Monetary Base Hits Record, Ratio of M.B. to Fed Assets Approaches 1.0x As Excess Reserves Fast Overtake Currency In Circulation

The Fed's monetary base has exploded, and is now at precisely $1,997 billion: an all time high. Even as the Fed's balance sheet "declined" this week courtesy of collapsing Commercial Paper holdings by the Fed, which were at just $15.6 billion, and Fed assets dropped to $2,147 billion. The ratio of Fed assets to Monetary Base is now down to the lowest ratio since the Lehman collapse, at 1.08x, after historically hanging around 1.0x, as the chart attached demonstrates. 

One thing to note is that even as the monetary base is rising, its only component that is increasing are bank depository reserves: the actual currency in circulation is declining as it can not keep up with the rate of increase in the excess reserves, and as banks refuse to push their vault holdings to the general population.

Which means that as the Monetary Base to Asset ratio approaches 1.0x, the one monetary derivative that will grow as rapidly as the Actual Fed balance sheet, will be banks' excess reserves. With Fed assets expected to hit $2.5 trillion by the time QE is over in March, that means that Excess Reserve have another 50% to grow from here, or another $500 billion. And as the consumer continues retrenching, one sure bet is that this money will not find its way into currency circulation but will continue being stored in bank vaults so long as the Taylor rule indicates that the Fed Fund rate should be -7% instead of 0-0.25%.