The forever stamp

The post office is planning a ”forever" stamp for letters, good no matter how many times postal rates increase.  That means people could say goodbye to those annoying 2- or 3-cent stamps that have to be added to letters every time rates go up.  The idea for the special stamps, which would be sold at the same price as other first-class stamps, was included in proposals announced yesterday that would also raise stamp prices 3 cents — to 42 cents — next year.

Here is the story.  Yes this is a hedging device, but it also represents an attempt to peg a real rate of return.  Write down a simple but absurd model.  The initial rate of return on holding the "forever stamp" is k, and is given by the hedging and liquidity value of the stamp asset.  In equilibrium that should be equal to the rates of return on other assets.  Do you want to stimulate the economy?  Just print more stamps and give them away, thereby diminishing their marginal utility and thus lowering their marginal return.  Watch real interest rates fall accordingly (hey, this is an equilibrium model) and watch investment and gdp rise.  As Philip Cagan once asked, who needs "money" for open market operations?  We can control the real variables directly, no?  Small levers can make for big effects.

You have my admiration if you can pinpoint what exactly is wrong with this argument.  Comments are open…

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