Charles Ponzi - Financial Genius for our Times
Charles Ponzi - after whom "Ponzi scheme" was named - convinced people to invest in postage stamps. This plan was widely criticized, because it promised profits, when in fact all it did was pay off early investors with a fraction of the money put into the scheme by newer investors.
These days, anyone who isn't self-deceived recognizes that this is the entire basis for Social Security, and increasingly all government spending. The entire idea behind the national debt is that someone will pay it off later - someone who must be a lot smarter than we are today, or perhaps a lot harder working, or perhaps just really stupid to pay off such a huge debt without having ever gotten any benefits and having no realistic chance of ever getting such benefits themself.
So ultimately, as no one seems willing to admit, the debt will be retired in one of two ways - repudiation, or inflation. Probably a combination - inflation to reduce the value, then some complex "currency re-valuation" that amounts to paying off the debt at 10 cents on the new dollar, but is sufficiently complex that people are confused into believing it MAY be doing something else.
But back to Charles Ponzi, prescient financial genius. Consider how you might manage to hang onto the current value of whatever remains of your retirement money. What you need is a form of currency that doesn't lose value. Gold? Silver? Well, those may retain value, but they're going to fluctuate a lot, and there's a good chance that they're over-valued already, so you'll be paying a premium to get into them now. In effect, you'll be like the late-comers to Ponzi's scheme, except that your investment won't drop to zero value.
No, Charles had a much better idea, a currency that is much more stable and reliable. Stamps. It used to be that you bought a 5 cent stamp. Then 6 cents, then 8, then 10, etc. Old stamps lost their value - you had to keep buying 1 cent stamps or 2 cent stamps to tack on along with any older stamps you had left over.
But now there's a new type of stamp - the "forever" stamp. The idea seems quite sensible - you didn't buy 5 cents worth of mail or 42 cents, or whatever. You buy the right to send one first class letter - no matter how much the price goes up in the future.
A "5 pack" of 100 stamps costs $42 - no mark-up, no tax (since a stamp itself is a considered a tax!) or other mark-up for handling costs. Try finding a deal like that for gold coins! If you buy them through the mail, there's a $1 handling fee - but you'd probably spend about that much driving to the post office. A pack of 100 stamps is about the same volume as five $20 bills.
I think you see where I'm going with this. Stamp prices track inflation fairly well - they have to, because the post office is a bureaucracy - no matter how many mail handling machines and robots they get, their real purpose of existence is to employ people and prevent their organization from being eliminated. The best way the post office has found to do that, is to make sure that most of it's operating costs are covered by the sale of stamps and metered postage.
Of course, other than holiday cards and paying bills, people don't send a lot of letters these days. But even if both of those uses go away, the post office will find a way to keep itself around and keep providing first class mail. So your 42 cent investment, today, will still be worth one first class letter delivered anywhere in the United States, 5, 10, even 20 years from now.
Sure, you may not care to send letter 20 years from now, but keep in mind, we're relying on the genius of Charles Ponzi here, with the government playing the role of the late investor, and you not expecting to come out ahead, just break even. Once you and a few million others realize that stamps are a stable "store of value", it won't matter any more. It won't matter any more than it matters that you don't really have any use for gold or silver coins. What will matter is that someone else will recognize the stored value, and be willing to exchange currency at the current inflated price for your stamps - even if THEY have no intention to send any mail either!
Now you may be saying "but wait - this is a lousy investment! It doesn't even increase in real value!". Yeah, right - like your 401K did over the years 1998 to 2008? Oops. And you need to understand that it's not over yet. If we assume that the stock market was roughly "correct" back in 1990 at about 2600, and that combining growth and inflation might yield a 5%/year increase, the market should be at about 2.5x2600, or around 6600.
Right now, April Fools Day, the Dow is dancing around 7700, or about 17% "high", and most small investors appear to *still* believe it's going to recover some of the 14000 it had in 2007. Since they're due to be disappointed, barring inflation, one of two things is going to happen. The Dow will bang around, up and down, staying near 6000-9000, and investors will slowly get disappointed and move their money into bonds or other investments any time the market moves up a bit - keeping the Dow stagnant. OR, all this government spending, combined with a partial recovery, will lead to inflation - which will make the market go up somewhat, but probably not as fast as inflation, because government will be busy trying to pull money back out of the economy by calling in loans to prevent hyper-inflation - which will just turn the inflation into stagflation. Either way, having currency that doesn't devalue will likely match or beat the average stock or bond investment.
Of course, if the government allows hyper-inflation in order to wipe out debt or reduce the value of social security obligations sometime in the next 30 years, your stamp hoard could easily beat any investment in a failing economy.
And there's another thing to factor into your consideration - the "Ponzi factor". Just as there have been speculative crazes in the past for new investments, so there could be a craze for stamps, once inflation starts taking hold. People might over-estimate the rate of inflation (e.g. believing, for some reason, that their government might be lying to them about the inflation rate). Or they might see that others are paying an increasing premium for stamps due to the post office running short on stamps, and decide to pay a larger premium. Very likely there will be TV ads selling stamps as "inflation proof investments", and active trading on the internet.
That'll be your cue - that's the time to sell. Because, of course, the government will not approve of people using stamps to avoid inflation. They probably won't want to simply declare old stamps valueless. But they might well freeze the value of old stamps. Or direct the post office to start printing enough stamps to meet demand and drive the price down, and *then* freeze the value of forever stamps. Either way, the stamp bubble will collapse. Very likely the government will put a permanent end to use of stamps as currency, by eliminating the forever stamp policy. If you haven't sold out, you'll be stuck holding stamps, with nothing to use them for but send old-fashioned first class mail...
These days, anyone who isn't self-deceived recognizes that this is the entire basis for Social Security, and increasingly all government spending. The entire idea behind the national debt is that someone will pay it off later - someone who must be a lot smarter than we are today, or perhaps a lot harder working, or perhaps just really stupid to pay off such a huge debt without having ever gotten any benefits and having no realistic chance of ever getting such benefits themself.
So ultimately, as no one seems willing to admit, the debt will be retired in one of two ways - repudiation, or inflation. Probably a combination - inflation to reduce the value, then some complex "currency re-valuation" that amounts to paying off the debt at 10 cents on the new dollar, but is sufficiently complex that people are confused into believing it MAY be doing something else.
But back to Charles Ponzi, prescient financial genius. Consider how you might manage to hang onto the current value of whatever remains of your retirement money. What you need is a form of currency that doesn't lose value. Gold? Silver? Well, those may retain value, but they're going to fluctuate a lot, and there's a good chance that they're over-valued already, so you'll be paying a premium to get into them now. In effect, you'll be like the late-comers to Ponzi's scheme, except that your investment won't drop to zero value.
No, Charles had a much better idea, a currency that is much more stable and reliable. Stamps. It used to be that you bought a 5 cent stamp. Then 6 cents, then 8, then 10, etc. Old stamps lost their value - you had to keep buying 1 cent stamps or 2 cent stamps to tack on along with any older stamps you had left over.
But now there's a new type of stamp - the "forever" stamp. The idea seems quite sensible - you didn't buy 5 cents worth of mail or 42 cents, or whatever. You buy the right to send one first class letter - no matter how much the price goes up in the future.
A "5 pack" of 100 stamps costs $42 - no mark-up, no tax (since a stamp itself is a considered a tax!) or other mark-up for handling costs. Try finding a deal like that for gold coins! If you buy them through the mail, there's a $1 handling fee - but you'd probably spend about that much driving to the post office. A pack of 100 stamps is about the same volume as five $20 bills.
I think you see where I'm going with this. Stamp prices track inflation fairly well - they have to, because the post office is a bureaucracy - no matter how many mail handling machines and robots they get, their real purpose of existence is to employ people and prevent their organization from being eliminated. The best way the post office has found to do that, is to make sure that most of it's operating costs are covered by the sale of stamps and metered postage.
Of course, other than holiday cards and paying bills, people don't send a lot of letters these days. But even if both of those uses go away, the post office will find a way to keep itself around and keep providing first class mail. So your 42 cent investment, today, will still be worth one first class letter delivered anywhere in the United States, 5, 10, even 20 years from now.
Sure, you may not care to send letter 20 years from now, but keep in mind, we're relying on the genius of Charles Ponzi here, with the government playing the role of the late investor, and you not expecting to come out ahead, just break even. Once you and a few million others realize that stamps are a stable "store of value", it won't matter any more. It won't matter any more than it matters that you don't really have any use for gold or silver coins. What will matter is that someone else will recognize the stored value, and be willing to exchange currency at the current inflated price for your stamps - even if THEY have no intention to send any mail either!
Now you may be saying "but wait - this is a lousy investment! It doesn't even increase in real value!". Yeah, right - like your 401K did over the years 1998 to 2008? Oops. And you need to understand that it's not over yet. If we assume that the stock market was roughly "correct" back in 1990 at about 2600, and that combining growth and inflation might yield a 5%/year increase, the market should be at about 2.5x2600, or around 6600.
Right now, April Fools Day, the Dow is dancing around 7700, or about 17% "high", and most small investors appear to *still* believe it's going to recover some of the 14000 it had in 2007. Since they're due to be disappointed, barring inflation, one of two things is going to happen. The Dow will bang around, up and down, staying near 6000-9000, and investors will slowly get disappointed and move their money into bonds or other investments any time the market moves up a bit - keeping the Dow stagnant. OR, all this government spending, combined with a partial recovery, will lead to inflation - which will make the market go up somewhat, but probably not as fast as inflation, because government will be busy trying to pull money back out of the economy by calling in loans to prevent hyper-inflation - which will just turn the inflation into stagflation. Either way, having currency that doesn't devalue will likely match or beat the average stock or bond investment.
Of course, if the government allows hyper-inflation in order to wipe out debt or reduce the value of social security obligations sometime in the next 30 years, your stamp hoard could easily beat any investment in a failing economy.
And there's another thing to factor into your consideration - the "Ponzi factor". Just as there have been speculative crazes in the past for new investments, so there could be a craze for stamps, once inflation starts taking hold. People might over-estimate the rate of inflation (e.g. believing, for some reason, that their government might be lying to them about the inflation rate). Or they might see that others are paying an increasing premium for stamps due to the post office running short on stamps, and decide to pay a larger premium. Very likely there will be TV ads selling stamps as "inflation proof investments", and active trading on the internet.
That'll be your cue - that's the time to sell. Because, of course, the government will not approve of people using stamps to avoid inflation. They probably won't want to simply declare old stamps valueless. But they might well freeze the value of old stamps. Or direct the post office to start printing enough stamps to meet demand and drive the price down, and *then* freeze the value of forever stamps. Either way, the stamp bubble will collapse. Very likely the government will put a permanent end to use of stamps as currency, by eliminating the forever stamp policy. If you haven't sold out, you'll be stuck holding stamps, with nothing to use them for but send old-fashioned first class mail...
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