The Monetary Base and Excess Reserves

Take a look at these two charts:

Adjusted Monetary Base

Excess Reserves

If you look at them together with the same time period (1 year, 5 years, etc.), they look very similar. This is no coincidence. In the fall of 2008, the Fed began creating money at an unprecedented rate. It eventually more than doubled the monetary base, which is really the monetary chart that the Fed most controls.

When the Fed created all of this new money, it went to the banks. The banks were, and still are, scared to lend. They are afraid of future defaults (and probably rightly so). They would rather keep their excess reserves sitting at the Fed earning less than .25% interest instead of lending out this money. The banks could loan out this money as they are only required by law to keep about 10% on reserve.

The fact that the banks have kept these excess reserves with the Fed instead of loaning out the money is what has kept price inflation from skyrocketing. If the banks start to lend and the Fed doesn't reign in this new money, then we will see prices jump substantially. Keep an eye on these two charts. If the monetary base goes up without excess reserves going up, or if the monetary base stays about the same with excess reserves going down, then you should be prepared for massive price inflation and should prepare your investments accordingly.