My only question is why banks agree to this deal: exchanging U.S. treasuries for bank reserves (which they only can use as a collateral for lending) ?
The CPI, meanwhile, has been stable, or even under the Fed's target. Presumably because those are basics, and you don't really need to buy much more of the basics just because you have more money. (The people with newfound stock wealth, that is; the people without it don't have any more money to spend in the first place.)
It's still a little unclear to me why the S&P 500 has remained in the "inflated but not insane" through most of the past decade -- though for the past week or so it's trending back to "insane" (a P/E ratio well above 20). That means that earnings were coming from somewhere, and if not from core consumer products, then presumably from other things that the stock-market-wealthy were buying from each other, at presumably inflating prices, or at least quantities.
On an inflation adjusted dollars-per-square-foot basis, housing is exactly the same price as it was in the 1970s [1] -- right around $115/sqft in constant dollars. 2008 didn't actually make a big dent on average.
The reason houses are more expensive today than they were in the past is that they're on average twice as big. This is due to city zoning ordinances, not inflation.
Similarly house prices exploded in major metros like SF because of artificial supply constraints. The city won't allow new building -> refuses to allow smaller units -> prices go up. Again, not inflation.
[1] https://fee.org/articles/new-homes-today-have-twice-the-squa...
I think that is the reason CPI hasn't increased. CPI only accounts for rent and not the cost of actually buying the house. There are definitely highly inflated price to rent ratios particularly in land constrained urban areas.
I think a better way to put it is that there is low/no Consumer Price Inflation but there is tremendous Asset Inflation (in stuff that wealthy people buy).
And perhaps if there did need to be inflation, then perhaps this is better than the reverse (i.e. high CPI inflation which would impact people's ability to buy the basics)?
The point I was making was that the price of housing on average ($/sqft) is the same as it has always been. Since we know major metros have gone up it likely means that tier-2 and below cities have actually gone down.
Further, it might be nuanced, but major urban areas aren't land-constrained. They are constrained by their city councils staunch refusal to permit new, tall construction to the benefit of existing landowners and at the detriment of renters. This is not an inflation-linked issue however but a city policy issue. It's strictly supply and demand.
It isn’t a given that you need to increase earnings to increase your P/E ratio. The “E” is your Earning Per Share. Buying back shares lowers your denominator and magically increases EPS, which drives the price higher.
It also lowers your P, so the net effect should be 0, no?
I believe the big question of "Where is the inflation" has to do with lending excess reserves. The amount banks have to keep in reserve is set, but it changes. They can lend the balance after that, although there's a rate set by the fed that also works as a lending/holding incentive too.
"Excess reserves are capital reserves held by a bank or financial institution in excess of what is required by regulators, creditors or internal controls. For commercial banks, excess reserves are measured against standard reserve requirement amounts set by central banking authorities"
So, this money actually hasn't really hit circulation. It doesn't really explain what's up with the SP (perhaps: credit based on reserve holdings, to hand wave a ton of complexity...), but it explains why there's no direct pipeline from Fed money prints -> my wallet -> CPI.
By Standard and Poor's
https://www.kreditordnung.info/docs/S_and_P__Repeat_After_Me...
The possibly essential caveat being that the ETF's being purchased are (as far as publicly known) all bond ETF's.
[0]: https://www.federalreserve.gov/releases/h41/current/h41.htm
It's a disgraceful system that is extremely morally questionable.