Cullen Roche states the following:
There were three basic interpretations of this chart – 1) the Austrians, hyperinflationists and some prominent mainstream supply side economists said this would cause high inflation; 2) the liquidity trap theorists said it wouldn't cause high inflation YET because the banks wouldn't be incentivized to lend out their reserves YET; 3) people like me have repeatedly said that the higher monetary base would not lead to more lending, not because of a liquidity trap, but because banks NEVER lend their reserves (even outside of a supposed "liquidity trap") and that inflation would remain low because the economy would remain far too weak to create high inflation (because demand for credit was weak and banks were tight).
I agree with Cullen except for his claim that the Money Multiplier doesn't exist. It is not a myth. The Money Multiplier simply means that the Fed requires 10% reserves against loans. Right now, the Fed is paying interest on excess reserves, which reserves are those that are over and above what is necessary for the banks to meet the 10%. That's all.
Lending more against those reserves moves those reserves from excess to regular reserves. The money supply goes up if the rate of new loans out paces the loans that are paid off and not renewed. More money in circulation does help stimulate. Enough stimulation can heat up the economy. Enough stimulation can overheat the economy. Unemployment can go to nearly nothing. Wages and salaries can race up as employers compete for workers. Employers then charge more for their goods and services to afford those wages and salaries, and you have price inflation.
When the economy heats up and the banks find ready and qualified borrowers, all of those excess reserve can be used for the 10% requirement. The banks could lend out hundreds and hundreds of billions over what is currently lent out. The banks wouldn't have to borrow any reserves. They'd just have to forego earning interest on them.
The Fed could, of course, reduce total reserves. It could also stop paying interest or lower the rate. However, the Fed can't overnight magically create qualified borrowers to borrow all that money and to put it to use in a solid economy that won't explode.
When the first predictions were being made about high inflation, they were made against, among other ideas, the notions that the Fed would not be paying interest on excess reserves and that there would be more, much more, Keynesianism than there has been, in other words, that the Fed and government would over shoot the "stimulus."
I for one was amazed at the foot dragging on the fiscal side. I thought at the time that the amounts being discussed were way too low by trillions and that spending was going in the wrong places. I thought the Austrian School would lose credibility much sooner. I thought the leadership in Congress and elsewhere wasn't as dumb as it was and still is. Inflation didn't pop up to the extent I thought it would solely for the reasons I've mentioned. If put in charge, I could easily create inflation. Ben Bernanke could too. He's mention fiscal constraints on the economy ad nauseam and rightly so.
Anyway, the whole American economic system is a mess and always has been. Frankly, it's ridiculous. The currency should be nationalized: Converted from Federal Reserve Notes to United States Notes, interest- and debt-free. The banking system should be Nationalized too and usury done away with. Of course, I'm speaking about democracy, representative democracy, but much more bottom-up and much more direct.
We could do away with inflation and deflation and have zero financial constraints, but it would mean the end of the elitists, the plutocrats, running everything for their benefit (even though they'd be better off too; they're too stupid to think that deeply though, too busy being self-centered for their own good).
I'll be vindicated. One day, the Earth will be cooperative, not competitive. Why? The truth wins. Faith.
UPDATE: This helps to explain it:
Debt monetisation has a bad reputation, which is justified by the fact that it has often led in the past to runaway inflation.
Under current conditions, this is most unlikely to be inflationary. Given the icy state of credit markets, increases in the money base do not translate into increases of the actual money supply; in effect, the money multiplier is about zero.
In addition, high unemployment has created a deflationary environment. But, hopefully, the credit market will be revived one day and the recession will come to an end. At this stage, the money base will have to be shrunk. This is the exit problem (Wyplosz 2013). An alternative is to raise reserve requirements to reduce the size of the money multiplier. Either way, the balance sheet expansion need not lead to inflation.