Charles 'Gutenberg' Evans
If Charles Evans (president of the Chicago Fed) were Fed chairman, we'd probably be halfway on the road to the abolition of the dollar and its replacement with the new 'territorial Mandat'. This is without a doubt the man who could deliver a Havenstein moment in the shortest time possible. There are several notable 'doves' at the Federal Reserve (Evans' colleague at the Boston Fed, Eric Rosengren is also well known for his dovish views for instance), but Evans is without a doubt the one intellectually most strongly invested in the idea that the central planning by the Fed – which in the final analysis most of the time amounts to little more than suppressing the interest rate below its natural rate and printing lots of money, either by passive accommodation or active monetization – can somehow 'save' the economy.
It is a mystery to us how anyone can subscribe to this idea with such unshakeable conviction. Even the Bernank – the original helicopter pilot, to borrow a phrase from Jim Dines (the 'original gold & uranium bug') – is wracked by doubt these days, as Jeff Harding notes in this insightful article on the chief deflation fighter's Jackson Hole speech.
On Tuesday, Evans let loose with a few comments that managed to add $40 to the price of gold before anyone could say 'what the hell happened just now?'. Not that we expect him to be perturbed by this market reaction, mind. He probably thinks it's a good thing, since it can be interpreted as a sign of increasing inflation expectations. And here we have a central banker who explicitly states that he wants to see more inflation (meaning, in this case, rising prices).
Charles Evans gives the gold bulls some ammunition – click for higher resolution.
As Bloomberg reports under the heading “Fed’s Evans Favors ‘Aggressive’ Policy Easing After Weak First-Half Growth”:
“Federal Reserve Bank of Chicago President Charles Evans urged easier monetary policy and said he favors setting unemployment and inflation markers that would trigger a pullback from near-zero interest rates.
“I would favor more accommodation,” Evans, a voting member of the Fed’s policy-making committee, said today in a CNBC television interview. “I am in favor of some of the most aggressive policy actions of anyone on the committee.”
[…]
“I am somewhat nervous about the economic recovery and where we stand at this point,” Evans said. “The first half of this year got revised down and we had very weak growth. We had been hoping to achieve something much more like a launch or escape velocity for growth.”
[…]
Evans said he “would have wanted to do more” easing earlier this month, when the Fed decided to commit to keeping its target rate near zero through mid-2013. The commitment is conditioned on “low rates of resource utilization and a subdued outlook for inflation,” which Evans said may be too vague.
“One thing I think we really ought to do is clarify what our policy intentions are going forward,” he said. “It is conditional. I think we need to explain what we mean by that conditionality.”
An improvement would be to detail “the economic markers” that would require a policy change. “We could allow rates to remain low until the unemployment rate fell to a certain level, maybe 7.5 percent, maybe 7 percent” or “if inflation became tremendously unacceptable” which could mean medium-term inflation at more than 3 percent.
“If we could sort of make everyone understand that this is going to be in place for a longer period of time, we would knock out some of that restraint that comes about when people talk about premature tightening,” Evans said.
[…]
“Employment growth has been very weak,” the Chicago Fed leader said. “The economy has been growing, but it is a small positive. We are really going sideways more than anything else. ‘‘The labor market — with 9.1 percent unemployment — we haven’t experienced rates like that which haven’t been associated with recession. This is not a good situation.”
[...]
“Inflationary pressures are not nearly as strong as a lot of people think,” Evans said. While the most recent consumer spending report was “pretty good,” most other economic reports, including manufacturing surveys, have shown continued weakness into the third quarter, he said.
“I really don’t need to see a lot more data to understand that we haven’t achieved escape velocity,” he said. “We need to do better.”
(emphasis added)
What can we conclude from the above mouthful? Evans does not view the economy as a stalled car engine in need of 'jump-starting'. Instead he views the economy as akin to a space shuttle or an Apollo rocket in need of 'achieving escape velocity'.
Regardless of the imagery employed, underlying it is always the same basic – and utterly false – notion that the economy is similar to a machine. A machine that can be described by sets of mathematical equations that modern-day econometricians use to create what are barren tautological models that have absolutely no connection with reality.
Don't get us wrong – artificial constructs have their place in helping to explain economic phenomena. It can make sense to create e.g. the artificial construct of an economy in equilibrium – abstracting from reality by taking away some of its crucial aspects as it were, in order to help with the elucidation of economic laws. But once one has done that it is vital to take things a step further and reconnect everything to the real world. The real world economy is decidedly not amenable to 'modeling'. No controlled experiments can be performed on it and its historical data can not be used for the deduction of economic laws.
And yet, the reigning economic orthodoxy (mostly a mixture of neo-Keynesianism and Monetarism) of which Evans is clearly a proponent, assumes all these things to be possible. Evans clearly seems to believe that the by now glaring evidence that 'QE2' has failed to achieve any of its stated objectives is not a good reason to critically examine the inflationist policy he supports. He instead seems to hold that there 'hasn't been enough of it'. Note also the continued and conspicuous failure to question why the economy has fallen into depression in the first place and why it is unable to extricate itself from the morass. This is apparently assumed to be something akin to a natural catastrophe, as though an asteroid had suddenly hit us.
Rudolf von Havenstein and his advisors were all academics that had likewise convinced themselves of the validity of a dangerous inflationary doctrine. They were big fans of chartalism – which today is known as 'modern monetary theory' (MMT) – the statist monetary crankism thought up by Georg Friedrich Knapp a few years prior to Havenstein's stint as president of the German Reichsbank. Remarkably, this school of thought has recently made quite a comeback under its new, more spiffy sounding name. It's still the same dangerous nonsense though.
Now, we're certainly not trying to suggest that the United States are facing a problem akin to that faced by the Weimar Republic at present. We merely want to make the point that a seemingly harmless situation can easily get out of control when people who are proponents of inflationist theories are at the helm of the central bank. If Evans were not merely the Chicago Fed's president but actually Fed chairman, then we'd probably have reason to be worried a lot more. Gold would likely be trading at an even higher level (currently the US dollar is trading at a 'Bernanke discount' to gold and it can be safely assumed that the 'Evans discount' would be even bigger).
In a way this is ironic, because the alleged 'mistake of 1937' is generally held to have been the fault of the Chicago Fed at the time, which had been the most hawkish faction at the Fed in the late 1930's, pushing back against the too loose monetary policy after witnessing inflation running amuck for five years.
The idea that wealth can be created by printing more money (figuratively these days, as most of the money creation takes the form of fiduciary media created by a few keystrokes) and pushing interest rates to an artificially low level is utterly absurd. Money is a sine qua non for the complex market economy, as it enables indirect exchange and economic calculation. But it is the one good that can not enhance social welfare if its quantity is increased – quite the contrary, as increasing its supply weakens true wealth generation and merely fosters malinvestment. And as we have pointed out on Monday, the quantity of money in the US economy has lately been increasing at truly breath-taking rates of change even before the Fed has had a chance to engage in fresh pumping measures.
