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The exchange rate that would equalise the price of a Swiss Big Mac with an American one is SFr1.55 to the dollar; the actual exchange rate is only 0.96. [1] ==

by 001sky 13y ago

The exchange rate that would equalise the price of a Swiss Big Mac with an American one is SFr1.55 to the dollar; the actual exchange rate is only 0.96. [1] == Swiss Franc is most overvalued currency [1] http://www.economist.com/blogs/graphicdetail/2012/01/daily-chart-3 http://www.economist.com/blogs/graphicdetail/2012/01/daily-c...

lostlogin 13y ago
I get your point, however is it really true to say that? If it were, people would sell the currency to get out while the going is good wouldn't they? How could it stay consistently over priced?
- brazzy 13y ago
  People hold CHF as a hedge against inflation and/or government defaults, not as a growth investment.
  - jnbiche 13y ago
    Well, then it's not overvalued, is it? People value it as a hedge, so it's relative value increases.
    - _delirium 13y ago
      In a certain sense it's always true that free-floating currencies are "correctly valued", in the sense that their value is what the market currently is willing to pay. As far as I know, CHF has no exchange restrictions or capital controls, so it's valued at whatever forex traders are willing to pay for it. If anything, the Swiss Central Bank has been trying to intervene on the other side, to bring the price down through monetary policy (due to worries that the high CHF value is hurting exports).
- 001sky 13y ago
  Actual quote was "Burgernomics shows Switzerland has the most overvalued currency" So, in terms of this limited real-asset convertability, yes it would be true (see footnote above).
- CHsurfer 13y ago
  It's a really nice place to live. You pay for what you get...
marvin 13y ago
As always, you are welcome to take up a very big CHF loan and put your money where your mouth is ;) I expect you have a 50% chance of making money. The actual explanation is a lot simpler; McDonalds employees are more expensive in Switzerland than in the US. You can see the same effect where I live, in Norway.
- crntaylor 13y ago
  Your first point isn't too far off the mark. If goods are really 60% more expensive in Switzerland than in the US, then you'd expect people/corporations/institutions in Switzerland to use their CHF to buy dollars, buy goods in the US at a large discount and have them shipped to Switzerland, or for Swiss companies to hire US employees and pay them in USD, thus driving the USD/CHF exchange rate towards purchasing power parity. Up to transaction costs (inc shipping) and trading restrictions, this really should happen, so it's interesting to explore why it doesn't. Typically the culprits are artificial limitations (e.g. international trade restrictions) or low-value goods where shipping costs are large relative to the cost of the item, or goods which spoil easily and so can't be easily shipped. If you can't explain the disparity with transaction costs and trade restrictions, then there must be some other reason for CHF being so high relative to the USD. One possibility - CHF is viewed as a hedge for various risks (inflation, market crashes). It is typically anti-correlated with the S&P500, for example, and correlated with market volatility, so it's good to be holding it in a crisis. The same applies to JPY, and the opposite applies to AUD and CAD, which are seen as risk-on currencies.
  - marvin 13y ago
    Just for the record, I am not currently arguing with you, but I just thought I would point out something from real-world experience which starkly contradicts the "ideal" economic equilibrium you describe. In my experience as a Norwegian, the parity argument isn't even close to true in the real world. There are lots of non-perishable goods here which are imported but are a lot more expensive than they are in the US. For reference, there is a 25% VAT on everything and there is occasionally an import tariff on the order ot 5%. Also some special taxes on vehicles, tobacco, alcohol and fuel, but I'll keep those separate. Most goods here are a lot more expensive than abroad. Clothes and shoes are 2-3 times more expensive than in the US. Ditto for furniture and most non-perishable goods you would buy in a store. All food is 2-3 times more expensive, even imported, canned goods. This is in line with the labor required to stock and operate a store. Electronics are usually ~30-40% more expensive than abroad if you get them in the right place, which does more or less match the parity theory. My guess is that this is because buying these goods on the Internet is a viable option (in contrast to groceries, clothes, shoes, food, medicine, furniture etc). Hence these retailers are forced to conform, or go out of business. I am not sure how they are able to do this, whereas a clothing store or a supermarket is not. But this is what I observe. The cheapest electronics retailers are very low on staff and high on automation. Long story short, locally labor-intensive products are obviously a lot more expensive in expensive countries. But higher salaries also have a very large effect also on the cost of imported goods, because there is a lot of labor involved during the shipping, import and sales process. If you are able to automate away some of this, you have a massive business opportunity. But it's a very obvious opening, so it is not a trivial task.

by 001sky 13y ago

lostlogin 13y ago

I get your point, however is it really true to say that? If it were, people would sell the currency to get out while the going is good wouldn't they? How could it stay consistently over priced?

brazzy 13y ago
People hold CHF as a hedge against inflation and/or government defaults, not as a growth investment.
- jnbiche 13y ago
  Well, then it's not overvalued, is it? People value it as a hedge, so it's relative value increases.
  - _delirium 13y ago
    In a certain sense it's always true that free-floating currencies are "correctly valued", in the sense that their value is what the market currently is willing to pay. As far as I know, CHF has no exchange restrictions or capital controls, so it's valued at whatever forex traders are willing to pay for it. If anything, the Swiss Central Bank has been trying to intervene on the other side, to bring the price down through monetary policy (due to worries that the high CHF value is hurting exports).
001sky 13y ago
Actual quote was "Burgernomics shows Switzerland has the most overvalued currency" So, in terms of this limited real-asset convertability, yes it would be true (see footnote above).
CHsurfer 13y ago
It's a really nice place to live. You pay for what you get...

marvin 13y ago

As always, you are welcome to take up a very big CHF loan and put your money where your mouth is ;) I expect you have a 50% chance of making money. The actual explanation is a lot simpler; McDonalds employees are more expensive in Switzerland than in the US. You can see the same effect where I live, in Norway.

crntaylor 13y ago
Your first point isn't too far off the mark. If goods are really 60% more expensive in Switzerland than in the US, then you'd expect people/corporations/institutions in Switzerland to use their CHF to buy dollars, buy goods in the US at a large discount and have them shipped to Switzerland, or for Swiss companies to hire US employees and pay them in USD, thus driving the USD/CHF exchange rate towards purchasing power parity. Up to transaction costs (inc shipping) and trading restrictions, this really should happen, so it's interesting to explore why it doesn't. Typically the culprits are artificial limitations (e.g. international trade restrictions) or low-value goods where shipping costs are large relative to the cost of the item, or goods which spoil easily and so can't be easily shipped. If you can't explain the disparity with transaction costs and trade restrictions, then there must be some other reason for CHF being so high relative to the USD. One possibility - CHF is viewed as a hedge for various risks (inflation, market crashes). It is typically anti-correlated with the S&P500, for example, and correlated with market volatility, so it's good to be holding it in a crisis. The same applies to JPY, and the opposite applies to AUD and CAD, which are seen as risk-on currencies.
- marvin 13y ago
  Just for the record, I am not currently arguing with you, but I just thought I would point out something from real-world experience which starkly contradicts the "ideal" economic equilibrium you describe. In my experience as a Norwegian, the parity argument isn't even close to true in the real world. There are lots of non-perishable goods here which are imported but are a lot more expensive than they are in the US. For reference, there is a 25% VAT on everything and there is occasionally an import tariff on the order ot 5%. Also some special taxes on vehicles, tobacco, alcohol and fuel, but I'll keep those separate. Most goods here are a lot more expensive than abroad. Clothes and shoes are 2-3 times more expensive than in the US. Ditto for furniture and most non-perishable goods you would buy in a store. All food is 2-3 times more expensive, even imported, canned goods. This is in line with the labor required to stock and operate a store. Electronics are usually ~30-40% more expensive than abroad if you get them in the right place, which does more or less match the parity theory. My guess is that this is because buying these goods on the Internet is a viable option (in contrast to groceries, clothes, shoes, food, medicine, furniture etc). Hence these retailers are forced to conform, or go out of business. I am not sure how they are able to do this, whereas a clothing store or a supermarket is not. But this is what I observe. The cheapest electronics retailers are very low on staff and high on automation. Long story short, locally labor-intensive products are obviously a lot more expensive in expensive countries. But higher salaries also have a very large effect also on the cost of imported goods, because there is a lot of labor involved during the shipping, import and sales process. If you are able to automate away some of this, you have a massive business opportunity. But it's a very obvious opening, so it is not a trivial task.