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Thursday, April 16, 2009

Is government a safe investment?

Consider the case of forever postage stamps.

The first forever stamp was introduced in March 26, 2007 for $0.41. The price of first class postage will increase to $0.44 on May 11, 2009. Assuming you could find someone to sell your stamps to (which is evidently not illegal), you might stand to make a little cash.

A purchase of stamps in March 2007 would, theoretically, yield a gross return in May 11, 2009 of 7.3%.

Think that sounds bad? Consider the S&P500:

On March 26, 2007 the S&P500 stood at 832.6
On April 16, 2009 the S&P500 stood at 869.36
On May 11, 2009 the S&P500 will stand at ??

Gross return on investment in the S&P500 would be 4.4%.

It would seem that investing in forever stamps is risk free. After all, the US Postal Service will continue to increse price in the future. As long as the Postal Service doesn't repeal the forever stamp, in which case your investment would go to a value of zero (well, not quite if the forever stamps have some collector value), it would seem a no-brainer.

Here's the problem. The Postal Service has been raising the price of postage over the past few years, often blaming a decline in traffic as electronic documents take over. However, while it might seem that raising price is the most appropriate method to increase revenue and profitability, it hasn't worked and it probably won't work. The Postal Service acts as if the market is sliding up their demand curve but this is probably not the case. Rather, their demand curve has decreased (shifted left) and this would correspond with a lower profit maximizing price.

While it might seem that purchasing stamps today for $0.42 cents and selling them later for a higher price is fool-proof. However, as the price of stamps continues to increase, there will be fewer and fewer people wanting to purchase stamps thereby making it harder for you, as an individual, to sell your stamps.

In small denominations and at relatively lower prices, perhaps you could make a few bucks off the forever stamp, but it is definitely not the way to retirement.

Right?



Prediction I: Social Security will continue to receive more than cost of living adjustments over the next few years [last year SS recipients received a 2.3% raise]. This will be spun as a healthier "return" than what is available in the private market, especially as the market continue to go sideways. Of course, this is a lie, but it won't matter.

How to make Treasury Bills more attractive than the private sector? Continue to make it so that those who have retired on the government's bill receive a higher and supposedly lower-risk return than those invested in the private market. Then, much like in the 1930s, as government policies intentionally or unintentionally force the market to go sideways for the next 7-10+ years and as more Boomers retire with less or choose to not retire and keep working, the government will offer to exchange any individual's 401(k), IRA, or other private-sector retirement account for an equal or greater value of Treasury Bills.

Prediction II: The government will offer to exchange current assets for Treasury Bills at a more than one-to-one ratio. Perhaps the government will determine the maximum value of an individual's retirement account, say in 2007 or so, and offers to make them "whole." Many people will take that deal, perhaps not realizing how risky it is, and the government will get their hands on hard assets they can either control or liquidate to fund the expansion of government.

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