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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bigdumbnugly's picture

true.  often times i myself have been rendered powerless by the little abstract guy controlling my actions.  the next morning i usually regret it.

jdrose1985's picture

In regards to TMosley;

My life savings are broadly diversified. Basically market neutral although my income is derived from the operation of my lifetime collection of metal fabricating machinery geared to the ags and such. Yes I'm a metal fabricator, hands-on kinda dude with a hard-on for beating cherry red steel and tearing shit up.

Nice and easy to just sit back and watch you all rebroadcasting your interpretations of the lie which was planted for you supreme clowns to stumble across.

It's really irrelevant to me which way the markets move. Whoever loses the least, wins. May the best man win.  

Basically the US economy is about $6T short and you idiots are screaming hyperinflation from the mountaintops because a whopping $4B was created...or whatever. Basically it's all irrelevant, you're not even looking at things in absolute perspective.

Look up Total credit market debt obligations (google is your friend) and tell me what you see...?

The money supply is less than 2008 which is called contraction. M2 etc are farts in the whirlwind.

$2T+ a day goes thru the NY Fed.

Ben Bernanke is religion to you.

"something one believes in and follows devotedly"

2002...Ben S Bernanke tells the greatest lie ever believed.

ZH has become a one way trade, used to be a place I would hear both sides of the story laid out...not any more.

Prices are basically lower than they were in 2008, but that never seemed to cross anyone's mind.


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.

What kind of person writes shit like this? You really think Ben Bernanke controls this fucking game? Of course, it's all part of the religion.

tmosley's picture

Honestly, your posts sound a lot more like those of a religious zealot than anyone else's around here.

Tell me, exactly what evidence will you require before you acknowledge that you were wrong?

Mine is simple--a sustained downturn in the price of gold and silver that lasts for more than three years.  You see, I fully expect there to be lots of deflation in terms of gold and silver.  The inflation/deflation in terms of the dollar will be 100% reliant on the amount of printing by the central bank, which has, as of late last year, printed enough to FILL the deflation hole you keep talking about.  This makes sense, as now, a year later, we are starting to see signs of massive inflation at home and abroad in our prices, unless you are still eating overstocked electronics.

chopper read's picture

what's the big deal?  All those little old ladies out there scrubbing toilets for yacht and ferrari money have nothing to worry about.  Its only milk and bread that are going up in price.

Bring the Gold's picture

Tell me, exactly what evidence will you require before you acknowledge that you were wrong?

Mine is simple--a sustained downturn in the price of gold and silver that lasts for more than three years.  You see, I fully expect there to be lots of deflation in terms of gold and silver. 


Ding, ding, ding! All the deflationists could join the winning team if they redefined their terms of deflation in gold and silver terms as opposed to fiat FRN's. It's so simple it escapes otherwise brilliant people. 1930's deflation was possible and caused by the conditions brought on by deleveraging AND (the key) gold back dollars. Period.

jdrose1985's picture

"If all the bank loans were paid, no one could have a bank deposit,
and there would not be a dollar of coin or currency in circulation.
This is a staggering thought. We are completely dependent on the
commercial Banks. Someone has to borrow every dollar we have in
circulation, cash or credit. If the Banks create ample synthetic money
we are prosperous; if not, we starve. We are absolutely without a
permanent money system. When one gets a complete grasp of the picture,
the tragic absurdity of our hopeless position is almost incredible, but
there it is. It is the most important subject intelligent persons can
investigate and reflect upon. It is so important that our present
civilization may collapse unless it becomes widely understood and the
defects remedied very soon."

-Robert H. Hemphill, credit analyst; Atlanta Fed. 1937

There's no money, only credit.

It's the oil that is doing us in, ultimately. I see it all day, every day. The oil supply is ultimately what we are up against. Dollar growth is limited by the ability of consumers to manufacture them who are limited by the availability of cheap energy inputs to maintain the illusion of wealth. Everything is an oil derivative. Prices going to collapse for lack of demand/availability of credit. It's a virtuous cycle very few of you can seem to grasp the logic of.

It's not's energy deflation as described as the brilliant Economic Undertow blogger. What he sez is the nuts and bolts of it.


tmosley's picture

You've changed your mind, then.  Previously all you could talk about was bank liabilities and debt destruction.  Now it's all about oil?

That is more realistic, but not completely.  Contrary to the assertions of many, oil is not the be all end all of energy, anymore than firewood, charcoal, or whale oil were ever the be all end alls of their respective times.  There are other sources of energy that are coming, and they look to be about as cheap to make and deploy as newspaper.

In addition to that, I just read about some new progress in nuclear physics regarding the fission of certain isotopes of mercury into unexpected products.  This means that we have more to learn here as well, which could certainly lead to new fuel sources.

It's a big world out there.  We aren't going to die because we've run out of oil anymore than we are going to die when bananas go extinct.  Sure, life will be a little crappier than it might have been for a while, but newer and better things will come along.  They always do.  This is the nature of invention.  Sometimes necessity is required.

Bring the Gold's picture

Well, I do think Peak Cheap Oil will have huge impacts and will at least cause a dip until something very creative comes on line (Some say it was Peak Cheap Oil that caused the limit situation in 2007).

There have been some successes in Cold Fusion per that 60 minutes a couple of years ago. Certain Palladium lattices seem to create more reliable results building off of the long discredited Pons & Fleishman experiments. Sounds like lattice quality is key to repeatability. Also their are always rumors of the Buckminster Fuller type Zero Point Energy machines. Not much meat there that I have found, but the rumor is strong.

The point is solar, wind, Geo-thermal and nuclear (fission) combined can't bring energy online on a large enough scale. Coal can perhaps do what we need in time, but Coal is one of the least environmentally friendly solutions available and not just the carbon but mercury, sulfur and other contaminants. Power Down is a good read on the subject.

I believe we will solve these problems and if you believe in energy solution suppression (seems plausible given the suppression of PM markets etc.) then we may have the solutions next to the proverbial Ark of the Covenant in some government or private wharehouse somewhere.

TLDR version: Peak Cheap Oil is a real problem, solutions will be brought to bear but not without significant disruption/restructuring of society IMO.

jdrose1985's picture

It IS all about debt destruction caused by liabilities incurred at a time of cheaper inputs being needing to be extinguished with liabilities able to expand at the same rate but in an energy/resource constrained environment.

Banks aren't liable's the people (who have extended their own credit to the banks) who have assumed liabilities for the very credit which they actually issued to the banks to begin with.

There will be a lot of death, everything is an oil derivative. You contract the oil supply by 10% and watch ho people who live on the edge of starvation will be gladly sacrificed so we can continue to drive cars.

There is no replacement for oil with the exception of possibly hemp. There are no outs really. Everything is a laughable pipe dream. Yes I hate to break it to you but people will be dying and suffering because of the backside of the slope

centerline's picture

Cool avatar stuff - thanks for the explanation.

StychoKiller's picture

Edit the avatar so that the eye is more visible (G.I.M.P. is your friend).

tmosley's picture

It is a bit washed out.  Thanks for the idea.

Dr. Sandi's picture

The train just hit the watermelon.  Bits of JDRose are flying everywhere. 

Yow, I have a vision of Gallagher brandishing a sledge hammer. "You want that economy to go?" BAM... "It's gone!"


TheGreatPonzi's picture

Deflationists are funny people. Do these people think Bernanke will stop his printing press one day? That he will accept deflation and thus default? You can dream.

Bernanke just has to push a button to fight deflation. I can't imagine him saying to the Nation one day: "Sorry, the fight against deflation has been lost, we accept our failure".

He will fight it tooth and nail... and he will inevitably print a bit more than needed. Because he is a sailor in an ocean with no visibility.

Everyman's picture

Bernake is getting removed from the Fed Res.  If Ron Paul does not do that both Ron Paul and Benny are dead men walking until someone takes their heads off.

Pretty simple that this infinite fiat creation cannot continue.  Some Patriot will end it even if it means becoming a martyr.

Shameful's picture


Why would Ben go? He's doing what he's told. I expect the congressional hearings to be a lot of stonewalling and if needs be for Zimbabwe Ben to sit there in total silence waiting the clock out. More likely he will pontificate on his academic days studying the Great Depression and wander into topics as his leisure. You say the infinite fiat cannot continue, history says you are wrong. Even if some guy got all dumb and martyred Zimbabwe Ben another flunky will get tossed in to rev the presses.

Biggus Dickus Jr.'s picture

True.  If Ron Paul gets too far out of line there will be problems.  You don't rock the boat when it is already taking on water.

jeff montanye's picture

your comment caused me to confirm that paul was just appointed head of the domestic monetary policy subcommittee of the house financial services committee.  imo if paul gets too far out of line he may be elected president.

delacroix's picture

oh great, that would render him powerless

goldfish1's picture

As much as I like RP and admire his positions, he's impotent.

WaterWings's picture

David was not impotent. He just happened to also be a crack shot with that sling. Will enough people realize that Dr. Paul is fighting for them? For their very lives?

And shameful is right: The Bernank is not the problem, the Fed is.

"Nothing good can come from the Federal Reserve."

Bring the Gold's picture

But what if after hyperinflation is a lock JP Morgan, Goldman and the FED are sacrificed as scapegoats and conveniently pave the way for a global currency centered on the IMF/BIS?


Just a thought. Remember the FED, Goldman and JP Morgan are just entities. Those who pull the strings on them can just create new legal structures to hide behind. Nothing special about those three other than brand power which has been under assault for years now. What better way of creating a false sense of justice served then to knock down a few straw men? Just an out of the money call on reality. ;)

WaterWings's picture

Yes. What if. Surely the dollar cannot last - the miseducated masses would probably welcome such a transition. We can only hope, for the sake of all things virtuous, that their plan fails.

The USA is finished. We can only hope for regional strength - were the wisdom of the imperfect Founding Fathers can thrive - pick a good region.

Founders Keeper's picture

[You say the infinite fiat cannot continue, history says you are wrong.]---Shameful

Hi Shameful.  Why do you think our (any)fiat currency will continue indefinitely?  What is history telling you?


Shameful's picture

Ok correction it will continue into hyper inflation then a few months past that.  And then they will try a new system.  Maybe another fiat maybe not.  But it will not end until the dollar is a flaming wreck no one will take.  I think the idea was that the printing would stop and the dollar saved.  The dollar is already dead, it just doesn't know it yet.  And the oligarchs will not stop, why would they?  They are winning.

TheGreatPonzi's picture

I'd add two things:

- If he doesn't print, history books will remember him as "the man who could have printed, but didn't". If he prints, he will just be someone who did everything he could.

- Most people assume that hyperinflation is a bad thing that will cause people anger. Temporarily, yes, if the food shelves are empty. But socialists and keynesians view hyperinflation as a totally sane and just event, which targets the poor less than the rich, and which for sure lightens the State debt.

Biggus Dickus Jr.'s picture

hyperinflation may be more just than deflationary depression, but they are both bad.  You ought to read the book "when money dies."

TheGreatPonzi's picture

To my mind, as a libertarian, hyperinflation is far worse than deflation. But to the mind of people who govern us, to the mind of keynesian teachers, and to the mind of ABC and CNN, it is better.

Shameful's picture

Hyperinflation is a fast wealth aggregator. Why would they not use it to rapidly shift out he last few % out of the hands of the bottom 99%. The could care less if the little people "own" their homes. After all with taxes even home and land owners are simply renters.

nmewn's picture

"After all with taxes even home and land owners are simply renters."

Hallelujah!!!...+++++ from the sky above, to the core of the earth below (old land title lingo...LOL)...someone else gets it.

tomdub_1024's picture

"After all with taxes even home and land owners are simply renters."

You know, this one fact alone, once truely thought about and internalized, was the complete illusion destroyer for was the single most devastating (among many devastations) economic enlightenment, causing many dark night of the soul and gnashing of teeth (and much alcohol consumption). The anger at the childhood/young adult programming and indoctrination, marketing, advertising, etc...

All the rest fell into place after this fact was fully realized.

nmewn's picture

"You know, this one fact alone, once truely thought about and internalized, was the complete illusion destroyer for me..."

Myself as well.

Of all the transgressions and indignities foisted on a "free people", this lie stands out as the boldest ever told.

It's right up there with debts incurred by the parents (deceased) passing to the heirs (the living). 

At some point justice will prevail. It always does.

I'm optimistic that the tide is turning...there is a lot of evidence that it is...the statists are being pigeon-holed into untenable positions everyday by the circumstances of their actions.

Here's something I came across today in my readings that I thought well reasoned;

"Right now, too many intellectuals try to turn this into a left/right debate rather than one about the past and the future.  There is a liberal case for the radical overhaul of our knowledge industries as well as a Tea Party one.  People who want to extend government protections to more groups need to be thinking how government can be radically restructured so it can be more effective at a lower cost.  People who want more education to be available for the poor need to think about deep reform in primary and secondary education, and they need to think up ways to reduce the spiraling costs of university education.  Those who like the public services provided in troubled blue states like New York, Illinois and California need to redesign state government and find alternatives to the tenured civil service bureaucracies built one hundred years ago.  Those who want more access and more equal access to education, to legal services and to medical care need to think about how we can use technology to radically restructure the way we organize and deliver these services — and the more you care about the poor the less you can care about the protests of the guilds."

tomdub_1024's picture

I don't like being played, because taking the barbed hook out of my lip really is unpleasant....and I got played for 30 years...ouch.

StychoKiller's picture

and the more you care about the poor the less you can care about the protests of the guilds.

And if those "Guilds" are precisely the one that spout off that they "care" about the poor?  Guess we'll find out how much they truly care, heh?

Blankman's picture

Stycho - Your comment brought this to mind and I ask it as I do not have the answer:

What is the purpose of the Buffet/Gates tax free charitable organization?

-Obviously the tax free thing helps, but what is at the root of this organization? How are they convincing these billionaires to give away their life savings? It smells.

TheProphet's picture

Marx is famous for saying that "Religion is the opiate of the masses." The new opiate is political parties and notions of left and right. Put gay marriage and abortion in the left hand, and rob the country blind with the right hand.  

kaiserhoff's picture

Great find.  ++

 "All professions are conspiracies against the laity."

George Bernard Shaw

revenue_anticipation_believer's picture

You don't really 'own' property, only the State provides the legal basis, based on military power of continuing possession...

FYI .... Hitler fought an aggressive and rational war to obtain 'land' with/without developement - in the "East" the policy was like USA Sherman, total annilation of the peoples/houses/ the "West" in Vichy France, existing property claims were least until AFTER the sucess of NAZI expansion... "My Battle" 1924 was a near blueprint for NAZI program, well beyond 1946..

You are "granted property", revolkable at any time for National Requirements, such as the Interstate Hiway system, or State/local governmental needs,......

Now, there is a 'rationale' for keeping 'working class peoples' in ONE place, it is usually more 'efficient' overall, net gain...Soviet Russia and NAZI Germany pre 1946 had a lot of paperwork/ID papers etc.

After WW2, the Iron Curtain countries, continued that policy using police force, hence, finally the Berlin prevent the Brain Drain to the West, etc...

BUT also the USA, created a voluntary program doing the SAME, keeping people PLANTED in one place by making their 'owned HOUSES' cheaper, relatively than the CAPITAL GAINS and subsidized loans, including the Interest Rate deductions..

During THIS current Political Economic Era, MOVEMENT of the works to the NEW JOBS is needed....i expect to see a lot of literal permanent Ghost Towns, like central Detroit where the houses are bulldozed, the loans totally written off..




tmosley's picture

Very thought provoking.  Thank you for the insightful comment.

jahbless's picture

yeah thanks for that - a highly interesting take.

plus, I really am digging the freudian anglo-german slip that works on so many levels = )


revolkable at any time for National Requirements


goldfish1's picture

After all with taxes even home and land owners are simply renters.


Especially now with Diebold. Happened in our bankrupt small town. Little industry left, everything moved to Mexico or China...only people making $$$ are school employees or hospital/health care. And diebold voted  new multi million schools to be built. The fukks (state contractors with the $$$)  brought in a ringer administrator to undermine the school stability and he did his job. The rubes are clueless as to what went down.

New schools in a bankrupt town with 50% unemployment, youth on drugs and the rest on welfare and foodstamps ???

Houses for sale EVERYWHERE, yet my property assessment went up 25%. And the new school taxes haven't yet kicked in.

TheProphet's picture

I recently bought this from Amazon and am looking forward to it.

But, in an abundance of caution, I decided to first read "When All Hell Breaks Loose."

jahbless's picture

I thought we were all boycotting Amazon?

Sean7k's picture

All you have to know about deflation is that bankers abhor it. They will institute any policy necessary to stop it. While we may experience a deflation in the prices of some assets, the system will never allow real deflation to correct the malinvestment we presently hold.

Bankers and corporations can only make money in an inflationary system with the power of the police state to threaten force. 

idoubtit's picture

Printing money is one thing.  Increasing credit is another thing.  The Bernank is printing money in the efforts to increase credit growth because  it's the credit growth that's the key to the game.  People need to sign on the dotted line.  Raising commodity prices without a corresponding increase in credit growth will only kill the economy as margins get squeezed.  We're so far from hyperinflation it's a joke.  If anybody doesn't want their "worthless" dollars they can send them to me, thanks.

TheGreatPonzi's picture

Well, every sovereign crisis since the abolishment of monetary standards led to hyperinflation. There might be a pattern in that you might want to look closely.

If the Chilian/Argentinian governement managed to "increase credit" sufficiently to create hyperinflation, the FED can do it too.

I really don't think credit is the key to everything in monetary events. You say the margin squeeze will kill the economy, I say it doesn't matter because hyperinflation does kill the economy. The end result is the same. An hyperinflation happens when there's more money than value in the world, and when people start to spend this money in anticipation of raising prices. As I said on a previous thread, hyperinflation in Weimar germany started when the average family mom bought 100 canned beans instead of 10, because she realized the price of these canned beans was doubling every 3 months. There's really no credit thing in that. It started on commodities, and the money used to purchase them was essentially salary, not credit.