The real reason arbitrage opportunities last so long

Every once in a while you come across a seemingly insignificant coincidence that gives a different perspective on a question you thought you understood the answer to.

I had one of those moments the other day when, for the second time in the course of a few weeks, a popular economics Twitter account dismissed my suggestion that he open a high-interest checking by saying “That is a ton of small print” (it looks like the first thread was deleted but you can find it cached here for now).

This made me reconsider the question: why do arbitrage opportunities last so long?

I thought arbitrage opportunities lasted because people were lazy

When you tell someone they can put their savings into a checking account that earns 50 or 100 times as much interest as their existing savings account, as long as they’re willing to execute a few debit card transactions on the first day of every calendar month, it has always seemed to me the logical response should be “oh thank God!” or “how did I not know about this?” That’s certainly the reaction I had when I learned about high-interest checking accounts.

When people did not have that reaction, I thought I knew why. They might be lazy, and not be willing to meet the high-interest requirements. They might know themselves well enough to know that they would let the requirements slip through the cracks. Or they might simply not understand how compound interest works and what the advantages of high-interest accounts are over low-interest accounts.

These can all be basically filed under the categories of laziness and ignorance.

Smart, energetic people’s reaction to arbitrage opportunities is suspicion

The reaction of these two prominent Twitter personalities gave me a different perspective. Their reaction was not “I can’t be bothered,” or “that sounds like too much work,” or “higher interest rates aren’t worthwhile.” Indeed, I was responding specifically to their individual complaints that they were earning too little interest on their savings.

Instead, their reaction was suspicion. “That is a ton of small print.” “You realize this is just a dang cash back credit card arrangement right.”

Instead of being upset for having missed out on higher interest rates on their savings for so long, they didn’t believe it was possible they had missed out on higher interest rates for so long.

There had to be a catch. But there is no catch. Arbitrage opportunities really are everywhere.

People need to get a grip on how late capitalism works

Many people, particularly those unfortunate enough to be educated in economics, still believe that late capitalist economies function by distributing global savings through capital markets to the investments which will produce the most economic output when the requisite amount of labor is applied to them. This is the “money market” described in Walter Bagehot’s brilliant book “Lombard Street,” in which the profitable agricultural estates of southern England send their excess cash to London for the bill brokers to lend out to the new manufacturing firms in the North.

Late capitalism is not like that. Under late capitalism, the United States Mint (and Canadian Mint!) accepted credit card payments for the sale of dollar coins at face value. Under late capitalism, online mattress companies will let you try a mattress for 100 nights and then refund your money while shipping the mattress to a landfill. Under late capitalism, Uber has perfected the flow of money from venture capitalists to consumers and car-owners.

In other words, arbitrage opportunities are everywhere.

If you’re going to be suspicious, be suspicious of the right things

That’s not to say that everything is free and easy under late capitalism. On the contrary, late capitalism goes hand in hand with what I call the “scam economy:” deals which sounds too good to be true because they are.

A reader turned me on to the idea of paying folks to use my Uber referral link; it worked ok, but I barely broke even after going back and forth with the South Asian scammer I used on Fiverr.

On the other hand sites like Prosper, Lending Club, Wunder Capital, and the now-ubiquitous non-traded REIT companies offer abnormally high returns, but they do so because people are rightfully suspicious about their ability to meet their debt service obligations. The higher returns they offer are compensation for higher risk, rather than arbitrage opportunities.

That means before pursuing an arbitrage opportunity it’s absolutely right and proper to establish what kind of protection you have, how well-established or profitable a company is, whether the company is based in the United States or elsewhere, and so on.

But if a FDIC- or FCUA-insured bank or credit union is offering unusually high interest rates for meeting a couple of simple requirements each month, the logical reaction is to read the fine print, fill out the online application, and move your cash savings there — or else please stop complaining about the low interest rate on your savings account.