Shadow Bank Liabilities Plunge By $700 Billion In Q2, $2.1 Trillion Year To Date

Tyler Durden's picture

Continuing the analysis of today's Z.1 report, we next focus on recent developments in the shadow banking system. And it's a bloodbath: total shadow bank liabilities dropped by $680 billion in Q2, and a massive $2.1 trillion YTD. If one wonders why Ben Bernanke (yes, it's technically TurboTim) continues to print trillions and trillions of debt, and it is still doing nothing (yet) to stimulate the system, here is your answer.

As credit will only exist if i) it is needed and ii) there are cash paying assets (or at least the myth thereof) to support its existence, the latest plunge in the shadow banking system is merely the most recent confirmation that the deleveraging in America is only just beginning. In fact, from the peak of the credit bubble in Q2 2008, through Q2, total bank liabilities (shadow and traditional) have plunged by $2.6 trillion, from $32.1 trillion to $29.5 trillion. Yet it is the collapse in shadow banking that was responsible, with shadow liabilities falling by a stunning 20% from $21 trillion to $17 trillion in just over two years even as banks have benefitted from the transfer of cheap government cheap on their traditional lending books (think Fed intervention and QE, leading to record low interest rates).

What this means is very clear: the shadow banking system is collapsing, period. Yes, the rate of collapse is slower than in Q1, but the total plunge was still a whopping $4.2 trillion annualized for 2010. And the delta between Shadow Banking and Traditional liabilities has collapsed from $10.7 trillion at the peak in March 2008, down to under $4 trillion. This is a record amount of "money" being removed from the system, and explains why, for now at least, the velocity of money is nothing faster than a crawl.

That said, if and when this indicator plateaus and recommences climbing, will be a very "sensitive" moment for all deflationists and inflationists as it will mark the inflection point from credit contraction to renewed credit creation. Alternatively, the Fed can merely force credit into traditional bank liabilities, which banks can then proceed to use and purchase stocks and commodities, at a zero cost of debt. What that will do to select asset prices, we leave to our readers' imagination.

Chart 1: Total sub-components of the shadow banking system

Chart 2: Comparison of shadow banking and traditional commercial bank liabilities

Chart 3: Consolidated shadow and commercial bank liabilities and sequential change

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MiningJunkie's picture

Superb observation. Thanks.

The "Long Gold Short ES" trade is flat now. Thank God I am triple-long Gold.

"Never underestimate the replacement power of equities within an inflationary spiral."

"Ain't no fever like gold fever".



GoldSilverDoc's picture

Holy mother of Gold. 

Find all you can.  As soon as you can.  Not much time left.

Oh regional Indian's picture

Holy mommy of Silver is where it is at GSD. Gold, long hold will get old. Quickly.

On a related/unrelated note, any whiners looking to become warriors? 

American readers, may I suggest you visit

You might "make" or better yet, "make back" more money than you can imagine.

I wish I knew this when I was a US rezzi-dent!





THE 4th Quadrant's picture

20 years in a federal cage. Nice advice, Indian.

Oh regional Indian's picture

Takes Cajones to play 4th.

Easy to be a compliant complainer rather than an active resistor.

The darkness is closing in and you might be amongst the ones who will be soothsaid to sleep.

It takes courage to be awake in a world full of those walking with eyes wide shut.

No pain no gain? ;-)


THE 4th Quadrant's picture

The actions of your superhero will be ruled upon by a Federal Judge. Get it?

Incarceration will prevent his final blog posting. Which should be title: "Stupid is as stupid does".

You seem intelligent to me but you may want to work on your poor judgment. There are better ways. That poor misled man may have gotten back $17k but in doing so with his continued baiting and challenges will in my estimation loose in excess of 3 - 4 times his temporary gains via penalties, fines, and legal costs.

*edit* That is; if your superhero is infact not a shill for the author or character created to increase sales. *endedit*

When you step inside the casino you WILL obey the rules of the establishment. Enforcement is trivial and potent.

Oh regional Indian's picture

Every change cycle takes a few brave men/women along and crushes them under the wheels/in the mill etc. Inevitable. I'm sure Jay is aware of consequences.

Of course the establishment rules with an iron fist, question is will you rise up and face it or cower back?

The Tao Teh Ching is replete with advice on matters such as these.

The soft will overcome the hard etc. 

I feel Jay's work, if well informed and meticulously done, is non-violent resistance.

To paraphrase Jack London, "I'd rather be ashes than dust"...


Edit: Read your edit... if you read deeply enough into the man's writing, you can see he is no shill, but a broad-spectrum truth seeker. 

Orly's picture

The Dao is replete with vague bullshit worse than anything Michel de Nostradame ever came up with.

Most of the teachings can be summed up fairly easily by noting that, "Stupid is as stupid does."

Oh regional Indian's picture

Orly, seeing that you are such a deep philosophical genius (wiser even than Lao Tzu, wow!), writing with such grace, fluidity and panache, I'll indulge you.

Study a geological feature called the grand canyon.

It is in the United States.

It was made by water wearing down rocks.

The soft wins over the hard, ultimately, every time. And spectacularly.

Shame on the committee who gave your your PhD.

Honoured to have shared words with your august, erudite and graceful self nonetheless..




Kayman's picture

Uh... ORI

I love the philosophy, but....

comparing the human condition to geology is a chasm as wide as the uh...

Grand Canyon.

Dang, dern it I forgets my mantra, and I falls asleep.

Oh regional Indian's picture

Hey Kayman, as above so below you know.

As every pattern watcher knows, it's a fractal world.

There is a human condition because there is geology.

I hope you can make the further connects.


Fish Gone Bad's picture

The soft wins over the hard, ultimately, every time. And spectacularly.

Fantastic claims require fantastic proof.  Let's take a look at the moon, it is rather hard.  Let's take a look at space, it is rather soft.  So the vacuum of space will dissolve the moon?

Being clever with words does not make you a poet or an artist, but it can certainly make you a politician, or friendless.

JR's picture


Old Chinese proverb, “With time and patience, the mulberry leaf becomes satin.”

Old Japanese proverb, “Fall seven times, stand up eight.”

H. Jackson Brown quote, “In the confrontation between the stream and the rock, the stream always wins- not through strength but by perseverance.”

ORI: “The soft wins over the hard.”

Or, Winston Churchill, “If you are going through hell, keep going.”

Irish Virus's picture

Or, as the famous Roman philosopher put it, "Semper ubi sub ubi," which can be roughly translated as, "Always wear underwear."

Oh regional Indian's picture

FGB, wearing down required friction. Space is known to be resistanceless, as we currently understand resistance anyways.

And if a heavy dose of sarcasm delivered to someone who says the Tao Teh Ching can be paraphrased as "Stupid is...etc." loses me a friend, I feel lighter already! 

Also, clever? Don't like. Wise (ancient wise-dom), anytime. 



carlosschw's picture

QEII will be the first attempt by the US to replace dollar for dollar the "money" dissapearing from the system due to this deflationary deleveraging. It is unlikely that they will succeed. What can go wrong? If they don't create enough it will be unsuccessful. It is likely that in the current environment even if they match or slightly exceed, it will be usuccessful. If they overshoot or the world's creditors think they might, they will demand an inflation premium on US long paper. (Start of Greek-like spiral and probable check-mate). Most likely scenario, a crash in risk accompanied by a sharp sellof in precious metals as people try to turn whatever they can into dollar bills. Cash in the mattress will be the best investment. When metals crash, buy with both fists until they can get the choppers off the ground laden with cash.   

Getagrip's picture

Is it too late to pull my FRN's out of the Shadow Bank's or should I buy the pullback?? 

unununium's picture

Look at the outflow from money markets alone.  Er, wasn't that the cash on the sidelines?

AccreditedEYE's picture

deflation bitches.

Mitchman's picture

Am I reading this right?  Did the GSE's go through the ceiling?

Tyler Durden's picture

It was a reclassification from GSE liabilities to mortgage pools. The two should net out

Carl Marks's picture

Long term actuarial models suggest decoupling of equity and credit markets along a sideband equilibrium distribution which would bode well for commodities.

Terra-Firma's picture

in plain language, what did you just say? Thanks in advance.

Eternal Student's picture

To put it simply: Gold, B*tches!

That's a translation of what CM said. Translating the chart and report is something else; words don't do it justice. But it's similar to watching the Towers fall on 9/11.

RockyRacoon's picture

Sure.  Markets will act according to the laws of physics? 

That would be nice.  Should make charting a lot easier.

Orly's picture

I know, right?  Where do I sign up?

frankTHE COIN's picture

Don't get caught long. Something wicked, this way comes.

Miles Kendig's picture

The actions by authorities to date clearly demonstrate where the primary focus of the losers cum winners is to be found...

Yes We Can. But Lets Not.'s picture






traderjoe's picture

I don't know how anyone could look at these graphs and not realize two things: (1) our expansion, especially from 2001 to 2008 was nothing more then an unsustainable debt-fueled binge; and (2) there is one hell of a hangover coming. 

And I add, imho, that the end of the ponzi, fractional reserve fiat system is certain, planned. Don't know dates, and times, but my guess is soon. 

Eally Ucked's picture

Probably end is very close because american consumer decided to take on new loans like there is no tomorrow:

the grateful unemployed's picture

hey that's good. the consumer chickens coming home to roost. actually i was going to suggest this was the fallout from the obama healthcare plan, people forced out of the system putting that cancer operation on their credit card. 

RockyRacoon's picture

Whoa there big fella.  Please go back and read your linked article.

The dramatic increases [in consumer
loans] over the past few months have
been caused by a new reporting
requirement issued by the Financial
Accounting Standards Board.

Look at figure 3 for the real picture.  There is NO consumer credit increase!

Ned Zeppelin's picture

Of course not. There is still some belief out there as part of the money on the sidelines nonsense that consumers are ready, willing and able to resume borrowing at a frenetic rate if just a few things would change. Reality is the consumer is tapped out, leveraged up to the hilt, and it will take years of debt paydowns and income increases to achieve a renewed appetite for credit. What the economists call the savings rate increase (as if people are wisely stashing cash in their bank accounts) is really a measure of monies directed at debt pay-downs which are non-discretionary, and the cash available for doing anything else is going there. 

RockyRacoon's picture

You nailed it.  As I understand it, the "savings rate" is calculated as the simple difference between wages and "consumption" numbers.  As if whatever is left over is saved.  It is going to deleveraging as you point out.

One of my pet peeves is people reading headlines or bold text and making assumptions as to the theme or focal point of an article.  The linked article above was NOT READ and its headline was put forth as its thesis.  Many ZH articles are skimmed only and the reader goes on to the comments to get embroiled in debate which wanders off topic, sometimes into tin-foil hat fringes.   Oh, the humanity!

Kayman's picture


Perhaps Eally Ucked was referring to the transition point in the fall of 08. I don't know.

I, for one, cannot keep up with all the ZH material, since I have another life.

I think, most ZH'rs read and understand the substance of most things they comment to.

It is the things in the shadows that are the most perplexing.  Derivatives in the shadows, off balance sheet liabilities including guarantees and contractual commitments hang like a guillotine. 


RockyRacoon's picture

Well, no.  He just didn't read the article link he posted.  It is a short .pdf and quite clear.  Not any more complex than that.

Uncle Remus's picture

into tin-foil hat fringes

You say that like it's a bad thing...

RockyRacoon's picture

Oh, hell no.  Some of my best friends are of the tin-foil hat persuasion.  They are a lot of fun to debate.  I love 'em all.

frankTHE COIN's picture

I feel in my heart that the Fed knows it's inevitable that we are going much , much lower. They just want to slow the fall down as much as they can. They know they can't stop the inevitable, they are working against a crash.  To me, it looks like a crash is unavoidable.

StychoKiller's picture

E = mv^2, when a large mass under a large velocity undergoes a sudden de-acceleration, a LOT of mass gets converted to energy to balance the equation (BOOM!) 

trav7777's picture

uh, no it doesn't.  Mass is always conserved except in nuclear reactions.

Athena's picture

Actually, for non-relativistic kinetic energy, E = mv^2/2.

Eternal Student's picture

Indeed. This is the kind of information that I'm looking for.

As for who could look at this and downplay it? Oh, I suspect the Gonzo economists could.