Give Me A Dollar and I'll Give You 90 Cents Back | Hacker News Reader

Give Me A Dollar and I'll Give You 90 Cents Back

larrycheng.com

36 pointslwc12329 comments

The following is oversimplified but has a grain of truth to it: Poor people pay for access to their own money. Rich people are paid for accessing their own money.

Here's a practical example for you: a one month train pass from my home town to Nagoya costs about $200. A six month pass costs $1,000.

Given these facts, some people (through either lack of means or lack of savvy) will in a six month period buy six one-month passes, each time incurring a $1 ATM fee, for a total cost of $1,206. More savvy people will buy the six month pass on a credit card and pay it off before the grace period runs out, which costs about $990 ($1,000 less the $10 your bank will give you to say "Thanks for your business! Please charge more stuff!").

If you know you're going to be working in Nagoya for six months, buying the six month ticket is equivalent to buying six month CDs at an APR in excess of 40%. The actual rate offered on a Japanese CD is typically .5%. Somewhat surprisingly, there are many people at my day job who buy both one month tickets and own $5,000 or more in CDs.

It's worth observing that your CD example may be rational given that CDs are more liquid than train tickets.

Train tickets are generally non-transferable so, absent a black market, they are not liquid at all. Buying a six month ticket is making a $1,000 investment in being in that situation for six months.

Maybe they'll lose the job in question, move, or need the $1,000 in cash for some emergency. Depending on how likely those possibilities are, the buyer is going to have a lesser or greater preference towards a more liquid place to put their money.

I would agree absent for the unstated knowledge that everyone at my office is a Japanese salaryman and, as such, the most negative thing you can say about my job security is that I may lose my job if I die.

Train tickets are generally non-transferable so, absent a black market, they are not liquid at all.

Actually, the tickets are refundable. There are restrictions which vary according to each train company (you might have to pay a small fee, etc), but still the tickets aren't completely illiquid.

or need the $1,000 in cash for some emergency

But that's exactly the point! If you are so poor you don't have the extra $1000 to carry you through you will have to pay more, just for being poor.

I think the time value of money is just totally upside down, and the train pass pricing is a good example of it. Nagoya needs to change their pricing to reflect that, because they're leaving money on the table by charging so much less for a six-month pass vs. one month passes. Chances are the money they get paid up front can't be invested in a short-term asset with a return that justifies the discount.

Governments move slow, and leave money behind them.

Not sure if this is what you meant or not, but while some of the discount comes from the TVM side of things, I'd venture to guess a much larger source of the discount comes from the fact that they have locked you in to a 6 month pass.

If you picture the monthly pass as a monthly subscription, then think of a reasonable retention rate for this situation (something less than 100% month-over-month), the value of guaranteeing 6 purchases up front starts to become significant.

Locking you into a pass for six months means they don't have to have as much cash on hand to deal with uncertainty. So they can invest additional cash in securities with 6 month terms.

It's not that they can invest the money, but that they've certainty over the money, and can plan with it, whereas they can't assume that a buyer of a one-month pass will buy another one-month pass next month.

JR (East and West) are both publicly traded corporations. I sympathize with "governments are inefficient by nature", but I think you're a wee bit off the mark here.

I say "a wee bit" because Japan Railways was once owned by the state, and at certain industries and certain sizes in Japan it is difficult to tell where the government stops and the companies start, and vice versa. This phenomenon isn't unique to Japan -- c.f. "military industrial complex" or the security arrangements at airports.

Anyhow, both of the JRs are solid constituents of what used to be called Japan, Inc. (A derisive name in the late-80s which fell out of favor after denationalization and, probably more importantly, after Japan's economic woes caused it to drop off the radar screen of threats to American economic preeminence.)

Not a perfect analysis, but still insightful. My issue with the analysis is that purchasing a CD is, to some degree, a mechanism to store your money - and hopefully get it back at the end of some period of time. Buying tickets one month at a time also gives you the flexibility of finding alternative transport or moving.

The point about gold is a bit misleading. Gold is not an "appreciating asset" any more than a baseball card that has a misprint and skyrockets in value is. Gold is priced on a world market and, for those of us in the US, purchased in dollars. When the value of the dollar goes down, the value of gold goes up, and the opposite is true. Macro factors have an effect on both sides of the equation (for instance, if nuclear war broke out tomorrow it's likely that both gold and the dollar would decline together, though there is probably a case for gold going up at that point) but in general gold moves inverse to the dollar. There are lots of reasons to expect the dollar to lose more value in the short term, but calling gold an "appreciating asset" is only true to the extent that the dollar (or currency of your choosing) is an inherently depreciating asset.

How about the lottery? You give them $1 and get back as little as $0.25 in EV depending on what you play. And that's not even counting that you're taxed on winnings as normal income but unless you're a professional gambler (and if you are, shame on you for buying lottery tickets) you can't deduct losses in a losing year.

The argument that gold is equivalent to currency is false. It's almost impossible to buy food from the grocery store with the gold watch you got last Christmas. For all practical purposes, gold is a second-hand good like anything else, and selling it to a dealer ensures you get nowhere near the appropriate value for it, just like selling any other second hand good.

I think both the article and your reply are a bit misleading because you talk of both "gold" and "gold jewelry", which aren't the same thing.

While gold is not exactly equivalent to paper money, it is a currency. Only it's not as used as before, and of course not as liquid as US dollars nowadays. It is certainly more liquid than other currencies though: most people would prefer to be paid in gold than in Zimbabwean dollars.

But of course gold and "gold watch" are different stuff. Plain "gold" usually means coins and bars, which are pretty much liquid. The spread can be as low as 2.5%, not much different from retail foreign exchange. Definitely not like any other second hand good.

The spread on Gold American Eagles is currently 1.02% at apmex.com. That's better than most atm transactions :)

I'm surprised he didn't call out insurance policies and warranties, which are always negative expected value in return for smoothing out risk. For some things this actually makes sense (you can't afford to gamble a few million bucks on "I'm never running anyone over in my car") but things like extended warranties, you're usually better off saving the money and, if need be, buying another toaster oven if yours goes kaput.

I'd imagine one of the things that happens when you get rich is you get to save all this money poor people spend on risk mitigation.

As you become rich you have more to lose. My experience is that you tend to spend more money on risk mitigation (even though the percentage of income spent may be lower).

The percentage is what it's all about though, isn't it?

If you earn $30000/year and have to spend $12000 on self-paid health insurance, that's an unbearable 40% of your income.

If you earn $250000/year and choose to spend $20000 on health insurance, that's a reasonable 8% of your income, and you're probably getting better risk mitigation too. (eg: no copays, 100% coverage, vs the out-of-pocket costs that would go along with the cheaper insurance.)

And $250000/year isn't even that rich anymore. In northern NJ, that's just starting to get comfortable.

There are other forms of risk mitigation that apply strictly to the rich, such as umbrella policies, media insurance policies, etc etc etc. I'm not familiar with very many of them, but they can often be costly.

These are needs that the poor will never have, because no one will ever imagine suing them (as they don't have anything worth the effort and cost).

1. ATMs - Only charged if you're at an ATM outside of your bank's network.

2. Travelers Checks - They were useful long ago when credit cards did not exist and carrying large amount of cash was dangerous.

3. Check Cashing - The bank that issued the check will cash it for free, regardless of account status.

4. Currency Exchange - Can minimize this by ATM / credit cards (MasterCard/Visa) but in reality, there's currently no way to get around currency exchange fees. Here's an article on this topic: http://travel.nytimes.com/2006/06/25/travel/25prac.html

5. Coinstar - Never had to use this (wife takes away all my change and it magically disappears).

6. Gold buyers - This one is not like any of the above despite what the author claims. Liquidity of the gold has nothing to do with it but rather the issue that the gold buyer's judgment is what decides the value of the goods. In all of the above, the financial company treats everyone based on pre-set rules (1% charge, $10 fee etc.) And my 1,000 quarters are just as valuable as your 1,000 quarters to Coinstar. Not so with gold buyers. They will offer the smallest amount that they think the gold seller with accept. The amount of gold or precious metal is a factor but not the sold variable.

I think #1-5 are pretty good services and shouldn't be lumped with the scams of #6. However, this article does highlight that people will pay for services like accessibility, insurance, portability, and security of assets that they already own.

> Check Cashing Is not true, most banks will but some (Wells Fargo) charge you to cash a check they issue. At least they have when I've attempted to cash my pay check there instead of my normal bank.

I think the argument about gold vs. dollars as assets is laughable. The author cherry-picked an 8 year period to compare 'historical prices'. I don't doubt that gold was a better position to be in during the last 8 years, but it's dishonest to say that gold is always a better investment than cash.

I expect long-run that gold will be a better position, but it tends to fluctuate wildly, and there are periods where cash is a better investment compared to gold.

How about slot machines that actually advertise "Pays out 95%"! as if it were a good thing.

For most gamblers, that is a good thing. Sure, if you play for a long time your winnings average out to a 5% loss; that's how the casino makes its money. But over the short term the random element means that the slot machine can pay out much more than 100%. So people play in the hopes that they'll get lucky and hit a high-pay-out short-term streak.

No one would play if it paid out 95% on every pull.

Of course, the real gamblers play poker or blackjack, where the odds really can be in your favor, if you develop the necessary skills.

Almost everything we buy works this way. Every good you purchase is marked up in price from what the seller paid for it. The true value you receive is always less than what the seller receives. So trading money for goods or services you nearly always receive less value in exchange. It's just more apparent when we take away goods and services and just show exchanging money.

Graphs with y-axes not at 0? Ick...

And at the grocery store, I give them a dollar, and they give zero cents back. Nothing, nada. Can you believe that scam? Implied value: food and stuff I need.

Rule: Anytime money changes hands, someone will get in the middle to take a cut.

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