Word of the day: arbitrage

I had to look this one up:

ar•bi•trage noun \’är-b∂-,träzh\

1  : the nearly simultaneous purchase and sale of securities or foreign exchange in different markets in order to profit from price discrepancies

2  : the purchase of the stock of a takeover target especially with a view to selling it profitably to the raider

I’m probably still not confident enough in what that means to try to use this word in conversation. But in the context of the following posts, I think I understand it well enough.

Felix Salmon on the American economy and the desperate need for more government borrowing and spending:

To spell this out: high corporate profits and low levels of job growth are two sides of the same coin. If things were working properly right now, companies would take their excess revenues and use them to hire more people. Instead, they’re basically just letting those excess revenues sit on their balance sheets as cash because they’re scared to invest in themselves. It’s frankly pathetic.

The solution to this problem is nothing complex — the arbitrage is sitting there in the first chart, plain for all to see. The government can borrow at 1.45 percent: it should do so, in vast quantities, and invest that money back into the economy itself. Take a few hundred billion dollars and use it to fix our broken infrastructure, to re-hire all those laid-off teachers and firefighters, to provide some kind of safety net for the millions of Americans who have been out of work for more than a year. Even if the real long-term return on any stimulus package was zero, the nominal long-term return would be well over 1.45 percent, making the investment worthwhile.

Dan Crawford on a financial transactions tax:

There are some significant factors in favor of a financial transaction tax that would reap a few pennies from each transaction. First, it would raise much-needed money from a group that generally can afford the cost. Second, it could act to discourage flash trading, where computer-run programs arbitrage the markets in a way that only those with the sophisticated programs can take advantage, leaving ordinary folk out in the cold. Third, it could be one factor in returning everyone to more prudent approaches to investment — investing for the long term, rather than profiting from arbitraging tiny differences in multiple trades.