Golden Triangle Drug Traffic Arbitrage?

[Anonymous]

"Tyler Durden" writes:

> An interesting though I had last night was that the Drug trade in the
> Golden Triangle (Burma, China, Thailand, etc...) might exist for precisely
> this reason...in other words, as a form of arbitrage of sorts between
> the actual local cost of goods and services and manpower and exchange
> rates of the US dollar. Heroin is an ideal medium for arbitrage, as it's
> price is almost a pure function of supply and demand (as opposed to cost
> of material). It can fluctuate with the currency markets and as a result
> forms  a sort of 'common denominator' for translating local wealth back
> into international, 'real' wealth.
>
> In other words, the drug trade is a direct result of government
> intervention in the currency markets.
>
> Of course, if May were here (may his soul roast in the hell of lesser
> lists) he'd say this was 'obvious'...

Actually, Tim May has some understanding of economics.  The notion
that heroin is an ideal medium for arbitrage because its price is a
"pure function of supply and demand (as opposed to cost of material)"
betrays a deep and abiding ignorance.

All commodities that exist outside of government regulation have prices
that are functions of supply and demand.  Heroin is no different than
any other commodity in that regard.  The notion that heroin has no cost
of material is especially absurd.  Do you think they can just conjure
it up out of thin air?  Nonsense.  Heroin, like any other commodity,
has significant costs to create, and those are what controls its supply.

One difference with heroin is that it has very high costs to transport and
distribute, relative to its creation costs.  That actually makes it worse
for arbitrage.  Arbitrage depends on making a profit due to regional
price differences.  But in the case of heroin, price differentials
are often reasonable and reflect the local costs of distributing and
selling it.  Heroin may be cheap in one place and expensive in another,
but that does not signal a profitable arbitrage opportunity; rather,
it merely reflects the differing costs of doing business in those regions.

If the yuan is actually cheaper than it should be because of being
pegged to the dollar, there's a much easier way to take advantage of the
arbitrage opportunity: simply buy goods in China and sell them in America.
And guess what, thousands of Chinese export companies do just that,
making money off the economic downhill slide that China has erected
spanning the Pacific.  This effectively forces Chinese workers to be
paid less than they are worth, decreasing their savings and acting as
an economic stimulus for China as a whole.