The short answer there is that we've exported most of it. It came across the ocean in the form of cheap chinese bikes and electric fans. Our cash went to China, the currencies took the brunt of the difference, and what came back was ridiculously low priced stuff. But there is a little more to it.
Personally I found this piece I posted a few months ago very persuasive. To summarize, Economist Robert Blumen claims that what would have been inflation in the form of excess Treasure debt was absorbed in the form of leverage by the derivatives market and Hedge Funds. But the thing that discounts is that the numbers don't quite match up. We should still have modest inflation falling out the bottom of all that financial engineering.
And I think of the difference every time some chamber of commerce type starts talking about the jobs Americans won't do. By allowing illegal immigration to depress wages, our government keeps those wages low, and prevents the cheap money flooding the market from being reflected in the form of wages that would be higher otherwise. Think for a minute about the humble strawberry.
We could pay Bill and Mike to pick the strawberries, but it would cost a lot more. That cost would be reflected in lower profits and higher prices. Did you catch that? It's the same strawberry, but the price for it is higher. That sounds just like inflation because in many cases, it is. In order for excess capital to be reflected in higher price inflation, the money needs to flow down to the labor market where a small individual increase in cost is, thanks to our incredibly efficient economy, reflected in a relatively substantial increase in price.
But if instead of paying Bill and Mike, we pay Miguel and Gerardo to pick the strawberries. Those guys will consume some things just like everyone else, and a little bit of inflation will poke through here and there. But the strawberry price will stay low because Miguel and Gerardo aren't making much, and their wages aren't rising. In effect it's inflation avoidance through regulatory arbitrage, but the regulation we're arbitraging, are our own. Those guys will also repatriate a portion of their earning to their homeland, so their cousins and brother in laws, and their aunt's cousin's, brother in law can come here too. It's not much in a Macro sense - just a few billion dollars a year. But between it, and the depressed and unmoving wages, the inflation never appears where it otherwise would.
It's been awhile since I've picked apart economic statistics, and to be perfectly honest, I don't have time right now either. So a story will have to do. But I'm sure if we worked out exactly what the prevailing wage would be absent the millions of illegals we have here artificially depressing the price of labor, the mystery of our missing inflation would start to emerge from the fog. Just a thought.