I'm saddened to see that while this post isn't down-voted, it is not the most up-voted post that it deserves to be so. I expect this to be because most people don't know what the Cantillion Effect is, so this post will attempt to show it.
People think of inflation like they think of the oceans. If the ice caps melt and water melts in, the shore lines from New York to Tokyo rise slightly. If you track this rise, that's inflation. That's not how it works, and it's not what the CPI tracks. Inflation is much more analogous to inland water, you know, lakes and rivers.
If you give the bottom 80% of the income distribution more money, they will spend it right away like a river. If you give the 81-90%, portion of it will be saved in their lake(say, a 401k) and they will spend some of it. And if you give the top 10% more money, they save all of it in their reservoir.
The way that we have been introducing new money into the system is not by melting ice in the middle of the ocean. We also haven't been raining all over. The key way that new money has been introduced over the past 50 years is by lowering the interest rate. When you lower the interest rate, what happens is that people refinance, and suddenly they can pay less, but quickly realize, oh, I can also borrow more, so they do.
I'll show you a few numbers, which I got by going to the zillow housing affordability page with default settings. I only modified the interest rate, all other values stay the same.
Year | Average Interest Rate 30 Year Fixed | Home you can Afford
1981 | 18.39 | $124,797
1991 | 9.00 | $200,862
2010 | 6.26 | $244,531
2020 | 2.67 | $328,569
And so what we see people and REITs and companies doing is taking out larger and larger loans, and putting those dollars into assets. Companies take out a bond and buy back their own stock(which props up zombie companies). And why wouldn't they, it's profitable because the environment makes it so. And that money flows throughout the system. We can track the inflow of all of this money by looking at say.. the M3. This seems to be the crux of your point, if the amount of money in the M3 has gone up by 40x since 1971, why is inflation not out of control?
The CPI is a measure for inflation that does not track the oceans water level. The M3 tracks that, and as you can see the M3 is out of control. The CPI doesn't track stock purchases, even though if you ask any personal finance person, they recommend that the average person put 15% of the money into retirement stocks, why is that? If the CPI were to track stocks weighted at 1971 levels, inflation WOULD be out of control. The CPI tracks, specifically, an average of tangible items that the bottom 80% spends their money on. Therefore the inflation number is based on the height of certain rivers. Now that's an important figure to keep in mind, after all if you get inflation in that bracket and income isn't rising, you quickly run into a revolution. And so that's what the FED has found, if you track the CPI you get the perfect amount of heating to boil the frog without them noticing.
But when you introduce money into the system by lowering interest rates, you are in effect giving the money in proportion to the assets already owned. Someone bought that home in 1981, and someone with the same exact income would bid 328k for it today. You basically tripled that home owners asset, without any need to compare anything else, like actual income rises, or for instance SF has moved upmarket which would also effect prices. And so if you don't have much assets, it's a desert. If you do, it's a rain forest. And because the wealthy already have all that they want, demand for those items that the bottom 80% spend their money on doesn't change. So the supply and demand of those items don't change. So the CPI value stays the same. But money was introduced. If you take a look at the velocity of the M3, the M3V, you can see this take place. The wealthy get the gains of the new M3 dollars, and store it away. The more dollars created, the lower the velocity.
So the question we have to ask ourselves, now that interest rates are at 0%, is that the FED has two options, they can continue to do they have been doing this year and dump the money straight into the reservoir by buying bonds and we'll get the same results, but it doesn't look like that is going to have popular support much longer. You see lowering interest rates is an implicit way to give wealth to the wealthy, and much like how CO-VID is implicitly killing more people per day than 9/11 did explicitly, but now that the FED is forced to explicitly give money out. What happens if it starts raining in the desert by printing money and handing it out fairly, say through a UBI? Will the rivers rise? If the CPI inflation indicator shows that the rivers are rising, what are we set to do?