A Step-By-Step Guide to Making Free Money From the 3-Cent Hike on Stamps

Step 1: Borrow money. Step 2: Buy stamps. Step 3: Sell the stamps. Step 4: Profit!
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Reuters

The US Postal Service (USPS) has made it official: Anybody who wants to turn a quick profit at its expense will have an opportunity to do so come January.

As of January 26 next year, it will hike the price of a first-class stamp from $0.46 to $0.49. Stamp prices are normally increased by about 1 or 2 cents a year to match inflation. This 3-cent increase, approved on Dec. 24 by the US Postal Regulatory Commission, is large enough that it creates an opportunity for arbitrage in so-called “forever” stamps, which hold their value regardless of changes in postage price. (The Postal Regulatory Commission stressed that the increase would be temporary, to be phased out in less than two years, when the Postal Service has made up the $2.8 billion it lost during the recession.)

Before forever stamps were introduced in 2007, all stamps in the US were denominated. In other words, the price paid was printed on the stamp. If the stamp was old, and the denomination was less than the current cost of postage, then a letter-mailer would have to supplement it with smaller stamps to make up the difference. A forever stamp can be used, well, forever.

So what’s stopping stamp peddlers from buying up forever stamps at $0.46 before the price hike on Jan. 26, 2014, and selling them afterwards at a profit for less than $0.49?

We hashed out a hypothetical plan to see whether forever-stamp arbitrage is worth it.

Timing

First of all, timing is key. It’s best to buy the stamps right before the price increase, and flip them shortly afterwards. The  longer you hang onto the stamps, the less you make in real terms, because of inflation:

Planning

Our plan is to buy 10 million stamps at $0.46 each and sell them at $0.48. The margins, of course, are small. If we buy 10 million stamps, spending $4.6 million, we’ll earn $200,000—a 4.3% profit.

The good news is that you can buy up to 1 million stamps in a single order from the USPS, and pay a mere $1.75 in shipping (shipping is their business, after all).

postage-stamp-arbitrage-usps-screenshot

Raising Capital

But $4.6 million (or $4,600,001.75 with shipping) is a lot of money, especially for folks like us (an economist and a journalist) who’ve never raised money before and don’t have many assets. Ideally we’d borrow it all at once, but given our limited financial means, securing a $4.6 million loan would be tough, at least at an interest rate that would still leave room for us to make money.

We’d get better terms on the loan if we had some collateral. But all we can offer is the stamps we plan to buy. So the trick is to get our seed funding by selling equity (we’d like to start with $250,000) and then securing loans for the rest using the stamps as collateral. It may seem a little far-fetched, but it’s not all that different from the kind of leveraged trading that goes on in the financial world.

In the past, our journey would probably end here. There’s no way we could convince our friends and family or millionaires to invest a total of $100,000 in this hare-brained scheme. But thanks to the recent US JOBS Act, we don’t need them. We can crowd-fund all of our equity from the general public on sites such as Crowdfunder. This would be our offer: We’ll split the profits 50/50, with half going to our shareholders and the other half to us.

Once we’ve raised the $250,000, we can order some stamps: 5,434 rolls of 100 stamps for $249,964, plus 8 strips of 10 stamps for $36.80.

Including the $1.75 in shipping, that’s $250,002.55.

Those stamps won’t be enough collateral for a $4.6 million loan, so we’d need to take out a smaller loan and use that money to buy more stamps. Then we use those stamps to take out yet another loan and buy even more stamps. We estimate that we’ll need to take out 18 loans to get our hands on 10 million stamps.

postage-stamp-arbitrage-table2

That’s a total of 19 separate stamp orders, which will cost $33.25 in shipping. We can front that money ourselves. So, what about interest? Even though our loan is collateralized, it’s a risky proposition, so we expect to have to pay a fairly high interest rate—8% on an annual basis.

Selling Stamps

Getting the stamps is one thing; selling them is another. There’s no way we could convince a buyer to purchase our stamps before the price increase actually happens in January. Who would agree to buy more expensive stamps in the future when they could buy cheaper ones now? So, we’ll have to cut all of our deals after we’ve already put ourselves on the hook for $4.6 million. This is our biggest source of risk.

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Presented by

Allison Schrager and Ritchie King

Allison Schrager is an economist who focuses on pension issues. Ritchie S. King is a reporter and visual journalist at Quartz, focusing on infographics and interactive features.

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