A widget called the US Dollar
Let's go back to our fantasy of creating more and more widgets and using the widgets to keep the price of the widgets high. For the widget called "US dollar", this is precisely what the Federal Reserve has managed to do. The game is to use some of that boatload of newly-printed dollars to bet in the futures market. Bets are placed, for example, on the price of gold. The bets are made "on margin", which means they are highly leveraged. For each $1 that you have on deposit, you may be able to bet on the price of $50 worth of gold.
The Fed, acting probably through Goldman Sachs and other private agents, places heavy bets that the price of gold will go down. Of course, the people on the other side of those trades are betting that the price of gold will go up. They are not so sure of themselves, nor do they have the unlimited backing that the Fed has. So the people on the other side of the bets do what prudent betters do everywhere: they hedge their bet that the price of gold will go up by selling real, tangible gold in the primary marketplace. This practice of bet-hedging is called "arbitrage", and it can be a way to lock in a sure profit. (As long as the price of gold in the derivatives market is lower than the price of gold in the primary market, the arbitrager can buy "paper gold" and sell "physical gold" and pocket the difference in price.)
So the price of physical gold is pushed down by the price of the bets in the derivatives market. The tail is wagging the dog. The strange thing is that this is in exact opposition to the law of supply and demand. The Fed is able to create new dollars at unprecedent speed, and use those dollars to bet that the dollar's value will go up. Since those huge bets are made in a leveraged derivatives market, they become a self-fulfilling prophesy; the value of the dollar floats upward and the price of gold goes down. In order to do this, no actual gold is needed. But new "paper gold" must be continually "manufactured". The amount of paper gold in the world goes up and up and up, while the amount of real gold stays the same, or increases much more slowly via old-fashioned mining operations.
In a game of poker, the man with the largest stack of chips has a distinct advantage. Even without the luck of a good hand, he can raise the bid higher than other players can afford to match, forcing them to abandon the position they've got on the table and withdraw from the hand, essentially by sheer bluster. In the derivative markets, a similar manipulation is possible. If the Fed sells a lot of gold futures rapidly, that creates paper losses for people who have speculated in gold on the upside. When these losses exceed the amount they have on deposit, brokers will call them up and demand more money to stay in the game. Brokerage policies even allow them to sell the position automatically if there is any question that the available cash can cover the loss. When this happens, it adds to the imbalance of selling over buying, dragging the price down yet faster.
This is an old and well-known tactic for market manipulation. In the US, there are laws against it, and there was a time when the SEC would investigate and prosecute market manipulation. That time is not now.
What about inflation?
By the old rules, printing so much money would cause inflation. In fact, there seems to be some indication in the real economy that prices are rising - especially prices for food, raw materials, and basic necessities. But statistics are being doctored to make it look as though the inflation rate is modest. (John Williams over at ShadowStats.com documents the difference between government-published inflation rates and his measure of inflation, calculated according to historic standards.)
It helps that the American economy is sputtering along so slowly that ordinary people don't have the money to pay for the basics; otherwise prices would be pushed up much faster.
Interest rates are suppressed in the same way
Just the same game can be played with interest rates. There are derivatives for interest rates as well as for commodity prices. The Fed borrows money, and uses the money to bet in the derivatives market that the interest rate will go down. The bets are huge. The bets themselves motivate arbitragers to buy up T-bills, pocketing the marginal difference in price between the derivative price and the price in the primary market. Using leveraged bets in the derivatives market, the Fed is creating real-world demand for its own T-bills. In addition, the Fed has also become the largest direct purchaser of T-bills, far outstripping the Chinese in recent years.
How do I know this is happening?
I don't, really. I'm guessing, based on a few hints. The price gap between paper gold and physical gold keeps growing, suggesting there's something unreal about the price of gold. The low interest rate doesn't mean that banks are eager to lend money to peons like you and me. (I managed to get a 3.5% mortgage this spring, but the application process was a nightmare.) And Paul Craig Roberts pointed out in an article this Spring that the timing of large gold sales has been just the opposite of what you would expect if someone had a lot of gold to sell and wanted to maximize the price it could fetch in the marketplace.
How long can this last?
I'm not going to try to guess. Suffice it to say I have had a terrible record in the past, forecasting disasters decades before they occur.