Yesterday I came across one of the stupidest Jerusalem Post articles I have ever read. From start to finish, it is so completely filled with nonsense that even I was a bit shocked. If this doesn’t confirm to you that empirical econometrics is nothing but soothsaying astrological voodoo tarot reading drivel, and that calling an economist is akin to phoning the psychic hotline, then nothing will.
I present to you the conclusion, based on the “Big Mac Index” that the shekel is “6.9% too strong” because a Big Mac in Israel is 6.9% more expensive than a Big Mac in the US.
Here are two paragraphs from this diuretic gem:
The idea, according to the newspaper, is this: The price of a Big Mac captures a lot of what’s going on in a given economy, from labor to rent to the price of produce. Since Big Macs are just about the same in most countries, they should, according to the economic theory of purchasing power parity, cost about the same when converted into the same currency.
“Since a Big Mac costs 48 kroner ($7.76) in Norway and only $4.80 in America, the kroner is overvalued by 62 percent according to this lighthearted, protein-rich analysis, making it the most puffed-up currency in the index,” The Economist offered by way of example.
Let’s leave aside the futility of imaginary indexes and the unfounded assumptions that they are based on. Let’s just examine the pure illogic of the statement “If X is more expensive in Y currency by Z%, then Y currency is Z% too strong.”
If one day you buy a pack of gum for 5 shekels, and the next day that same pack of gum costs 10 shekels, did your currency strengthen, or weaken? Obviously, it weakened by 100%. So how on Earth can one make a claim that if something is more expensive in shekels than in dollars, that this shows that the shekel is strong? If anything it shows that the shekels is weak.
I’ll say it again. If it costs more money to buy the same stuff, it shows a weakness in the money and a strength in the stuff, not the other way around. It is such simple logic, I’m at a loss to explain it any more simply.
But nevermind that. The entire method with which this soothsaying economist came to this conclusion is the same as astrology. Making a statement that Big Macs “should be the same price everywhere” is the same thing as saying “When Capricorn intersects Jupiter and invades Aquarius at an angle perpendicular to Virgo while Pisces is giving birth to Cancer and Sagittarius is in a drunken brawl with Leo after accusing the latter of stealing his girlfriend, you should be expecting to choke on a raisin at 3:00am on September 28th.”
Big Macs neither should, nor should not be the same price anywhere. Big Macs in different locations are different goods. A Big Mac in Manhattan is different from a Big Mac in Wyoming. A Big Mac in Wyoming is cheaper. The prices of Big Macs have no special constancy regardless of location any more than real estate does. Just look at the $50 homes you can buy in Detroit these days.
The price of a Big Mac is determined by two things, and two things only. Supply of Big Macs, and demand for Big Macs. Not the cost of making a Big Mac, not the greed of the McDonald’s franchise owner, not the price of Big Macs anywhere else in the world. Only the supply of Big Macs in a given location, and the demand for Big Macs in that given location.
If the average price of a Big Mac in the US is 6.9% lower than the price of a Big Mac in Israel, that only means one of two things. Either the supply of Big Macs in relation to the demand in the US is 6.9% larger than in Israel, or the demand for Big Macs in relation to the supply in Israel is 6.9% higher than the US, or a combination of the two factors, yielding a market-clearing price 6.9% higher than the market-clearing price in America.
That’s it. That’s all it says. It does not say anything about the shekel, and it certainly does not say that the shekel is “too strong“.
Then why write this nonsense, that besides not having any scientific basis, the conclusion even based on dumb premises is flipped on its head?
It’s because economists work for governments and central banks. Governments need money to fight wars. If they can get in your head that the currency they control is “too strong” then they can print more and use it to fight more wars.