Friday, July 28, 2006

Feds to Wall Street: Party on dudes!

Billmon discusses the big thumbs up from the new Bush-appointed Chairman of the Federal Reserve Bank, Ben Bernanke, to Wall Street:

As I said, there are many reasons not to worry about inflation in the long run, and some more debatable arguments for not worrying too much about it in the short run, either. But that's not how a Fed chairman is supposed to think. Not when inflation is in the 4-5% range. He should be thinking about what that rate of purchasing power erosion, compounded over time, would do to the real value of a 30-year Treasury bond at maturity. He should be getting mad about it -- like an defensive lineman ready to chew the face off the opposing quarterback -- instead of spreading sweetness and light to all the good little boys and girls at the New York Stock Exchange.

One could point to the market's giddy reaction as proof that Ben and the boys are actually correct not to get their bowels in an uproar about a 4%+ inflation rate, but this would be to misunderestimate the traditional relationship between the Fed and Wall Street. The markets almost always rally on Fed dovishness, because to the average trader easy money is, well, easy money. When your investment time horizon is roughly 24 hours, and you're playing with borrowed chips, liquidity is always a good thing, while inflation is something for the little people to worry about.

Remember folks, Wall Street is just one part of society. What's good for Wall Street is not necessarily good for the rest of us, and what's good for Wall Street over the next six months is not necessarily good for them over the next thirty years.

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