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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Cheesy Bastard's picture

Yep.  Stocks , pillories, and guillotines should all do well.

honestann's picture

Yes, you please keep buying stocks.

You'll be one who gets into the following trap.

2010/2011:  gold == $1400 : buy stocks for $100,000.

2012/2013:  gold == $5600 : sell stocks for $200,000.

You will brag to everyone that you earned 100% profit in 2 years.  You will pay 20% (or whatever) in taxes on those gains, leaving you with $160,000 after taxes.  You will imagine you ended up with $60,000 in profit, and like many naive fools, be happy you were screwed over.

You will ignore the fact that the dollar is worth 1/4 as much as when you bought those stocks.  You will ignore that the value of the $160,000 in fiat toilet paper you received in 2012/2013 is only worth $40,000 in the 2010/2011 dollars you invested.  You will ignore the fact that the money you invested in 2010/2011 was worth 2.5 times as much as the money you hold in 2012/2013.

And so, you will have happily funded the predators-that-be, and the entire predator class, thereby making them richer and stronger.

Congratulations, master investor.

Founders Keeper's picture

[You will imagine you ended up with $60,000 in profit, and like many naive fools, be happy you were screwed over.]---honestann

Thanks for your post, honestann.  Fiat currency is insidious.

I believe the pitfalls of fiat currency are not beyond the intellectual capacity of "naive fools."  Curious, these pitfalls are not required learning in public schools. 


blindman's picture


Deflationists Take Note: Bernanke Succeeds In Offsetting Shadow Banking Collapse


so, does this mean that the american taxpayer has been fucked twice

during his/her dream filled slumber?  oh my!  can we do it again?

the "public" now being in debt on the books for the first go round and

now in debt off the books, (soon to be on the tax bill) for the second

go round and the banks are financed indefinitely and blameless both

ways and will be the recipient of all tax receipts going forward as "they",

not the taxpayer/serf are financing this master orgy of fucking working

and productive entities.  what can we call this?  i know, an historic and

horrific and laughable mistake for the history books and tombstones of

millions with misleading and poorly written epitaphs.


  end the fed, buy silver

ppss  .. more bonuses, higher, harder and faster and sooner.

bigger BONUSES NOW!  more, mmoroeoo  mmooooororororrrrreeeee

aaahhhhhhh!!!!! now moooooorororororoeoeeeeoooororooeoe



Deflationists Take Note: Bernanke Succeeds In Offsetting Shadow Banking Collapse

does this mean there is an end in sight to QE^infinity?  fuck NO!  ?

"legal stealing is way too profitable to respect any rational limitation".

Atomizer's picture

Agenda 21-- Eugenics And Depopulation

Yes, keep buying stocks as above lemming tells you.. winks

tradewithdave's picture

In recogntion of the efforts of Rupert Murdoch and the entire team at NewsCorp and DowJones/Wall Street Journal, Dave would like to acknowledge that imitation is still the sincerest form of flattery.  Tyler, would having your charts copied AND recognized in the Wall Street Journal feel sincere and flattering?  ZeroHedge seems to have lost track of its priorities as it has become hugely popular and successful, but lost sight of how Media-Mogul-Murdoch measures "quality online journalism."   

“I think people will start paying to read quality journalism online.”  NewsCorp Staffer, March 2010 commenting on the construction of new paywalls.

I've got to run... I'm giving paid subscriptions to Murdoch's online properties to all my friends for Christmas gifts.  I'm also makng some of those wooden plaques where you carve sayings in the wood using a woodburning tool.  This year's slogan... "Relax... Hope Is Once Again A Strategy."  

Dave Harrison (aka former Comcast subscriber)

P.S.  For a link to the video interview where Team Murdoch proclaims "Our websites aren't worthless" click here:

Perseid.Rocks's picture

Preventing deflation ensures there won't be any growth, ever again, because debt service takes up disproportionate amounts of all earnings generated by an enterprise.

Because growth will remain stagnant, there won't be any new lending, since qualified borrowers, and reasons to borrow, will remain scarce.

Also due to stagnant growth, there is no reason to invest in a business enterprise, so unemployment will remain high, perhaps even continuing to increase.

The only ones benefitting in this environment are bankers. Even creditors don't benefit with no lending and a flat yield curve.

The only demand in this environment is being created by government spending, which is forced to borrow further and further into the future. Once the government enters austerity mode, either voluntarily or by force, look out below.. that's when the crisis happens.

Implicit simplicit's picture

I suspect that defaults on RE will continue to for some time even as RE continues deflating, considering the unsustainable house value/income ratios.  If rates move up, defaults on unsecured debt would accelerate in tandem with secured.

This along with the diminished jobs related to a healthy RE environment will not allow the GDP to grow above the 3% rate necessary for the unemployment rate to decline.

RE is the Alpha asset that will make any recovery feeble, and the reason the Fed feeds the dysfunctional banks with market to fantasy support.

Hyperinflation/deflation combo, as oil, gold,stocks bonds etc... have been rising while the alpha asset declines. How long can the big dog be ignored before the dogs follow tne leader? Maybe for a long time, even with an economy with its tail between its legs, making believe it is healthy.

Perseid.Rocks's picture

You really have to wonder why they're doing it if they're forced to print money just to keep the debt service payments happening. Preventing deflation is the worst possible outcome that can happen. It ensures a miserable future for everyone, indefinitely, with nobody paying their bills, nobody buying anything, and continuous, ongoing, defaults and bankruptcy. It's complete insanity, care of shred the Constitution but save the banks Bernanke, Great Depression expert and friend of bank.

Implicit simplicit's picture

Your last sentence answered your first. The torturers need the elite system in place for their wealth =happiness model of life, along with their superiority complexes of knowing whats best for the masses.

 Its a rigged 3 dimensional monopoly board game. Go outside the game to the fourth dimension and help tip the game over by refusing to play by the their rules, or better yet, if possible, don't play.

CrashisOptimistic's picture

You, sir, are almost, not quite, correct.

The alpha asset is oil.  The beta asset is, indeed, housing, and there is nothing that can be done about that.  Housing defined the workforce and it defined national wealth and that is not going away.

Everything Bernake is doing is to try to counter the smashing of money in the universe known as mortgage defaults.  You can make a case for that being global.

It was and is the source of US wealth.  While it declines, and oil disappears, there is no solution.



unum mountaineer's picture

housing and it's associated workforce aren't going away at all...while the abstract and related econmic elements go negative, the people associated remain..they're quite present actually, BLS has some fancy  hokus pokus that makes them magically you like them centrally planned statistics...magical..mark-to-unicorn like!

Seer's picture

"The alpha asset is oil.  The beta asset is, indeed, housing, and there is nothing that can be done about that.  Housing defined the workforce and it defined national wealth and that is not going away."

OK folks, I'm sure that by now you'd figure out what I'd say... Food, Shelter and Water!  Yup, check, housing ("shelter") is still meaningful, though the McMansion/Keeping-Up-With-The-Joneses housing will fall by the wayside.

And, YES! growth happens only via work, and, in this industrial/post-industrial robotic world, work is increasingly done more and more with direct injections of energy (electricity, fossil fuels) rather than indirect energy via food consumed by humans.  Increasingly, however, this work paradigm will revert as fossil fuel extraction becomes more difficult.  Result: peak growth, followed by de-growth (an unwinding of "economies of scale").

Implicit simplicit's picture

So true. Hope adds honey to what is perceived as a "bad" death cycle. The cycles of the economy must be allowed to boom and bust in normal fashion; otherwise the quality of existence is ratcheted down but kept going with intravenous fiat hope.

Everything is born and dies over and over. Fear, greed and hope will not change this. For the death cycle to be less traumatic, it must be accepted for what it is- death for a re-birth to something new.

Nobody knows how long it will take. refuse to be  the slow tortured or the torturer. An enlightened consciousness of the cycle allows one to do what must be done to not be tortured by the debt system. If you are not a fiat torturer- bankster, than free yourself from the beast by any means possible.


blindman's picture

as someone said? austerity is self imposed disciple,  poverty

is other imposed usury.  or something like that.  it was that banker

in the keiser 1-6 parts video previously posted.  that excess labor pool

has a price that goes unpaid , for a while.  very valuable/exploited in

certain circles. 

CrashisOptimistic's picture

The policy of the US Government for as far as the eye can see is:


There is no constituency for austerity.



blindman's picture

maybe part3?  or 2


the constituency is a follower ship, looking for direction.  the universe

and its manifestations providing those signals to be interpreted by

leaders.  government is not government but the fungal mat of consensus

ignorance, expounded as policy.  only the individual can see and integrate

these dynamics and then incorporate these insights / sights.   so on...

Seer's picture

And the fungal mat is incapable of cooperatively establishing sustainable existence.

Let us not confuse poverty with being destitute. One can be cash poor and still live fine.  Most who worry about poverty are least able to live more sustainably.  And, it's primarily they who put extra pressure on those at "poverty" levels in order to try and keep their excessive existence afloat.

And here we are, sitting on our asses burning up electrons (well, pushing electrons), producing exactly NOTHING while wondering why other folks who aren't producing anything are taking meaninless crap from us.  Each one of us should look in the mirror and ask: What am I doing about the fundamentals (food, shelter and water), am I a producer?

blindman's picture

we're all being pushed in that direction by a thousand factors

and failings.  the systems way of righting itself or clearing out

the dead wood.  ?  ongoing.  nice to hear from you.  i'm currently

in a coffee shop / lost losing access  at the residence?  sheesh..

location location location .....

Kassandra's picture

Thanks Tyler. Hope the flu don't get ye...I am down for the count.

Kassandra's picture

Nasty, nasty, nasty.

Wholeden Caulfield's picture

@ the end of the day my friends, it is how you manage your deltas. teach peace



f16hoser's picture

Is this the "Event Horizon?"

agrotera's picture

i gasp for breath -- cognitive dissonance is stubborn/

Die Weiße Rose's picture

cognitive dissonance...

I find if I put on my pink eye-shades and some pink Lipstick,

play soft pink music on the pinkano,

Psyche vibrates perfectly with pink cognitive harmonic resonance ;)



flow5's picture

The shadow banking system (the financial intermediaries), i.e., its lending, is reflected in the transactions velocity of existing deposits, whereas lending by the member banks, is reflected in the expansion and turnover of newly created money.

The transactions from both the money creating depository institutions, & the financial intermediaries, all clear thru the commercial banks.

The magnitude of these transactions is reflected in "The Federal Reserve’s 2010 study of noncash payments has revealed that in 2009 more than three-quarters of all U.S. noncash payments were made electronically".

And contrary to economic theory, & Nobel laureate, Dr. Milton Friedman, monetary lags are not "long & variable".  The lags for monetary flows (our means-of-payment money X's its TRANSACTIONS rate-of-turnover), i.e., the proxies for (1) real-growth, & for (2) inflation indices, are historically (for the last 97 years), always, fixed in length.  However, the FED's target (?), seems to vary widely.

I.e., the rate-of-change in long-term (MVt) bottoms in JAN (as will be demonstrated by bottoms in core inflation & housing).

So the deflationist argument extends to JAN - when aggregate monetary purchasing power, as measured by the flow of money, will finally show a new peak in real-gDp - finally exceeding the 2nd qtr of 2008's figure of $13,359T.

truont's picture

Paging Robert Prechter--

Your crow is now ready...

zen0's picture


This is one of the most explicit statements by a central bank I have read recently.


Go forth, and download December's pdf.

Seer's picture

Canada is going to feel a big thud soon.  Yes, they managed their banks well, but they're still highly dependent upon out-of-control export countries (US being key).  They're hooked into the global system which was rigged by the US.  Even honest thieves are still thieves...

SpeakerFTD's picture

I feel the same way.    I have been a deflationist, based on the collapse of M3, but if Bernanke has really succeeded in stemming that collapse, then I may have to rethink things.  

If he has truly succeeded, then we should see an explosion in velocity soon.   That's a very scary thought.

Stuck on Zero's picture

Just got this in an email ...

It is a slow day in the small Montana town of Circle, and the streets are deserted.  Times are tough, everybody is in debt, and everybody is living on credit.
A rich tourist visiting the area drives through town, stops at the motel, lays a $100 bill on the desk and says he wants to inspect the rooms upstairs before selecting one for the night.

1. As soon as he walks upstairs, the motel owner grabs the bill and runs next door to pay his debt to the butcher.

2. The butcher grabs the $100 and runs down the street to retire his debt to the pig farmer.

3. The pig farmer takes the $100 and heads off to his supplier, the Farmer’s Co-op.

4. The guy at the Farmer’s Co-op takes the $100 and runs to pay his debt to the local prostitute, who has also been facing hard times and has had to offer her services on credit.

5. The hooker rushes to the hotel and pays off her room bill with the hotel owner.

6. The hotel proprietor then places the $100 back on the counter so the rich traveler will not suspect anything.

At the moment the traveler comes down the stairs, states that the rooms are not satisfactory, picks up the $100 bill and leaves town.

No one produced anything.  No one earned anything.  However, the whole town is now out of debt and looks to the future with a lot more optimism.

And that, ladies and gentlemen, is how Stimulus works. 

SpeakerFTD's picture

I've seen this email about half a dozen times now, and it is massively flawed.

Each and every player in the email is NOT in debt.  They have a flat balance sheet with $100 debt and a $100 credit from someone else.

That's not the real world.  In the real world, 90% of the people have NET debt, and the other 10% have hold all of those chits.    

StychoKiller's picture

Bet you're real fun at parties, too! :>D

Stuck on Zero's picture

Massivley flawed?  You, Sir, are a bad accountant.  Each person in town actively owed $100 debt but could not offset it on the books with uncollectable debt.  You cannot put uncollectable debt into the assets column.


Dick Gozinya's picture

So, if the deflationist lounge is empty, then Peter Schiff was right all along?

gwar5's picture

Deflation was looming, per the M3 plunging, but I never thought it was a real threat

Deflation is too hard to hard to tax. Inflation is stealth robbery and too easy to do

Besides, The Bernank already told us he would helicopter drop money. He's a crook not a liar.

honestann's picture

No, the Bernanke is both a crook AND a liar... that should be utterly obvious.  Also note how often Bernanke, who coined the "drop money from helicopters" idea, repeats "we are not creating money", "we are just buying bonds"... ignoring the obvious question "where did the money come from to buy the bonds".  Duh.

I believe the deflation versus inflation argument is designed to take our eyes off the most important issues... like "manipulating the economy is central planning, which is overt, criminal, totalitarian dictatorship, and exactly what destroyed the USSR".  Say goodbye to the USSA.

chopper read's picture

that pretty much sums it up. 

indio007's picture

I'm intrigue by the post that said the FED refunds the interest it is paid on US bonds back to Treasury. How long have they doing this? What is the legal authority? Why is this just not considered the same as if the FED simply canceled/retired the notes? 

Mad Max's picture

This tends to undermine claims of deflation, in much the same way that a birth tends to undermine claims of virginity.

Got chickens and a little garden?

TruthInSunshine's picture

I will fall back and protect my six in the deflationists' lounge.

The one thing rarely spoken around here is that the biggest creditors are the biggest losers in an inflationary, let alone a hyperinflationary environment.

Inflation destroys creditors and boosts debtors.

The same people telling me that the biggest creditors control the Federal Reserve and U.S. Congress (et al.) are also telling me they're going to not only allow, but accelerate, inflation of troubling proportions - for any significant period of time.

There's some contradiction in that.

Now, the argument would be more sellable, to me at least, if one were to add the caveat that this isn't about a wealth creation/destruction/transfer event, but a political/social power play.

***Just because Bernanke MAY HAVE (and let's look at true market asset prices, folks, rather than fairy tales ones) have stemmed one index of this crisis, doesn't mean further asset devaluation to come doesn't make his efforts for very vain and max pain.

*****Also not going to happen with the U.S. having the reserve currency - good luck to the rest of the world figuring out HOW to cobble together a replacement, assuming it's even politically possible - bodies in motion, tend to stay so, as do bodies at rest. Hell, the EU can't even figure out how to construct a stable competitor after 20 some years, and no, just because the Euro has maintain relative value for some time does not mean there aren't massive fireworks behind (and in front of) the curtains that make the Euro far less stable and viable than where it's priced now.


tmosley's picture

If you wanted to be conspiratorial about it, they don't need our "money" any more, as they already have all of the gold.  As such, the transition to a gold standard would leave them with all of the capital.  The new hard money regime means that the debts held in that currency will be much harder to repay, theoretically leading to a new feudalism.

Of course, the simpler explanation is that it is NOT the creditors who have control of the government, because the banks ARE NOT CREDITORS.  They are only able to lend the money given to them by the Federal Reserve.  They didn't save to get that money.  In reality, the people in charge are a bunch of debtors.  We have a huge national debt.  The banks are all beholden to the Federal Reserve, and the Federal Reserve is just creating money out of nothing, so they have no skin in the game.  This is a recipe for destruction of real capital, and that is exactly what is happening.

TruthInSunshine's picture

I'm glad you gave that response.

I wasn't trolling for it as a flame baitor as some may have done, but I did want to see that particular rebuttal made.

First, who is "they," with some specificity?

Also, you are claiming that some big movers and shakers who are owed lots of fiat currency, whether banks or not, and who have influence over U.S. monetary policy (but may not have such influence in China or Germany or Russia), would somehow trade off the debasement of the debts owed to them, in exchange for a upswing benefit in gold valuation or elsewhere?

And if this is an attempt for the U.S. to pay back its debts with debased fiat, and I think that's pretty much what you're saying (correct me if I'm wrong), what particular interest would the Federal Reserve have to debase it's only trump card, to wit, the fiat currency of the U.S?

In other words, wouldn't the Federal Reserve simply be marking itself for extinction by losing control of the one thing that allows it to control some of the most influential and immediate levers of the U.S. (and global) economy?

If the U.S. Dollar is debased to the point where it can no longer serve as the reserve currency of the world, then does the Federal Reserve really have a foothold in other safe havens, where the next reserve currency may arise?

Is the Federal Reserve part of a much larger enterprise, knowing no allegiance to any nation-state?

More importantly, have the Federal Reserve & its constituents really amassed a supply of gold? I had always thought that the claim was that they U.S. Government has that amassed pile of gold, and that the Federal Reserve Bank is private in the sense of having private shareholders, and that it is not a part or arm of the U.S. Government?

honestann's picture

Oh right... what a wonderful argument!  Why would the FederalReserve want to debase its own "money"?

Hahahahahahahahahahahahaha.  Hahahahahaha.

Fact:  1933 dollar == 1/20 ounce of gold.
Fact:  1971 dollar == 1/35 ounce of gold.
Fact:  2010 dollar == 1/1400 ounce of gold.

Yeah, right.  The federal reserve would never debase its "dollar".

Hahahahahahahahahahahahaha.  Hahahahahaha.

cranky-old-geezer's picture

(1933) 20 / (2010) 1400 = 1/70.

So the dollar today is worth 1/70th of it's 1933 value. 

1/70th = 0.0142857 = 1.42857%

So the dollar has lost 98.57143% of it's 1933 value.

Last time I checked a couple years ago it had lost 97% of it's 1933 value.

In two years it has lost half of the last 3%.

How many people have received a 100% after-tax raise in the last two years to make up for it?

chopper read's picture

"they", for example, are our Shadow Government, including David Rockefeller (Fabian Society, Council of Foreign Relations)  and extended members of the International Banking Cartel who indirectly own the private Federal Reserve Bank through LLCs in Upper East Manhattan, specifically.

the 'big movers and shakers', while not always in agreement, are collectively moving in the direction of a feudal oligarchy evidenced by such political organizations as the G20 which includes China, Germany, and Russia.

Perhaps the current debasement of the private Federal Reserve Note is in efforts to temporarily continue the monopoly over American 'legal tender' and buy time in order to allow other debt-based currencies to run their course towards collapse and consolidation under the IMF in the form of debt enslavement.

Perhaps when America's inevitable debt-based currency collapse comes, the IMF will be ready to offer "Special Drawing Rights" or the "Bancor" in order to 'save' the United States.

Perhaps the private Federal Reserve Bank has already siphoned a great deal of gold upwards to itself in the form of interest payments from a once gold-backed debt-based currency with the actual proceeds now sitting protected deep below the Federal Reserve Bank of New York.  

This Gold is part of the New York Federal Reserve Bank. The vault sits on the bedrock of New York 80 feet below the street surface and 50 feet below the sea level. You won't be digging to get to this one. At the time of the photo, the vault had $86 billion in gold, 269 Troy tons.

Seer's picture

"what particular interest would the Federal Reserve have to debase it's only trump card, to wit, the fiat currency of the U.S?"

The system works on a high transaction count.  Taxes on each transaction.  The Fed would NOT exist if not for the Federal Govt, therefore it is in the Fed's interest to continue to foster the system that allows it to rule.  What was the worst fears when everything locked up?  Velocity of "money" (currency)!  If people don't use their system they cease to exist.  The theory wasn't so much to debase the currency so much as it was to try and ram enough of it into the system that it would move; and while there may be movement, the fundamental cancer still exists, it's just that we're still in denial that pumping more shit is a solution; at some point we'll tire of the shit, that's a certainty; but in the mean time the continued attempt will be to push more and more shit around in the hopes that we start to accept shit (again, it's shit, in which case it will fail).

Regardless of whether there's overriding evil or benevolence, the problem is that it's all based on perpetual growth, EVERYTHING.  People yaking about interference with "capital" miss the fucking point of the System, that no matter how purified they'd like it to be (something totally impossible in reality), it ain't gonna be that way, which means, ultimately, FAIL!

fallst's picture

Just Roll It Over!

See you in 6 months.