I think this is really interesting. Putting images on a page without an actual image.
But, I encoded an 2.371K jpg into a base64 string and that string appeared to be 3.192 K. And that was only an 80x80 thumbnail. So in the end, apart from the fact that there's no support in IE, I don't think this will be any faster or use less bandwidth. Less hits and no hotlinking worries..