Monday, January 19, 2009

Minting Pennies and Nickels: Not Economically Viable?

Due to the rapid rise of commodity prices – especially metals - during the start of 2008, the cost of minting American pennies and nickels is now twice their actual face value. Weird economics at work?

By: Ringo Bones

When the global economic downturn instigated by the subprime mortgage crisis of the summer of 2007 started to be noticed on American soil during the first quarter of 2008. The US Mint or The Bureau of the Mint also started to notice that it’s now worth twice as much to “make” pennies and nickels than their face value – i.e. the coin’s buying power - due to the increasing prices of “coinage” metals like copper and zinc.

Noting that it now costs 2 US cents to make an American penny (a US 1 cent piece) and a nickel (a US 5 cent piece) now cost a dime or 10 US cents to make. It would only be a matter of time that the US Treasury Department will tell The Bureau of the Mint in Washington, D.C. to stop minting coins because they’ll be losing money - weird economics has finally arrived. Given that a typical American “Honest Abe” penny is 98% zinc while an American nickel is 25% nickel and 75% copper. The three metals – namely zinc, nickel and copper - whose trading values went through the roof during the first part of 2008 makes it easy to see why that minting coins using these traditional coinage metals is now more expensive compared to a generation ago.

Most countries around the world has since abandoned using gold and silver as coinage metals since making them costs way more than the coin’s intended face value, looks like copper, zinc and nickel will now be deemed too expensive for coinage use. Some countries have even resorted to using steel and aluminum to keep the cost of minting coins down. Especially during the early 1990’s when Sumitomo attempted to unlawfully manipulate copper prices in the London Metals Exchange by hoarding large stocks of copper for six years.

In the US, grassroots movements like Americans for Common Cents has been busy campaigning for the US Government to keep minting coins because if Uncle Sam ever decides to stop minting pennies and nickels, the penniless could literally become penniless. Like when merchants start rounding-off prices of goods to the nearest dime – given that if the US 10 cent piece or dime becomes the smallest American currency denomination – could cost American consumers 600 million dollars a year in retail expenses.

As we celebrate the 200th anniversary of Abraham Lincoln’s birth and the 100th anniversary of the “Honest Abe” penny in 2009, has the American penny and nickel become an archaic time-wasting transaction of our modern credit-based economy? In my opinion, coins of small denominations – like the American penny and nickel – are still relevant in today’s economic transaction, especially at the retail level. Plus, given that coins are more difficult to counterfeit when compared to paper currency and are less tempting to steal in comparison to credit card data, American pennies and nickels still serve an indispensable part of the American – if not of the global – economy.

Wednesday, January 7, 2009

US Treasury Bonds and Securities: A Bubble that’s About to Burst?

With a budget deficit that could reach 1 trillion dollars in order to save it’s own economy, are US Treasury bonds and securities still a sound investment choice in 2009?

By: Ringo Bones

With the critics of incoming US president Barack Obama’s supposedly socialist-leaning economic policies now segueing into the background like their empty rhetoric, the question still remains whether US treasury bonds and securities are still the safe-haven investments that they are touted to be. Or are they the latest speculative bubble just waiting to burst?

With the US government now printing money at an unprecedented scale and the government spending deficit that is predicted to reach over a trillion dollars just to save the American economy, financial analysts around the world are now casting their doubts over the long-term profitability of US treasury bonds and securities. Because if you choose to invest in US treasury bonds now, there’s no telling of it’s actual value when it matures. Looks like when one invests in US treasury bonds he or she will be primarily driven by patriotism rather than for profit. If he or she is willing to overlook the inherent disadvantages of financial and / or speculative bubbles.

Since US treasury bonds and securities was no longer the safe-haven investment vehicle that it once was, what are our options? In my opinion, investing in gold is a better bet right now because gold is not backed by credit – i.e. it has inherent value of it’s own. But if the patriotism issue is really nagging you, here’s my view on this: Does investing in a less desirable financial instrument in order to “help keep our fellow Americans employed and off welfare” both economic common sense and patriotic?

My answer to this is a really big fat no. Investing your hard-earned money in a less desirable financial instrument in order to “help keep our fellow Americans gainfully employed and off welfare” does not really make economic common sense or is really patriotic, it is just thinly veiled charity. A charity that most of us succumb into every time we use “liberal guilt” as a defense mechanism every time we are emotionally blackmailed into buying something we don’t really need. And by the way, when it comes to good business practices, emotional blackmail is still illegal.

But if you are like me – and many others - who still believes that America under the helm of President Obama, miracles – especially economic miracles – can still happen. Then by all means invest in US treasury bonds and securities as your patriotic duty to help keep the American economy strong. But beware and be very aware that the current state of the US economy still resembles some rickety contraption being held by bailing wire and the good intentions of a czarist-era mad Russian. Which is my latest assessment given the aftermath of the Bernard L. Madoff fraud that could put Charles Ponzi and his start-up pyramid scheme to shame.

Saturday, January 3, 2009

The Lowdown on Commodities

The current low price of commodities – especially that of crude oil - had lessened the impact of the global financial crisis to most sectors of the economy even though it will be very bad in the long run. A good time to cry wolf?

By: Ringo Bones

The world’s leading economist had already reached a consensus and had been warning us for sometime that the low prices of economies resulting in the lack of demand due to the global economic downturn. Will be bad in the long run – even if the global economy recovers sometime in the future – because producers are not making the necessary investments to expand current production to meet possible future demands. The proverbial “ticking time bombs” in the commodities market are copper and crude oil whose prices could skyrocket way pass their 2008 peak once the global economy recovers causing an increase in demand.

Violent price rises will be the norm – rather than the exception – when it comes to commodities prices when the global economy recovers around 2010 or so. Due to lack of current investment to expand production, demand for copper and crude oil in 2010 might not be met fast enough - which could be a headache to commodities trading. Especially when it comes to the demands of emerging economies in Asia like India and China whose economies are not as badly affected as those in the United States and Europe despite of the tragic job loss figures. Plus the increased affluence of consumers in Asia could also send prices of wheat, corn, and soybean skyrocketing past their 2008 levels due to these food crops being diverted into meat production as animal feed.

The world’s policymakers better start consulting their economic advisory team on how to plan ahead to avert disastrous and violent commodity price volatility in the near future. Even if the global economy eventually recovers, it could derive our poorer brethren of their daily bread if the recovery plan is ill conceived. Making that “dramatic” percentage-point rises in the global stock market a rather Pyrrhic victory for stock market traders.