Friday, October 15, 2010

How to Cash in Your Nickel Collection

To make sense of this blog, you need to read the previous blogs we've written about nickels. First, we predicted nickel prices would go up, and they did. Second, we clued you in to it and told you to get to work on your nickel collection. 

The obvious question at this point is how to cash in your nickels. There are several ways.

1. The Illegal Way
It is illegal to melt U.S. coinage. However, in the future, its always possible that this law will be overturned. If metal prices ever go totally through the roof, like 25 cents for the metal in a nickel, then the government will surely overturn this law in order to increase the metal supply and reduce prices. So just keep your nickels until the law is overturned. Or, alternatively, you could just break the law and melt them yourself. I recommend putting them in your car and parking in the sun. That will probably melt them, but I don't really know how to go about cleaning them up later. Thats on you to figure out. The criminal mind will probably find a way.

2. By Exporting Them
Another way to make money off nickels would be to export them to a country that doesn't care about U.S. laws, such as China or Venezuela.  If you can find a way to get them to China without paying high shipping costs, this would work.

3. By Waiting for the Inevitable
My guess is the Treasury will eventually start making nickels out of something cheaper such as zinc or aluminum. Look for it in the news, because it will probably happen sometime in the next year or two as inflation keeps increasing. Once the new cheap nickels are in circulation, the price of the originals will go up all the higher as collectors, melters, and weirdos like me start hoarding them all. They will also get bought up by China and other places that will melt them freely. This is your chance to sell them off to people who want them.

If inflation gets too far out of control, the Federal Reserve will take the drastic step of hacking off zeros from all our bank accounts. Like I said, its a drastic step. However, if inflation really does go out of control, lopping off zeros is the only widely accepted solution, and its been done many times in the recent past. Brazil hacked off three zeros in 1994 and again in 1998. Zimbabwe lost three zeros in 2006Israel knocked off 3 zeros in 1985. Turkey lost six zeros in 2004.  Like I said, its extremely drastic, but it is the widely accepted way of handling runaway hyperinflation. By "hacking off zeros," I mean dividing the value of paper money by 10, 100, or 1000 times. Inflation would have to increase significantly in order to warrant this kind of trick in the U.S., but in just the past 20 years a gallon of gas has gone from under $1 to around $3, and movie tickets have gone from under $5 to over 10. Don't even get me started on baseball tickets. So you can see that eventually such a step might be conceivable.

If this happens, there would be a mandatory trade-in of all currency. However, in the examples above, only the paper currency is revalued, leaving coinage intact.  Its much easier to demonetize your bank account electronically than to visit your house and hunt down your piggy bank. The government just assumes that people don't have more than a few pocketfuls of coins, so they leave you alone. Some freak with a basement full of nickels would get off pretty well in this situation. This has the effect of multiplying the value of coins while dividing the value of paper money. Your $10,000 savings account might only be worth $1,000 or $100, or 10, but your nickel would then be worth 50 cents, or $5 dollars, or $50. It sounds far fetched and drastic, but like I pointed out above, its happened several times in recent history, and there is no fundamental reason why it couldn't happen in the U.S. If such a thing happens, your $1,000 nickel collection would be worth $10,000, $100,000 or $1,000,000. If it gets as bad as Turkey, with six zeros being divided off, your $1,000 nickels would be worth $1,000,000,000. Yep, a billion.  If it does happen, you can cash in simply by spending your coins as money like you currently do. The only difference is they would be worth 10 or 100 or 1000 times more. Then you can tell your grandkids about how you used to buy "penny candy" and get a haircut for 10 cents, like your grandparents tell you. Economics works in cycles.

Again, let me say that this is an extremely unlikely scenario. First, inflation would have to go up massively before the Fed would even consider this. Second, the Fed would have to have the backbone to actually lop off everyone's bank accounts. The first step is somewhat conceivable, but the Fed growing a backbone is not.

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