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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tmosley's picture

"They" would generally be those in charge of the monetary policy, those on the FRB.  When people talk about conspiracy theories, they generally stop here.  But it does NOT stop there.  The reality is that it is the politicians who hold the power here.  The thing is, politicians are dumb, and have exceedingly short time horizon goals, but they also have the guns.  

The bankers, through the FRB, own a HUGE amount of gold, and they have the ability to issue an unlimited amount of fiat currency.  If they wished to, they could easily trade against the fall of the dollar by taking possession of the gold, and then printing money stealthily to buy up more gold, and other assets.  This is what has happened historically, most recently in Zimbabwe.  You can see that this is happening (if not in a totally blatant way) by observing the increasing concentration of wealth in this country, even as total wealth is destroyed.  Those with "pull" are becoming fabulously wealthy, while everyone else is getting poorer (including those whose wealth came through honest means).

I sort of think of the people in charge, both politicians, and the FRB, as being similar to Azathoth, the Lovecraftian god.  He is absolute and all powerful, but not sentient.  That is the power of the state.  What we have are a bunch of lesser beings attempting to use that power to their own ends, and in so doing have brought about a situation that is likely to be catastrophic for all involved.  Sure, some might remain relatively wealthy, but their absolute standard of living will go down, as though they were able to become the King of England, but only in 1200AD.

Those in control of the Fed think they can win.  They look to ZImbabwe, where the central bank still operates, and think they can make it, but the reality is that this situation is more or less without precedent in the history of the world.  The closest thing we have to precedent is Yuan China, where they had an unconquerable imperial hegemon that controlled the "entire" world, and held a fiat reserve currency.  That case saw widespread civil war, with a loss of about 20% of the population prior to the establishment of the next dynasty 25 years later.  The addition of rifles and nukes in the modern world makes things a bit different, though.  We don't yet know what effect these developments (taken together) will have on civil wars.  Will nations be willing to use nukes on their own soil against their own countrymen?  Who knows?

The Federal Reserve DOES owe allegiance to the US, specifically the politicians, but they certainly don't respect them, as they violate their laws left and right.  But they do supply them with funding, so they retain enough "pull" to operate above the law.  The coming of oversight from a non-corruptible, knowledgeable congressman (Ron Paul) is certain to upset this balance.  I don't know what the effect will be.  If conspiracy theorists are to believed, he will likely be assassinated at some point, an act which will likely be the trigger to a civil war.

But yes, they DO have gold.  Many have seen it, felt it, and picked it up.  Unlike the Treasury, they allow tours of their gold hoard, because the bars are too large to steal without being obvious.  Whether they could make off with it or not, well, we all know what the last official act of any government is.

TruthInSunshine's picture

Technically, isn't it true that the U.S. Treasury, via its ability to tax and raise revenue, and to issue treasuries to raise revenue, is the entity that funds the government?

tmosley's picture

That is the way it is supposed to work.  The Fed is supposed to control the money supply and keep inflation and deflation in check, but now their prime directive is to monetize the debt so we can keep that spending going.

Jerry Maguire's picture

Google Beardsley Ruml.  He gave a famous speech to the ABA c. 1946 that explained why taxes are not necessary to fund the government, but rather to maintain the credibility of the dollar.

It's a mess, and has been for a long time.

M.B. Drapier's picture

Certainly important, but isn't it still premature to predict major inflation instead of/before further deflation on this basis? Looking at Evidence E, it seems that Bernanke's managed the feat of reversing a decline in shadow + traditional bank liabilities once before, but his triumph was short-lived and so not very inflationary. (True, the decline in liabilities was still only small the first time it was stamped out, but the second derivative made it a wild ride.)

So the Fed can helicopter-drop bundles of dollar bills on top of the rubble-heap of bank liabilities, but it seems that will only cause the pile to go higher unless and until the internal dynamics of the pile produces another rockslide. That's an incomplete analogy, because this pile can fall upwards (through renewed optimism leading to increased lending) as well as downwards. But the example of last time round suggests that while a sustained releveraging is possibly coming next, it's by no means inevitable. Which suggests that the inflation/deflation question will be settled less by the macroeconomic dollar-bombing air war than by the continuing ground campaign to stave off every possible future deleveraging crisis - US commercial and residential RE, US municipal and state debt, China, the PIIGS, etc. etc. - until some unpredictable point when irrational exuberance takes off again. Another quarter? Over twenty years?

Speaking of which, would the comparable graph for Japan show any periods of increasing financial-sector liabilities in the post-bubble decades?

(Disclaimer: I don't know nuthin' about anything.)

Seer's picture

What, really, was taken care of?

We've had a bunch of balance sheets altered.  It's been no more than a repackaging of "risk."  Actually, it's been a repackaging of promised future work.  We're still continuing to lie to ourselves.  Anyone here really believe that our aging demographics and declincing energy sources can take care of this, without severe reductions in standards of living?  And declining standards of living will likely place more claims on future work in the form of health care services.

Poeple can perform these mental masterbations about inflation and deflation all they want, but as a civilization we're in decline.  And for what it's worth, decline seems to side with deflation more than inflation does, but that's just semantics...

gloomboomdoom's picture

Looks like Ben really has saved us from the Second American Depression. Bless his soul.( I don't bank at TBTF)

2011 shaping up to be a great year. We have a ways to go before the consumer can deleverage more meaningfully. Taking everything into account (reading all the charts posted up here on ZH, Market Watch, Market Ticker and IBD... We are going to grow out of this, no question about it. (after all, who is going to come collect on US federal debt?) lol!

The worst is behind, folks. We won't lose another 8 million jobs. Maybe 300 billion or so (municipals). but not enough for the DOOMSTERS to get theire way (Total Collapse & System Reset)

Gold is looking to be a great short right about now. Should plunge to around 1,100 or so by March 2011. It is definitly overheated, bull market is fading fast. Bonds are NOT a bubble like so many here believe. US Bonds > Gold.

Thanks for the work Tyler and ZH! (Can't wait to see what Denninger and Mish have to say about this, I value you their opinion on par-but not as good as Tyler)

honestann's picture

I dare you to short gold and silver now.  I dare you.

TruthInSunshine's picture

Bernanke is pretty much running out of time, IMO.

If really brash inflation DOES (I am assuming 'brash' hasn't happened yet) start to hit, isn't Bernanke guaranteeing his own resignation or ouster?

How long would a Congress in today's U.S. political climate allow voluminous and increasingly angry senior citizen 'sit/cane/wheelchair-ins' within offices and the halls of Congress if the big I really did to start to cost them a 10% to 20% (not selective, but averaged/smoothed out) real inflation haircut.

I do not think our system is designed to allow for a politician wishing to be re-elected to tolerate this.

You may say in response: "But so what, because there's nothing they can do stop inflation."

Answer: Paul Volcker.

History may not always repeat exactly, but it sure does rhyme strongly.

gloomboomdoom's picture

Don't worry about the Debt. 90% USA. 200% JAPAN. We will come back in a decade and talk about a US soverign debt crisis.

GET OUT OF GOLD! I have beaten the Markets every year and made most of my money in 2008. Gold is a giant bubble! Please do it folks, it is going to crash!

Peter Schiff "was right" but lost most of his money during the 2008 crash.

Seer's picture

Well, if you've done so well, then why the fuck are you here?  I mean, if had all the money that you'd like us to believe that you've made I think that I'd be off enjoying it.

Do people really believe that they're safe gloating about shit that they have really little control over?  Seems pretty stupid to me...

Seer's picture

Listen, I'm not fucking flagging you!  If you're running around flagging me (I see that everything that I've been posting in response to your posting seems to get flagged) then fuck you you childish fucking idiot!  If not, then the ignore...

chopper read's picture

i'm flagging him. he has shit for brains. 

honestann's picture


That statement sounds good on the surface, but you really must take a look at the numbers before you say this.  Do you have any idea how much interest the USSA would need to pay on its debt at this point if it raised interest rates to 20% or higher?  Assuming the tax scheme is passed that Obama and the republicrats have agreed to, the new debt becomes about $3,000,000,000,000 to $4,000,000,000,000 every year... and that doesn't even count the additional $4,000,000,000,000 or so for shortages in SocialSecurity/Medicare/Medicade and other "locked in" expenses.

So, what happens when they have $8T in additional debt every year that they finance at 20% interest?  Huh?  And since they now finance most government debt with shortish term bonds (to hold down their interest payments), what happens when $20,000,000,000,000 is financed at 20% interest rate?  That's $4,000,000,000,000 interest per year, which is far more than tax revenue... just for interest (no programs).

This would happen very fast in your scenario... because they actually make it happen on purpose in your scenario.  The fact is, the interest rate "death spiral" would happen almost instantly in your scenario.

This is not the early 1980s.  What you're saying should happen, but it won't happen.

In fact, the FederalReserve and government of the USSA have now locked themselves into a completely and inherently impossible situation.  The FederalReserve must (and therefore will) leave interest rates at [near] zero forever... where "forever" means "until the system completely collapses".

Anyone with half an eye open can see that the predator class has now officially given up.  How?  Well, the debt commission just offered a report with some extremely modest debt-reduction suggestions.  What happened in response?  The commission itself could not even accept the suggestions.  And Obama immediately decided to let everyone (at all incomes) retain the "Bush tax credits" for another two years (at which time they will be extended again).  In fact, every move the government makes increases the debt further and faster.  Which means, they have totally freaking given up.  They know the collapse is coming.  They know they can't stop it.  They know they can't even do much to delay the collapse any longer.  So they're just beefing up the TSA++ police state as quickly as possible while they pretend to give every interest group whatever they want to keep riots from breaking out today.

In other words, game over.  They know it.  Anyone awake should know it.  The entire system will collapse in 2011 and 2012... and they very much intend to make the world a rock solid police state during those two years.  Just watch.

chopper read's picture

that pretty much sums it up.  

Seer's picture

Yeah, this isn't the Volker era.

I've been telling people that I didn't expect any possibility of signficant interest rate increases until after all the big rash of ARM resest were over.  But now, seeing as unemployment is only getting worse, I don't think that rates can be increased even after the ARM resets.

Further, it is more than clear that there needs to be a signficant shift in the use of capital, one that's far more focused.  That ain't going to happen with inflation.

I DO believe that The Bernank and others DO want deflation, but the trick is in not allowing it to get out of control.  They just can't teletgraph it, lest it be defeated by other forces.  Deflation will keep the system going, inflation, as PM holders believe (and I support this belief) will kill it.  Those wishing to clean up the system promote deflation.  As we all know, the numbers that we're presented with are generally distortions.  The greater measure is what we actually see.

Fearless Rick's picture

+$14T. You are absolutely correct, sir. Thank you.

This statement:

"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!"

is pure rubbish. One quarter is not a trend.

honestann's picture

I suppose these analyses have utility.  But frankly, I believe they mostly serve to take many eyes off what matters, the fundamentals.  That is the inherent corruption of "fractional reserve banking" and fractional reserve practices of all kinds.

Think about it.  Assume you work long hard hours diligently for years.  You live a frugal life and save 30% of your income for "later" (to send kids to college, to give kids a starter home, to travel the world for two years, to start your own business, to enjoy retirement, whatever).  This pretty much describes Chinese workers... and prudent westerners.

Now, you need to decide whether to just bury the gold coins you earn to save them... or... lend some/much/all of your savings to others to hopefully help others develop viable endeavors and improve your own savings results... an overall beneficial and benevolent alternative, but with very real risk (if those who borrow your savings cannot repay the loans).

This makes you very careful.  You either decide to forego the potential benefits of being a creditor, or you are very careful to lend wisely.  Either you personally choose who to lend to and the terms of the loan (and require very reliable collateral), or you very carefully personally choose an agent that pools funds from many savers and lends to many borrowers, thereby diluting the impact of bad loans.

What you would never do is... make loans without very carefully considering risks.  Why?  Because you are risking 30% of your entire working life, and that's a huge.

Now consider the essence of fractional reserve banking.  Now you save your gold (or federal reserve notes) in some bank.  You don't give a damn which bank, because they are all insured by the FDIC, so you will definitely get your money back.  So you might as well just choose the bank paying the highest interest rates.

Now look at your bank.  Your bank doesn't lend your money to anyone, it just sits inside its computer as a pattern of bits.  However, due to fractional reserve banking, that bank can lend money to others.  What money?  Doubly-fictional money, of course.  Not only is the "money" you deposited fictional (fiat, fake, fraud, fiction, fantasy federal reserve notes... and debt notes to boot), but every penny your bank lends out is created out of thin air.  Your bank simply credits the account of the borrower.  POOF.

Now, isn't that special?  Your money is "safe", because the bank did not lend it out AND because the FDIC will cover any losses the bank suffers and make sure you get your savings back.  No problem, since the cabal who creates fiat credit money out of thin air will always "lend" the FDIC more money.

So your bank has every incentive to lend the money.  They know perfectly well the only risk they have is... that the obscene profits and salaries and bonuses they receive might end someday if most of the borrowers can't pay back the loans.  So, worst casesenario?  They retire early with $100,000,000 instead of normal with $250,000,000 or so (reduce a zero or so for smaller banks).

What if a bank only makes prudent loans?  Well, quite possibly they will not have any customers.  After all, why would someone borrow at a higher interest rate from a bank that requires 30% down payment when most banks offer a lower interest rate and 3% down payment?

How can any honest, ethical human justify a system in which the most utterly non-productive people on earth "earn" massive riches by creating fiat-debt-money out of thin air, at [near] zero cost, and entice poor, clueless fools to become life-long debt-slaves?  Answer: no honest or ethical humans can or does justify such a system.  They either don't understand how inherently corrupt the system is, or they consider it revolting.

The problem with this system does not end with the absurdity of making working people the slaves of utterly non-productive (actually destructive) people.  On the more general viewpoint, we have a system that inherently misdirects resources towards non-productive and/or riskier places and thereby weakens an entire society (and world).  It completely destroys the relationship between productivity and reward, and in fact inverts the relationship.  Over time, this makes everyone but the most thoughtful people become more corrupt and less productive, and convinces honest, productive folks to "give up".  Call this the "USSR phenomenon" if you wish, where the system literally ground to a halt for lack of any real incentive to be honest or productive.

Today, the "fractional reserve culture" has reached what must be a "peak" (let's hope so, at least).  The predator class who run this system have figured out endless ways to massively jigger the system to enrich themselves beyond absurdity, and totally dislocate the world economy.  For example, they have found ways to effectively "multiply the fractions".  They know a bank is allowed to create out of thin air 20x to 50x as much as they hold in deposits.  So, in effect (albeit slightly more obscurely), they realize they can loan 50x their assets to a collaborator, who deposits that into their "bank", who can then loan out 50x that amount via the same fractional reserve scam, and control 2500x the fiat wealth they collected from their slaves (depositors).  These schemes are endless when fiat is allowed, because nothing is real, and multiplication is free.

The only solution is get real, which also requires remove multiplication.  Eliminate all forms of fiat money.  Eliminate debt money.  Eliminate all fractional reserve practices.  Return to an honest system.  Which is?

People who produce trade the real physical goods they produce for other real physical goods.  For convenience, most people will choose to receive gold coins as the real, physical good they receive in exchange for the real, physical goods they own and trade.  People will then save or carefullyloan their assets to others on the basis of their history of personal honesty, ethics and reliability, plus the wiseness of their plans, plus their collateral.

Simple.  Honest.  Ethical.  And no need for a predator class.  Today, we can clearly see what happens when a scam as obscene as "fractional reserve practices" exist.  The predators know a good scam when they see one, so they take control of this system.  Predators have no ethics, so soon they learn how to buy (and become) politicians and bureaucrats.  Now they can totally control everyone, and everyone becomes enslaved in their police state.

One very rarely identified, but horrific problem is how high prices become in fractional reserve systems.  Before such systems are created, goods are cheap... for several reasons.  First, prices must be low, because sellers will find very few people who can afford their expensive products.  Second, prices are low, because the bulk of wealth is available to producers and not sucked away to fund the predators in the fractional reserve [financial] class.

For example, a house today would cost 8x to 12x less if no fractional reserve practices existed.  In effect, what tends to happen is this.  The price of a house (or other asset) that is affordable in an honest system, is replaced by the "required down payment" in the fractional reserve system.  In other words, a house that costs $50,000 cash in an honest system ends up costing $50,000 down payment and $500,000 total (including mortgage interest) in a fractional reserve system.  Today, this absurdity has been pushed even further, to the point that zero down payment is required... and presto --- one more life-long debt-slave is created.

Yes, fiat money must end.  But even more important, fractional reserve practices must end.  This is the most egregiously corrupt system imaginable, which is why the banksters have been pushing it so hard for hundreds of years.  They love being the most unproductive people on earth, at the same time they are the richest.  This must end.

End fiat.
End fake.
End fraud.
End fiction.
End fantasy.
End fractional reserve practices.

gloomboomdoom's picture

sorry had to junk you only because I disagree, respectfully.

Without Bernanke and his actions, we would be in the thick of a CRUSHING Deflationary Depression, as we speak.

I believe Ben deserved Time's Man of the Year. SO far, he has done absolutely stellar.

We can agree to disagree. Will see who is correct. I am more confident than ever that Bernanke "killed it off"... (take that for what it is worth)

honestann's picture

Okay, let me ask this.  If not for the actions of Greenspasm and Bernanke and the FederalReserve in creating bubbles and encouraging absurd types of mortgages and derivatives and other actions... would events have occurred that REQUIRED his actions to avoid a CRUSHING deflationary depression?

I hate to even ask "practical" questions like that, because it seems to accept the notion that "central planning" and "authoritarianism" and "elitism" are acceptable forms of organizing human interaction.

You also say "we will see who is correct".  No, we won't.  You seemed to conveniently miss the main trust of my message.  Whether Bernanke can engineer a "non fatal crash landing" of the economy rather than a "fatal crash landing" has nothing whatsoever to do with the question of whether some favored bunch of non-productive predators should be allowed to hold strings that manipulate the lives of all productive individuals.  The answer to that is NO, regardless of how well Bernanke happens to fly his helicopters.

gloomboomdoom's picture

fair enough. I don't disagree with what you say in the context of history. I am merely pointing to the context of the current global financial system.

Essentially the US' main threat are the BRIC nations. They are ultimatley the bond vigalites calling the shots. Include Japan in there, fine.

Japan has a debt to GDP of 200%. Who is the cental banker of Japan? Chicago school monetarist. Same as Bernanke a monetarist- not a keynesian. I studied Bernanke for extra credit. Milton Friedman, Paul Craig Roberts, Paul Volcker, Karl Brunner, etc...

I don't see any COLLAPSE/BIG EVENT/BREAK DOWN/DRAMA playing out. Very very very very slow grind. "Fall of Rome" scenario. When most of us are supposed to be collecting social security maybe.

The curreny system can last for at least another decade, pending no "BIG event".

I agree with the "Peak Oil" theory to the extent growth is not infinite. Credit cannot expand forever. I do not believe we have seen "peak credit" in terms of Soverign Debt. 

All else equal (no black swans bank failures etc), credit aggregates and the status quo can be maintained right on out through 2015...perhaps significantly longer...

good luck to all

Seer's picture

So, just because you don't SEE any black swans means that there aren't any lurking?  That's absurd logic!

Further, studying history means squat in the face of a totally new/fresh scenario, that of the global economy grinding to a halt.  Yes, you too might believe that it's slowing down, but to categorically state that it can NOT hit upon a big unforseen tipping point is wreckless prognostication, one overflowing with hubris.

All systems fail.  And big systems fail big.

As far as your prognostication that the status quo will hold through 2015, how is this to be measured?  A lack of massive riots?  TPTB are still in power (perhaps through a full proclaimation of a state of emergency)?

Remember: 1) tipping points don't happen at half-way points, they can happen much sooner; 2) economies of scale can also operate in reverse (most people just can't get their heads around this one; typically the same types of minds that said that housing prices could never go down).

gloomboomdoom's picture

so the Constitution is, in point of fact, a "Living & Breathing" document, after all.

Thankfully, Glenn Beck reality check didn't come in (2 junks for that)

I don't beat off to Hilary nor Keith Olbermann either...yikes

Seer's picture

I think that you misplaced your reponse...

Biggus Dickus Jr.'s picture

junking is so much fun!  It's a junk party!

Biggus Dickus Jr.'s picture

There is a myth that somehow we can live in a libertarian world full of sunshine and unicorns.  There will always be a bunch of favored non productive predators.  However in a meritocracy all of us have the chance to be a predator.  Look at lloyd Blankfein or whatever his name is.  he grew up poor didn't he?  The current head predator at Goldman?  Most of those goldman worker bees were hungry lower middle to middle class guys growing up. 

honestann's picture

What a putrid pile of slime you are.

Fearless Rick's picture

I had to junk you because I believe you honestly don't know what honeststan is talking about. Ergo, you are junked for being ignorant.


Biggus Dickus Jr.'s picture

I see your junk and raise.  Every gold standard has failed.  Sure every fiat standard has failed too, but every gold standard in history has failed.  If you read about the people who lived during a gold standard it did not help the little man.  The gold standard imposes horrendous costs.  We see all the disadvantages of fiat because we live in a fiat system.  Those people who lived during a gold standard thought, and wrote, differently.

honestann's picture

WRONG.  The gold standard did not fail, the politicians and international central gangster banksters murdered it.

The "gold standard" imposes ZERO costs.  Sure, I am certain the international central gangster banksters have written endless piles of lies in gold standard times to justify installing themselves as masters of the universe.  Those arguments are pure lies and deceptions.

Everyone who wants something for nothing will surely hate any form of "gold standard".  No kidding.  Just like every thief just hates high quality alarm systems and vaults.

However, every honest, ethical, productive, liberty-loving human benefits from a pure solid gold standard.

You are an apologist for the predator class... period.

fallst's picture

The Vampires are 40% of the economy?

This will go to 50% , then 60%, then what?

Oh, , "Privatize" All Government Services.

Parking meters, tolls, prisons, so far.

jimmyjames's picture

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.


Why would anyone use M3 to measure Money-

M3 also contains MZM and MZM has no effect on the increase or decrease of Money Supply-

Large time deposits-travellor checks-etc.

Money moving in or out of MMMF's in large amounts would effect direction of M3

BigDuke6's picture

i'm enjoying the banter 2 nite chaps.

i like the well crafted debate and the points are well made.


1) will inflation be exported around the world, such as in china just now perhaps?

or will it be like wiemar germany and be mostly in usa

2) i get the feel the weak politicos have given up - but system collapse and anarchy, i dont see that.

if u r still up i'd be interested to hear ur thoughts

my personal thoughts are bernanke intends and has always intended to inflate away the debt.

history shows us its that or default.

default = end of the dollar

chopper read's picture

because the private Federal Reserve Note has been the 'world reserve currency', with such commodities as oil priced in this fiat, it is possible that we could see hyper-inflation without other fiat currencies being entirely destroyed.  The number of Federal Reserve Notes in circulation (including digital entries) is unprecedented in human history.  A run on the bond market, for example, could be the event which creates the final push for The Fed to print even more before a complete flight out of all Federal Reserve Notes and into PMs and those other national fiats not so widely printed.

TruthInSunshine's picture

Remember that only 3% of U.S. fiat currency exists in physical form.

It may or may not be a small or very large point at a time when mark to fantasy valuations are tagged on every asset imaginable.

BigDuke6's picture

did yothanks i'll look at that.

did u know the real chopper read still goes about australia doing the odd show here and there with his wicked tales and thoughts on life?


he lives in tasmania but flies to areas to do one or two nights at small selected venues

then its back to the quiet life.

the guy is still living life his own way.


chopper read's picture

best-selling author who is "semi-bloody-illiterate".  gotta love it. 

London Banker's picture

The key to a shift from deflationary deleveraging to inflationary debasement is monetary velocity.  Money being created is not enough; money must be spent, and spent again and again to create inflationary pressures. 

Wages are still falling for the vast majority of non-C-level workers.  An increasing proportion of wage packets is going to the basics of fuel, food, healthcare and education.  Unemployment is high, and staying high for the foreseeable future.  Non-financial sector corporate profits are being squeezed by commodity spikes.  Taxes will rise because the deficit is otherwise uncontrollable, particularly as interest rates rise on government debt.  As a result, the risk of an inflationary expansion of economic activity sufficient to get velocity to the critical level for hyper-inflation is near zero. 

I'll believe in inflation when real wages for real workers show strong, sustained growth.

Seer's picture

The phrase "Pushing on a string" comes to mind :-)

Lucy in the minSky with Deflation's picture

Yep, never more appropriate phrase!!!

Seer's picture

Hey old chap, good to see you again!

And it's really as simple as you state.

I think that people are placing their emotions (financial positions/bets) and their literal interpretations too much into this.  The world is experiencing full blown contraction, how much is yet to be seen, but everyone has backed off of the throttle.  Hardly a case for inflationary scenario: yes, in patches there's inflation, but on the whole it's contraction.

Since energy = work, and since oil is the greatest energy source, one need only look to world crude oil production to test whether the global economy is expanding or contracting:

I'm hedged for just about any outcome, in which case I've got no clear reason to push a particular point.  I'm long physical realities and logic.

Lucy in the minSky with Deflation's picture

Ok! I always appreciate new points of view as your, but how we explain this?

If we read the last "Flow of Funds Accounts" ( released by FED, we can see at pag.111/125 the continuing loss of value for householders and the deleveraging in act especially in the financial sectors at pag.17/125 (line n.10).

In other words...deflation.

Seer's picture

Lucy, I wasn't arguing against deflation.  I'm trying to cut to the real chase, that of the relationship of physical resource extraction, esp energy, to growth, and that for all purposes the real issue is whether the world's economy is expanding or contracting: it is, after all, a global economy (set up and driven by the US).

Someone here recently posted the following, which I found rather interesting/telling:

Lucy in the minSky with Deflation's picture

If you are intersted on this issue, you can found many articles on internet (example: or but in general I prefer read about Nicholas Georgescu-Roegen's works which fall within the Thermoeconomics ( or better the Ecological Economics (

In my opinion, it's important reading also about the idea of degrowth (

Seer's picture

On the de-growth front, one thing that I haven't had much success in is getting someone to acknowledge the impact of reverse economies of scale.  It's my belief that reverse economies of scale will signficantly push up the tipping point.

I was, as far as I know, one of the first people to talk about peak oil exports.  I think that the first person I heard mention this angle was Jeffrey Brown: I had a brief exchange with him.

Why poeple don't get the energy = growth (potential) connection is beyond me.  You'd think that after the Bush administration that this would be pretty clear: they were desperate to hold control over Iraqi oil; that administration wasn't stocked with energy idiots.

Jerry Maguire's picture

This is an important point.  The government can hire people and pay them, and to some extent it is doing that, but at the price of increased deficits, which call other things into question.

Out in the private economy, nobody's paying anybody.  They could, but that's a wealth transfer reversal, even as private debt is maxed out, too.

The debt has to be reduced but within the current system that is impossible.  It can only go up.

That leaves only one thing.

hambone's picture

Bens made holding dollars, CD's, etc. nearly yield nothing attempting to force a flight into risk.

         But real estate (RRE and CRE) is the foundation of all...and credit expansion here is the key.  But up to 30% of homes are being bought for cash...the rest are generally being financed with 10%, 20%+ money down.  CRE likewise moving on cash and strong financing.  Lack of leverage expansion and outright credit contraction is BB's worst nightmare.  Likewise, personal credit growth down.  Only expansion is in student loans that will be a net drag on housing and the economy once these poor kids graduate into a "new normal" lower income job market with this education debt anchor immediately round their necks.  US real estate prices will continue falling on flat wages, rising interest expenses, increasing lender requirements, and oversupply for a while (people don't usually lever up on a depreciating asset).

Look at the economy, wages, and credit expansion - 

         The U.S. economy (GDP) grew by an average of 3.8% from 1946 to 1973 while real median household income surged 55% (or 1.6% a year).

         US has had slower GDP growth since 1973 (averaging 2.7%), and nearly stagnant living standards, with household incomes increasing by 10%, or only 0.3% annually.

         Ahhh, but look at credit growth from late 80's onward.  Stupefying what was made up with credit growth for what was not made in wage and GDP growth.

         BB's attempt to start inflation only seems capable of debasing the dollar (rising inputs) but incapable of creating jobs, raising wages (due to the globally competitive labor market), nor creating credit expansion.  Can't have proper inflation without wages increasing (at least somewhat) and/or credit expanding.  The faster BB debases dollar, the sicker the US economy becomes (higher unemployment, etc.) due to higher inputs not offset by higher wages or credit expansion.

         BB can and will print until someone or something stops him but I only see stagflation and BB needs outright inflation for one more go round on the bubble machine.

It's deflation and stagflation on the back of dollar devaluation but just don't look for it in the stock market - the direct recipient of printing (money has to go somewhere...there's an upside to every downside).  Fiat will go there and commodities to offset the ultimate expected loss of dollar buying power.  The US economy is set to have a stagflationary  depression but many S&P500 corporations are global (inexpensive workforce and global consumer), lean (replacing people w/ tech / automation), and cash flow producing providing services at a profit and in dollar terms their stocks could? rise nicely.  US consumer dependent / US staffed  business of the Russel, that's a whole other story and looks like the next great short.



zhandax's picture

I can't beleive that we have gone through 230 comments (OK, I didn't read the last hundred) and no one has tied this revelation to the coincidental spike in bond yields.  Cummon, guys, just because its the weekend, don't get lazy...