Deflationists Take Note: Bernanke Succeeds In Offsetting Shadow Banking Collapse

Tyler Durden's picture

The biggest piece of news in Thursday's Z1 statement was not that consumers continue to deleverage, that corporate cash levels are at $1.9 trillion (of which $1 trillion is financial and half of the rest is held offshore: maybe instead of copying Zero Hedge charts, the WSJ could have actually focused on the story behind the headlines) or that the stock market continues to be the only manipulated delta in household net worth (even as wealth in real terms is dropping). A far more relevant and important data highlight has to do with the only thing that actually matters for the reflation of the monetary bubble: namely the fact that the contraction in the shadow banking system is continuing. Or so was the conventional wisdom. As of September 30, Bernanke has successfully stopped the net decline of monetary aggregates even when including the massive shadow banking system.

As we have long claimed, every action by the Fed, every attempt at reflation, every bond purchase directly, and ES purchase indirectly courtesy of Citadel, have had the sole goal of counteracting the impact of the the collapsing shadow banking liabilities. Compared to shadow liabilities, which topped out at $21 trillion in March of 2008, all other monetary aggregates are irrelevant: this includes both their representation in bank balance sheets, such as traditional banking liabilities and the broadest representation of money stock tracked by the Fed, M2 (since as of 2006 M3 is no longer tracked due to the egregious costs of keeping track of this data). And the biggest, and so far most credible, argument that deflationists have had, is that the shadow banking system, and its reconstructed M3 proxy is plunging far faster than Bernanke is reflating other parallel aggregates. Well, that is now over. As of Q3 2009, the sequential change in shadow and traditional bank liabilities was net positive by $3.8 billion: this is the first time this number has posted an increase since December 2008! This fact should send a wedge of terror into the hearts of all those, both deflationists and inflationsts, who realize the significance of this inflection point: it appears that Bernanke has finally succeeded at offsetting the drop in the shadow banking system.

Up until now the one and only defense that those who anticipate continued asset price declines was that on a net basis, the monetary system was still contracting. That is now no longer the case. And now, ironically, all that remains is for a very much cornered Ben Bernanke to convince people that the economy is getting better, resulting in a surge in net borrowings, and a spike in monetary velocity, and... hello Weimar.

But don't shoot the messneger: here are the facts.

Evidence A: total shadow banking system liabilities:

Evidence B: sequential change in actual components to shadow liabilities:

Evidence C: comparison in levels of traditional and shadow bank liabilities.

Evidence D: Overlay of M2 and Shadow Liabilities

Evidence E: most importantly, the sequential change in the combined liabilites represented by both the shadow and traditional banking system. As the arrow indicates, it is now positive to the tune of $3.8 billion: this is probably the most important fact for monetary policy in the past two years.

Of course, all of this is possible only because the state is now the ultimate backstopper of all risk. And now that the monetary inflection point has been reached, and the negative convexity event has passed, we expect that the debasement of the US currency will now start in earnest.

Source: Federal Reserve Flow of Funds and H.6 Statements

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living on the edge's picture

Doesn't matter, gold is the place to be invested.

Winterland's picture

"Sure, we will have to pay more interest to the other bondholders, but the offset by the Fed refund will subdue this worry. If we are our largest debt holder, and we can finance this debt at zero by holding it at the Fed, many of the apocalypse scenarios loose credibility."

In what world does the above make sense?

Red Neck Repugnicant's picture

Are you aware that the Fed refunds interest receivables on Treasury holdings back to the Treasury at year end, minus relatively small costs?

When the Fed holds Treasury debt, we are effectively financing our deficits at zero.   

Winterland's picture

So, under that premise why even bother to hold Treasury auctions? The Fed lends money directly to the Treasury at zero cost.


Or am I missing something?

tmosley's picture

His premise boils down to "We can print money!"

Prove me wrong, Republicunt.

dnarby's picture
"If a country could simply buy its own debt with zero downside, I say we should have been doing this all along." - Greg Hunter,
...I'm sure there will be no consequences of note to what the Fed is doing.  All is well, nothing to see here, move along...
QuantumCat's picture

Linear projections always work... just like the housing recovery.  Oh, wait...

flacon's picture


The hyperinflation/hyperdeflation and destruction of the US Dollar has already happened. It occurred on August 15th, 1971 when US Dollars were no longer considered by the market as having the quality "Paid In Full" (that is the meaning of gold - "Paid In Full"). The deed is already done - Bernanke has no power to change what happened in 1971 because he can't undo history. 


US Dollars are today monetary terrorism. I hope some day to not pay any taxes by stopping working, growing my own food, and bartering, and not buying anything with terrorist US Dollars.


Read FOFOA. 

flacon's picture


...or you could just understand history.

Because of the excess printed dollars, and the negative U.S. trade balance, other nations began demanding fulfillment of America’s “promise to pay” - that is, the redemption of their dollars for gold. Switzerland redeemed $50 million of paper for gold in July. France, in particular, repeatedly made aggressive demands, and acquired $191 million in gold, further depleting the gold reserves of the U.S. On 5 August 1971, Congress released a report recommending devaluation of the dollar, in an effort to protect the dollar against foreign price-gougers. Still, on 9 August 1971, as the dollar dropped in value against European currencies, Switzerland withdrew the Swiss franc from the Bretton Woods system.

The shock

To stabilize the economy and combat runaway inflation, on August 15, 1971, President Nixon imposed a 90-day wage and price freeze, a 10 percent import surcharge, and, most importantly, “closed the gold window”, ending convertibility between US dollars and gold.

Oh, and if Nixon believed that "Gold is a barbarous relic" then why not just let the Swiss and French and everyone else trade their "far superior US paper dollars" for that nasty yellow metal?! 

EscapeKey's picture

Since it's out of the shelf, I'll throw in another quote from this excellent book (a passage describing the late 60'es):

"Hard money countries, such as West Germany, France, and Switzerland, increasingly balked at accepting the importation of dollar inflation, and began to accelerate their demands for redemption in gold. Gold increasingly flowed out of the United States and into the coffers of foreign central banks."

- The Mystery of Banking, Rothbard, pg 251

Western Europe is upset with the importation of inflation, questions Bretton Woods, and starts redeeming in gold. It's worth remembering currency exchange rates were fixed at this point in time. Shortly thereafter, Nixon closes the gold window, currencies float, and gold spikes (nominated in USD).

Now, consider China at present. They import inflation from the US, have a USD fixed exchange rate, and gold imports are going through the roof.

SWRichmond's picture

tmosley said:

His premise boils down to "We can print money!"

Yes, but he dressed it up in a lot of pretty banksterese lingo that made it sound so...doable.  And his premise is also based on another old argument, capital controls, money having nowhere else to go besides fiat currencies: "Our fiat sucks less than everybody else's, so our fiat is going to be OK!"  But capital DOES have somewhere else to go, and is going there: it is hiding in the precious metals markets where it is safe from debasement.  It will keep hiding there until it is once again safe for it to come out to play.

The quickest way to make it safe again would be to close all the central banks worldwide, reissue national currencies, take the TBTF banks into receivership, and lower tax rates.

kaiserhoff's picture

Amen.  The massive losses on this fraud will show up when they try to unwind the toxic waste purchases, if not before.  When any public figure opposes a full and complete audit, you know he is a crook and shovelling smoke.

EscapeKey's picture

They're not allowed to do so, except for during wars.

Red Neck Repugnicant's picture

We're doing it right now.


Edit in:  After re-reading my post about how the Fed can control inflation, I forgot to mention that the Fed can - at any time - simply increase reserve requirements.  

The inflationary push of all that cash sitting at the Fed in those billion dollar reserve accounts of Wall Street banks can be manipulated in "15 minutes."

You have no idea what the Fed can do.

EscapeKey's picture

No, we're not. The Treasury sells bonds at auctions to PDs, and the PDs sell the bonds to the Federal Reserve during POMO's.

The Federal Reserve is not buying directly off the Treasury.

Red Neck Repugnicant's picture

Yes.  You're right. 

I misunderstood your brief post.  I thought you were saying that the Fed could only purchase treasuries in times of war. Instead, you were saying they could only purchase directly from the Treasury during times of war.

My misunderstanding of your post   ...and my apologies.

EscapeKey's picture

No worries, and just because I've gone and located the quote, I'll add it here:

"If the Fed were to finance new Treasury bond issues directly, as it was only allowed by law to do for a while during WW2, this step would be wildly inflationary." - The Mystery of Banking, Rothbard, pg 174.


hungrydweller's picture

Tell me what the difference is:  The PDs buy treasuries and then 1 or 2 weeks later sells them to the Fed at a profit during POMOs.  Looks only slightly removed from purchasing them directly.  So instead of "wildly inflationary" its only "very inflationary".

cocoablini's picture

OMG I junked you with my fat thumb, sorry!
The FED 's plan I assume is to keep the dead body functioning until retial suckers start flooding back in the market to take the stocks and bonds off the Primaries.
Its been a great hologram- and everyone thinks tthe FED is in 100% control which makes me think we have a year or so before it all goes to crap again.
Bernanke will start getting his God complex.
Obama will start thinking he's FDR.
Apple will be at 500
Retail players and greed will convert the markets back into a natural ecosystem and it will all crash for good at that time.
Yes, the FED is quite successful because it is a HUGE buyer that does not abide by the laws of the market- which is too make a profit.
The FED deliberately loses money on trades, and screws up the entire eco system.
See Soviet Union, circa 1986. Control hologram economies can only exist so long

Troy Ounce's picture


Red Neck, you can print all you want and point out technicalities.

But you can't print "trust".

Widowmaker's picture

I trust Bernanke is a fraud, bailing out failure and criminal TBTF cartels and cashing all the checks of the future.

Nothing but facts.

centerline's picture

+1.  The heart of the matter.  Internally, hundreds of millions of people really could care less about printing, it is the effects of that printing they care about.  If there were no consequences - then okay.  But, there are consequences.  Of course, externally there are consequences as well - with all sorts of other nasties associated.  Combine the two, and situation gets potentially explosive.

Red Neck Repugnicant's picture

Yes.  Indeed, trust is everything. Our currency is backed by a trust in our government's ability to protect our sovereignty and that our currency will still be legal tender whenever that bond you're holding expires. 

That being known, how do you have a conversation about trust with a bunch of hyper-paranoid wingnuts who have enough ammo hidden in their bunkers to blow the moon out of orbit?  How do you discuss trust with people who believe that 9/11 was a false flag event?  That's a knife fight with a hemophiliac.  

Through my comments, I hope to show some of the lunacy in believing that the great apocalypse is upon us.  It's not.  Things may be really fucked up, but the wheels on the bus go around and around.  

If someone from say 2004/05/06 was given the opportunity to see into the future, into the events of October 2008, that person would have packed up all their belongings and moved to Mars.  It would have been utterly unfathomable to believe that the world could have withstood the dominoes that were unwittingly being aligned and set to fall.  

Instead, the Fed and our Treasury, were able to draft immediate rescue plans that went far beyond anyone's imagination.  And as fucked up as everything is, the Earth is still rotating, and no one has bought land on Mars yet. 

When/if inflation begins to creep out of the bag, I have faith that the Fed will conjure equally unfathomable policies that will smash inflation immediately.  Just like the person from 2004/05/06 could never have imagined the policies in 08/09/10, I have a similar inclination to believe we cannot fathom today whatever the Fed may use in the future. 

Again...the wheels on the bus go around and around...

When you get to a point that you have 500 cans of green beans under your house and your neighbors stop inviting you to their holiday parties, you may want to consider that your beliefs about trust are highly skewed.  


DaveyJones's picture

how do you argue with someone who is the only fan of their humor

Clinteastwood's picture

Hey I got an idea.  Let's fight inflation by inflating the currency.  Yeah, that's it, yeah, yeah, that's it! .

chopper read's picture

RNR, is the same monkey who has continuously insulted everyone for owning gold.  In a strange about face the other day, he then said he will be a buyer at $1,000.  ha, ha. 

could you imagine having "Faux News" as your photo icon while at the same time being a worse trader than Glenn Beck himself?!!!    ha, ha, ha, ha, ha, ha, ha, ha!!!!!!!!!!

Glenn Beck owns gold and RNR does not!!!!    ha, ha, ha, ha, ha, ha, ha, ha!!!!

too funny!!!!!!

Red Neck Repugnicant's picture

holy. fucking. shit  

Had I known that your level of intelligence and wit skims near zero like an asymptote, I would never have wasted my time with you.

too pathetic...  


chopper read's picture

me thinks thou doth protest too much.  just admit it when you buy gold at $2,500.  okay, monkey?

dnarby's picture

Rather he admits it when he buys at $10,000.

barbage's picture

I seems the winds of change are already upon us. According to the article below Switzerland is in 1st place in the world economic ratings. The US has slipped to 4th. The trust already seems to be dwindling. The group that came to these conclusions however are based in Geneva, so it could be a bit of self glorification.

Hero Protagonist's picture

Forget Apocalypse bashing and forget focusing on the world coming to an end.

You use the word "trust" a bunch and then "faith" once.  I want to focus in on "Faith" while trying to forget the religious ramifications of the word.  

You stated accurately "Just like the person from 2004/05/06 could never have imagined the policies in 08/09/10, ..."

The reason they couldn't of imagined it and I believe many here also believe is because the recklessness of doing so balanced against the objective sanity of letting the market correct, as painful as that correction would have been, is obvious.

The FR and Treasury with the approval of the US government and Financial System, have removed every pressure valve so that we are now left with relying on's binary at this point.  That is where the frustration is...why remove checks and balances and just fall back on the faith that everyone will stay on your bus.  It didn't have to be this way but now it is.


So, I'll put it to you, if the Faith that you have comes to an end for a meaningful measure of the financial markets in 2013 (arbitrary year)  would you have said now that it was "unfathomable"?





Bring the Gold's picture

You and Bigus Dickus Jr. should start your own comedy troupe. Black comedy, surreal interpretations of reality, hubris, cluelessness and blind trust in power. The two of you capture the comedic zeitgeist like no other. 

Ripped Chunk's picture

The PD involvement is a charade. Just sticking to the process that has been in place for decades to provide an illusion that short term liquidity markets are operating normally. Oh and with every transaction, there are fees/spread. Would not want those poor folke to go broke now would we?

caconhma's picture

<You have no idea what the Fed can do.>

Certainly, it is impossible to predict what mad, stupid, and/or incompetent men can do. However, regardless of what they do, they are not Gods and Laws of the Nature will always prevail.

AnAnonymous's picture

So, under that premise why even bother to hold Treasury auctions? The Fed lends money directly to the Treasury at zero cost.


Or am I missing something?


Maybe to expand the participating base.

Maybe to keep pretending. Debt is a hot issue as it seems more and more that debt will not be repaid other than in nominal terms.

All in all, what you are asking is why set up dummy companies...

AndItsGone's picture

Are you aware that when a snake's head eats its own tail, it's effectively providing calories to itself at no cost?

SWRichmond's picture

...and winds up eating shit

dnarby's picture

...And collapses into a singularity.

Either that, or it just dies.

UncleFester's picture

Burning calories to (re)consume calories it already consumed before is at no cost...who knew?

SamuelMaverick's picture

Yeah, if you have a partial understanding of reality. We are not financing the debt at 0, we are financing it off the backs of the American people by making one dollar worth less and less, while their paychecks remain the same. Granny has 200k in the bank making less than 1%, while all of her expenses are shooting thru the roof. Yeah, all is well, move along people.

Idiot Savant's picture

@Red Neck Repugnicant:

Wow, sorry to see you got junked so much. I appreciate opposing viewpoints, especially well thought out ones. It's sad to see that so many ZHers don't appreciate differing opinions.

What happend to your original post??

Regardless, I have a question for you. Let's assume the FED can fight inflation and raise rates without choking itself. It would seem then that the end-game is when the rest of the world rejects dollars. What happens if/when oil is traded against a basket of currencies, or is that where our military comes in to play?

tmosley's picture

If I post disappears after it has been replied to, that means it accumulated too many junks and got deleted by the board software, I believe.

caconhma's picture

Idiot Savant, I have a bad news for you. Specifically, "where our military comes in to play".

Let me explain.

First, little bid of the history.

In 1917, a group of Jewish thugs and terrorists led by Lenin and Trotsky was sent to Russia by the USA and the Great Britain to destroy the country. After all, the USA and the Great Britain purpose of the WWI was to destroy Germany and Russia. Both countries were about to emerge as new world superpowers ready to challenge American and British world domination.

The plan was that Lenin, Trotsky and their thugs would leave Russia after bringing it down. However, Lenin and Trotsky concluded that they would not last long leaving Russia. They just knew too much. So, they decided to stay in Russia using all means keeping the power. Well, Lenin did not last long. He died from a syphilis shortly after. After Lenin's death, Trotsky lost a power struggle to Stalin, was exiled, and later killed. Lenin and Trotsky associated still hoped to move to the West. They hated USSR. This is why Stalin purged/liquidate almost all "old Bolsheviks" since they they were "Soviet 5th column."

Stalin transferred the Soviet Union into a nuclear superpower with an intention to destroy both American and British Empires. In 1953, he was killed. The Soviet Union new leaders opted for a coexistence with the American-British axis.

This situation lasted for almost 30 years before Gorbachev destroyed USSR and sold it to America, got his money, and moved to live in America. Yeltsin has played by the American "rules". America became the only superpower. The entire world was at American mercy.

President Yeltsin appointed Putin as a new Russian President to protect his ass since Putin was/is a very corrupt and ruthless thug with strong security apparatus connections. Putin was an American puppet. This is why GWB looked into Putin eyes and "liked" what he saw. Putin and his people were destroying Russia, stealing billions of US$ and depositing the loot into Western banks.

So far, so good for America but, from time to time, Putin likes to be treated as an equal to the Western leaders. His ego creates some frictions with his American bosses. And here comes Wikileak telling Putin that Americans consider him who he really is: a mafia thug. Furthermore, Putin understand that, if he leaves Russia, he would not be treated as Gorbachev. His money could be seized and he can be treated as Saddam Hussein...

Now, both Russia and China are nuclear power. In a future, the both are ready to use their military/nuclear muscles. Consequently, presently American military options become very limited.