Plunge in Treasury Yields Is Forecasting More Than Just Deflation

By Pam Martens and Russ Martens: January 15, 2015

Janet Yellen Testifying Before the Senate Banking Committee on July 15, 2014

Janet Yellen Testifying Before the Senate Banking Committee on July 15, 2014

Plunging yields on U.S. Treasury notes and bonds, record low yields on the sovereign debt of countries in the European Union, together with plunging industrial commodity prices, are sending a crystal clear message to stock markets: there is a glut of supply and too little demand from consumers.

Such a supply-demand imbalance brings about price wars. Thus we have Saudia Arabia slashing prices on oil to its customers in an attempt to grab market share, triggering a global price war in oil; supermarket pricing wars in Britain; gas station pricing wars in the U.S.; mutual fund fee pricing wars; magazine price wars. There is even a chicken nuggets pricing war.

Collapsing yields, collapsing commodity prices are the result of distorted income dispersal, otherwise known as income inequality.

Last August, researchers at the Federal Reserve released a study showing the fragility of the U.S. consumer. The Fed’s Division of Consumer and Community Affairs found that 52 percent of Americans would not be able to raise $400 in an emergency from their checking account, savings or borrowing on a credit card that they would be able to pay off when the next statement arrived.

There is a delicate equilibrium of income distribution that sustains growing economies. When income distribution becomes insanely skewed to the top 10 percent, deflation is the inevitable outcome.

To express it another way, when workers are stripped of an adequate share of the profits of their productive labors on behalf of the corporation, they can’t consume an adequate amount of the corporate output. Supply gluts develop and deflation follows.

Nary a week goes by that we don’t hear about a retail store chain in trouble and closing stores. This week we learned that Citigroup is closing retail bank branches.

As we reported on December 31, much of the globe is now in the throes of  virulent deflationary forces. Ten of our trading partners are experiencing outright deflation as measured by their annual Consumer Price Index while another seven countries are showing CPI of less than one-half of one percent.

Against this backdrop, one must seriously ask why the U.S. central bank, the Federal Reserve, continues to talk about hiking interest rates. The only answer that makes any sense is that the Fed is focused on maintaining the strength of the U.S. dollar to prevent capital flight from the U.S.

Price wars and currency wars are the beggar thy neighbor policies that exacerbated the Great Depression. There is news out this morning that the Swiss National Bank has removed its currency cap on the Franc, sending the Franc up almost 30 percent against the Euro in the minutes after the announcement. Reuters headlined the move a “Currency Tsunami.”

Fed Chair Janet Yellen needs to come clean with the American people and Congress. Our nation’s problem is clearly not one of an overheating economy but one of massive income and wealth inequality.

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