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Artificial price controls have never worked in the long run, and never will. They do, however, create substantial distortions that often manifest in unexpected ways. Consider the curious case of McDonald’s Big Mac burger and its near-absolute scarcity in Argentina.
South America’s second-largest economy, Argentina, has unfortunately turned into an emblematic example of how not to run a country’s overarching economic policy. Facing a crushing sovereign debt load of over $400 billion, with $110 billion owed to the IMF alone, the besieged country appears to be heading toward its tenth sovereign default since gaining independence from Spain in 1816.
3/5 Massive deval on one hand that shall make the prices shoot up for 1-3 months a lot.
(but it’s not internal circulation inflation)
BUT cutting the gov spending
(doing the opposite of internal circulation inflation)— Geoffrey Fouvry (@GraphFinancials) December 13, 2023
With its reserves tapped out and successive currency devaluations unleashing a fierce inflationary wave, Argentina has been resorting to price controls to try to maintain some semblance of purchasing power for the beleaguered Argentine Peso.
The Economist magazine regularly publishes a Big Mac index to compare the price of this well-known offering from McDonald’s in various countries. The index offers a rough idea about the inflationary impulse prevalent in a country. It also allows a first-glance estimation as to how overvalued or undervalued a particular currency is relative to its peers.
In July 2023, a Big Mac burger cost 1,650 pesos in Argentina and $5.58 in the US, implying an exchange rate of 295.70 pesos for 1 USD. At the time, however, the Argentine peso was trading at 275.27 for 1 USD, implying that the currency was overvalued by 7.4 percent.
Because The Economist publishes a Big Mac Index to show inflation, Argentina imposed strict price controls on the Big Mac to get better numbers. But this meant that every Big Mac sold in Argentina was sold at a huge loss, so McDonalds made it almost impossible to buy a Big Mac https://t.co/W7l1wmvuga
— Armand Domalewski 🇬🇾 🇬🇾 🇬🇾 (@ArmandDoma) December 12, 2023
Since then, however, the Argentine Peso has undergone significant currency devaluation and is currently trading at around 800.51 Pesos for 1 USD. In order to make it difficult for a layman to get an idea as to how overvalued/undervalued the Argentine Peso is relative to its peers, the geniuses at the helm of formulating Argentina’s economic policy have imposed a strict price control on the Big Mac burger. Consequently, instead of selling its iconic offering at a substantial loss, McDonald’s has made it extremely difficult to get one’s hands on the burger within Argentina.
The Soviet Union convincingly demonstrated how price controls don’t work. Yet, a sizable number of struggling economies still resort to this snake oil prescription for their economic woes.
— “REITerminator” REITRob (@HedgeyeREITs) December 14, 2023
Of course, inflation and the attendant loss of purchasing power are a hallmark of the fiat currency construct. The US Dollar is the least bad option here owing to its reserve currency status. However, it too has lost sizable purchasing power over the recent decades. This is one of the reasons I remain a Bitcoin proponent. But that is a topic for another day.
Note: The post has been updated with the correct Argentine Peso exchange rate.