Everything You Know About Monetary Policy Is Wrong... And Why This Is Very Bad News For Europe

Tyler Durden's picture

For over a year we have been cautioning that even more than a "liquidity versus solvency" debate, the biggest unspoken factor (though slowly gaining prominence) not only for Europe, although manifesting itself there most prominently, but all across the developed world is the quality of the (deteriorating) asset base, thanks mostly due to the Fed's influence over corporate cash misallocation, and courtesy of the fact that the bulk of credit money creation in the past decade has come via the shadow banking system, broad asset collateral. Last year MF Global taught us that it is this shadow collateral which exists merely in ledger entries between fractional reserve entities (mostly broker dealers and hedge funds), that is now extremely scarce and has to be pledged and repledged in daisy chains of ultra rehypothecation, and which just like robosigning exists until it is actually called for delivery, when the entire collateral<->money linkage falls apart. It is this intersection of traditional monetary liabilities and new shadow aggregates that is completely undiscussed by conventional economic literature, and is why traditional monetary theory is completely helpless in coming up with credible and effective means of returning the world to a growth state. In other words, the Krugmans of the world are absolutely unable to explain how shadow banking should be accounted for when explaining something as simple as the leverage collapse, first in Europe, and then in the US (we have covered the collapse of shadow banking repeatedly, most recently here).

We are delighted that one entity - Aitken Advisors - has put together a presentation for all those who take their Econ 101 as cannon, and explained why everything most people know about traditional monetary policy is not only out of date but hopelessly wrong.  We urge everyone to read this simple yet exhaustive explanation cover to cover, because only by understanding what it says, do we have any chance of properly addressing the fundamental problems that are affecting the developed world. Sadly, as anyone who will read this presentation will also comprehend, the one immediate implication is that the European Monetary Union is finished in its current iteration. Whether this EMU unwind will also lead to the collapse of all modern financial institutions remains to be seen but is certain unless the proper underlying cause is addressed and fixed, instead of merely treating the symptom: excess leverage...with even more leverage which guarantees a terminal collapse of everything modern society has fought hard to achieve over the millennia.

Below we summarize the key thoughts in a bulleting even Nobel prize winning economist can understand:

  • In a financed financial system, collateral is money
  • Large banks and dealers use and reuse collateral pledged by nonbanks, which helps lubricate the global financial system
  • Post Lehman, there has been a significant decline in the source of collateral for the large dealers that specialise in intermediating pledgeable collateral
  • This decline in financial lubrication likely has an impact on the conduct of global monetary policy
  • ...but remember ‘subprime is contained?’ Why?
  • New classical, new Keynesian, DSGE models: the crisis was not supposed to happen. Indeed, it could not happen.
  • These models rule out extended economic disequilibria by assumption...
  • ....and pay little if any attention to the factors now commonly believed to have both precipitated the crisis and to have contributed to its longevity
  • Worse, recent regulations aimed at financial stability, focussing on building equity and liquidity buffers, reducing leverage, and segregation of margin will  also reduce financial lubrication between banks and nonbanks
  • -> The EMU is over
  • How did EMU run out of eligible collateral? Where did that Euro 14 trillion of eligible collateral go?
  • Answer: nowhere, and that is the problem
  • Bigger firewalls? OR Creating the right incentives for buy-and-hold credit and fixed income investors to return to peripheral European credits with confidence?
  • How about loosening collateral guidelines even further?
  • The looser the collateral guidelines, the bigger the haircut, the less the bang for the ECB’s buck.
  • New collateral guidelines = credit risk absorbed by national central banks
  • Balkanisation of collateral guidelines across EMU = credit nationalism


  • What should you do?
  • If you think, like me, EMU is slowly and occasionally rapidly disintegrating before your eyes then the question you should be asking yourself every day is this: ‘How do I reduce my gross exposure to European credits and European banks to zero?’
  • In the absence of adequate hedges, the answer is ‘never take the exposure in the first place’.

Alas, for most banks in Europe how fell for the siren song of the LTRO it is now too late.

In presentation format:


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unununium's picture

Greenspan told Tom Keene this week that equities are the collateral of the financial system, hence that's why they are propped up.  These guys don't even bother lying anymore.


Another tidbit near the end -- Greenspan confronted with his own statements of 40 years ago that gold stands as the protector of property rights.

NewWorldOrange's picture

It won't be long now before even the TRUTH won't be believed anymore, on the rare occasion it can be found at all. The point of no return.

MillionDollarBonus_'s picture

I have been shocked and appalled at some of the gross misstatements I have seen about America's economy in the comments sections. There are many inaccurate data providers out there including known liars like John Williams of "shadowstats" dot com. 
Non-governmental sources of data should simply be banned. It is absolutely irresponsible to publish figures that deviate from official government statistics. 

AlaricBalth's picture

Come on MBD. I've seen you do better than that. I need some comic relief after getting clobbered on EUR/USD today.

The Big Ching-aso's picture



Hey things are pretty bad here too.  NASA just announced they're gonna try and land a man on Detroit.   Hope he re-enters with his ass intact.

Colombian Gringo's picture

What is even more funny, as part of NASA's search for intelligent life, they are starting with Detroit.  Any bets on what they will find???

skank's picture

10 bucks on crunchy monkey

RafterManFMJ's picture

Hey things are pretty bad here too.  NASA just announced they're gonna try and land a man on Detroit.   Hope he re-enters with his ass intact.


Well, baby steps. You gotta crawl first. Thus NASA is planning a manned mission to Cleveland.

CAPE CANAVERAL, FL—Hailing the dawn of a new era in long-distance highway travel, NASA officials unveiled Monday the agency’s ambitious plans to put a man on a bus to Cleveland, OH by early 2013.

The complex and dangerous three-day mission, dubbed “Chariot I,” is expected to pass through six states and include two brief transfers in Atlanta and Louisville in both directions, at a reported total cost of $360 dollars plus taxes and fees.

“For almost as long as our nation has existed, man has gazed upon a map of the eastern United States and dreamed of traveling to Cleveland, the largest metropolitan area in Ohio,” NASA administrator Charles F. Bolden, Jr. said at a press conference announcing the agency’s first major initiative since the discontinuation of the space shuttle program. “Until now, the immense physical and psychological risks involved in any manned mission had put that dream sadly out of reach.”

“But not anymore,” he added. “Next year we are going to Cleveland and back.”

Enlarge ImagePotential candidates must be rigidly trained to withstand more than 19 hours of vacantly staring out a bus window at a barren field.

Standing next to a scale model of the vehicle that will make the difficult 1,039-mile voyage—a Motor Coach Industries 102DL3 equipped with extra legroom, power outlets, and a wheelchair lift—Bolden discussed the details of the mission, which is set to carry a payload that includes one change of clothes and a paperback copy of Erik Larson’s The Devil In The White City.

According to Bolden, barring any weather-related delays or the driver not showing up for some reason, the bus will depart from a station in Orlando on a north-northwesterly path following the curvature of Interstate 75 though the inhospitable central regions of Georgia, Tennessee, and Kentucky. Once it reaches Cincinnati, the bus will alter its attitude due east and slingshot around the city, merging onto I-71 for the final 130 mile stretch to Cleveland.

“En route to Ohio the vehicle will pass through some of the most unforgiving environments known to science,” said Bolden, alluding to, among other areas, the barren vacuum of Appalachia with nothing going on for hundreds of miles. “But the dangers aren’t limited to outside the bus—whoever makes the journey will have to contend with a host of toxic smells; loud, unrelenting noises at all hours of the day and night; and highly unstable passengers with whom a lack of eye contact alone does not necessarily guarantee one’s personal safety.”

“And those don’t even account for less predictable difficulties,” Bolden added. “The entire mission can suddenly be brought to a halt by the driver’s decision to pull over for a smoke.”

Candidates for the first Chariot mission have already begun rigorous training at NASA’s Kennedy Space Center in a true-to-life bus simulator capable of replicating the 52 hours of intense jostling they will experience in a threadbare, minimally reclinable seat. The preparation also addresses specific scenarios such as reading on the moving bus without throwing up, using the vehicle’s disgusting bathroom in stop-and-go traffic, and diffusing a conversation with a man who is clearly going to Cleveland to stalk his ex-wife.

Sources said that of the original 48 applicants, more than three quarters have washed out and returned to their respective branches of the military. Those who remain will spend months training for Chariot’s several scheduled EVAs, or extravehicular activities, during which they will leave the bus for a period of time to pick up food and hang out at a highway rest stop.

“The EVA presents the greatest risk for something to go wrong, whether it’s forgetting where the bus is parked or encountering a ridiculous line at the KFC/Taco Bell,” said mission control specialist John Lawton, who will be in constant contact with the passenger via a direct cell phone line. “You’ve got to be ready to improvise on a moment’s notice, grabbing a slice at Sbarro or, in a worst case scenario, a cup of soft-serve TCBY, and then waiting by the bus until people start to come back.”

“Because if that thing pulls away and you’re not on it, it might be days before NASA can mount a rescue,” he added.

Speculating on what future trips might entail, Lawton said that if the first mission is a success, a three-man Chariot II crew could return to Cleveland by bus later in the summer. He suggested that down the line, perhaps with Chariot V or VI, a NASA team may be able to reach Tucson, where research shows there is a possibility of hailing a cab to the Marriott Courtyard.

“Right now we are committed to putting a man on a bus to Cleveland and bringing him back safely, but ultimately Cleveland is just a stepping stone,” Lawton said. “If all goes as planned, we’ll have voyages to the outer reaches of Chicago, Minneapolis, and beyond.”

“And who knows?” he added. “Maybe it will even happen in my lifetime.



TheFourthStooge-ing's picture

I call bullshit. Everyone knows that you can't send a man all the way to Cleveland. It just can't be done.

And bring him back safely? Do you know how crazy that sounds? Why not send him to the friggin' moon and back? Sure, that's not possible either, but it sounds a lot more believable than Cleveland.

Manned voyage to Cleveland - coming soon to a NASA soundstage.


LongSoupLine's picture

It better be a union astronaut...

o2sd's picture

That's not MDB, its a clone.

carbonmutant's picture

Be careful MDB censorship is a two way street...

francis_sawyer's picture

 "Non-governmental sources of data should simply be banned. It is absolutely irresponsible to publish figures that deviate from official government statistics."



SilverIsKing's picture

"It is absolutely irresponsible to publish figures that deviate from official government statistics."

Please explain why this is if the figures are more accurate than government figures.  Thank you in advance.

MillionDollarBonus_'s picture

Here's what concerns me:
Many of the views of these data sources and the zerohedge readership are of a conspiratorial nature and an even larger number have a distinct right wing tone, which infringes on their objectivity. In my opinion Zerohedge needs to make people with softer views feel more welcome. Besides, most of the ideologies on this board such as anti-bankerism, libertarianism, anarcho-capitalism and off-the-gridism, have been repeatedly shown to be false by both the media and professors at top academic institutions.

Nobody For President's picture

Give him props for trying - it IS Friday and it was not a great day for many - I was OK on the hedge (TZA) but tubed on most everything else - but I thought he was just a little bit too much this time. 

At best, you can't really be sure he is jiving...

azzhatter's picture

MillionDollarBoner is always good for a laugh. He's a good robot. You can wipe Ben's jizz off your cheeks now

superbroker1's picture

because media and professors at top academic institutions have been right on, right?

wandstrasse's picture

...both the media and professors at top academic institutions...

too blatant... it is close to impossible that you really mean what you type.

jimmytorpedo's picture

I think i'm in love with MDB

Toes the line and makes me laugh 'til I cry

Perfect wife material

Keep 'em coming MDB!

NemoDeNovo's picture

Its not a "Conspiracy Theory".......its a Business Plan!  Just my 2c


Boxed Merlot's picture

Absolutely.  We need more Kumbayah, campfires and s'mores.

Beyond that, the more the laiety can learn about the dangers repos pose to our fragile financial state the better.  Evidently, the 2 main tri-party repo agents, Mellon and the morgue, would be foolish if they didn't take advantage of the info they have on their clients agreements.  After all, trading on that info only makes the market "solvent", right?

Gone are the days when financial institutions could honestly call themselves trusts.



Bartanist's picture

The issue that I have with your posts is that they come across to me as simply spouting dogma, but offer absolutely no proof. If I wanted that, I could ONLY read outlets that get 100% of their news from Reuters (like all western mainstream media outlets do).

Unfortunately, and I really mean unfortunately, the idea that conspiracy "theory" is a ridicuous fantasy has been replaced by the realization that more and more of conspiracy theory has become documented conspiracy fact. Examples being the nonexistent Gulf of Tonkin incident and the USS Liberty incident, weapons of mass destruction in Iraq, each factually documented to have been very different than those wanting war had claimed.

A little closer to home, lets look at the Bear, Lehman and Merrill collapses, the intentional abuse of the required laws for the filing of mortgages and the MF Global incident, all of which would deserve prosecutorial interest if the people involved were not inside the "conspiracy". Crimes were comitted and documented by several writers and no one was prosecuted.

There are two main trains of thought. The first is that the people who are involved were simply greedy and incompetent, got in over their heads in an attempt to salvage their own income, their company's survival and the wellbeing of the country and the world. If that's the case, then oh well they did bad things and should be prosecuted, just like the guy who stole food to feed his family. The second possibility is that it is all intentional, at least from some level, most likely the lower levels are just ignorant dupes, but it feeds into a much greater and patently evil plan (if good and evil are judged by the actions of someone on others). IMO, both are likely true and people such as yourself either grossly ignorant or or grossly lying to protect your piece of the conspiracy is a subject for amusement.

I am not sure it is possibly to "re-educate" people without first passing through the truth. 

Commander Cody's picture

MDB: Are you dating Charlie Munger?

lizzy36's picture

Here Here.

Finally someone speaks some sense.

I also thinking that selling stocks should be banned because clearly that is also absolutely irresponsible behav

Central planning:we are doing it for your own good.

Bansters-in-my- feces's picture


I see you had some paid monkeys hit the up arrow for bananas.


TWSceptic's picture

lol you have to read his comments as sarcasm

Yossarian's picture

MillionDollarBonus: Kirshner in Argentina agrees and likely so does Krugman as he uses the "official" Argentine inflation figures to deflate nominal GDP while making the case for the brilliance of the Argentine economy.  You know, not the "bad" inflation figures put out using real data: http://www.washingtonpost.com/world/americas/a-quiet-battle-over-argentinas-inflation-rate/2011/10/29/gIQAEiUjYM_story.html  

Chuck Walla's picture

Is MDB really David Axelrod or Larry Summers?  Or does he just keep forgetting to end his stuff with /sarc?

MeelionDollerBogus's picture

He IS /sarc

That's the joke

Given the opinions & tone I suggest a comparison to Joe Wiesenthal or directly to Paul Krugman.

None of us really know :D

collon88's picture

I see your shtick still continues to confound many ZH readers.  Keep up the good work, I love sarcasm, especially when nerds don't get it. That means you Sheldon Cooper.

MeelionDollerBogus's picture

John Williams? He uses the same input stats as the government.

He just doesn't use the modern equations with fraud components. He uses the honest equations used by the government in past generations.


TheFourthStooge-ing's picture

NewWorldOrange said:

It won't be long now before even the TRUTH won't be believed anymore, on the rare occasion it can be found at all. The point of no return.

We took the wrong step years ago.



battle axe's picture

If you are a European bank you are fucked. Lets all pray that the US Banks have really decoupled from that nuke waiting to go off across the Atlantic. But once again I am thinking Bank Of America and CITICORP will royally screw this up, and blow up. They always seem to shoot themselves in the head.  

Chuck Walla's picture

Problem is that the US banks use really high powered ammo to shoot themselves with and we are all standing right behind them.

NewWorldOrange's picture

Thanks FourthStooging. Incredible song with amazing artwork.

Stay Gold!

NewWorldOrange's picture

"‘How do I reduce my gross exposure to European credits and European banks to zero?’"

Short the Euro, long gold. Not just a hedge, but a potential (likely) fortune in the making. Opportunity of a lifetime.

BlandJoe24's picture

Unless gold first drops precipitously becuase people have to cash it in to meet margin calls...

WonderDawg's picture

That's kind of how I'm playing it. I expect most asset classes to tank when the margin calls get rolling. That'll be the time to load up.

q99x2's picture

Now you're talkin. That's economics.

Scary, "The overall effect may have been a $4-5 trillion reduction in

high-grade collateral circulating in the US financial system"

carbonmutant's picture

Norway’s sovereign wealth fund (which knows more about the issues in the EU than we do) is cutting it's exposure to European investments for a reason...

The Alarmist's picture

To be frank, the Norwegians are lousy investors. The oil money has made them fat, dumb, and too lazy to challenge the MPT bullshit their advisors sell them.

carbonmutant's picture

Well they were smart enough to vote against Greece’s debt swap this year because they disagreed with being subordinated to the European Central Bank.


boiltherich's picture

Cmutant:  That would be a neat trick since Norway is neither a member of the Eurozone nor even of the EU.  Just like you if you owned Irish or other sov debt you could dump it as well, and I suppose that could be called voting with your feet, but they have nothing otherwise to say about the EU/EZ/ESM.

boiltherich's picture

How on Earth could my post have gotten two red arrows for stating plain facts?  Norway is not in EU.  Give that a red arrow retards. 

carbonmutant's picture

Probably because neither Bloomberg nor I posted anything about Norway being in the EU. Try reading the article... again.

Comay Mierda's picture

How do I reduce my gross exposure to European credits and European banks to zero?

cash under mattress and gold in the backyard. and an AK47