Following up on 'simonyadig' and his thoughtful answer about why we aren't seeing inflation despite all the money that seems to be getting poured into the economy.
We experienced a severe deflationary event when all the banks and other investors lost so much money on bad mortgage backed securities. That money wasn't just lost, that money disappeared, and that was the hugely deflationary event. Paulson, Bernanke, and Geithner had to replace that lost money with more money for more reasons than just keeping the financial system afloat, they had to stop the deflation that was already going on.
So they kept the financial system alive, but, as simonyadig pointed out, the banks aren't lending the way they used to. I know this first hand because I just refinance my house, and the documentation standards went way, way up from the last time I got a mortgage. So, the banks are getting the money, but that money isn't flowing out to consumers in a way that will cause inflation. It seems like the only beneficiaries of this money are hedge funds and investment banks, which borrow the money at low rates, and use the money to play the markets, which has propped up prices in stocks and commodities.
We would be seeing even more deflation except the government, in a paradoxical way, has lowered its lending standards to banks; the government is allowing banks to carry bad assets on their books without forcing the usual reserve requirements. Banks, in turn, are holding onto defaulted mortgage properties much longer. We should have been seeing a flood of REO properties hitting the market. Instead, there's a steady but controllable supply of short-sale properties hitting the market.
Wages and employment are still under severe pressure. More and more employers are no longer providing health insurance. Vehicle prices are also under pressure. And property taxes are falling in many areas.
We're seeing deflation, but because gasoline and food prices haven't fallen, people don't yet recognize it.