The Big Mac And Your Financial Health

To contact us Click HERE
Sent to me by Mammoth from Seeking Alpha. QB

The Big Mac And Your Financial Health: Rising Burger Prices Show A Worrying Trend

By James Cornehlsen, CFAThe rise in the price of a Big Mac is faster than the official rise in consumer prices and has been since the late 90's. In 1998, the average price of a Big Mac was about $2.50. Today, the average Big Mac is $4.33. If we were using the Consumer Price Index (CPI), the price of a Big Mac today would be about $3.35. See the graph below. The price hikes represented by this popular burger will impact individuals more than the saturated fat content that Big Macs bear.The rise in the price of the Big Mac foreshadows how the printing of money is eroding the financial system's arterial walls. The impact is broad based:

1. Each dollar we own is buying less.
2. For individuals relying on Social Security, the compensation for inflation is not keeping up with the prices people actually pay.
3. The price of bonds should be much lower if interest rates fully accounted for the rise of inflation based on the Big Mac.
4. The official economic growth rate would be lower now if prices were based on the Big Mac Index.

Using the Big Mac Index to Measure InflationThe Economist Newspaper created the Big Mac Index in 1986. The Big Mac Index was created to compare the price of currencies between different countries. The index is based on a theory called purchasing-power parity. This theory looks at the same basket of goods in each country and then adjusts for the interest rate one would pay for a loan or get for a savings account. This adjustment for interest rates makes the price of a Big Mac comparable in each country. The Big Mac index just has one item; however, because it contains beef, dairy (cheese), wheat (bun), cost of labor, and the cost of real estate, I believe it is a good representation of prices in the United States and abroad.Rather than use the Big Mac index for comparing the value of currencies between countries, we wanted to take the price of the Big Mac each year within the US to see how it changes over time. You could also use this approach to look at the trend of prices for other countries as well.By graphing the trend of the Big Mac index each year since 1986, we are shown that prices have accelerated much faster than the official reported Consumer Price Index (CPI) from the Bureau of Labor Statistics. On the BLS's website, CPI is defined as "a measure of the average change over time in the prices paid by consumers for a market basket of consumer goods and services. The basket includes food & beverages, housing, apparel, transportation, medical care, recreation, education & communication, and other goods & services". However, there are two broad concerns with the CPI. First, CPI accounts for the substitution effect whereby if the price of beef increases, it is assumed that fewer people will buy beef and will instead buy chicken. Second, there is a "chained" effect meaning the basket of goods isn't consistent from one time period to the next. The reason for this is that it is believed people change their spending habits as prices change which is why the bureau of Labor Statistics instituted this policy.(click to enlarge)Since 1986, the price of a Big Mac has increased 171% from $1.60 to $4.33 today. During this same time period, the consumer price index has increased at a much lower rate of 109%. More disconcerting is the effect of aggressive adjustment of monetary policy by the Federal Reserve, beginning in 1999. This policy shift started with the Asian crisis and Long Term Capital Management, followed by the Internet bubble, housing bubble, and Great Recession, and now the "New Normal" of zero federal funds rates and quantitative easing. In the context of these Fed policies, the rate of price increases for the Big Mac is almost three times greater than the official Consumer Price index.In 1986, $1 would have purchased over half of a Big Mac. Today you would have to cut the Big Mac into five pieces and only eat one of the five pieces for $1. Consequently, each dollar we have is buying a lot less.He has more to say at this link below with more charts. Thank you Mammoth. QBhttp://seekingalpha.com/article/1071571-the-big-mac-and-your-financial-health-rising-burger-prices-show-a-worrying-trend
This sucks that we the savers and taxpayers are going to lose 10-20 Billion to save GM and how can the gap be so large? I think there should be no bonuses for execs and the money goes back to the government for the shortfall. Although Washington would just waste that in a week. QB

U.S. to sell off its remaining GM shares

Paul Sancya/AP - Treasury says it will unload 500 million shares in the automaker that it held under the industry bailout.

•   Text Size
• Print
• E-mail
• Reprints

By Zachary A. Goldfarb, Updated: Wednesday, December 19, 4:04 PM


The much-debated bailout of Detroit is finally nearing an end after four years — and it looks like the ultimate cost to taxpayers will be between $10 billion and $20 billion.

Having already disposed of its stake in Chrysler, the Treasury Department announced Wednesday that it is now planning to sell its 500 million shares of General Motors stock. The company is buying back 200 million of those shares for $5.5 billion, while the Treasury is developing a plan to sell the rest over the next 12 to 15 months.



If the remaining stock sells at $27.18 a share, GM’s price as of 4 p.m. Wednesday, the government will have sustained a final loss of about $12 billion in its investment in GM. Treasury lost $1.3 billion on Chrysler and still is owed $11.4 billion by Ally Financial, formerly GM’s financing affiliate, to come out even on that investment.

Though the auto bailout is likely to produce a financial loss for the federal government, it was part of a financial rescue that far exceeded expectations. Treasury has recouped 90 percent of the $418 billion it invested in banks, autos and other firms as part of the overall financial bailout.

“The auto industry rescue helped save more than a million jobs during a severe economic crisis, but [the intervention] was always meant to be a temporary, emergency program,” said Timothy G. Massad, Treasury assistant secretary for financial stability, in a statement. “The government should not be in the business of owning stakes in private companies for an indefinite period of time.”

The Treasury’s original total investment in the auto industry was about $80 billion, including $50 billion in GM.

The government’s exit from GM will ultimately free the firm of constraints that executives have said limited how they could run the business. For example, executive compensation caps made it difficult to recruit top business leaders, and the company could not own corporate jets. The compensation restrictions remain for now, but the jet provision has been lifted.

Executives also worried about having a reputation as a federally restricted “Government Motors.”

http://www.washingtonpost.com/business/economy/us-to-sell-off-500-million-remaining-gm-shares/2012/12/19/6dfc345e-49fd-11e2-b6f0-e851e741d196_story.html