Hedging and Betting

A few weeks ago, Yglesias made a very insightful post about the difference between "betting," hedging," and other similar words. Betting has some negative connotations. Investment is a bet that something will go well. Hedging is a bet that something will go poorly. But investment and hedging aren't really gambling in the pejorative sense. In fact, their investments do something active to help make it reality.

Yglesias compares Norway and an airline. The former, by a fluke of geography, is heavily invested in oil. It is smart investing for it to hedge by investing in concerns that will go up if the price of oil goes down. That hedge could be called "betting against Norwegian oil" but it's more accurate to call it insurance (another form of betting). An airline has the opposite problem: it's profits go down when the price of oil goes up, so it makes sense for a prudent airline to invest in oil. In both cases, even if things go wrong, they won't be as bad as they might be.

I had wanted to blog this one back when I read it but forgot. Now I'm reminded as Sumner reposts a discussion Republican investments:

This is from the WSJ (via a recent post by Niklas Blanchard):

Putting his money where his mouth is? Eric Cantor, the Republican Whip in the House of Representatives, bought up to $15,000 in shares of ProShares Trust Ultrashort 20+ Year Treasury ETF last December, according to his 2009 financial disclosure statement. The exchange-traded fund takes a short position in long-dated government bonds. In effect, it is a bet against U.S. government bonds—and perhaps on inflation in the future.

Here’s Matt Yglesias’s take:

Given his investment positions, Cantor should be joining me in calling for more short-term fiscal stimulus and urging the Federal Reserve to act more aggressively to raise the price level. But either Cantor doesn’t understand his economic self-interest properly, or else he’s more committed to his principled opposition to sound macroeconomic stabilization than he is to the performance of his portfolio. One doesn’t normally urge members of congress to be more greedy and venal, but in this case it might do a lot of good.

Please, no more greed, more enlightenment. Here are three forms of government:

The Good: Enlightened and civic-minded

The Bad: Unenlightened and civic-minded

The Ugly: Greedy

We’ve got enough problems without encouraging Cantor to move from unenlightened to greedy. (Yes, I know that Yglesias was kidding.)

I mentioned to him that it may just be that Cantor is hedging. It’s thoroughly possible that Canter is saying “I don’t want inflation, but if it comes, I want to be ready. I will hedge against the inflation I fear is coming while doing all I can to prevent it.”