Exclusive: In Q1 Bernanke Spurred Inflation By Successfully Offsetting The Ongoing Collapse Of The Shadow Banking System

Tyler Durden's picture

While the rest of the economic world was staring transfixed at the ongoing collapse in American home equity disclosed by the most recently Z.1, we were busy analyzing the as always far more important liability side of the ledger. After all, the quarterly Z.1 update provides the only undisputed update of the state of the Shadow Banking system, or more specifically, Shadow Liabilities. Not only that, but it also fully exposes the periodic changes in the "overt" Commercial Banking system's liabilities. The results as always hold some very dramatic surprises, although those who read and understood our recent expose on the surge in foreign-banks' cash courtesy of the Fed spike in reserves, may have a sense of what is coming. In a nutshell, and not very surprisingly, Shadow Liabilities dropped once again, and for the 12th consecutive quarter (or 3rd year in a row), although the $81 billion decline was the smallest since the $604.9 billion rise (the last one recorded) in Q1 2008. The drop since then is now a total of $5.1 trillion, and the total now stands at $15.8 trillion, a far cry from the all time high of $20.9 trillion just before the 3 years of consecutive declines. That the shadow system continues collapsing is no surprise: after all with the securitization machine dead, and the nationalized GSEs (with $6.6 trillion in liabilities) unable to relever there is little marginal debt that can be accrued to the shadow banking system. Yet oddly enough, despite drops across most other shadow liability verticals, there were some very strong performers, with Open Market Paper seeing the biggest surge since Q2 2007 at $74 billion. Though what was most surprising (or least, considering that it is Bernanke's only role now, as we have said since last July, to reflate the conventional banking system liabilities, and thus assets, through QE) is that traditional liabilities of Commercial Banks exploded by $424 billion in Q1, more than offsetting the drop in the shadow banking system, and leading to a $343 billion jump in the liabilities of the consolidated financial system. To all those wondering, here is your answer where the inflation in Q1 came from. Yet the biggest stunner in the data set is just where the biggest jump in commercial bank liabilities came from. Jumping from $19.4 billion to $232.4 billion over the quarter, accounting for two thirds of the Q1 "inflation" was... interbank liabilities due to foreign banks. And there you have that foreign bank smoking gun again...

First, we present consolidated shadow banking by segments since 1960. As noted above, we have just completed the 12th consecutive quarterly decline.

Spreading the actual sequential changes in the 6 shadow liability components:

But more importantly, here is the comparison of the shadow and traditional bank liabilities: even as the shadow debt is plunging, conventional liabilities have just hit an all time record of $13.2 trillion.

And the most important chart: consolidated financial liabilities (total credit money) and the sequential change. Note that in Q1, courtesy of QE2, we have just experienced a jump in this series of a whopping $343 billion. Absent this jump the economy would have plunged into a deflationary collapse... And Ben Bernanke knows this.

And the megabonus - as mentioned above - can be found on Line 23: Net Interbank Liabilities to Foreign banks of L.109 (page 71) of the just released Flow of Funds report. Go ahead, look - the link is here. In Q1 foreign banking offices in the US transferred $210 billion in cash to their host headquarters (ergo recording a liability on the US hosted entities' balance sheets). Keep in mind that this is data as of March 31, 2011. Were one to extend this to Q2, or whatever the most recent comparable H.8 report is, we would be willing to wager that this $210 billion number increased by at least another $300 billion as the bulk of the cash was transferred offshore, with the only asset remaining being"Reserves at the Federal Reserve" which increased by $430 billion in the quarter. But of course, those who read our previous expose on the topic of where the "money" from QE2 went will know this data well in advance.

What are the implications of this data: more or less the same as before. With the shadow banking system continuing to be in freefall primarily due to the ongoing crunch at the GSEs which are no longer relevant debt-creating entities, with Money Markets hounded by the administration, and every attempt made to transfer capital held there into equities and bonds, with ABS issuance dead, or at best comatose, there is no hope that the bulk of unregulated credit money can awake any time soon.

Which leaves just one option: the Federal Reserve... Whose ongoing boost in excess reserves (its Liability) for the pendancy of any monetary easing episode, results in an increase in Reserve assets at Commercial Banks (their asset), but more importantly, a boost in Commercial bank liabilities, be they US (which is not the case) or (foreign) which we have now proven twice is what is happening. Simply said, absent the ongoing transfer of credit money liabilities, so critical to keep the economy growing, from the Fed to private institutions, there will be no marginal growth in the consolidate financial system's liabilities. Which in turn means outright deflation.

And you can bet your bottom fiat piece of linen and cotton that Ben Bernanke knows this all too well.

With QE2 ending just as Q2 ends, we are convinced that the next Z.1 report, due out in early September, will show another massive jump in liabilities... And that's it. It's all downhill from there. Unless, of course, the Fed comes up with another Fed to Commercial Bank liability transfer program, which the Fed can call it whatever it wants. The point is: it is critical for it to materialize soon or else, the economy, without a marginal source of new debt, will plunge in the deflationary abyss that the $5.1 trillion plunge in shadow liabilities would have created had it not been for Ben Bernanke.

Our prediction, as it has been from January 2011, expect more of the same, as the only thing more nightmarish to Ben Bernanke than hyperinflation is hyperdeflation.

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sellstop's picture

How did I ever live without ZeroHedge?


goldfreak's picture

yeah but

Tyler couldn't you put out the main point of the article within the first few sentences?


TheTmfreak's picture

How did I ever live without ZeroHedge?

This is really simple to answer.

You weren't.

phungus_mungus's picture

I vote we all have a fat-finger moment around 4:15 or so this Friday... two or three extra "nauts" each outta do it.... see just how fast the plunge protection team can get their private jets back on the ground! 

Highrev's picture

How did I ever live without ZeroHedge?

Hear hear.

I am more equal than others's picture

... like living without the wheel.

Re-Discovery's picture

Like any good magician. 

You look 'here', I mess with crap there.

Quinvarius's picture

Sounds more like an upper decker.  You watch the bowl flush.  But, you can't figure out why the smell never goes away and the water stays brown.

Re-Discovery's picture

ahhh memories of college.  good times.

PicassoInActions's picture

So Big Ben is the savier right?

BigDuke6's picture

Fucking Ben Shalom and his buddies.


Orlando police say they violated a city ordinance restricting the feedings.

Create dodgy financial products and become a millionaire. Set up a soup kitchen and get arrested.

The US looks more and more like the mirror image of the USSR.

As long as we think its a good idea to spend trillions on wars that do nothing for us we will continue on the path to ruin. The real problems will start when we start to break up in the same way as the USSR did and for the same reason... an expensive industrial military complex that adds nothing to the standard and quality of life of its population

Reptil's picture

then add a war like Afghanistan and another Chernob.... oh wait

Vagabond's picture

Short term savior, long term disaster.

Crab Cake's picture

Oh joy, let us herald the coming of the deflationary abyss; (coinciding with drastic austerity) so that our banker overlords may buy up all things of value with their well timed exit and Fed provided fiatscos... or sdrs as the situation allows.

Just imagine, one beautiful world irrevocably indebted to one beautiful all world nation crushing bank. It's.... it just hits me right here, you know? So many really good people have worked on this for so long. I'd like to thank the academy, and the media, oh and the Congress and Senate... We couldn't have done it without you guys. Thank you every one!

My fellow Americans, it is time to tear some shit up. Resistance might very well be futile, but I for one will not go quietly into that good night. Burn it down, it is time for project Mayhem.

GeorgeHayduke's picture

A little Monkeywrenching is needed you say? I agree. We will see if the mainstream folks can catch onto the idea or if they instead will embrace their new complete peon status.

Fancy Bear's picture

Oh, how so much has changed in the last 10 years.

Let's burn this bitch down and start over.

TomGa's picture

"Was it over when the Germans bombed Pearl Harbor?"


"Stop it, he's on a roll."

swissbene's picture


will not find peace on the streets

until each gentleman armed with a piece

fuck police corporation-states

/tupac paraphrase


j0nx's picture

It was so obvious from the start that hyper inflation would never be allowed to happen and was almost comical that some people thought it would end that way. Silly rabbits. Tricks are for kids. Hyper inflation leads to people being able to pay off their debts overnight and own all of their assets after paying the bank back with worthless fiats. The banks will never allow that when they can hyper deflate and scoop up everything of value for pennies on the dollar (POD) instead. That and they drive up the price of commodities as well to make sure there is no extra slack floating around in the middle class able to buy up anything except for commodities, which the banks already own of course. It's the same old once a century or two scam that they pull and the masses suck for it every time. Only this time they are much more brazen than they used to be. Probably because the population is much more useless and retarded than ever before.

DoChenRollingBearing's picture

Tomorrow is the day everyone has been talking about (June 14, "do not play").

A great day to buy some gold, guns, rice...  Pay in cash!

Alcoholic Native American's picture

No shit, he basically took the budget off the books, you know, like the Pentagon.   QE1 never stopped, I wish you retards would stop giving these extensions other names QE2 QE3, wtf shut the fuck up, that too is propaganda, the FED is free floating the ENTIRE WORLD FUCKEN ECONOMY  you fucken reatards.

Quinvarius's picture

And it was going on for Bush's entire 2 terms as well.

Coke and Hookers's picture

Yep, the Fed is printing/devaluing money for the entire world now. It's economic warfare against the global serf class and the Fed is the arsenal used for the killing. When someone resists, he's branded a tyrant and a 'revolution' arranged. If that doesn't work, NATO is sent into action. After that, the serfs can happily accept freshly printed fiat via the IMF - like this:


Just wait until the EU countries integrate their 'national budgetary policies' and the ECB can really start up its printing press - then we'll see some heavy shit:


Reptil's picture

Awesome... so.... the solution for total FISCAL INCOMPETENCE and CORRUPT CRONYISM is .. more of the same but then on a bigger scale? Right!

Whatever Trichet has been smoking, I want it, I need it, I gots to have it! It's delusional to assume the dream can be saved by transferring power to exactly those that created the problem in the first place.

The problem of the EU is NOT the economy breaking down, it's the decade of corruption in the unholy marriage between power hungry politicians and banks that stop printing only when they run out of ink. Austerity will only WRECK the economy, thus making it impossible to grow out of the debt.

Here's a letter of the EU budget accountant office, who refused consequently for years to sign off on budgets with more holes and disappearing money than a swiss cheese (or Edammer, whatever you prefer) It's long and boring, but I summarise their conclusion: "Your budget sucks, we won't sign."



And now... finally, the politicians are doing an 180, and are on ramming course with the EU and ECB.

phew... that's a relief? they smarted up? like the Pakleds in Startrek TNG ep 143? http://images.wikia.com/memoryalpha/en/images/b/bf/Grebnedlog.jpg

Our representatives realised the danger of throwing money into an insolvent financial system, just in time?.......

NO just a year too late. That's our money you suckers spent, in 2010, by throwing it in artificially created black holes.


I think we have a bright future ahead of us, apart from CERN where they bump things that boink in the night, we have another interesting phenomenon to study, the black hole singularity that is Brussels. Maybe we can ask G. Papandreou to pilot an experimental craft in there, reportedly he's been there and came back... <insert curseword here>



Bay of Pigs's picture

No need to sugar coat this...

Go ahead, tell us how you really feel.

PY-129-20's picture

Just don't eat a banker. Their lifestyle doesn't sound healthy with all these drugs and stuff. But if you really want to cook a banker, you can try this recipe...

  • 1/3 cup Dijon mustard
  • 1/4 cup honey
  • 2 tablespoons mayonnaise
  • 1 teaspoon steak sauce
  • 4 skinless, boneless banker breast halves
  1. Preheat the grill for medium heat.
  2. In a shallow bowl, mix the mustard, honey, mayonnaise, and steak sauce. Set aside a small amount of the honey mustard sauce for basting, and dip the banker into the remaining sauce to coat.
  3. Lightly oil the grill grate. Grill banker over indirect heat for 18 to 20 minutes, turning occasionally, or until juices run clear. Baste occasionally with the reserved sauce during the last 10 minutes. Watch carefully to prevent burning!
OldPhart's picture

You forgot the best part.


First, shoot a banker in the head.  You don't want to eat the brain anyway. 

Then slowly slice large segments of flab grown during the bailout/bonus era.  (It's the most bitter part.)

SparkyvonBellagio's picture


Stop the give aways and get the USA boots off of foreign soil.


We'd probably have a Friggin Surplus then!

My God this is simple.

Phuuuuckin' idiots in Washington.


We have more than enough Coal and Natural Gas to fuel our energy needs for 200-300 years.  We don't need foreign oil. We have enough. If we need anything extra our NAFTA partners Canada and Mexico could most likely help out.

blindman's picture

Activists to Occupy Financial District’s Liberty Park Until Demands Are Met – Operation Empire State Rebellion Begins
June 13th, 2011

"beauty is the antidote to fear." gerald celente
The Financial Road to Serfdom:
How Bankers are using the Debt Crisis to Roll Back the Progressive Era
By Michael Hudson
June 13 2011 "Information Clearing House"
.."This is what today’s financial warfare is about. At issue is the financial sector’s relationship to the “real” economy. From the latter’s perspective the proper role of credit – that is, debt – is to fund productive capital investment and spending, because it is out of the economic surplus that debts are paid. This requires a financial regulatory system and tax system to maximize growth. But that is precisely the fiscal policy that today’s financial sector is fighting against. It demands preferential tax-deductibility for interest to encourage debt financing rather than equity. It has disabled truth-in-lending laws and regulations to keeping interest rates and fees in line with costs of production. And it blocks governments from having central banks to freely finance their own operations and provide economies with money. And to cap matters it now demands that democratic society yield to centralized authoritarian financial rule." ..
"But the tables are now turning, from Icelandic voters to the large crowds gathering in Syntagma Square and elsewhere throughout Greece to oppose the terms on which Prime Minister Papandreou has been negotiating an EU bailout loan for the government – to bail out German and French banks. Now that nations are not raising money for war but to subsidize reckless predatory bankers, Jean-Claude Trichet of the ECB recently suggested taking financial policy out of the hands of democracy.

But if a country is still not delivering, I think all would agree that the second stage has to be different. Would it go too far if we envisaged, at this second stage, giving euro area authorities a much deeper and authoritative say in the formation of the country’s economic policies if these go harmfully astray? A direct influence, well over and above the reinforced surveillance that is presently envisaged? …

At issue is sovereignty itself, when it comes to government responsibility for debts. And in this respect the war being waged against Greece by the European Central Bank (ECB) may best be seen as a dress rehearsal not only for the rest of Europe, but for what financial lobbyists would like to bring about in the United States."

Reptil's picture

"beauty is the antidote to fear." gerald celente


Michael Hudson's article also good. But perhaps a bit long for the iPad generation.

Raymond_K_Hessel's picture

Can anyone dumb this down for me?  Are we actually heading for deflation?

holdbuysell's picture

I think the point is that without intervention, yes, because the money supply (read: credit/debt) is shrinking. This is the classic definition of deflation: contracting money supply.

Raymond_K_Hessel's picture

I guess this is where I'm getting hung up.  If credit/debt is still shrinking, and all of the money the Fed is printing up is really going to fill this massive hole that was created during the 2008 crisis, is the printing really inflationary?  I mean, it seems like it is, don't get me wrong, but this article, and the one recently about how all of QE2 went to Europe really made me start to question how inflationary all of the QE has been so far.

i-dog's picture

I believe (gut feeling) that they are strangling liquidity and reducing the money supply to the productive economy -- just as they did to cause the Great Depression -- but, to be honest, I don't have a fucking clue what all those technical terms, virtual money-printings and convoluted transfers between entities (Fed, PDs, CBs, IBs, etc) mean to be able to confirm my belief. I just rely on Tyler and the commenters to [occasionally] make sense of it for me.

OldPhart's picture

I'm sorta dense too.  I would expect the printing to be inflationary also.  If banks are pushing paper to foreign banks, that puts the inflation temporarily at arms length.  The flood of dollars isn't here where we would see the water rising.

However it would still have an effect, I believe, on everywhere else as the prices worldwide jumped...similar to what we saw earlier in the year with commodities.  That spike would create rising prices here, not falling, right?

So are we to have price inflation with monetary deflation until the foreign banks send the cash back to purchase assets?

This is confusing as hell.

blindman's picture

the fed makes base money. not the multiplier.
the economy is supposed to created the bulk of the
credit money thru loans. it refuses as there are no incomes
to justify prices and entrepreneurial expectation. and there are
tonnes of legacy costs and transitional demolitions that
are staring us in the face. and taxes and misallocations
to satisfy the ignorati bent on ongoing stupidity, destruction,
miseducation and random acts of violence via war.

falak pema's picture

By making this base money the FED, lead financial instrument of world oligarchy play, encourages the multiplier and, more importantly, allows the PDs to direct it where they want it to go; for their own good (this term is a misnomer as its for decreasing their big, mega infested, ever simmering, putrefying mountain of toxic bad).

Meanwhile, we all bean count the disaster from outside ...with a time and knowledge lag that ZH tries to fill in remarkably... the hidden, festering shadow banking/obsessively mad derivatives playing shell called (WS + surrogate dark pools +subservient bourses around the world), hooked on USD/Euro/Yen fiats pumped with steroids.

Horror movie that even the most zany of Hollywood moguls would not have imagined in its wildest dreams (WS- Gordon Gekko is chicken shit in comparison) and would now love to produce for sure if he is still solvent after the collapse. I bet we can count on that, but here in ZH we're getting a preview of the film in near real time that main street will be seeing in two years time...

Conversely, I'm sure BB and his oligarchic elite have probably convinced themselves, in their head-in-ass or 'dugout in the bunker' approach, that they are doing "God's work" defending "western values" like Leonidas at Thermopylae. Alone, against all comers from the invading barbaric eastern horde who are waiting in the aisles of history in the making to take over the whole shooting match. 

macholatte's picture

Oh bartender!

I'll have one of whatever he's drinking. Uh, make that a double.

falak pema's picture

its called oligarchical vodka on the rocks...enjoy...before the caviar bar closes...If you knew how to sing in russian you would sing the soviet national anthem while breaking your glass over your shoulder...tovaaaarich!

ZackLo's picture

to sum it up fed prints dollars foreigners buy dollars and then the inflation comes through other countries printing They're local currencies to countereffect those dollars and the inflation comes through those said countries buying hard goods in their local currencies equating to rising prices here because it created a higher deman for those goods and we import 50-60% of goods from other countries and the shitstorm doesn't really start till all of those foreigners all try and get all their money at once creating a run on all of the liabilites accrued through fractional lendig drawing down the money supply? correct me if I'm wrong murray N rothbard pretty much sums up the evolution of fractal lending in this lecture...from wild cat banks in the 1800's to the great depression assets will never match liabilities and thats when the deflation comes in... It's only an hour and 30 minutes but definitly worth your time was a great economist and historian probably the greatest of the 20th century by far...



FreeNewEnergy's picture

Thanks for the link, ZackLo. Best hour and 38 minutes of listening in a long time. Rothbard had such an easy way of deciphering complex issues. Of course, completely a lost art in the hands of current economists and other worthless talking heads.

Highly recommended listening.

Reptil's picture

The question can be answered, if you know the following:

Is there going to be a settlement for that debt? If so, who will be on the recieving end? What will be exchanged to settle?

holdbuysell's picture

If oil goes to $200 in this otherwise deflationary environment, does that spur printing?

Alcoholic Native American's picture

It sure as hell doesn't spur growth.  But in the new normal DOW 30,000 is right around the corner, like the end to the wars.

blindman's picture

witness the end of exponential growth as a
distorted virtual image in a cracked mirror.
ie..money. stay calm, many minds will be blown
all around. someone needs to relax just to so
we all don't stop breathing at once.
" it's only money ", remember when people
used to actually believe that?