Don't take a penny (or a nickel) at face value
The bull market in commodities is driving up the cost of making small change. Wooden nickels, anyone?
By Jim Pavia
March 17, 2008
It is no longer really a penny for your thoughts. To be precise, a thought is now worth 1.67 cents. And when someone offers you their two cents, they are really giving you 3.34 cents' worth of advice.
That is because the government shells out 1.67 cents to manufacture one penny, up from 0.93 cents in 2004, according to the United States Mint.
It costs a mint to make pennies. Case in point: The U.S. Mint produced billions of pennies in the last fiscal year, costing taxpayers about $130 million; the coins have a face value of $80 million.
If you think this is crazy, consider the nickel. Every five-cent piece costs almost a dime (9.5 cents) to make. That means last year, more than $120 million was spent to produce about $65 million worth of nickels.
If the American government were a publicly traded company, shareholders would be questioning whether the chief executive was sane. After all, how can a business remain viable if its production costs are nearly double the retail value of the items being manufactured?
Clearly, the U.S. Mint and taxpayers can't afford to keep losing money by producing the penny and the nickel.
Economists might call the problem reverse seigniorage, or a loss—rather than the usual profit—from the government's monopoly on producing coins. Typically, coin making is a great business because the metal content of pennies, nickels and dimes is usually worth less than the currency value assigned to them.
But because of rising commodities prices, the metal content of the one-cent coin is now worth more than its face value. Copper prices have tripled over the past five years, while the price of zinc—which has constituted 98% of the penny since 1982—has recently doubled.
Demand for copper and zinc is at an all-time high because they are used for everything from batteries to suntan lotion, so prices are unlikely to decline.
It may be time, therefore, to find a new, cheaper metal to produce a penny or to stop making the penny altogether.
Congress has faced this issue in the past and apparently has decided to ignore it. (There is no real market solution to the problem, because it is against the law to melt down coins and sell the metal.)
Even Edmund C. Moy, director of the U.S. Mint, acknowledges that the losses can't go on forever.
He reportedly has urged Congress to give the U.S. Mint more flexibility to “determine the metal content of the penny at any given time,” depending on shifting world prices.
One recipe being considered for the penny would involve coating a low-cost steel core with copper. That seems like a common-sense alternative.
Congress should let the U.S. Mint explore other options to bring down the cost of the penny. After all, 1.67 cents saved here or 9.5 cents saved there is good for the taxpayer.
Hey, I am just giving you my 3.34 cents.
Jim Pavia is the editor of Financial Week sister publication InvestmentNews.
You must be logged in to see this link.
"Clearly, the U.S. Mint and taxpayers can't afford to keep losing money by producing the penny and the nickel. "
No problem, just ask the Federal Reserve to print you up some of those cheap to print Federal Reserve Notes.
"If the American government were a publicly traded company, shareholders would be questioning whether the chief executive was sane." No, they would be wondering if he or she was in the Mafia. (My apoligizes to the Mafia.)
|
Don't take a penny or nickel at face value.
Forum Locked
Posted - 03/17/2008 : 18:54:19
