Thursday, December 17, 2009

Why I hate gift cards

Every economist on the planet loves to remind us that gift giving is inefficient, here's a good one from The Economist.) Yes, cash is king. Gift givers think it's too impersonal, so they roll out the gift cards.

They're telling themselves they aren't so boorish as to give cash. Giving cash pre-allocated to the store or enterprise of the giver's choice is so much more expressive. Right.

But it's worse than that. Cash gifts can go directly to the bank. Given FDIC, they're safe. Or, you spend them, however, wherever you want. If you are so inclined, you can buy something in particular that will remind you of the gift giver.

Gift cards are a monitoring disaster waiting to happen, not just simply because you lose them. Imagine someone gave you a gift and said "Here's a hundred bucks. But, it might not be worth $100 because this is actually a claim on $100 from a counterparty that really isn't particularly credit worthy."

From the store's perspective, these things are incredible. They borrow money very cheaply because the buyers don't account for the risk, or this risk is viewed as less "important" than the "thoughtfulness" of the gift. Why do you think Target will sell you a gift card for iTunes? Because Target takes a cut to distribute non-interest bearing, unsecured bonds for Apple Inc.! Target

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