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Wall Street Hails the Great Inflator - Money Matters for 10/24/05 Don Bravo | 10/24/05
Brokers and traders were falling over each other in a mad rush to buy stocks in US equities today after President Bush announced that Ben Bernanke would succeed Alan Greenspan as Chairman of the Federal Reserve.
Bernanke, formerly a Fed Governor, but most recently Chairman of the President's Council of Economic Advisors, is one of the nation's most ardent cost-pushers, which is generally sweet music to the ears of the corporate elite, who see his potential appointment (subject to Congressional approval), as a green light to raise prices and pave the way to easy profits.
Sadly, these Wall Streeters are historically short-sighted in their outlooks, seeking immediate and short-term gains in the face of longer term problems. While the Greenspan Fed has long been waging war against inflation, Bernanke has a difficult time taking inflation seriously.
In remarks to the National Economists Club, in Washington, D. C., on November 21, 2002, Bernanke made the following remark in his topical treatment of then-threatening deflation:
"...the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation."
Bernanke, somewhat one of the more loose-tongued of the economist talkers in America, also said, earlier in the speech, "...the Fed should try to preserve a buffer zone for the inflation rate, that is, during normal times it should not try to push inflation down all the way to zero."
In other words, Bernanke believes that there should always be some inflation, or, to put the matter in perspective, some weakening of the value of the U. S. Dollar.
While this appointment may look like good news on Wall Street, for you and I, Mr. and Mrs. average Joe and Jane Americans, all it is going to mean is higher prices for everything, including the kitchen sink. I have to believe, that if we aren't well into a recession by the first quarter of 2006, Ben, the Great Inflator, will push us over the brink by no later than July or August.
While the Fed has consistently raised interest rates 1/4 point in each subsequent meeting since early 2004, and will likely raise them in their next two meetings, on November 1 and December 13, we can now count on Bernanke to lobby for no rate change prior to taking charge on January 31, 2006. The FOMC opens business for the year with a meeting on January 26/27. If there is a neutral stance at that meeting, the Fed funds rate would then be a solid and sustainable 4 1/4%. If raised once more, 4 1/2%. Either rate would give Bernanke maneuverability. He could continue to raise rates as inflationary pressures increase, threatening a stagflation scenario, or he could do nothing, allowing inflation, mostly in the form of higher energy and food prices to take the US economy on a path of runaway growth and the consequent inflationary spiral.
Lowering interest rates, for Bernanke, and especially after such unprecedented continual hikes, is simply not part of the equation.
Of course, over in the bond pits, where sharper and more focused minds operate, treasuries were hammered down again in anticipation of the Bernanke assault. Yields on bonds of all maturities groped higher by anywhere from 5 to 7 basis points. Bond traders see Bernanke as unequivocally inflationary and quite possibly politically motivated.
For the day, the Dow, Nasdaq and NYSE all gained more than 1.5 percent, marking one of the best days for US equities this year. Trading volume, however, belied a lack of support, as shares changing hands was only in the moderate range.
Amidst all the Fed hoopla, news that two Dow components, drug-maker Merck and financial concern American Express, each missed 3rd quarter earnings estimates by 2 cents. Perhaps the jubilation may be short-lived and more pomp than circumstance.
I would also like to point out that my every-Monday search on Google News for the word "recession" hit a new low, with about 4,700 results returned.
Dow Jones: +169.78; 10,385.00 close
NYSE Advancers: 2523
Nasdaq Advancers: 2173
NYSE New Highs: 65
Nasdaq New Highs: 84
Gold: -2.10; 467.00 close
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