Why No Inflation?

I think I finally figured it out ... why we have had no inflation after years of our Fed (and other national banks) flooding the world with cheap money ... remember Quantitive Easing? Starting with the financial crisis in 2008, the Federal ReserveBank has been burning up the presses printing money ... as have the central banks in the European Union, Japan and most of the rest of the world. So why don’t we need wheelbarrows full of worthless bills to buy a loaf of bread ... like in Germany after World War One?

Well the coronavirus has exposed the reason. During our present pandemic we discover that over 90% of our critical drug components are made in China. And this seems just the beginning. For decades, ever since Bill Clinton invited China into the World Trade Organization, American companies have been shipping our manufacturing jobs to China ... because it was very cheap and provided results. Add to drug manufacturing transfers  ... electronics, toys, clothing, auto parts, furniture and on and on ... all at a mere fraction the cost of what it was here in the U.S.

This obviously has meant a continued large reductions in the cost of goods for American companies ... and fueled 7+% growth for China for almost 25 years ... a seismic economic shift happening right before our eyes ... yet we did not grasp the downside consequences.  Lower cost of goods has encouraged these American companies to keep prices low in order to expand market share (read Walmart, etc.). The United States has been on a consumer buying binge ... all fueled by hundreds of millions of very cheap Chinese workers (and the resulting strategic supply-chain fix we now find ourselves in due to the Wuhan virus.) We have built up a potential enemy in exchange for cheap manufacturing .... and more profits ... a massive strategic blunder given China’s desire to dominate. There is always an obverse side to every shiny coin.

Bingo ... no inflation ... despite enormous monetary expansion during the Obama administration. Now it all makes sense.

Afterthought: Will fixing our trade imbalances with China finally bring about the inflation we all have been expecting?

VAT

VAT stands for value-added tax ... a federal consumption tax raised in steps from corporations and the ultimate end users ... and implemented in most of America’s trading partners. The United States does not use such a tax and, as will be demonstrated, this puts us at a distance trading disadvantage.

Let me explain ... most of Europe, Mexico, Canada and Asia have a VAT ... an effective sales tax that is applied at each stage in the manufacturing process as a product passes up the supply chain. In effect, a VAT is a tax applied against a finished products’ Cost of Goods ... less such taxes already paid ... up and down the supply chain, effectively a regressive sales tax on the final sales price. For a fuller explanation, see: Investopedia Explanation.

However, here is the rub ... in countries with VATs, when a product is exported, the VAT taxes paid by the seller is remitted. An example of this would be that US travelers to Europe can apply for a rebate any VAT taxes paid in their travels for goods that they are returning home with. (they seldom do however.)

What does this mean? It effectively means that countries with VATs are subsidizing their exports by the cumulative amount of the VAT taxes that had been paid during their manufacture. This, combined with any import tariffs into these countries establishes their mercantilism. This edge puts the U.S., with no VAT, at a very distinct disadvantage trading-wise. However, Trump’s tariffs have begun to close this gap in some places.

Why doesn’t America have a VAT, or national sales tax in order to level the playing field? For a number of reasons, but primarily because of the fear that we will end up with this national sales tax AND a corporate income tax. Not a happy thought.