The AMEX Game

     If you’re watching for indications of an economic upheaval, there are signs aplenty. However, some of the “traditional” signs have become ambiguous, owing to changes in the ways in which the related goods are traded and their current prices are quoted. For example, I’ve long advocated keeping a close watch on the price of an ounce of gold. Sharp increases in that price once indicated that a wave of price increases would soon be flowing through other important commodities, in response to a previous governmental expansion of the supply of currency and credit (i.e., inflation). But the relationship is no longer a strong one owing to the rise in trade of gold futures. The price of a call contract on some quantity of gold has proved a destabilizing influence on the price of the delivered metal.

     Another indicator that proved reliable over the years was the interest rate lending institutions would charge on a fixed-rate mortgage. This, too, has weakened a bit, under pressure from the Federal Reserve and competition from certain government-operated mortgage lenders and mortgage-guarantee institutions. It’s still worth watching – mortgage interest rates have a large influence on other areas of investment and speculation – but it’s no longer a perfectly reliable signal of inflation about to take its toll.

     There’s one area that continues to be very much worth watching: what I call “the AMEX game.”

     Originally, the American Express company made the greater part of its revenues from “the float:” i.e., its ability to lend money – accrued out of payments made to AMEX on its credit cards – to other institutions for very short terms, typically overnight. Such loans are scheduled to be repaid just as AMEX will need the money to pay the vendors whose products and services the credit-card holders purchased. To profit at this practice requires certain other conditions to be in force:

• There must be a sufficiency of institutions interested in such short-term loans;
• The interest rates short-term borrowers are willing to pay must be above a certain level;
• Personnel skilled at negotiating those short-term loans must be willing to work at doing so;
• The amounts of money accruing to the would-be lender through credit-card payments must be substantial;
• The transaction costs of making and controlling the loans must be substantially less than the revenues in prospect.

     Because these conditions are not guaranteed to last – or exist in the first place – the AMEX game is not always a profitable one. At the dawn of consumer credit card usage, AMEX was alone in its market sector, and was able to capitalize on the conditions that existed. Shortly thereafter MasterCharge and Visa entered the fray, found the AMEX had a virtual monopoly over “the float,” and resorted to imposing fees on both users and vendors. Over time those fees declined sharply, many holders of Visa and MasterCards were offered zero-fee arrangements, and AMEX found that it had competition for “float” revenues. For a while, there was plenty of room for the three competitors. The joyous investment markets of the Eighties were hungry for funds with which to capitalize the many start-up businesses that responded to the Reagan tax cuts and the rise of the microcomputer.

     There’s still some “float” play going on today. I don’t think it’s quite as vibrant as it once was; if it were, I’d expect to hear a lot fewer complaints from vendors about credit-card transaction fees. But there are new players in the game that one should note when they appear. The most important of them are the smartphone vendors and phone-applications makers who support pay-by-phone technology.

     Apple was first to make a splash in this area. Other companies have followed suit...which they would not have done were the supporting conditions not in force. The business area is still populating, which suggests that the conditions remain in force as you read this.

     Borrowers copious enough and short-term interest rates high enough to make the AMEX game worth playing suggest that interest rates charged to consumers will soon be affected as well. This is consistent with the unprecedented federal deficit for fiscal year 2020: at this time, estimated to exceed $3 trillion.

     Regular Gentle Readers will already be aware that I’m constitutionally averse to debt. Yet in a regime of rising interest rates, the borrower has an advantage over the lender, for his obligation will be repaid with “cheaper dollars.” There is a terminus to this, of course. When the game collapses and the currency devalues to zero under the pressure of hyperinflation, you don’t want to be stuck holding a mountain of it. But there will always be “timers” who seek to make a quick killing, then “flee to quality” – i.e., tangible goods such as gold and silver – and get out before the crisis strikes.

     Watch for a flood of new players in the AMEX game. Should such a flood occur, it will be time for persons with substantial dollar-denominated savings to adopt measures of financial self-defense. Remember that you read it here first.