Monetary Base vs M1

In 2008, something strange happened with US money. The monetary base (M0) was inflated above the circulating cash and checking account money (M1). As far as I know, this had never happened before since the Federal Reserve was created in 1913. While M1 has grown since 2008, the velocity of M1, how fast it circulates, has dramatically slowed down. It appears people like having extra cash on hand, but those that have it, don't spend it.

Most of the monetary base money has been created in Federal Reserve computers to purchase bonds, mortgage backed securities, and to run the various Fed bailout programs. Large banks tend to get most of that money, which they promptly deposit back into the Fed as excess reserves, so all that money isn't creating inflation. Theoretically, all those reserves could be turned into roughly $25 trillion in new checking account money (through loans), and could create inflation greater than anything seen in the 1970s. That is all theory. In practice, the reserves are sitting idle collecting 25bps in risk free interest.

I have no idea when or if that huge monetary base will impact the real economy, but it, along with a $4-5 trillion balance sheet will be among the problems inherited by the next Fed Chair in 2014. Next year, get ready for a surprise!