system
Given the following post, respond as if you're commenting on Reddit:
human
Dear Economists, this thought occurred to me the other day, and it scares the hell out of me. Please tell me why I'm wrong.

Alright, so this thought occurred to me the other day.  Basically, ever since the financial crisis in 2008 and even before then central banks in most countries especially the US have been lending money at near 0% interest rates.

Now conventional economic wisdom tells us that extended periods of low interest rates increases the money supply and leads to inflation.  However, we have yet to see a significant increase in inflation as the result of this extended period of extremely low interest rates.

It occurs to me that this may be a result of the way we measure inflation.  Econ 101 says that inflation is measures by taking a basket of common consumer goods and determining how much it costs to buy those goods, the more money required to buy them, the greater the rate of inflation.  However, the money being lent at the fed window (at near 0% interest) is only lent to large institutional investors and the interest rates for the common consumer have not changed dramatically.  

Suppose then, that you are a large institutional investor that has access to almost unlimited quantities of nearly free money.  Common sense says that you should borrow all of the money that you can and purchase any investment products that will likely return at a rate greater than 0.025% interest (or whatever the current fed rate is).  In fact all of the large institutional investors should be doing the same, potentially driving up the cost of almost all investment products as a result of the unnatural demand brought on by nearly free money.  Persons paying attention to the news of late will also note that at present the US stock market is in record high territory, despite the still relatively weak economic recovery in the US and Europe.

My theory is thus:  that the near 0% interest rate given by the fed to large institutional borrowers has created huge levels of inflation, however, the inflation is not able to be measured using traditional tools because the extra money has only been used to buy investment assets (stocks, bonds, derivatives, etc.), and that the price of those products, is, as a result currently inflated (perhaps hugely) by said excess monetary supply.  If this is true it would mean a few things, first that the fed borrowing window has created a two tiered monetary system, with one access to money for the ~0.5% (or less) who can borrow directly from the fed and another monetary system for the rest of us.  Second, and more importantly, that the stock and bond market may be in the midst of a bubble, brought on by easy access to nearly free money, and that this bubble may be largely hidden and potentially massive.  Following from that conclusion, should such a bubble exist it has the potential to massively impact the stock market (perhaps the kind of crash we have not seen since pre-1929), including large investors like pension and mutual funds.

So that’s my theory, it would really reassure me if someone much more well versed in economics than I could tell me why I’m wrong.  Please.
gpt
So, keep in mind that a lot of that near-zero money isn't being lent (or "invested") by banks.  Which means its pumping up bank reserves (making the ratios look healthy), but not actually impacting the simplified inflation model you're working from.

Now also, if aggregate demand is down (from the recession, less consumer income, etc.), many prices fall, which means that basket of goods is not becoming more expensive per dollar (i.e. no/low inflation).

Given that profits are up, but incomes are stagnant among the working class, unemployment is higher etc., all that money that is being pumped into the economy isn't really having the effect you would expect.  It is however reducing risk profiles of types of investment and encouraging some investment/development.