NO INFLATION ECONOMY---NOT GOOD

MYSTERY OF MISSING INFLATION

YELLEN CALLS LOW INFLATION A "MYSTERY"

I  read this week in the Guardian (UK) and CNN (Money System) that the Federal Reserve Bank will begin undoing the extraordinary steps it had taken to prop up the economy since the Great Recession.  Over the last ten years it soaked up about $5 trillion dollars in mortgage backed securities, and bank debt and reduced the interest rate that banks charge to each other --its 'benchmark' rate-- to zero.  . By these means it had hoped to stimulate the faltering economy. But now a decade later the economy--at least to some in Washington---seems to be on the mend. Recent accounts indicate that there has been modest growth in household spending, business investments and a lower rate of unemployment.  As a result, the FED under Chairman Yellen has raised the benchmark rate from zero to 1% and then more recently to 1.25%  And now, it has started unloading the security and debt investments from its so called "balance sheet" on to the open market  Selling off about $10 billion dollars each month.

But even though some aspects of the economy show signs of improvement, the rate of INFLATION remains low.  We have little inflation in this recent economy.  Ms Janet Yellen, chairman of the FED and one who is required by statute to keep inflation at about 2% has termed this fact a "mystery".

But to my mind it is no mystery.  The economy has no inflation because there is not enough money in the hands of middle and working class purchasers.  That is a major problem.

Why should we be concerned about inflation?  The word "inflation"  even sounds negative--like a bad disease.  Who would want it?  The fact is a thriving economy has it. Its lack means our economy is stilll in trouble.

Inflation is simply one of the best ways to measure the demand for goods and services and the vitality of an economy. That is why the officials who established  the FED made it a requirement to MAINTAIN INFLATION at 2%.    Inflation is one good measure of how much disposable cash is in the hands of consumers.  Inflation measures the demand for goods.  It is a force that bubbles up from the multitude of small transactions into profits and new investments and to an overall vibrantly growing economy.  When people have sufficient cash available they use it to purchase goods.  The sellers respond to this demand by raising prices to increase  income or to cover costs of the increase (new employers, new product, etc.) in demand.  As a result the prices of goods and services go up. That is inflation.  Ms Yellen is required by stature to keep inflation at 2%.  But she has not been successful in this important goal.  It's persistent low level she has termed a mystery.  

But inflation can only occur if consumers have sufficient disposable income.  So why is there so little  inflation today?

1- The Great Recession has left a great overhang of debt.  Many people still have bills to pay off and must use any spare cash to pay off debt rather than  purchase a new refrigerator or a stove or a new car.  As a consequence of this lack of demand the prices of those items have remained fairly constant.


2-  In the last several decades income inequality in the USA has increased drastically and presently the USA has  the highest inequality of income ratings world wide.  Out of 173 nations, the USA ranks sixth from the bottom in terms of income inequality.  That IS embarrassing and exceptional! .

In 2014 according to CBO,  87 percent of the  income distribution in the USA was garnered by the top 50% of the working population, while the bottom 50% took in only 13 percent of the total.  This value  has changed greatly for the worse since the 1970s  To put this figure  into into a time perspective, the CBO has calculated that if the USA had the same income distribution that it had in 1979  each family in the bottom 80% of the distribution would today have $11,000 more per year on average.  Think of how that amount of money would add to the economy and how it would generate inflation.

Vast amounts of wealth and Income in America are presently sequestered by those few at the very top income brackets.   An often repeated fact is that today the top 400 richest Americans have more wealth than  the bottom 61 percent of the population,  or more wealth than 151 million Americans living in 57 million households.  Thus the vast majority of people --those in the bottom 50%---are living in an economic environment where more than 50  out of every 100  dollars is NOT available to them--since those funds are nor circulating since they are held in the hands of the top 400.  They are playing the economy with only half the deck.  The concentration of wealth in the hands of so few is one of the major causes of a weak, stuttering, stumbling economy.   Imagine a big rock placed under the gas pedal of your vehicle. You can press the pedal down but the engine can never roar into life. It only staggers along.  That is how our economy is functioning with vast sums of income essentially sequestered in the very top income brackets.  This is a staggering, stumbling economy--- an economy with no inflation.

3- Out-sourcing of jobs overseas leaves too many of our citizens  with only lower paying jobs.  Good high paying middle-income jobs are scare in a nation which permits and even encourages  its companies to pack up its factories and mover them overseas. Located in Mexico and China these firms produce their  product cheaply and then package  them up and offer them for sale in the USA-as if they were produced HERE!.  Most of the profits from these transactions go to the small cadre of executives and investors--not to the multitudes of American workers--they might have in times past.  This injustice only exacerbates tine income inequality problem of above.


4- Our youth are burdened with trillions of dollars of debt as a result of their expensive educations. At the age when they should be making some of the major expenditures of their lives, getting married, purchasing a house, filling it with kids and furniture, these young people are instead living monastic lives in their parent's attics and basements, working perhaps but unable to save enough as they pay off their heavy college debts.

So there is no "mystery" as to why we have low inflation.  There is no inflation because there is not  enough money in the hands of the MANY.  Not enough disposable income for  consumers too create enough demand for producers to actually raise prices of those goods and in doing so  generate a vibrant, energetic economy...and the inflation which comes with it.

These above are the economic problems we face as a nation.  They are also sadly exacerbated by the fact that the American population is aging.  Older Americans are retiring..and they leave the work force.    And also by the fact that a vibrant technology is constantly creating new ways to eliminate jobs and hand them over to machines.

Low inflation is no mystery at all.  Mystery is why we have not