The "flagged" mailboxes show if you have flagged messages. They don't show if you don't. The disappearance may not be immediate, but it will happen after a bit, or perhaps after a re-launch of mail.
Same with VIP mailboxes, FYI.
So what you've seen is totally normal behavior. No need for "yikes."
There are 7 different flagged mailboxes you can have: Red, orange, yellow, green, blue, purple, and gray.
The Yikes was because just after I came here to ask for help removing the mailbox it just disappeared. It took it's time. I think the VIP mailbox has a right click command to remove it.
It's funny though, I'm beginning to think of ways to use it. Especially if as you say I can have 7 different ones. I must give you a help star for that.
Flags are great. I use them all the time. I just wish the iPhone supported them in the same way.
VIP folders you can't remove, either. However they are automatic: If you have marked people as VIPs you will have mailboxes for them. If you un-mark people as VIPs their mailboxes will disappear.
I wish Mail on the iPhone supported VIPs the same way the OS X version did, as well. Maybe someday :-/