A few days ago I was complaining to my son about how the markets are rigged by the Federal Reserve; that stock prices aren't really going up but the dollar is going down, etc. because the Fed is printing extra money every month.
He then asked me to explain where all that money is going. After starting to explain, I found myself stumped. It took me a weekend of thinking about it to be able to explain it.
The extra money they are fabricating has obviously been going to buy U.S. Treasury Bonds and Mortgage Backed Securities. But those securities would be sold to SOMEBODY so the money isn't really making the government or the GSEs richer.
The government is then using that money to support their deficit spending habits like the perennially underfunded entitlement programs. But the people receiving those entitlement checks aren't getting any more money, and the government departments aren't seeing their budgets increase.
No, the answer is not where the printed money is going, it's where investor money IS NOT going. Those debt securities the Fed is buying are being ripped off the market at non-economical rates, so investors seeking safe income must put their money elsewhere.
This means that the extra money in the system is really being pumped into the things those investors were looking for before the Fed took them away. They are looking for absolutely safe long-term income. These investors include pension funds with guaranteed income contracts to fulfill, retirees with needs to replace maturing bonds with equivalent income, etc.
When these investors move their money (the money that should have been absorbed by treasuries and mortgage loans) outside their comfort zone, they end up inflating those other things they are buying. This is why stocks, junk bonds and rental real estate are among the assets which have been moving in a straight line up in the last few years.
All that extra Fed money isn't creating general inflation because the ongoing and increasing supply of excess human capital ensures that no wage-price spiral can occur. There are simply too many people on earth that have access to transportation and the Internet that can compete for fewer and fewer jobs as those jobs are replaced by information technology and factory automation. Yes, a few industries are labor-constrained but those are specialized jobs that don't have broad economic effects when their wages are driven up.
So we find ourselves in a world where (at least for now) investment assets have a funnel of fresh money constantly driving them upward. In that economy we simply have no choice but to participate in those markets, until such time as the risk-adjusted return on those investments does not compete favorably with fixed income. The tipping point will come when the Fed can no longer afford to suppress long-term interest rates. In the meantime, I think I hear the sound of asset bubbles being inflated, which is a bit frightening!
Sorry if all this seems painfully obvious to you brilliant Seeking Alpha readers (and there are a lot of you). In that case, you might try showing this to your kids and help enlighten the younger generations. My twenty-something son gets it now.