In this week's post, I am posting the Confederacy of Dunces biography of Charles Evans and some associated commentary. Evans is a PhD economist and was appointed president of the Federal Reserve Bank of Chicago in 2007. (1) Evans is currently a non-voting member of the Fed's open market committee, (FOMC), but will become a voting member in 2019. Now that the Fed has stopped cutting interest rates and has started to raise them, the hot air that lifted asset prices - stocks and bonds in particular - higher and higher has cooled considerably. As a consequence, asset prices have started to buckle.
One of the side-effects from the volatility in the stock market has been increased scrutiny of the Fed. Unfortunately, missing from this scrutiny is questioning all the interest rate cuts and "quantitative easing" that fueled the enormous explosion in the now sinking stock and bond markets. A valuable exercise in times of increased Fed scrutiny, is to take a closer look at not just the policies the Fed is pursuing, but the people that are able to exercise the Fed's enormous power. The value in this exercise is the realization that a system - like the Federal Reserve - that allows fully fallible human beings to exercise so much unaccountable power is not only fundamentally flawed, but completely incompatible with a constitutional republic.
A cipher is an individual who has no meaning or importance, and only assumes importance as part of a larger whole. It is useful to think of an encrypted message. Absent the cipher key, an encrypted message can't be read and has no value. Charles Evans - along with all the other Federal Reserve officials on the Confederacy of Dunces list - is a cipher. By himself he has no value, and is likely incapable of completing any task of practical significance. However, as part of the Federal Reserve, Evans wields power that most people can't even comprehend. The enormous economic upheavals that dominate the US economy of the past twenty years - and the Fed' enormous role in all of them - are merely an echo of placing so many ciphers like Charles Evans in powerful Fed positions.
In the discussion below, Evans talks of the Fed's 2% target for inflation. Implicit in discussing this 2% target are two fully fraudulent beliefs;
- The Federal Reserve can set objectives for the economy
- The Fed's belief that inflation is an inevitable consequence of economic growth.
It is this first fully fraudulent belief that empowers all the economic ciphers like Charles Evans. Any hope for real economic reform and eliminating the enormous boom and bust cycles of the past twenty years must include addressing this false notion. Chief among the signs of successfully addressing this false notion will be Charles Evans and scores of other PhD economists searching for gainful employment outside of the Fed.
Charles Evans - Dunce
Evans was appointed president of the Federal Reserve Bank of Chicago in 2007 and has been dispensing bad advice ever since. Even among the Federal Reserve – which since 1971 has unleashed a devastating inflation on the United States - Evans is known as a monetary milquetoast or, more politely, an “inflation dove.” His dovishness means he is willing to tolerate or at least run the risk of higher levels of inflation to ensure economic growth. Here is Evans in his own words discussing what he thinks the Fed should be willing to do to meet its “objective” for the economy; “The surest and quickest way to get to the objective is to be willing to overshoot in manageable fashion. With regard to our inflation objective, we need to repeatedly state clearly that our 2 percent objective is not a ceiling for inflation.”
There are two enormous fallacies with this statement. The first – and the root of all the other enormous blunders perpetuated by the Federal Reserve – is that the Federal Reserve is in any position to set plans or objectives for the economy. This is central planning and the collapse of communism the world over should have convinced even the PhDs at the Fed that central planning doesn’t work. (It would have been beneficial if the Clinton Administration had become aware of the folly of central planning as well. If they had, there never would have been a housing bubble.)
The second fallacy – and the focus here - is the supposed relationship the Fed believes to exist between growth and inflation. The Fed is fond of viewing the economy as an engine, and this economic engine is prone to overheating if it runs to fast. More specifically, the Fed – in spite of all sorts of examples to the contrary – believes that inflation is a natural consequence of economic growth, and as an economy grows faster it will generate more inflation. Of course, viewed as an inevitable consequence of growth, inflation wouldn’t be all bad. Unfortunately for the hundreds of millions of people with no connection to the financial services industry, the Fed is completely mistaken about there being any sort of consistent relationship between growth and inflation. History proves this conclusively.
For example, during the Industrial Revolution the economy grew by leaps and bounds as prices fell. According to Jim Grant in the last three decades of the 19th century the U.S. economy “endured” falling prices of about 1% per year while the economy grew at almost 4% per year. (2) The second most important price in any modern economy, the price of electricity, fell for decades on end even as the use of electricity soared. The census bureau reports that the price for a kilowatt-hour of electricity fell from 6.03-cents in 1930, to 3.01-cents in 1948 and just 2.12-cents in 1968. (3) Of course, today we have the example of all sorts of electronics and computer products, the prices of which plummet even as more and more people use them.
In sharp contrast to Evans’ and the Fed’s completely mistaken belief in inflation as some sort of inevitable consequence of economic growth, inflation is the worst type of economic cancer that can infect an economy and a society. Charles Holt-Carroll called inflation, “the most effectual of inventions to fertilize the rich man’s field with the sweat of the poor man’s brow.” Evidence of Holt-Carroll’s insight is provided by the enormous concentration of wealth that has become the focus of so much discussion lately. In typical mainstream media fashion, the concentration of wealth has been discussed in the context of political policies, when evidence clearly shows it has nothing to do with politics. The concentration of wealth has been going on since the early 1970s and continues through Republican and Democratic presidents and congresses.
Instead of having anything to do with politics - the enormous concentration in wealth which Holt-Carroll cautioned against is a side-effect of all the inflation the Fed has created since 1971. Since 1971 and the closing of the gold window, there has been nothing to prevent the Fed from creating more and more money. After the gold window was closed, the Fed was free to embark on an unprecedented campaign of increasing the money supply – the very definition of inflation – and this is exactly what the Fed did. Proof of this is easily provided by the price of gold. Since 1971, the price of one-ounce of gold has risen from $35 to well over $1200 today. This enormous increase in the price of gold is not the result of gold undergoing some sort of magical transformation. Instead, the enormous increase in the dollar price of gold is merely the echo of a dollar today only being worth roughly 3% of what it was in 1971.
Not coincidentally and exactly as Holt-Carroll predicted, less than two years after the gold window was closed and the Fed embarked on its policy of inflation, income disparity began its inexorable march higher. In 1973 the share of national income earned by the richest 1% bottomed at 7.7%. The richest 1% now “earns” 19% of the nation’s income and the percentage continues to increase. Unsurprisingly and according to a study from the University of California at Berkley, the richest 1% of Americans now own 35% of the nation’s wealth.
Charles Evans is an inflation apologist and without him and all the others like him, the Federal Reserve never would have been able to pour rocket fuel in the great engine of economic destruction created by the Clinton Administration. Without him and all the others like him, the Fed never would have been able to be the driving force behind the enormous concentration of wealth that has occurred in the United States since the early 1970s.
09 DEC 2018
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(1) Among Evans' predecessors at the Chicago Fed was the "quiet man of LaSalle Street," James McDougal. In the wake of the July 1927 Long Island conference of central bankers and the NY Fed's Ben Strong interceding in US markets to benefit the Bank of England's Montagu Norman, McDougal refused to go along. The NY Fed prevailed and in doing so upset Carter Glass, one of the first legislators to champion the Federal Reserve Act, and H. Parker Willis, the first secretary of the Federal Reserve Board. who had first championed the Federal Reserve. This was a major watershed event in the increased centralization and power of the Federal Reserve. For more on the July 1927 Long Island conference of central bankers, see the following blog post from September 30, 2018; http://www.the92ers.com/blog/federal-reserve-and-fatal-conceit-economics-necessary-and-sufficient-conditions-cause-enormous
(2) James Grant, Mr. Market Miscalculates, Axios Press, Mount Jackson, VA, 2008, p.2
(3) Daniel Pope, Nuclear Implosions - The Rise and Fall of the Washington Public Power System, Cambridge University Press, New York, 2008, p. 25. Pope cites the Census Bureau's 'Statistical History of the United States from the Colonial Times to the Present (1970)."