|Source: St. Louis FED, FRED database|
What does this mean? Essentially it means that every dollar created by the FED (an increase in the monetary base M0) will result in a <1 dollar increase of the money supply (M1), as is evident from the figure below. So, the credit and deposit creation of commercial banks is limited in this case. The banks are still holding on to a lot of excess reserves.
|M0 (St.Louis adjusted, green) and M1 (red) are both on the right scale. |
Source: St. Louis FED, FRED database
The effect of a 0<m<1 multiplier is that the monetary base is larger than the M1 money supply (remember that M1 doesn't take into account savings deposits or time deposits, which are included in the M2). This kind of a situation is obviously not good, as there is more money in the economy created by the central bank than it is created by commercial banks. One could say this is a clear example of a liquidity trap, as the central bank is powerless in trying to encourage banks to take on more lending.
The multiplier is reciprocal to the reserve requirement of a bank (meaning the more money a bank is required to hold as reserves, the less it can use it for credit and deposit creation), so the reason it is low is the fact that banks have increased their reserves and are not producing as much credit as the economy needs (not lending enough). And the reason why banks are still careful is that they are unwilling to accept any further losses or take on risks partially due to the already high levels of public anger aimed against them (hint: bailouts). So they lower their lending to businesses and consumers, increase their reserves, meaning that the multiplier decreases. And the fact that it's below 1 means that the recovery is still holding back. A way to get it started isn't via quantitative easing or any other form of increasing the money supply; rather the focus should be on restoring confidence.