How are U.S. Treasuries out of circulation? The government spends that. I dont’ think it’s out of circulation. Why would the government not spend the money it gets from auctioning treasuries? A recent Bloomberg story said the government didn’t get enough money in its recent auction to cover its deficit spending. So we need to consider why the CPI is low.
I think CPI is low for 2 reasons: because of cheap imported goods from China, and hedonic adjustment/substitution by the government. Let’s start with cheap imported goods. Back in 1970, a garden trowel was made of steel and cost $10, maybe, just guessing. Today it’s $1.79 and made of some cheap metal and breaks if you actually try to use it. Same with irons and vacuum cleaners. My first vacuum cleaner was a used Hoover, purchased in the late 1980’s, with a steel plate on the bottom. I used that Hoover until it burned in the 2003 Cedar fire. Since then, I’ve gone through 3 vacuum cleaners, all with plastic plates on the bottom (no more steel in these models). I’ve gone through 3 irons, and hope this Rowenta is my last. I’ve stopped buying goods at Walmart – I only get paper products there, because the quality is just getting worse and worse. The point is, inflation is down only because stuff is made cheaper and cheaper, and the quality is dropping.
If the Chinese ever let the renminbi appreciate, so our imported Chinese goods cost 30% more, then inflation will be much much higher.
Hedonic adjustment and substitution means the government tinkers with the prices of increasing goods by substituting and making assumptions about greater quality. The government does not want to report true inflation, because they don’t want to pay 10% annual increases in cost of living to veterans, social security, and other entitlement people. So if the price of milk goes up, they substitute low fat milk in the basket of goods. They put a big outlay like family medical premiums, which can take 5% of a family’s income, at .1% of the CPI. Other games …. all to make the CPI less than it actually is.
So in summary, I think inflation is low because it is not properly reported, and because the Chinese are keeping their currency undervalued and selling us very cheap goods.
