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The Calgary Eye Opener Friday, October 23, 2020
 
!%@From the Long Bar at the Alberta Hotel@%!
Aug 2008 -The Economist releases the Big Mac Index - Ronald McDonald claims Canadian Dollar 15% too high
I drove the last spike on the CPR railroad in 1885. A fellow I fired wrote a book about me, full of vicious lies and insinuations and exaggerations ... trouble is though, it's mainly true
August: This is one of the peculiarly dangerous months to speculate
Mark Twain
07-Aug-08 -
LET ME TELL YA', YA' IDIOTS --- I'M AN INSTANT BILLIONAIRE --- THE EURO'S BEIN' GOIN' UP LIKE A ROCKET --- I MORTGAGED MY HOUSE AND PUT EVERY CENT INTO THE ALMIGHTY EURO    INTO THE EURO?!!! GIVE YOUR HEAD A SHAKE McGONIGLE         BUY HIGH -- SELL LOW ---  HOW MANY TIMES HA' YA' BEEN BANKRUPT McGONIGLE    WHATEVER IT IS ADD --- ONE -- - THE BIG MAC INDEX SAYS THE EURO'S 50% OVERVALUED

WHAT'S THAT MEAN - THE "BIG MAC INDEX"? 

     
 
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Many a sucker has regretted taking my word for anything --- . But don't take it from me --- take it from a rag actually named after economists, The Economist.

I bet, McGonigle, you'll live to wish you'd known that, every year since 1986, The Economist has compared the prices of the Big Mac Hamburger in different countries all over the EGA ( the empire where the sun never sets, the Empire of the Golden Arches - which is bigger than the British Empire ever was). A week ago The Economist found a hamburger containing exactly the same quantity of cholesterol and trans fats and anything else bad you can think of - that exact self-same hamburger sold in Shelby, Montana for only $3.57 but sold in Calgary, Alberta for $4.09US; sold in Oslo, Norway for $7.88US!!! but sold in Beijing, China for only $1.83US.

By comparing prices of Big Macs globally --- aka all over the EGA, The Economist put together what they call the Big Mac Index. If a Big Mac sells in a foreign country for more than it does in the USA, The Economist says that that country's currency is overvalued. So The Economist says that the Canadian Dollar is 15% overvalued; the Norwegian Kronor is 121%; but the Chinese Yuan, on the other hand, is 49% undervalued. And the European Euro -- a Big Mac is selling in Paris for $5.34US --- is overvalued by 50%.

McGonigle --- when you saw the Euro rocketing up ... you wanted to get in on the easy money ... you mortgaged your house and bought Euros. I have to tell you, sir, the money traders are really hosing you, you poor old sod. According to the Big Mac Index, if you had bought Euros with American dollars, you'd have paid 50% too much. But because you bought them with Canadian dollars and Canadian dollars are overvalued by 15% therefore, according to my calculations --- and I'm seldom wrong --- you probably paid about 43% too much. What's going to happen at some time --- just like the sun gets up in the east in the morning --- the Euro will fall. A laddy like you, McGonigle, of course, thinks some sucker will come along and be even a bigger sucker than you are and will pay you more than an extra 43% for a Euro --- and that same next laddy on the sucker list will be motivated by the belief that another even bigger sucker will come along and pay even more. Well you can see where it's going --- it's called speculation --- most people who get involved lose big money and the really stupid ones mortgage their houses. And sitting calmly on the other side are the value investors --- people who do the same thing Warren Buffet does in the stock market --- buy low/sell high --- they know the market for a currency will head towards its real value eventually and, therefore, when one currency is overvalued --- they sell it --- when another is undervalued --- like the Singapore dollar --- according to the Hamburger Index --- it is 18% overvalued --- they buy it. But McGonigle you'd never do that because you're not a contrarian - you're the very opposite of a contrarian.

Lordy Lord Strath --- are you saying that the Big Mac Index can scientifically predict what the dollar will be trading at in the future?
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Bob Edwards
The so-called "science" is called "Burgernomics". Burgernomics is is based on a theory of economics called "PPP". PPP doesn't stand for some kind of roadside marijuana test where the kops'll zap you if you don't give a sample --- no PPP means "purchasing-power parity" --- the theory of the learned economists who peddle the PPP is that red-blooded loyal consumers are made from the same mold all the world over/ EGA and will --- eventually --- pay the same price all over the world for the same product being, in this case, the Big Mac hamburger, cholesterol, trans fats and all. --- In this Consumer Heaven, Old Timer from Pincher Creek, you'd pay the same for a Big Mac in Calgary, Alberta, Kingdom of Canada, as would Sam Slick in Shelby, Montana, United States of America. Don't forget it's just a theory no different from David Suzuki's theory that CO2 causes global warming or that a cat has nine lives --- a theory's fine but you have to prove it --- What surprises me is that I cannot find anywhere where The Economist magazine has compared all of their statistics over the 22 years since 1986, the year they started using the Big Mac Index --- for instance --- did the Big Mac Index in 1986 predict what the Canadian dollar would trade for in 1987? Why, all a person would have to do would be to sit down with every Economist report since 1986. Well I can't see anyone's done it. A couple of Hungarians, Antonio Fatás and Ilian Mihov compared the cost of living indexes in Australia and England - converted them to U.S. dollars and plotted them from 1975 to 2003. And then plotted out the exchange rates for the Australian dollar and English Pound over those years. I saw a chart there on page 15 of Chapter 18 of Fatás's and Mihov's report that seemed to give some proof to the PPP theory. And my gut tells me that the learned Hungarians are right and that's why I sold the Euros McGonigle bought. I've never been bankrupt (mind you I've been plenty close ... like the time we built the CPR) --- McGonigle's been bankrupt as many times as he's been convicted of impaired driving --- 17 times going on 18. And the Canadian Dollar has gone down from $1.00US on July 25, when the Economist published it's latest Big Mac report to 96 cents today.

The Lady Who's Known as Lou
'Ere ducky ... after all is said an' done --- what does it mean for non-speculating personages like me?
Well, if the Big Mack theory is right --- the Canadian dollar will go down --- and we sell our oil in US dollars and, therefore, what we get for oil is going down . And if what we get for our oil goes down --- the Toronto stock market will crash because it's so loaded with oil stocks. And also, right now, any Canadian selling things in to the competitive U.S. market is being beaten up because the price he has to sell them for is too high.
Country
Price of Big Mac converted to U.S. $
% currency overvalued/undervalued
Australia
$3.36
-6%
Canada
$4.08
+14%
China
$1.83
-49%
Europe
$5.34
+50%
Japan
$2.62
-27%
Russia
$2.54
-29%
Mexico
$3.15
-12%
Norway
$7.88
+121%
Britain
$4.57
+28%

For The Economist's July 25 Big Mac Report --- CLICK HERE

For further information about the PPP theory and proof thereof see Macroeconomics for MBA by Antonio Fatás and Ilian Mihov - Chapter 18: Exchange rate determination --- CLICK HERE

For those among our readers who are not loaded up on trans fats and chloresterol for information about the Big Mac itself --- CLICK HERE

For more detail on the Big Mac Index CLICK HERE

And for another view of Burgernomics, Beyond Burgernomics and MacParity: Exchange Rate Forecasts Based on the Law of One Price by Matthias Lutz University of St. Gallen --- CLICK HERE

To view the Oanda.com - currency website -- which covers the Big Mac Index -- CLICK HERE

For information about another book on the subject, The Big Mac Index -- Applications of Purchasing Power Parity by Li Lian Ong - CLICK HERE --- Here's what the dust jacket claims: This book demonstrates the applications of Purchasing Power Parity (PPP) in exchange rate determination as well as more practical applications of salary comparison and the cost-of living across borders. It usesThe Economist's annual Big Mac Index in place of the traditional basket of services used in PPP research. The author demonstrates that this is a good solution to the index-number problem since it is readily available and more appealing as an international monetary standard. The book also shows how The Big Mac Index could have been used to predict the Asian Currency Crisis and the Mexican Peso stand-off where more traditional economic measures failed.

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Bob Edwards,
Editor
READ Jane Jacobs's
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