Hacking Life with Geoarbitrage

Have you ever gone on vacation to a foreign country and thought “Wow, everything is so cheap, I feel rich!”. Then congratulations; you have discovered geoarbitrage!

When you go to another country and exchange your native currency to their currency, often the goods and services denominated in that local currency require less purchasing power to acquire, as compared to buying the same things in your country using your native currency (assuming you are from US, or Europe or some country with strong currency).

I should mention, I wrote this in mid 2022 originally, for context.

Let’s draw from an example in a previous post.

I love Filet Mignon; in Brazil it’s sold by the Kilo, instead of the pound. A kilo is 2.2 pounds.
A kilo of filet at the local store in late 2018 was $44.99 Reals. A pound of filet in Texas at the local grocer at the same time (choice grade), was $24.99 USD. $44.99/2.2 = $20.45 Reals per pound of Filet in Brazil. $20.45 Reals at the exchange rate at the time (~3.8 BRL to 1 USD) was equivalent to $5.38 USD. In the US a pound of filet was selling for $24.99 and in Brazil it was selling for $5.38 USD. Using this example my purchasing power was almost 5x as compared to buying the same thing in the US. The PPP figure at the time would indicate an average closer to 2.25-2.3x for a broader basket of goods and services.

That’s a small example, but imagine nearly everything was proportionally lower cost in a different country.

That idea, applied to retirement or financial independence, is that your money can stretch further in different areas of the world. Imaging you have $1,000,000 USD saved up. In the US it currently buys you $1,000,000 USD worth of goods and services. Now take you same $1,000,000 USD and go to Mexico with it. How many goods and services would it buy? A lot more! You can live a higher quality of life (at least materially) with the same funds. Or… your money can last longer without you having to continue to work, not accounting for differences in inflation.

This particular nuance of the world allows aspiring retirees or FI minded people to achieve their goals sooner and with fewer financial resources. Geoarbitrage is leveraged by retirees, digital nomads and a slew of other savvy FI minded people to make their financial resources stretch further.

This concept of the difference in purchasing power can be measured. Let’s have a look.

Measuring Geoarbitrage: Big Mac Index

I’m from the US but now based in Brazil, so most of the examples here on out will compare purchasing power in the US to Brazil.

McDonalds operates in most countries around the globe. Conveniently many menu items are offered globally as well. The Big Mac is such an example. You can by a Big Mac in the US, Mexico, Italy, France, Brazil and so forth. In all those areas the Big Mac is, for all intents and purposes, the exact same item. However, it is offered in those regions in the local currency. So how far does your US Dollar stretch when going to a foreign country and buying the Big Mac as when you buy it in the US? This is what the Big Mac Index measures.

For example, according to the Big Mac Index, as of December 2021, you can buy a Big Mac in the US for $5.81. You can buy that same Big Mac in Hong Kong for HK$22.00. At the time the exchange rate was 7.8 HKD to USD.

So, if you travel to Hong Kong, and bring $5.81 USD (price of Big Mac in US), that would exchange to HK$45.32. But wait, the Big Mac only costs HK$22.00 in Hong Kong… That’s right; your $5.81 which buys a single Big Mac in the US, now buys you two Big Macs in Hong Kong, with HK$1.23 left over. Pretty cool!

So, let’s look at Brazil (source, economist.com Big Mac Index).

Let’s draw out the same scenario form this data. In December of 2021, a Big Mac costs $5.81 USD in the United States. At the same time the same Big Mac costs BRL$22.90 in Brazil. In December of 2021 the USD to BRL exchange rate was 5.31. So, if you flew to Brazil with your $5.81 US Dollars, converted that to Brazilian Reals at the rate of 5.31, you would end up with $30.81 BRL. As you can see a Big Mac only costs BRL$22.90, which would leave you with BRL$7.95 left over. Enough to buy some fries perhaps!

Purchasing Power Parity

A more scientific approach uses Purchasing Power Parity (PPP). PPP calculates the theoretical exchange rate between two currencies by comparing the cost of a ‘basket of goods’ in two countries. For instance, if a car, a house, some groceries, a haircut and so forth cost $100,000 USD in the United States, and the same car, same house, same groceries, and same haircut cost $200,000 BRL in Brazil, the PPP is 2. Now if at the same time the actual exchange rate is 5 BRL for 1 USD, Wow, that’s a deal. Think about it, in this theoretical example, you can get 5 BRL for every 1 USD but you can buy the same stuff for only 2 BRL as you can for 1 USD, then you’ve increased your purchasing power by 2.5x.

Using data from the Organization for Economic Cooperation and Development (OEDC) website, we can obtain PPP and average exchange rate figures for USD to BRL going back to 2008. Here it is presented in a chart.

You can see from 2008-2014 there wasn’t much difference between the lines. That means, there wasn’t much of a discount for goods in Brazil as compared to the US at the time. Then in 2015-2016 the lines begin to diverge, and therefore “stuff” got comparatively cheaper in Brazil. In 2019 and beyond, “stuff” got way cheaper in Brazil.

This effect occurs when your country’s currency gains value as compared to the other countries currency, but at the same the other country doesn’t experience inflation at the same rate as their currency devaluation. With comparatively low inflation, the cost of goods and services doesn’t rise much. However, if the currency devalues, you get more of that currency, even though good and services haven’t risen in price much.

How does Geoarbitrage apply to you?

A disparity between purchasing power and exchange rate is what you want to look for when exploring the idea of leveraging geoarbitrage to gain purchasing power.
When comparing some locations, the geoarbitrage effect is relatively consistent over a long period of time. For instance, someone living in Los Angelis or New York, can go almost anywhere and more for their money.

When comparing other areas this effect is not as consistent. In our case we found there was an occasional window of opportunity, where we could vastly increase our purchasing power by trading our US Dollars for Brazilian Real. You can do what we did. Identify such an opportunity and start buying inflation adjusting assets (like real estate) in your target area and in the local currency. That allows you to ‘lock in’ those gains in purchasing power, at least theoretically.

-Sirsandals