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comment by Meriadoc

wasoxygen, how's the bet looking?





wasoxygen  ·  1998 days ago  ·  link  ·  

Could be better. I don't update the charts as often when things are not going my way.

Based on the trend since 2004, Big Macs should be around $4.95 when the bet matures in December 2015, giving an index price of $95 to compare to an oil barrel. That's a good 12% lower than today's crude price, but there's plenty of volatility to keep my hopes alive.

I just worry about what flagamuffin is cooking up.

b_b  ·  1997 days ago  ·  link  ·  

    Based on the trend since 2004, Big Macs should be around $4.95 when the bet matures in December 2015...

That's assuming that the trend continues. I doubt it will. From everything I remember reading last summer, the price of meat is expected to rise sharply in the near term, due to the epic drought that the West has experienced in recent years. Last summer they had to cull the cattle heard fairly dramatically, which made prices fall last year, due to oversupply, but will likely make them rise this year and next, because the cattle that should have been mature are already dead, creating a lack of supply. The trend does look pretty stable, but with that pressure coupled with more and more fuel efficient cars (especially cool ones that people actually want to drive) coming on the market all the time, I think the BM (pun intended) will carry the day.

wasoxygen  ·  1997 days ago  ·  link  ·  

I am betting against expensive oil, so expensive beef would help me win the wager, though if I win due to cattle scarcity that would not very well serve my larger point that material welfare is getting better for people over time.

The Big Mac index has already risen significantly more sharply than inflation. A spike in prices due to the drought-induced shortage would be a perfectly Simonian trigger to provide incentive for more people to produce beef and beef substitutes, restoring supply and driving prices back down.

As you point out, substitutes for oil seem more likely in the near future. One of Simon's important points is that people do not really want sticky, messy petroleum, they just want their cars to go.

b_b  ·  1997 days ago  ·  link  ·  

    I am betting against expensive oil, so expensive beef would help me win the wager, though if I win due to cattle scarcity that would not very well serve my larger point that material welfare is getting better for people over time.

I'm not sure I would agree that rising meat prices would be antithetical to the idea that material welfare is increasing. Given the myriad externalities that aren't currently priced into meat, rising prices might actually be more reflective of the rising consciousness of a more educated and savvy population. Government regulation has created an artificial price support for meat, and if it were allowed to expire, you would win the bet by 10-fold. Agriculture is a hard one to make a Simonian bet on, given that he tried to (it seems based on my very minimal knowledge of the man) make bets that were freer of government price interference. Oil has some, too, but not anywhere near the level of meat.

wasoxygen  ·  1995 days ago  ·  link  ·  

I agree that the price of crude oil appears to be mostly based on market realities, with government distortion coming later, such as in gasoline tax. And the corn subsidy must have a significant effect on beef prices, though I doubt one pays more than double for a grass-fed steak, assuming that is a less distorted alternative.

But you may be overestimating the amount of beef in Big Macs. It looks like a "10:1 Regular Meat" — the tenth-of-a-pound beef patty, two of which go into a Big Mac — costs about 18 or 21 cents. That's only about 10% of the retail price of the burger.

Simon did try to avoid bets on prices that were distorted by government. His last wager stipulated that "This agreement is null and void if the price of saw timber (in south Alabama) is controlled by the government" after five years. Simon paid out on that bet but cited logging restrictions in the Pacific northwest that influenced prices, invalidating the bet.

b_b  ·  1995 days ago  ·  link  ·  

Yes, I spoke incorrectly (or, rather, incompletely) when I mused about price supports for meat. What I should have said was that the government has huge price supports for fast food, because we're talking beef, wheat, corn and soy all in one package (w.r.t. the Big Mac), not to mention the welfare and food stamps required to supplement the wages of the workers for them to pay rent and sustain themselves. None of these things is a consideration in the price of a barrel of crude.

wasoxygen  ·  1995 days ago  ·  link  ·  

I can think of some government policies that might make fast food less attractive than alternatives, like minimum wage and crazy fees, but I bet you're right, most of the distortion favors McDonald's.

Why on Earth would government promote less healthy food at the expense of healthier alternatives? Oh right, because politicians respond to incentives, like everyone else.

b_b  ·  1995 days ago  ·  link  ·  

Unfortunately for us the incentives to which they're responding often don't align with those of their constituents. Hence the deferred costs of unhealthy food.