Attention Hedge Funds! Bernanke is not exactly London Whale.

Brad Delong draws a nice picture of how hedge funds see the world.

Some in the industry like to draw parallels between the London Whale trade last year that cost JP Morgan $6bn and being short US sovereign debt: they think one day the trade has to be unwound in a quick and messy manner and then the shorts will cash in. There’s one big difference: JP Morgan can’t print money, Bernanke can. And then there’s a concern for inflation ( a strange concern for someone who’s supposedly short Treasuries).

But, the hedge fundies say: “What if the economy recovers and starts to boom? What if inflation shoots up? The Fed could loose $500 billion on its portfolio as it moves to control inflation! Why doesn’t that fear that?”

The Fed does not fear that. That is what it is aiming for.

Hedgies also upset that there’s no higher authority that can come in and right the imagined wrong done to them. Unlike London Whale (Bruno Iksil), Bernanke doesn’t have a boss who can force him to unwound this trade today. This fact really annoys the hedgies.

Who do the hedgies imagine are the Fed’s political masters who will tell it to shift and adopt policies that will bring on even massier unemployment? Rand Paul?

There is a reason that the trade of shorting the bonds of a sovereign issuer of a global reserve currency in a depressed economy is called “the widowmaker”.


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