The Flinchum File

Thoughtful Economic Analysis and Existential Opinions
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The Value of Unhealthy Fast Food

People who make their living by buying one currency and selling other currencies often have a stressful life.  They make long-term bets but have to constantly and continually make course corrections.  For example, most believed the euro was in a slow, downward trend, which reflects their economy.  Then, the European Central Bank (ECB) announced a program of quantitative easing (QE), which would benefit the economy in long-run but kill the euro in the short-term.  Currency traders who did not instantly sell all their euros lost substantial money, especially because they are usually leveraged or bought with borrowed money.

Currency traders are also noted for their “gallows humor.”  One of their favorite economic indicators is the Big Mac Index.  Since the fast-food sandwich is the same worldwide and needs the same amount of meat, lettuce, tomato and sesame-seed bun everywhere, we can compare the cost of a Big Mac in each country.

Assuming the unhealthy sandwich sells for $4.79 in this county, we see that it sells for 57.5% more in Switzerland, which means the Swiss franc is 57.5% over-valued, compared to the dollar at current exchange rates.  It does not necessarily mean the Swiss franc must come down, but it does mean the currency exchange relationship between the franc and the dollar is not at equilibrium and therefore must change.  The dollar may well increase in value against the franc while losing value against another currency, like the pound.

Continuing this examination, we can see the British pound is 8.8% under-valued, the euro is 11% under-valued, the Japanese yen is 30.1% under-valued, the Chinese yuan is 42.2% under-valued, and the Russian ruble is a whopping 71.5% under-valued.  Another way of looking at this data is that the dollar is that percentage over-valued against the currency.  In other words, the dollar is 8.8% over-valued against the pound.  Nonetheless, I do not see the dollar decreasing any time soon!

Bottom Line:  currency exchange rates are seldom static, but the current set of rates convinces me there is indeed a currency war going on, and we are losing.  A strong dollar gives export advantages to other nations.  It amounts to a subsidy from U.S. taxpayers to foreign exporters to the U.S.

We might as well act like a strong dollar is some cause for celebration this Fourth of July and have lots of parades with lots of flags.  Afterwards, we can all go to McDonald’s for a dose of cholesterol?