 20% inflation that kicked in.Bingo! There's the wildcard that makes me think twice about any government-backed inflation hedge. Any time inflation actually gets serious enough for the hedge to be "awesomely in the money", the government will find a way to default on it.
I expressed similar cynicism, but about "too big to fail" corporations in an earlier blog post. It also links your discussion of this phenomenon on Wall Street: "Um, the shares you bought are in the money and we can't find them ... wanna reverse the trade?"
And remember, there are many, many ways to subtly default. Let's say they "honor" forever stamps, but then you one day notice that letters with forever stamps take, er, forever to get there.
I expressed similar cynicism, but about "too big to fail" corporations in an earlier blog post. It also links your discussion of this phenomenon on Wall Street: "Um, the shares you bought are in the money and we can't find them ... wanna reverse the trade?"
And remember, there are many, many ways to subtly default. Let's say they "honor" forever stamps, but then you one day notice that letters with forever stamps take, er, forever to get there.
Why not?
Imagine that forever stamps do actually increase in value at the same rate as the CPI does (which isn't too far off from reality). In that case, you're better off buying TIPS, as they also track CPI, but pay interest - little as it is - on top of that.
The only reasons I can think of to prefer Forever Stamps to TIPS: if you think the likelihood of a TIPS default is greater than that of a Forever Stamp default (I trust our government to print as much money as necessary to pay for its debts), and, as Robert Wenzel points out, Forever Stamps might have some collector value.
Imagine that forever stamps do actually increase in value at the same rate as the CPI does (which isn't too far off from reality). In that case, you're better off buying TIPS, as they also track CPI, but pay interest - little as it is - on top of that.
The only reasons I can think of to prefer Forever Stamps to TIPS: if you think the likelihood of a TIPS default is greater than that of a Forever Stamp default (I trust our government to print as much money as necessary to pay for its debts), and, as Robert Wenzel points out, Forever Stamps might have some collector value.
Bob,
I'm impressed that you pulled out the ol' "blink" tag for this one.
I'm impressed that you pulled out the ol' "blink" tag for this one.
# posted by : May 29, 2009 at 10:34 AM
: May 29, 2009 at 10:34 AM
If the stamps became significantly more valuable, you can be sure the government will find a way to tax them one way or another, even if it has to put USPS through some sort of bankruptcy to invalidate the stamps.
# posted by : May 29, 2009 at 12:13 PM
: May 29, 2009 at 12:13 PM
LOL! I was just thinking about this too -- and I guess I'm not alone because the guy at the post office yesterday told me they were sold out.
Anyway, as soon as they've got more I'll be stocking up, but not $1,000 worth. I absolutely do not trust the USPS to honor them in any meaningful way in a hyperinflationary environment. But my greater fear (OK, hope) is that the whole "enterprise" will go bankrupt and ALL stamps will become worthless/collectors' items.
Anyway, as soon as they've got more I'll be stocking up, but not $1,000 worth. I absolutely do not trust the USPS to honor them in any meaningful way in a hyperinflationary environment. But my greater fear (OK, hope) is that the whole "enterprise" will go bankrupt and ALL stamps will become worthless/collectors' items.
Erick: Some things I can't fax, like sending a book to somebody. I pay my bills electronically for my personal finances, but with my business I still use checks, mostly because I'm still getting the hang of QuickBooks and it seems more "real" to me if I print out a check. (I would make a terrible central banker.)
Lucas: I think one way the government is cheating right now is by suppressing the CPI. The advantage of the Forever stamp is that it entitles you to an actual service.
E.g. I wish Exxon sold "Forever gallons." I'd be all over that.
And in case you want to ask the next obvious question, I am not sophisticated enough yet to be buying oil futures. I would rather hedge my actual consumption expenditures in a very easy way, if possible.
Lucas: I think one way the government is cheating right now is by suppressing the CPI. The advantage of the Forever stamp is that it entitles you to an actual service.
E.g. I wish Exxon sold "Forever gallons." I'd be all over that.
And in case you want to ask the next obvious question, I am not sophisticated enough yet to be buying oil futures. I would rather hedge my actual consumption expenditures in a very easy way, if possible.
Bob: IIRC, over the last few years, I have actually heard of "forever gallon" gasoline programs at gas stations (though obviously not under that name!). Supposedly, they allowed you to buy gallons and then redeem them at any time later.
But there is still reason to be skeptical of such programs, even when it's not the government. I mean, think about how gift certificate holders get screwed. (Gift certificates are a kind of "forever X dollars at Circuit City").
I used to think that once you bought one, you were entitled to X dollars of merchandise (specifically, the store is obligated to treat gift card dollars as regular dollars for purposes of canceling debts to the store) so long as such merchandise exists. I mean, you bought $X worth of stuff, so that $X is no longer theirs to give away, just like stores can't raid my shopping cart when I've made my purchase and am on my way out, no matter what their financial situation is.[lb]
But then I found out they can default on them, just like they were a regular financial security.
Okay, so buyer beware, right? But no, normal people assume that if they don't have to jump through strange hoops, don't need to show ID, and are getting a bearer instrument (bearer bonds haven't been issued in the US for decades), they didn't buy a security.
So, I wouldn't trust any forever-X program unless there was some tranparency by which I could verify they actually incorporated this as a liability on par with their highest-grade debt.
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But there is still reason to be skeptical of such programs, even when it's not the government. I mean, think about how gift certificate holders get screwed. (Gift certificates are a kind of "forever X dollars at Circuit City").
I used to think that once you bought one, you were entitled to X dollars of merchandise (specifically, the store is obligated to treat gift card dollars as regular dollars for purposes of canceling debts to the store) so long as such merchandise exists. I mean, you bought $X worth of stuff, so that $X is no longer theirs to give away, just like stores can't raid my shopping cart when I've made my purchase and am on my way out, no matter what their financial situation is.[lb]
But then I found out they can default on them, just like they were a regular financial security.
Okay, so buyer beware, right? But no, normal people assume that if they don't have to jump through strange hoops, don't need to show ID, and are getting a bearer instrument (bearer bonds haven't been issued in the US for decades), they didn't buy a security.
So, I wouldn't trust any forever-X program unless there was some tranparency by which I could verify they actually incorporated this as a liability on par with their highest-grade debt.
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