The Government does create, indirectly via the issuance of Treasuries, money.
Government debt may have a value equivalent to cash if you are large financial institution able to trade them. But it's not monetary base, it's long term debt. You can't buy a Big Mac with bonds. They are not legal tender. You can't deposit them in bank for interest, they are already producing interest. If you are a bank you can't use them to constitute minimal reserves at the Fed onto which to extend credit. The bulk of debt is held by institutional investors for years or decades, and it's not traded. Debt held by foreign governments in reserve is rarely if ever traded, the same for debt held by pension funds or inter-governmental debt.
The velocity of treasuries is one order of magnitude lower than monetary base, so if you really want to count them as money you would do so towards the M3. As any macro professor will tell you, financing by bonds is less inflationary than financing by monetary expansion.
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If the supply of Treasuries compared to cash is too great, then the Central Bank will step in, and purchase Treasuries with new cash.
The Central Bank is under no obligation to do such a thing. The Central European Bank certainly did not step in to buy hundreds of billions of Greek debt when the supply was too great. And it is certainly too great: investors are currently unloading them at 50-70% discounts. The Central Bank can purchase bonds, but it's a policy option towards it's main goal of inflation, exchange rate or interest targeting.
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Therefore for the Central Bank to create money, there must be Treasuries circulating, and shows that Treasuries are the initial form of money.
The swaps for treasuries is one option for monetary emission but it's certainly not the only one. The central bank could give money directly to the government for spending when it would decide to expand the money supply. The advantage of borrowing it to the government is that when inflation hits the excess liquidity can be sterilized by forcing the government to tax and pay the debt.
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Sure if there is a disconnect between the issuer of the currency and the capacity of the economy then of course there will be an inflation. As I said before the FED doesn't create inflation if it is swapping one form of base money(M0-M2) for another.
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As you can see, the amount of money that the FED has created since 2008 has increased dramatically. There is 3.8 times as much money now compared to 2008. So you would expect to see an inflation of atleast 200%, and that has not happened. In fact core inflation is around 3%. This is because when the FED created most of that money(inflationary), it also purchased a heap of assets that behave exactly like money(deflationary), therefore the inflation has not changed dramatically.
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As you can see, the amount of money that the FED has created since 2008 has increased dramatically. There is 3.8 times as much money now compared to 2008. So you would expect to see an inflation of atleast 200%, and that has not happened. In fact core inflation is around 3%. This is because when the FED created most of that money(inflationary), it also purchased a heap of assets that behave exactly like money(deflationary), therefore the inflation has not changed dramatically.
I take your graph and raise you with one excess reserves graph:
From the money the Fed has created, a vast quantity sit as excess reserves in the Feds accounts. They are simply idle because the banks are unable or unwilling to find able borrowers. You will notice that the shape of the curve matches the total monetary base curve almost perfectly, and by subtracting the former from the later you will get the total monetary base that actually circulates in the economy. From the 1900 blns created since 2008 only 300 are circulating; the other 1600 blns are simply numbers in the fed's computers. That, coupled with a deflationary economic environment is the real the reason you don't see massive price inflation.