The Historic Inversion In Shadow Banking Is Now Complete

Tyler Durden's picture

Back in June, we wrote an article titled "On The Verge Of A Historic Inversion In Shadow Banking" in which we showed that for the first time since December 1995, the total "shadow liabilities" in the United States - the deposit-free funding instruments that serve as credit to those unregulated institutions that are financial banks in all but name (i.e., they perform maturity, credit and liquidity transformations) - were on the verge of being once more eclipsed by traditional bank funding liabilities. As of Thursday, this inversion is now a fact, with Shadow Bank liabilities representing less in notional than traditional liabilities.

In other words, in Q3 total shadow liabilities, using the Zoltan Poszar definition, and excluding hedge fund repo-funded, collateral-chain explicit leverage, declined to $14.8 trillion, a drop of $104 billion in the quarter. When one considers that this is a decline of $6.2 trillion since the all time peak of $21 trillion in Q1 2008, it becomes immediately obvious what the true source of deleveraging in the modern financial system is, and why the Fed continues to have no choice but to offset the shadow deleveraging by injecting new Flow via traditional pathways, i.e. engaging in virtually endless QE.

What is more important, the ongoing deleveraging in shadow banking, now in its 18th consecutive quarter, dwarfs any deleveraging that may have happened in the financial non-corporate sector, or even in the household sector (credit cards, net of the surge in student and car loans of course) and is the biggest flow drain in the fungible credit market system in which the only real source of new credit continues to be either the Fed (via QE following repo transformations courtesy of the custodial banks), or the Treasury of course,via direct government-guaranteed loans.

And while the chart that is the topic of this post is the following, which shows that the red line - traditional bank liabilities - have once again overtaken shadow...

... The most important chart of the modern monetary system, and hence the one which you will see nowhere else, continues to be the one below, showing that on a blended notional basis, total traditional and shadow liabilities have not budged at all in the last three years despite the massive injections from the Fed!

Translated, the Fed continues to fight a losing battle, in which it has no choice but to offset any ongoing deleveraging - be it through maturities, prepays, or counterparty failure, or just simple lack of demand for shadow funding conduits - in the shadow banking system.

And a notable tangent continues to be that between the peak of the credit bubble and the most recent data, there continues to be a $3.7 trillion credit hole on a consolidated financial credit basis, which is precisely the reason for the ongoing Economic Depression from a simple Austrian money supply perspective, why the Fed and the government are forced to misrepresent the true state of the economy (far worse than current economic "data" represent), and why should the Fed ever halt its monthly flow into markets which is now $85 billion each month, there will be a dramatic stock market crash... and Bernanke knows it.

However, the bigger problem as more and more deposit-based liabilities take place of deposit-free shadow equivalents, is that the systemic propensity for runaway inflation rises with every quarter in which Fed reserve conceived deposits -prone to spilling over into the broader market based on the irrationality of individual psychology -serve to offset delevering shadow conduits. As explained in July, shadow banking was nothing more than a massive inflation buffer whose historic build up allowed the Fed to inject trillions without this money leading to a collapse in the USD value, now that it is actively deleveraging. But with every "shadow dollar" that is taken out of the system, said buffer gets smaller and smaller...

Finally, those curious which components in the shadow banking system were responsible for the most recent deleveraging in Q3, the chart below sums it up:

And the shadow deleveraging on a consolidated quarterly basis in all its glory:

To summarize, the Q3 change in shadow liabilities:

  • GSE & Agency Mortgage Pools: ($16.2) billion
  • Asset Backed Securities issuers: (39.3) billion
  • Funding Corporations: ($49.5) billion
  • Repos: ($33) billion
  • Open Market Paper ($4.8) billion
  • Money Markets: +$39 billion: the only net addition in Q3

How was this drop offset? Simple - by a $177 billion increase in the liabilities of U.S.-Chartered Depository Institutions, which rose to a record $12.224 trillion in Q3, primarily due to a rise of $140 billion in Small time and Saving Deposits, a topic discussed previously here.

In summary: the shadow banking collapse continues, and is offset via the Fed "excess reserve" injection pathway entering M2 thanks to the ~4.5x M1 to M2 conversion pathway. Remember Fed's excess reserves are a component of M1: these then get "fractionally reserved" into M2 as per the multiplier shown below:

To summarize: all hope abandon ye who think the Fed will stop monetizing debt, and thus injecting flow, at some point in the next several years.

* * *

For more on the topic of Shadow Banking, we suggest the following reading material:

Source: Z.1

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PaperBear's picture

Is this the deflation that’s got the Keynesians s**ting themselves ?

knukles's picture

John Maynard (What me worry) Newman did not believe a liquidity trap should be able to exist.  Sorta like no queer Englishmen.
But, the good news is that this means alls been fixed insofar as Chuckie "the Fix" Schumer is concerned so best be times for more hearings (and attendant campaign contributions) to study what was wrong, how it got healed and what "we' should do next to save the people from Wall Street, big and small.... etc., etc., etc., etc


I mean if this shit keeps up there'll be no more Popeil Pocket Fishermen to hand out. 

kliguy38's picture

Poppeel Fisherman will become a highly desired comodity as peeps look for any solution for food shortages. They will serve as a solution to dumpster diving without leaving your apartment thereby negating the risk of having your dumpster goodies stolen from you if you had to physically go to the dumpster

Mr Lennon Hendrix's picture

If that was deflation it sure didn't feel like it.

MsCreant's picture

With all my thinking and planning, I have deluded myself that I might make it. I have no debt. I have some preps, some savings. I am noticing I have less and less to work with each month in terms of adding to the savings. It is just a matter of time...

FoeHammer's picture

Just remember- On a long enough timeline the survival rate for everyone drops to zero. Complete your daily and monthly tasks as best as you can, help others, keep learning, and happiness will follow.

Keep at it.

StychoKiller's picture

Time to get this ready for the NEXT idiocy coming out of D.C.:

   To Mr. Boehner:
Sorry, but I cannot in good conscience contribute any FRNs (Federal Reserve Notes) to the Republicon party, given the level of deceit and depravity exhibited by the Republicons (AND Decepticrats!) since I've become aware of their real intentions.  The Republicons and Decepticrats are merely two sides of the same coin!  This latest raising of the debt-ceiling is the icing on a very putrid cake.  A lot of folks have believed the MSM hoopla that spending cuts were actually made in return for the debt-ceiling rise, but we both know that cutting the RATE of future spending growth is not the same thing as actual cuts to the US Budget!

   I would recommend that you ask your friends that run JP Morgan, Goldman Sachs, Wells Fargo, CitiGroup, and Bank of America to fund your party, since they have received $BILLIONS (maybe even $Trillions!) in US Govt largess, authorized by both the Republicon and Decepticratic parties.  Surely they can afford the few $Billion(s) required to continue to re-elect their Congressional and Senatorial puppets.

   The destruction of the US, (nay, the World!) Economy has become a mathematical certainty, and the US Govt is too cowardly to admit it.  I will continue to prepare for The Great Implosion, which will arrive soon, possibly before the 2014 elections.

   Enjoy your acting career while it lasts -- sooner or later, the Kabuki theater known as Washington DC will be burnt to the ground.  I hope you have a good hiding place in mind, because you and the other 535 (or so) actors will have targets painted on their backs, pretty much around the World.

From "The Onion:"

WASHINGTON — Following Sunday’s pathetic excuse for an agreement on raising the government’s borrowing limit, Democrats and Republicans took time to celebrate the meager, ineffective deal, calling it “a testament to the not-so-great things that can happen in Washington when both parties barely come together and agree to not really accomplish anything.” “It took months of phone calls, negotiations, and meetings, but finally we created a pretty sad version of a framework that, we’re happy to say, none of us is really proud of, and that doesn’t really do much to solve our country’s fiscal problems at all,” said House Speaker John Boehner, who gave a cheerful thumbs up and added that the sorry piece of legislation was expected to pass both houses of Congress with a really pitiful display of bipartisan support. “Once again, Democrats and Republicans have demonstrated why our mangled, fractured, barely functioning democracy is the greatest in the world.”

If I couldn't laugh about what you've done (along with the others), I'd have to cry.

                               Deja-vu (all over again!)

q99x2's picture

If the Fishermen Pocketed Popeye. Arrest them.

Silver Bug's picture

Wow that is disgusting. How much longer can they keep this farce going? Years, months? Who knows, but it will come to an end.


"The five most common gold and silver investing mistakes. Free eBook."

vast-dom's picture


economics9698's picture

Last I checked the Fed was leveraged 52-1.

MsCreant's picture

I am ignorant here. How can you be leveraged if you can print?

vast-dom's picture

by soaking up toxic junk like MBS' etc. there was an excellent post here about a year and half? ago on Fed's shadow books, which consist of banks' derivatives plus Fed essentially using their own derivative-like un-accounting "products" in these unofficial holdings.  


Fed is proving more and more to be a colossal cluster-fuck of epic central ponzi planning proportions.

Panafrican Funktron Robot's picture

Right, bad bank indeed.

What is the true MTM value of the fed "assets"?  2 trillion?  1.5 trillion?  1 trillion?  .5 trillion?

None of the above?  Consider a scenario in which the Fed tried to unwind even a small portion (say, 10%) of their portfolio over the course of 12 months.  What kind of bid would they catch?  80% of "par value"?  60%?  40%?  Less?  For the sake of argument, lets say they catch a 65% bid on the open market (stupidly high estimate, but lets use it anyways).  If the value of the USD has at least part of it's value basis in the Fed balance sheet, and the Fed balance sheet is only worth 65% of what they say it is, that essentially means the USD is worth significantly less than what it is imagined to be.


TruthInSunshine's picture

This is what real time destruction of a once mighty economy looks like.

They'll continue to destroy real wealth via Bernanke's Virtuous-less Circle, while engaging in even more frequent and necessarily larger lies about (massively overstated as it is) GDP and other goal-posted economic metrics.

p.s.  Congratulations, Amerika!  Consumer debt hit a record 2.75 trillion dollars USD this week, with a massive % of that amount represented by mortgage, student loan and credit card debt (aka borrowing/indebting oneself to cover necessities), as the charlatans of fractional reserve alchemy will now continue to sink their meat hooks into Americans in much the same way, and along the same pattern, with a lag of about 30 years, that they've been doing to Brits since the time of the good ole' Nathan.

Consumer debt rises to $2.75 trillion
  • Boston Globe-Dec 7, 2012
WASHINGTON — Americans swiped their credit cards more often in October and borrowed more to attend school and buy cars. The increases drove US consumer debt to a record high. The Federal Reserve said Friday that consumers increased their borrowing by $14.2 ...
Confidence Fairy's Revenge On The Way

Without exception, throughout history, the masses do not understand there is a crisis until well after it has already begun, and they've already committed to many purchases, indebtedness and other forms of dis-saving, that they wouldn't have committed to had they known accurate information sooner.

Dr. Sandi's picture

People borrow exactly as much money as they can. If consumer debt is on the rise again, that means the qualification standards are back down in the honey bucket.

Rise up, monkeys. Refuse the golden banana of indenture.

catacl1sm's picture

I drove by an Ashley Furniture store yesterday with a new banner out front, "No Credit Needed! The Answer is Yes!". That says it all. Companies are engaging in sub-prime loans to make their quarters so the Executives can get their bonuses and leave the shareholders holding the bag.

Brokenarrow's picture

Ben bernanke and the fed pose a greater risk to this country than communism, terrorism, or an natural disaster. The tbtf banks and their employees have all benefited from this behavior. They have created a new age fuedilism. A mechanism to make money out of thin air for their sole benefit.

Why is it that the public does not recognize any of this?

btw: Business Insider? The new cnbc x3? If you disagree with their chief wall st minion, Weinenthal, they bolck you from posting their site. Read them for fun. You will see that all their readers are good boys and girls, nodding their heads in agreement on every wall st pumping article, especially anything about the banks or fed.


TruthInSunshine's picture

99% of Weaselthal's written slobbering is cut, copy & paste from someone else's intentional pollyannic drivel. He's hoping to earn his stripes as a Lieutenant of Sell-Sider Bullshit/Propaganda.

sumo's picture

Weaselthal is learning from one of the "best": Henry Blodget. Only Cramer would be "better".

Tirpitz's picture

"the ongoing deleveraging in shadow banking, now in its 18th consecutive quarter, dwarfs any deleveraging that may have happened in the financial non-corporate sector..."

Seems the Fed tries to make up for it by printing trillions over trillions. But what about all the shaky off-balance debts which keep growing, and the derivatives bubble waiting to burst? They'd keep me more up at night than the comparatively controlled delevering of the mere shadow banking assets.

Yen Cross's picture

Shadow banking. This shadow banking?

sitenine's picture

We know, but what can be done?  Bankers and their minions STILL have a warped perception that just because the 'money' exists that the goods/assets/services will just magically appear when needed.  I'm starting to get the feeling that just maybe a society, as a whole, cannot consume more than it produces into perpetuity (duh).  As long as sheople still believe that 'money' is an asset, I suppose that they might be complacent enough to let TPTB keep printing it.  Sad really, that we all just sit around and blame this or that.  The era of consumerism is drawing to an obvious, quick and possibly violent end.

I am Jobe's picture

Nice going. Now for the final chapter, bend over

Winston Churchill's picture

So Tyler,

when does the buffer no longer buff ,and unleash hyperinflation ?

Or is it a deflatioary collapse first, followed by hyperinflation ?

Hapa's picture

collapse first, then the tasty morsels of deflation and hyperinflation roll out in bits and bites...

valley chick's picture

To summarize: all hope abandon ye who think the Fed will stop monetizing debt, and thus injecting flow, at some point in the next several years.


This can go on for several years????

kalasend's picture

Chances are it can go on till you die and then your kids think you're just one crazy old man with all that gold coins, and then they sell'em all for cash.

AmCockerSpaniel's picture

The kids will not be bothered selling them. They will just spend them at face value. 

valley chick's picture

no somebody will get lucky.  ;-)

MsCreant's picture

That was a Valley Chick you were responding to. If the kids think she is a crazy old man with gold coins, a whole lot got weird between there and here.

Your point, however, is otherwise well taken.

Hapa's picture

they still have the people's pensions and savings to steal first.  there's trilions there, so the can kicking will go on for awhile longer, IMO.

Hapa's picture

they still have the people's pensions and savings to steal first.  there's trilions there, so the can kicking will go on for awhile longer, IMO.

glenlloyd's picture

Yes....and they're seriously eying the sequestered 401k money as we speak. There's a lot more speculation about them going after this pool now than there was even a year ago.

A friend suggested that they'll quietly shut the door on liquidating 401k plans and then they'll step in and sieze it all with promises of some sort of annuity...all wrapped up in some pathetic patriotic propaganda.

Get it out now before 1. they take away the ability to get out and 2. tax rates on the 'rich' go parabolic.

After they take 401k they'll certainly implement a VAT and when that fails to achieve any boost they'll start talking about a wealth tax. I still believe eventually when things get bad that they'll attempt to seize various means of food production, but that's probably some distance out....

catacl1sm's picture

I've even heard rumors of nationalizing all 401k's with a guaranteed 2% apr + inflation.

Panafrican Funktron Robot's picture

Given the upcoming further fucking-with of the inflation number, this should be pretty easy for them to pull off.  Goal-seak inflation to 1% annually, and you're basically "borrowing" at 3%.  That can keep a ponzi going for a long ass time.  

EuroInhabitant's picture

Mish calls the money multiplier a myth and rules out hyperinflation. It's the deflationary deleverage, stupid!

"So another trillion in printing is going to cause hyperinflation? When the total credit market is $50 trillion? Please be serious."

hamster wheel's picture

Diocletian had it easy...

GCT's picture

Thanks ZH for posting this as it helps me to understand the predicament we are in.  They have a long ways to kick the can.  Private debt is nothing more then most people buying food and fuel on credit.  They over extended themselves a long time ago and soon the bills will be coming due. 

They will print until they can't and alot of people will be rioting in the streets when they have no hands on skills and cannot sit at home and get a check in the mail.  The people are not saved at all and will drink upon the government teat until they can't.  Wait for food prices next year when all the higher prices for fuel and the drought this year catches up with us.  Going to be ugly for alot of people. 


Karlus's picture

My guess is that people will riot a bit, realize that there is no entity left to riot against and then turn to a different store of wealth.

The New "New" Normal will happen so quick it will blow you away.

People will want food so it may be that some state script might be favored in a crisis until something a bit more permanent takes over

zenon's picture

Sorry to spoil the party, but excess reserves do not count as M1 (and of course not M2). As to what constitutes these bloated saving deposits, I don't know. My suspicion is it's the government's/Fed's greater involvement in the economy somehow showing up as increased "private" savings, in the same way as GM reports elevated car sales.

Tyler Durden's picture

the various deposits that comprise the non-currency portion of M1 are simply the monetary plug equivalent of excess reserves with a unitary or even fractional velocity. Compare China deposits ($14 trn total) vs PBOC expansion.

buckethead's picture

I really want to pretend to understand this post. Clearly it's over my head, but it sounds like shadow banking (a concept I don't understand) is using QE manufatured currency to deleverage, mking themselves whole, while the remaining portion of the economy loses value. 

I am at a loss... seeking a less technical layout of this scenario.

junk away. :)

donsluck's picture

You are essentially correct, congratulations. Money is actually simple, and if a person of average intelligence doesn't understand what's going on, it's fraud. Simple, no?

skipjack's picture

Did you know that savings are considered to consist of, among other things, paying down debt, AND DEFAULTING ON DEBT... ?  Rising food and fuel, decreasing wages, high what's that mean ...

donsluck's picture

Think this through...when money can only be created by loaning it out, the only way it can actually enter the system is bankruptcy.

disabledvet's picture

that's why it says "novus ordo seclorum" on your dollar bill folks! in the 90's it was called "the New New Thing." it means "a new order for the Ages." too many MISconstrue it to mean some type of conspiracy...but in reality it's a...ahem..."simple"...replacement of the existing order "with a new one." hence "natural gas/solar/cloud computing." and yes i'm being totally serious when i say this. here's First Solar's response to the election of the President: that's a solid 30% signalling obviously continued Federal support for solar plays...but also a case study in how this will have a real world impact on the world's energy future. same with Oracle Corporation:

max2205's picture

Long generators and seed

bunnyswanson's picture

Better go long on Zionide capsules.  We may have to do a Jonestown exit.  I just watched a clip of several US citizens signing a petition to void the 1st Amendment.  The Kill - 30 seconds to Mars.