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The Fed Spots Inequality, Misses the Point

Janet Yellen says US inequality is worse than any time since, umm, the Fed was created...
 
IT DIDN'T take long did it? asks Greg Canavan in The Daily Reckoning Australia.
 
Now the Bank of England, the Federal Reserve's old partner in crime, is at it too. On Friday, the BoE's chief economist, Andy Haldane, said he favoured delaying interest rate rises in the United Kingdom.
 
That, along with comments from the Fed's James Bullard on Thursday, helped global markets to rally late last week. It's having a nice effect on our market so far today too. It was just as well. The situation looked extremely dicey on Wednesday.
 
Given US markets haven't even had a 10% correction, the coordinated comments have a whiff of panic about them. What...can't markets even have a half-decent correction these days without central bankers wetting themselves in panic?
 
While the minions were trying to hold things together late last week, boss Janet Yellen was inadvertently making a pretty decent argument to end the Federal Reserve altogether. She just didn't know it.
 
In a speech on 'economic opportunity and inequality' in Boston on Friday, Yellen came out with some clangers. Unfortunately, most observers missed the irony of some of her comments.
 
Yellen drew heavily on data collated from the Fed's Survey of Consumer Finances, which began back in 1989. Take it away, Janet...
"By some estimates, income and wealth inequality are near their highest levels in the past hundred years, much higher than the average during that time span and probably higher than for much of American history before then."
Hmmm...the past 100 years you say? The Federal Reserve came into being in 1913. A coincidence, do you think?
 
Not convinced? Give us some more stats then, Janet...
"After adjusting for inflation, the average income of the top 5% of households grew by 38% from 1989 to 2013. By comparison, the average real income of the other 95% of households grew less than 10%.
 
"The lower half of households by wealth held just 3% of wealth in 1989 and only 1% in 2013."
That's interesting. Go on...
"The average net worth of the lower half of the distribution, representing 62 million households, was $11,000 in 2013. About one-fourth of these families reported zero wealth or negative net worth, and a significant fraction of those said they were 'underwater' on their home mortgages, owing more than the value of the home. This $11,000 average is 50% lower than the average wealth of the lower half of families in 1989, adjusted for inflation."
Wow! The average net worth of 62 million US households is just $11,000...half of what it was back in 1989, despite 25 years of (mostly) economic growth?
 
Is it another coincidence that just two years before 1989 the Federal Reserve embarked on a policy of full-blown central banking activism? In 1987, Alan Greenspan had just taken the helm from the last great central banker, Paul Volcker, when 'Black Monday' hit, on the 19th of October (nearly 27 years ago to the day).
 
Greenspan panicked. He promised the market liquidity and support and whatever else he could. The Fed hasn't looked back since. From that day on, it's been the market's socialist tormentor and benefactor...creating crises and then trying to solve them by throwing money at the problem.
 
And where does the money end up? In the hands of the already relatively well-off, which is why Janet Yellen's statistics look so horrible.
 
The irony of a new Fed Chief pointing all this out is particularly...rich. Actually, it's nauseating. If you didn't know any better you'd think she was actually having a laugh. It's either ingenuous or the work of the devil.
 
In truth, I think it's genuinely ingenuous on Yellen's behalf. You don't set out to become the world's biggest do-gooder by being a hard-nosed realist.

Greg Canavan is editor and publisher of Sound Money, Sound Investments, a weekly financial report devoted to unearthing great value investments amid today's "money illusion" of fiat currency. Formerly editor of Australia's market-leading finance newsletter, Greg has been a regular guest on CNBC, ABC and BoardRoomRadio, as well as a contributor to publications as diverse as LewRockwell.com and the Sydney Morning Herald.

See the full archive of Greg Canavan.

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