HELPING PHYSICIANS ATTAIN FINANCIAL SECURITY
By Robert M. Doroghazi, M.D., F.A.C.C.
This is a pun, and will allow me to address two points.
Literally, drop a new penny and listen to the sound. Now drop a pre-1982 penny—the sound is more ringing; in the 12kHz range. Even to the untrained ear, you should be able to tell the difference.
For 2,000 years, the world used a commodity-based currency. Every attempt to use paper money ended when it reached its intrinsic value=zero. From 1793 until 1933, our currency was commodity-based. Pennies were copper, 5-cent pieces were nickel; dimes, quarters, half-dollars and dollars were silver, and the larger coins gold. The US dollar was defined as $20.66 to one ounce of gold.
Roosevelt confiscated the gold in 1933. Finally, by 1964, the dollar had depreciated enough that the silver content of coins was higher than face value, so we went off the silver standard. Dollar bills were no longer “silver certificates”, redeemable at the Treasury for a silver dollar.
From 1946-62, the penny was “bronze”; 95% copper, 5% tin and zinc. From 1962-81, it was “brass”, 95% copper, 5% zinc. By 1982, because of inflation, the copper in a penny was worth more than one cent (with copper at $4 per pound, the pre-1982 penny has about 2.7 cents of copper). The current penny is copper-coated zinc, with a composition of 97.5% zinc and 2.5% copper.
Point Number One: Metallic-based “hard” currencies were the norm since the first coins were minted in about the 7th century BCE. People were willing to exchange something of value, such as wheat or an ox, for something of value they could hold in their hand. Now the only reason you are willing to accept the current coin of the realm is because you believe the next person will take it; it has no intrinsic value.
I believe we will eventually return to a commodity-based currency. It is the only way to impose discipline on the politicians. Remember, this year the Federal government is borrowing 40% of every dollar they spend.
“Seigniorage” is defined by Webster’s as “government revenue from the manufacture of coins calculated as the difference between the monetary and the bullion value of the silver contained in silver coins”.
In the past, the metallic value of a coin was set just below the face value. People felt comfortable accepting the coin, because for practical purposes, it had the value indicated, and it generated a slight profit for the government. It was also an incentive to keep the value of the currency constant. If the value of the metal rose above the face value of the coin, the government lost money and the coins were just melted down (as happened to many US gold coins in the period of 1813-34).
From 1837 until gold was withdrawn from circulation, the gold content of US coins was 0.9 gold and 0.1 copper. The $20 gold piece contained 0.96oz of gold, about $19.70.
So, how much is our government making on the penny? Even with the minimal copper content, it’s losing money, because the current penny costs 1.79 cents to mint.
The only use for the penny is to pay sales tax. When I worked at Graham’s Book Store from 1967-9, we still had penny post cards. Bubble gum was a penny. Now you can’t buy anything for a penny.
I suggest sales tax be collected in 5-cent increments. It would save time, and be more convenient, and save the government money, and as the title suggests, we could “drop the penny”.
RMD
Last Week in the Market
Several things are worthy of note.
1) Interest rates plunged, with the rate on the 10-year Treasury falling below 3% (see chart, next page). This suggests a softening of the economy.
If you have a large position in bonds, you are sitting on some nice capital appreciation from the drop in rates. You may consider taking some profits. Rates could fall further, but they can’t fall much more, and at some time they will rise significantly.
This is what you might do with the proceeds. A) Buy some gold (see more below). B) Keep some in cash. Interest rates on short-term bonds are so low, the difference is negligible. A little physical cash in the safe deposit box would also be OK. 3) If you are so inclined, you can then buy back into bonds when interest rates have risen back to say 3.4 or 3.5% on the 10-year. The difference is a nice profit
2) In several recent newsletters I expressed concern about the poor action in XLF, the ETF for the big financial stocks. XLF was trashed last week (see chart, page 4), with a strong sell-off. It’s hard to envision the stock market doing well without the financials. Berkshire Hathaway (BRKA) is at its low for the year; and lowest since last August.
3) Gold continued to hold up well. The DJIA to gold ratio dropped below 8. 12,151 divided by 1,542=7.88.
4) QE2 ends shortly. The Federal Reserve has a terrible choice to make. Housing is weak (see below). Unemployment is rising. The stock market is weakening. Many measures of economic activity are weak.
So, will there be a QE3? Without the props of free money, the economy could fall hard. This just won’t fly with elections around the corner. Also consider that if the effects of QE1 and QE2 were just temporary and not very effective, QE3 would have to be humongous. It would trash the dollar. Watch the dollar index and gold.
On Tuesday (5/31), the Case/Shiller Home Price Index was down again, with a 4.2% annualized loss for the first quarter. It is back to mid-2002 levels.
RMD comment: There is still no apparent bottom in the residential home market. They are already saying “wait till next year” for the rebound. Again, I would only buy a home if the situation is particularly compelling.
I have mentioned in previous letters that I am an introvert. One subscriber, who also considers himself an introvert, posits that this makes one a better investor than our more gregarious, outgoing brothers and sisters.
RMD comment: I admit I’ve never thought much about it. I can see how he drew this conclusion, but I think it is unlikely.
This last weekend was Alumni Weekend at my med school Alma Mater, the University of Chicago. I’ve been active in the Alumni Assoc. for some time and last weekend took over as President from Dr. Anthony Cutilletta
At Alumni Weekend, friend Dr. Dennis Wentz (who received a well-deserved Distinguished Service Award) gave me a copy of an article from JAMA (5/25/11, vol 305, no 20) entitled “Are Patients Knights, Knaves, or Pawns”?
“British sociologist Julian Le Grand has noted that public policy is grounded in as conception of humans as “knights”, “knaves”, or “pawns”. Human beings are motivated by virtue (knights) or self-interest (knaves) or are passive respondents to their circumstances (pawns)…
Le Grand’s original analysis applied to British citizens affected by the postwar social welfare state in Britain…
As patient behavior (in the US) is tied to rising costs, and increased scrutiny is applied to the volume of health care services consumed, policy discourse often reflects the perspective that patients are an obstacle to, not an enabler of, a functioning health care system. Rather than counting on patients to exercise good judgment in managing health care problems, this view holds that patients should be guided with an increasing menu of behavioral or financial devices and strict regulations”.
RMD comment: A very eloquent and perceptive expression of my concerns for health care (and government interference in the economy and our lives in general). I suggest you read this article for yourself.
My boys are 2 ½ years apart in age (3 years apart in school). Every Saturday night we went to a movie, and from 1987-1994, were home in time to watch every episode of “Star Trek: Next Generation”, which I believe was one of the five best shows ever on TV.
Every Friday night we went out to eat. Being young, energetic boys, they did not wait well, so we were usually at the restaurant before 530 so we could be seated without a wait. When they were about 6 and 9, as we walked into a restaurant, I saw a relatively short, thin gentleman with his back to us, having supper with several other folks. Out of the blue I said “he looks like Chuck Berry”.
The next day in the paper I see that Chuck Berry played that night at the “Blue Note” next door to the restaurant. It was Chuck Berry!!, in my opinion, the absolute greatest rock star ever.
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