Monday, January 17, 2011

The Ten PM Tutorial iv

Several questions that we’ll get to tonight: Bond pricing, States minting their own coins, effects of dollar devaluation on asset prices, and precious metals in an estate.

Bond pricing: Bond prices are often listed as “108^25”, or “108-25”. This is from the old habit of prices being in thirty-seconds of a dollar. Hence 108^25 would be $108 and 25/32 of a dollar, or in other words, $108.78.

States minting their own coin: In the United States, it is a Federal crime to counterfeit the currency. It is also illegal to make a competing legal tender. The currency of the United States is legal tender, and must therefore be accepted as payment for a debt.

That said, it is not illegal to make your own debt note. So as happened in the case of California, when there was no budget agreement and the State began issuing IOU’s which began to be traded, it would be possible—and legal—for a State to issue script that would be a promise of repayment, and for recepients to begin using these IOU’s as “money”. But there would be no obligation for people to accept this script or IOU notes—and no State could force people to accept these IOU’s as payment for anything.

So in a short-term sense, a State could issue IOU’s that would be valid. But as a practical, long-term issue, it could not happen, and most likely will not.

Devaluation of the dollar, as it affects asset prices: If there is a devaluation of a currency, the markets naturally adjust. So if, say, a house costs $100,000, and the dollar is devalued by diktat by 50%, then the house would likely rise in value, conceivably up to $200,000—but it would not jump to this new price level as a matter of course. After all, the government—which controls the currency—does not control the prices of assets. It can influence the price of assets, but it doesn’t control them.

Often in situations where there is a sudden devaluation of the currency by the government, it takes several days (or even weeks) for the markets to adjust to the new price levels. And often as not, when there is a devaluation of the currency—either by diktat or by loss of purchasing power due to inflation—asset prices do not rise in lockstep with the percentage fall in the purchasing power of the currency. So that $100,000 house—after a 50% devaluation—might rise only to $160,000, which of course is the equivalent of $80,000 pre-devaluation.

Precious metals in an estate: My understanding is, precious metals in an estate are treated at the higher value as of the date the will is probated: So if a $1 dollar gold coin has three values—face value, weight in gold, and numismatic value—and the numismatic value is (for the sake of the example) $10,000, the spot price of the metal is $1,000, and the face value is $1, then the value for the estate would be $10,000. That is my understanding—but consult an attorney.

Any questions you might like to ask, leave it in the comments section, and it will be answered during the week.


  1. hi GL!

    i'm considering leaving the US and becoming an expat

    so my question is, are there any expat individuals out there who have influenced you? any whom you really admire? people who are the "model expats"? and what makes them so bad ass? what's the common thread?

    actually that's, like, 5 questions right there .. ..

    thanks, and take it easy man, i greatly enjoy your analyses

    j.j. from pittsburgh

  2. I hear people saying that if interest rates rise too much it could bankrupt the Fed. Is this even possible? I know that when rates rise the value of all the treasuries, MBS, etc. that the Fed owns will go down but why does this matter? Can't the Fed just keep printing money? Does the Fed really care if it takes a loss on the assets that it purchases? Thanks.


Knock yourself out!

The cult of stability is a culture of death.