The Great Divergence

[Jester]

Just forwarding growing phantom capital as a possible exlanation for the current divergence. Where do I label something a problem?

You don't believe that the growing inequality is a problem? You don't believe that pyramid schemes are a problem?

You appear to be going with what wiki calls the "common" as opposed to the "academic" usage. My own opinion (admittedly, as an academic) is that the "common" usage is incorrect

So it's only your opinion that I'm wrong. I can live with that

No, it's not "only my opinion". It is my opinion, of course, but there are good reasons for it.

Arbitrage is an idea. Its proper and original meaning was a risk-free trade by buying one commodity, and selling it directly back for a higher price. Some people deluded themselves with fancy models into believing that a certain type of statistically calculated trade was equivalent to arbitrage. It isn't, and it never was. But they thought it was, so they called it "statistical arbitrage". Their mistake does not redefine the word.

Or, put another way, just because your grocery store puts the tomatoes in with the vegetables, doesn't mean it is one, nor is it just a matter of opinion. The colloquial definition is "good enough," but in the end, it's wrong.

For a more rigorous discussion, try the New Palgrave Dictionary of Economics. It goes into achingly high detail, and also discusses how the mathematics of arbitrage led to asset pricing modes, and much of modern finance. Now, I think these models are critically flawed in their overreliance on errors being normally distributed, when in fact they are much riskier ("fat tails").

But, in the end, the more complex derivations that rely on arbitrage as a principle, valid or not, trace back mathematically to exactly what I said: Arbitrage is about buying something at one price, then selling it back at a higher price, risk-free.

-Jester