“So where did all the M0 money go if it wasn’t multiplied through the credit system? The answer is that banks and financial institutions hoarded the money in order to shore up their own balance sheets and regain profitability.”
USAGOLD note: The banks deposited those funds at the Federal Reserve in the form of excess reserves delaying the inflationary effects. Now the banks have begun drawing down those reserves with added incentives to do so built into Fed rate policies. Whether or not the reserve repatriation will now ignite inflation remains to be seen, but last month’s .6% producer price index jump could have been an early indicator. The draw-down has gathered pace over the past year as shown in the accompanying chart. By closing the gap between the rate on excess reserves and the Fed funds rate, the Fed has sped up the process.