Saturday, June 27, 2020

The Parable of the Gift Cards

The Best Gift Cards For 2020 And How To Save Money On Them


Scott was a serial entrepreneur. And he knew how to catch a fad. Purple, Serta, Sleep Number, mattress companies were popping up offering high end mattresses with huge margins, there was even one selling mattresses made out of parts of avocados. He decided that the right thing to do was mix a new craze with an old one. Hollywood had taught him that nothing sells like nostalgia, look at the box office: Star wars, Ghostbusters, Beauty and the Beast. For him the obvious answer was waterbeds.

He quickly got with his manufacturing contacts and within a few months Ocean Rest was born. But clearly nostalgia has its limits and while he was making a living the beds weren’t flying off the shelves. The Christmas holiday was fast approaching and Scott decided to get in on the gift card business. Why would you buy gift cards for $25 or $50 dollars for a $2,000 item? Even the optimist in him didn’t think he would sell a lot, but on the bright side because of that many that were sold would never get redeemed. So, he would sell a 10 cent piece of plastic for $25. That was the kind of business he could get into.

He dropped some money on a graphic designer and when he got them back he had to admit, they were very cool looking. He bought a few hundred and distributed them around at some stores. A few days later his phone rang. It was from his friend, Sai, who owned the local hardware store. “We would like 200 more gift cards.”

“What?”

“You heard me, the 20 you gave us flew off the shelf. We project we could sell 200 more this holiday season.”

“Sai, you’re very funny. But I’m not making 200 cards.”

“Suite yourself, but I’m serious. They like your cards.”

He and Sai often played pranks on each other so he ignored the call until all the others started coming in. “We will take 100 more.” They all said. Something about that card. And after he filled those orders the calls for 1,000 more came almost as fast. People all over the country were calling asking to get his cards. Soon Wal Mart ordered 10,000. For some reason everyone wanted one.

Scrolling through his facebook feed one day he saw it, a woman holding one of his cards saying, “Can’t wait to give my parents their waterbed gift card for Christmas. The day I punctured theirs and flooded the room they will never forget. They are going to lose it when they get this.” And they started popping up, memes, jokes, memories all with his card. Clearly, $2,000 was too much to have a nostalgic experience, but $20 wasn’t.

As the cards came off the shelf the money started pouring in. First thousands, then tens of thousands, hundreds of thousands and ultimately millions. Making gift cards felt like printing money.

“Dad, I don’t know what to say.”

“The polite thing to say is, ‘Thank You’.” Scott said as he sat with his daughter and their family on Christmas.

“But Dad, I can’t accept this.”

“Of course, you can, it's your Christmas Gift.”

“But my home...paid off.”

“I know you and Billy are doing okay but think about how much easier things will be without the mortgage.”

And Scott was also generous with his extended family. Aunts got boats and Uncles got trucks to pull them with. But Scott wasn’t worried it seemed the money poured in faster than he could spend it. So, he just kept spending.

But all crazes die, and when this one died, it died in two phases. Phase 1 was when people stopped buying the cards. The money slowed down and Scott began to scramble. In addition to gifts he had bought many nice things for himself, and the beach condo had a steep HOA, and the water bill at his new mansion with the lazy river, equaled most people's house payment. Things were getting very tight, he even wondered if he would have to sell one of the six new homes when Phase 2 hit.

In Salt Lake another young entrepreneur’s wheels were turning. The world was flooded with $20 gift cards for water mattresses that were almost worthless to those who held them. People would gladly cash them in for pennies on the dollar.

Scott was excited when he got the first order for 15 waterbeds. After all, he could use the money. But then he noticed how they were paid for, all with gift cards. He wouldn’t see a dime, he already had and spent the money for these. This was painful, but he had to deliver. Then another order for 20, then 30. The young man in Salt Lake was buying $2,000 waterbeds with worthless gift cards and selling them for $500 and turning a decent profit.

One by one the six homes were sold. Pouring all his money to fulfill orders that didn’t bring in a cent. It was staring at a computer in his daughters basement at an order of 100 mattresses that he realized the game was up. He didn’t want to declare bankruptcy but it was his only option. In desperation he called a number he had looked up sometime ago.

“Hello, this is Anash, did you want to order a mattress?”

“Anash, this is Scott, owner of Ocean Rest. I can’t do it.”

“Do what?”

“I can’t fill any more orders. I’m bankrupt, I can’t afford to sell you any more mattresses.”

“But that doesn’t make sense. You were paid in advance for these orders. Paid one gift card at a time. You should have money to spare. Getting paid in advance of the orders is an advantage, how could you not have the money?”

Scott knew Anash was right, he knew money today is worth more than money tomorrow, but he also knew why in his case, that hadn’t been the case. “I didn’t expect people to use the gift cards. I assumed most would get lost or thrown away. At least, I guess that is what I assumed. I probably didn’t really think about it enough. I’m sorry, but you have to stop.”

“I can’t, I have orders to fill. I’ve taken another 50 since I sent you that last order yesterday.”

“Then it looks like we're both going out of business.”

----------------------------------------------

I think this parable needs some explanation. Scott is you and me. It’s all the citizens of the United States and the gift cards are $100 dollar bills. Since the great recession the demand for $100 dollar bills has skyrocketed. As demand goes up they simply print more. They now print more $100 dollar bills than $1 dollar bills. There are several reasons for this. Many countries knowing that large bills are often used in crime stopped printing large currency bills. The Euro for instance discontinued their 500 Euro note for this reason. The US dollar is also amazingly stable, so it is seen as a safe place to store your money if you are overseas.

So with all this printing of money why are we not seeing inflation. And isn’t having the world use our currency a good thing? We are not seeing inflation because much of the money isn’t going into circulation. We get to essentially spend it for goods and services and then it goes into someone's mattress or in some cartels shed. Is this good for us? Like Scott and his family members it is, in the short run. We get the world's goods and services and what do we have to provide in return? Nothing, or practically nothing, a 12 cent piece of paper.

The danger is that just like Scott, this game will die and die in two phases. Phase 1 will be when the demand for $100 bills stops. When people in India, China and drug cartels no longer want to use $100 bills as their preferred source of money storage. That will be painful, because no more buying goods and services for practically nothing. But it is nothing compared to the pain we will feel in Phase 2 when people decide to begin to liquidate the bills they have. There will be massive inflation. That is when we will be forced to make goods and services and get nothing in return. Just like in the story the pain will be shared by both us and those who hold our money.

What should we do? We need to realize that we can’t keep printing money without consequences. The decision to print or not print money is based on keeping inflation low, because deflation would also cause economic pain. The best way we could control this is do what Europe and other nations have done and discontinue the $100 bill. It would be a tough decision. It would be like Scott deciding not to sell gift cards when they are flying off the shelf. But we need to. Because the only other option is actually to use good times to save money and prepare for the payback when it inevitably comes. And unfortunately I don’t see us as a nation doing that.


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