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Fed's John Williams Opens Mouth, Proves He Has No Clue About Modern Money Creation

Tyler Durden's picture


There is a saying that it is better to remain silent and be thought a fool than to speak out and remove all doubt. Today, the San Fran Fed's John Williams, and by proxy the Federal Reserve in general, spoke out, and once again removed all doubt that they have no idea how modern money and inflation interact. In a speech titled, appropriately enough, "Monetary Policy, Money, and Inflation", essentially made the case that this time is different and that no matter how much printing the Fed engages in, there will be no inflation. To wit: "In a world where the Fed pays interest on bank reserves, traditional theories that tell of a mechanical link between reserves, money supply, and, ultimately, inflation are no longer valid. Over the past four years, the Federal Reserve has more than tripled the monetary base, a key determinant of money supply. Some commentators have sounded an alarm that this massive expansion of the monetary base will inexorably lead to high inflation, à la Friedman.Despite these dire predictions, inflation in the United States has been the dog that didn’t bark." He then proceeds to add some pretty (if completely irrelevant) charts of the money multipliers which as we all know have plummeted and concludes by saying "Recent developments make a compelling case that traditional textbook views of the connections between monetary policy, money, and inflation are outdated and need to be revised." And actually, he is correct: the way most people approach monetary policy is 100% wrong. The problem is that the Fed is the biggest culprit, and while others merely conceive of gibberish in the form of three letter economic theories, which usually has the words Modern, or Revised (and why note Super or Turbo), to make them sound more credible, they ultimately harm nobody. The Fed's power to impair, however, is endless, and as such it bears analyzing just how and why the Fed is absolutely wrong.

First, here is our rule of thumb to determine if someone who talks about money, inflation or monetary policy has even a vague clue of what they are talking about: do a text search for the words: repo, shadow banking, collateral, collateral-chains, rehypothecation, or deposit-free money creation. If not one of those terms appears anywhere, feel free to toss the reading material right into the trash.

The reason for this is that as we will not tire of explaining, conventional monetary theory, as it existed 50, 40 or even 30 years ago changed totally and irrevocably with the advent of shadow banking: financial bank transformation (Maturity, Credit and Liquidity) intermediaries unfunded by deposits, and whose liabilities exist in state of Schrodingerian "moneyness" limbo, as unlike banks they have no [insert term here]-to-deposit ratios of any kinds. As such the liabilities backing the assets shadow banks create out of thin air has the same practical reality as a wave function: the money is there, as long as it is not observed. Any process of observation of what is really beneath the surface leads to an eventual collapse of the Shadow Banking wave function, and with it the credit money that it sustains. As frequent readers will know this is a sizable amount: as of last chick it was just under $15 trillion or just over the total conventional liabilities in circulation!

We have discussed the topic of Shadow Banking, and its importance extensively before, most recently here.

What is amusing and at the same time tragic is that as the chart above shows, the reason why virtually nobody talks about shadow banking, and not one coherent monetary theory exists to account for its is simple: shadow banking as a relevant phenomenon only appeared in the 1980s and then exploded, hitting a peak of over $20 trillion in liabilities. As such when the bulk of "modern" monetary theories were conceived it was not a factor. Now... it is, and accounts for more than half of the credit money in circulation. 

In other words, an appropriate analogy to what happens when virtually anyone defines or tries to explain monetary policy, having been taught using conventional theory, is the same as attempting to understand how an iPod works using the instruction manual for a 19th century record player.

And still they do.

Here is what is happening explained as simply as possible, and paraphrasing what we said last week:

  • The reason inflation has not exploded yet, dear Mr. Williams, is that even as the Fed is pumping trillions of reserves into conventional financial intermediaries, shadow banking is continuing to implode at a pace of nearly $100 billion per quarter.
  • The continued implosion of shadow banking liabilities is why the Fed will have no choice but to continue stepping in and providing reserves which in turn merely plug a deleveraging hole created as more and more market participants realize the only players left in "capital markets" are central banks, creating a feedback loop, whereby more CB intervention leads to more private capital outflows and so on.
  • The disappearance of shadow liabilities which are deposit-free, and thus not a cause of inflationary concern, means their replacement will naturally have to come courtesy of deposit-backed conventional money replacements.
  • As deposits soar from their current level of $10 trillion to $20 trillion and so on, as more and more money is printed by the Fed, the threat of hyperinflation becomes all too real, as all shadow banking has done for the past 30 years is merely to buffer the inflationary threat! (a bullet point that none of our endgame: deflation friends seem to grasp)
  • Finally, the offset to any actual deflation in the real world, even by the Fed's broken comprehension of modern money creation and monetary pathways is one: CTRL-P. And believe us: puhing CTRL-P takes no effort at all. In fact, the more the 'deflation' out there, the more the CTRL-P pressing. Until one day, hyperinflation, which has always been a phenomenon of terminal loss of confidence in a currency, is the inevitable answer.

And there you have it: this is what Mr. Williams should have discussed when he explained how this time monetary theory is different. He didn't, not because he doesn't get it: we are confident he does, but because he understands that if people begin discussing the real swan in the box, then a light-bulb may go off above the head of some more reputable economist somewhere, and at that point the Fed's little game will be exposed by even the "respected"establishment.

Which is why it won't happen.

Luckily, for those who wish to learn more not less, serendipity will have it that none of than that sole expert on how true modern money creation works, the IMF's Manmohan Singh, has released a key article on VOX just today, which is incalculably more relevant and valuable than any garbage spewed forth by the Fed. The article, is titled, appropriately enough: "The (other) deleveraging: What economists need to know about the modern money creation process." It doesn't explain everything, but at least it attempts to bridge those aspect of shadow money creation that few if anyone dares to speak about in formal circles and among serious people with Ph.Ds, and even Nobel prizes in Economics and Peace.


Must read:

The (other) deleveraging: What economists need to know about the modern money creation process

Manmohan Singh, Peter Stella, 2 Jul 2012

The world of credit creation has shifted over recent years. This column argues this shift is more profound than is commonly understood. It describes the private credit creation process, explains how the ‘money multiplier’ depends upon inter-bank trust, and discusses the implications for monetary policy.

One of the financial system’s chief roles is to provide credit for worthy investments. Some very deep changes are happening to this system – changes that surprisingly few people are aware of. This column presents a quick sketch of the modern credit creation and then discusses the deep changes are that are affecting it – what we call the ‘other deleveraging’.

Modern credit creation without central bank reserves

In the simple textbook view, savers deposit their money with banks and banks make loans to investors (Mankiw 2010). The textbook view, however, is no longer a sufficient description of the credit creation process. A great deal of credit is created through so-called ‘collateral chains’.

We start from two principles: credit creation is money creation, and short-term credit is generally extended by private agents against collateral. Money creation and collateral are thus joined at the hip, so to speak. In the traditional money creation process, collateral consists of central bank reserves; in the modern private money creation process, collateral is in the eye of the beholder. Here is an example.

A Hong Kong hedge fund may get financing from UBS secured by collateral pledged to the UBS bank’s UK affiliate – say, Indonesian bonds. Naturally, there will be a haircut on the pledged collateral (i.e. each borrower, the hedge fund in this example, will have to pledge more than $1 of collateral for each $1 of credit).

These bonds are ‘pledged collateral’ as far as UBS is concerned and under modern legal practices, they can be ‘re-used’. This is the part that may strike non-specialists as novel; collateral that backs one loan can in turn be used as collateral against further loans, so the same underlying asset ends up as securing loans worth multiples of its value. Of course the re-pledging cannot go on forever as haircuts progressively reduce the credit-raising potential of the underlying asset, but ultimately, several lenders are counting on the underlying assets as backup in case things go wrong.

To take an example of re-pledging, there may be demand for the Indonesia bonds from a pension fund in Chile. As since these credit-for-collateral deals are intermediated by the large global banks, the demand and supply can meet only if UBS trusts the Chilean pension fund’s global bank, say Santander as a reliable counterparty till the tenor of the onward pledge.

Plainly this re-use of pledged collateral creates credit in a way that is analogous to the traditional money-creation process, i.e. the lending-deposit-relending process based on central bank reserves. Specifically in this analogy, the Indonesian bonds are like high-powered money, the haircut is like the reserve ratio, and the number of re-pledgings (the ‘length’ of the collateral chain) is like the money multiplier.

To get an idea on magnitudes, at the end of 2007 the world’s large banks received about $10 trillion in pledged collateral; since this is pledged for credit, the volume of pledged assets is a good measure of the private credit creation. For the same period, the primary source collateral (from hedge funds and custodians on behalf of their clients) that was intermediated by the same banks was about $3.4 trillion. So the ratio (or re-use rate of collateral) was around 3 times as of end-2007. For comparison to the $10 trillion figure, the US M2 was about $7 trillion in 2007, so this credit-creation-via-collateral-chains is a major source of credit in today’s financial system. Figure 1 shows the amounts for big banks in the US and Europe.

Figure 1. Pledged collateral that can be re-used with large European and US banks


An example

As this process is unfamiliar to many non-specialists, consider another example. Figure 2 illustrates how a piece of collateral (e.g., US Treasury bond) may be used by a hedge fund to get financing from a prime-broker (say, Goldman Sachs). The same collateral may be used by Goldman to pay Credit Suisse on an OTC derivative position where Goldman was ‘out-of-the-money’ to Credit Suisse. And then Credit Suisse may finally pass the US Treasury bond to a money market fund that will hold it for a short tenor (or till maturity). Notice that the same Treasury bond has been used twice three times as collateral for extensions of credit – from the original hedge-fund owner to the money market fund.

Figure 2. An example of a collateral chain



The other deleveraging

Comparing private and traditional money creation, a critical difference is that private credit creation turns on banks’ trust of each other. New credit gets created only if the onward pledging occurs and this depends, for example, on UBS’s trust in Santander as a counterparty in the first example. Due to heightened counterparty risk, onward pledging may not occur and the collateral thus remains idle in the sense that it creates no extra credit.

To put it differently, a key difference between the trade and pledge-collateral credit creation processes is the role of governments. The traditional textbook money multiplier is based on insured deposits and thus largely a creature of government regulation and the central bank’s lender of last resort assurance. The collateral multiplier is very much a creature of the market.1 The multiplier – which essentially measures how efficient illiquid assets can be converted into liquid collateral and thus credit – varies with the extent to which markets views a given asset classes as ‘liquid’ in normal and stressed markets.

This brings us to the key policy point. The ‘other’ deleveraging. In this new private-money-creation process, there are three distinct ways of reducing credit.

  •     Increase the haircut (like raising the reserve requirement);
  •     Reduce the supply of assets that can be used for pledging; and
  •     Reduce the re-pledging of pledged collateral (shortening the collateral chain).

Most recent research has focused on the first. Balance sheet shrinkage due to ‘price declines’ (i.e., increased haircuts) has been studied extensively – including the recent April 2012 Global Financial Stability Report of the IMF and the European Banking Association recapitalisation study (2011).

In this column we raise the flag on the second and (more importantly) the third way. When market tensions rise – especially when the health of banks comes under a shadow – holders of pledged collateral may not want to onward pledge to other banks.

  • With fewer trusted counterparties in the market owing to elevated counterparty risk, this leads to stranded liquidity pools, incomplete markets, idle collateral and shorter collateral chains, missed trades and deleveraging.
  • In practical terms, the ratio of pledged-collateral (which is a measure of the credit thus created) to underlying assets falls as this onward pledging, or interconnectedness, of the banking system shrinks.

This ratio decreased from about 3 to about 2.4 as of end 2010 – largely due to heightened counterparty risk within the financial system in the present environment. These figures are not rebounding as per end 2011 financial statements of banks – see Table 1 and Figure 1. Indeed, anecdotal evidence suggests even more collateral constraints recently.

Table 1. Sources of pledged collateral, re-use and overall collateral 


Source: Velocity of Pledged Collateral – update, Singh (2011)

Consequences of the other deleveraging: The cost of credit

Reduced market interconnectedness, or the trend toward ‘fortress’ balance sheets, may be viewed positively from a financial stability perspective if one simply views each institution in isolation. However, the vulnerabilities that have resulted from the weakened fabric of the market may yet to have become fully evident. Since the end of 2007, the loss in collateral flow is estimated at $4-$5 trillion, stemming from both shorter collateral chains and increased ‘idle’ collateral due to institutional ring-fencing; the knock-on impact is higher credit costs for the economy.

Relative to mid-2007, the primary indices that measure aggregate borrowing cost (e.g., BBB index) are well over 2.5 times in the US and 4 times in the Eurozone. This is after adjusting for the central bank rate cuts, which have lowered the total cost of borrowing for similar corporates (e.g., in the US, from about 6% in 2006 to about 4% at present). Figure 3 shows that for the past three decades, the cost of borrowing for financials has been below that for non-financials; however this has changed post-Lehman. Since much of the real economy resorts to banks to borrow (aside from the large industrials), the higher borrowing cost for banks is then passed on the real economy.

Figure 3. Post-Lehman, borrowing cost for financials are higher than non-financials 


Source: Barclays Intermediate, investment grade spreads (1983-2012)

Collateral and monetary policy

Since cross-border funding is important for large banks, the state of the global pledged collateral market may need to be considered when setting monetary policy.

Overall financial lubrication in the US, UK, and the Eurozone, exceeded $30 trillion before Lehman’s bankruptcy (of which 1/3rd came via pledged collateral). Certain central bank actions, such as the ECB’s LTRO, the US Federal Reserve’s qualitative easing and the Bank of England’s asset purchase facility have been effective in alleviating collateral constraints. However, these ‘conventional’ actions, to the extent they merely exchange bank reserves for collateral of prime standing (such as US Treasuries), do not address the issue credit creation via collateral re-pledging (Singh and Stella 2012).

The ‘kinks’ in the red line (Figure 4) M2 expansion due to QE but much of the ‘easing’ for good collateral is deposited with the central banks and is not available to fund lending. As of end-2011, the overall financial lubrication is back over $30 trillion but the ‘mix’ is in favour of money which not only has lower re-use than pledged collateral but much of it ‘sits’ in central banks.

Figure 4. Overall financial lubrication – M2 and pledged collateral 


Policy issues

As the ‘other’ deleveraging continues, the financial system remains short of high-grade collateral that can be re-pledged. Recent official sector efforts such as ECB’s ‘flexibility’ (and the ELA programs of national central banks in the Eurozone) in accepting ‘bad’ collateral attempts to keep the good/bad collateral ratio in the market higher than otherwise. But, if such moves become part of the central banker’s standard toolkit, the fiscal aspects and risks associated with such policies cannot be ignored. By so doing, the central banks have interposed themselves as risk-taking intermediaries with the potential to bring significant unintended consequences.

Authors' note: Views expressed are of the authors only and not of the International Monetary Fund.


Copeland, A, A Martin, and M Walker (2010), “The Tri-party Repo Market Before the 2010 Reforms”, Federal Reserve Bank of New York Staff Report No. 477.
EBA (2011), 2011 EU-wide stress test results.
IMF (2012), Global Financial Stability Report, April.
Mankiw, Greg (2010), Macroeconomics, Worth Publishers; Seventh Edition. Shin, Hyun. S (2009), “Collateral Shortage and Debt Capacity” (unpublished note).
Singh, Manmohan (2011), “Velocity of Pledged Collateral – Analysis and Implications”, IMF Working Paper 11/256.
Singh, Manmohan and Peter Stella (2012), “Money and Collateral”, IMF Working Paper No. 12/95


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Mon, 07/02/2012 - 14:44 | 2581318 francis_sawyer
francis_sawyer's picture

He shoulda stuck to doing inspirational & faggoty movie tune soundtracks...

Mon, 07/02/2012 - 14:46 | 2581328 takeaction
takeaction's picture

This is a better tune.....I swipe my EBT...."Wish I could buy some weed with my EBT"  Classic

Mon, 07/02/2012 - 15:03 | 2581384 vast-dom
vast-dom's picture



Federal Reserve Consumer 

Mon, 07/02/2012 - 15:08 | 2581397 Pladizow
Pladizow's picture

He is attempting to do nothing more then justify QE3++++++!

Mon, 07/02/2012 - 15:20 | 2581421 vast-dom
vast-dom's picture

he's doing a lot worse than that...

Mon, 07/02/2012 - 16:03 | 2581571 The Monkey
The Monkey's picture

Shorts squeezed again! Here comes 1400.

Mon, 07/02/2012 - 19:17 | 2582098 Jay Gould Esq.
Jay Gould Esq.'s picture

Mr. Williams' assertion calls to mind another prescient call:

"Stocks have reached what looks like a permanently high plateau."

Prof. Irving Fisher.
15 October, 1929.

Mon, 07/02/2012 - 15:57 | 2581542 Edward Teller
Edward Teller's picture

Go to and check out MZMNS and MZMV (in the monetary section). Mr. Durden's excellent piece explains all the nuances of what's happening. These charts (going back to late 1950s) show what's coming simply and graphically. The destruction of values may very well be keeping "inflation" (It's ALL inflation) in line, but turnover is the lowest since 1960. When velocity turns, that's it.

Mon, 07/02/2012 - 18:08 | 2581950 Fluffybunny
Fluffybunny's picture

I agree that it's excellent. It's one of the the best, most informative posts on this site in a long time. Lots of credit to Manmohan Singh as well.

Mon, 07/02/2012 - 14:51 | 2581344 theMAXILOPEZpsycho
theMAXILOPEZpsycho's picture

Increasing the monetary base has absolutely zero bearing on price inflation - not when all the money is going towards clearing the debt in the system. This is exactly the policy the fed should favour, and only sadists actively seeking the end of the world as we know it would argue differently. Where there is price inflation, this can easily be stopped by prosecuting commodity speculators. We need a reset, we need to re-capitalise our greatest institutions, and we need to move forward. Together.

Mon, 07/02/2012 - 14:59 | 2581370 francis_sawyer
francis_sawyer's picture

Another 'wannabee' MDB...

Mon, 07/02/2012 - 15:19 | 2581414 Kitler
Kitler's picture

I don't know FS... he kinda had me at:

"We need a reset, we need to re-capitalise our greatest institutions, and we need to move forward. Together."

"...and only sadists actively seeking the end of the world as we know it would argue differently."


Moving forward 'together" is very important when someone has their penis up the other guy's ass. Sounds like the our good friends have things well under control to me.

Mon, 07/02/2012 - 15:21 | 2581438 Bansters-in-my-...
Bansters-in-my- feces's picture

another "fucking idiot" I would say.

Mon, 07/02/2012 - 14:59 | 2581372 centerline
centerline's picture

Where can I get in on all this debt clearing action?  I must be missing something.

Mon, 07/02/2012 - 15:00 | 2581376 Dr. Engali
Dr. Engali's picture

There is only one MDB.

Mon, 07/02/2012 - 15:03 | 2581381 Comay Mierda
Comay Mierda's picture

not when all the money is going towards clearing the debt in the system

every FRN printed is a dollar of debt with interest attached to it.  money printing does not clear debt, it replaces it with new debt

the only way to clear debt from the system is bankruptcy, then switching to an asset based currency like gold.


Mon, 07/02/2012 - 15:02 | 2581383 bnbdnb
bnbdnb's picture

Good plan, its not happening. Now what?

Mon, 07/02/2012 - 15:27 | 2581463 El Oregonian
El Oregonian's picture

" and we need to move forward. Together."

Hey Psycho, you go over the cliff on your own. Boiled down to simpleton terms so that even airheads get it...

If you have a lemonade stand with just so much lemonade to sell but someone gave everyone endless dollars to buy my lemonade. Provided it is the best lemonade around, how long until the product is gone or the inevitable rising prices to accommodate inventory replacement?

Remember, free money isn't free...

Mon, 07/02/2012 - 18:09 | 2581952 Fluffybunny
Fluffybunny's picture

MMT is dead. Let it go.

Mon, 07/02/2012 - 20:22 | 2582199 cranky-old-geezer
cranky-old-geezer's picture



Increasing the monetary base has absolutely zero bearing on price inflation - not when all the money is going towards clearing the debt in the system.

No debt has been cleared from the system idiot. All that new money has been funding more and more debt, and a lot of that debt is junk status.  Trillions of dollars of debt paper out there, from federal down to corporate, is junk, just shy of worthless.

That's why bank balance sheets keep going red again after multi-billion dollar bailouts.  All the debt paper held  on those balance sheets keeps losing value.

You're right that price inflation isn't directly linked to money printing. 

Price inflation IS directly linked to confidence in the currency, and confidence in USD around the world is dropping rapidly, especially now with the entire asian bloc of nations moving away from the dollar.

Williams' cute little charts don't show steadily dropping confidence in the dollar, nor do they show when confidence will suddenly vaporize completely and the dollar crashes overnight.

That time is coming.  It's closer than anyone wants to believe.

Your idols at the Fed know this.  It's why your chief idol, Bernanke, is scared shitless about QE3.  He knows it would precipitate a major drop in the dollar, and QE4 might crash the dollar completely.

On the other hand, if what you say is true, then go ahead with QE3 then QE4 then QE5 and so on.  Fund $500 trillion of new debt, $1,000 trillion of new debt, hell, even $10,000 trillion of new debt.  Let's have $50 QUADrillion of debt floating around out there. 

Imagine how THAT would boost the economy.

Mon, 07/02/2012 - 16:41 | 2581666 Chaffinch
Chaffinch's picture

John Williams has been re-hypothecated ; )
According to Shadowstats there is some sort of multiplier thing going on...

Mon, 07/02/2012 - 14:45 | 2581326 Widowmaker
Widowmaker's picture

John Williams is a fucking liar.

Does that make sense?


Mon, 07/02/2012 - 16:06 | 2581583 machineh
machineh's picture

I'm surprised Williams didn't advocate monetizing international postal reply coupons.

Oh, wait -- Charles Ponzi already did that!

Mon, 07/02/2012 - 14:48 | 2581333 Flakmeister
Flakmeister's picture

Hey... maybe he is telling us the secret plan, which is that all "printed" money is going to Money Heaven, aka Excess Reserves, as fast as assets are vaporising....

Oh yeah, it ends when the Aliens from Beta Centari arrive to inject capital into the "good bank" once the FED is split into a "bad bank" and a "good bank"....

Mon, 07/02/2012 - 14:56 | 2581360 Widowmaker
Widowmaker's picture

Here is good bank/bad bank paradigm for your models:


Fraud Bank of the Federal Reserve


Federal Reserve Bank of Fraud

Mon, 07/02/2012 - 15:01 | 2581378 centerline
centerline's picture

Bankerspeak for saying that current money has already gone to heaven.  lol.

Mon, 07/02/2012 - 15:01 | 2581334 Mercury
Mercury's picture

In a world where the Fed pays interest on bank reserves, traditional theories that tell of a mechanical link between reserves, money supply, and, ultimately, inflation are no longer valid. that logic, why bother to collect taxes?

Here you go kids (and Mr. Williams), some holiday catch-up reading:

Shadow Banking - Pozsar

Shadow Maturity Transformation and Systemic Risk - Krieger

Rehypothocation/Shadow Banking - Singh

Are The Brokers Broken? - King

 There will be a pass/fail test later on in your life (but sooner than you think!).

Mon, 07/02/2012 - 15:04 | 2581389 Marginal Call
Marginal Call's picture

The purpose of taxes is to create demand for their bank notes by tying our labor to it and then taking some of it.  It's not so they can take our dollars, it's so we'll take theirs. 

Mon, 07/02/2012 - 17:06 | 2581770 emersonreturn
emersonreturn's picture

 Egyptian slaves produced a pyramid, all we get is yet another scheme.

Mon, 07/02/2012 - 18:25 | 2581976 ATM
ATM's picture

But we're getting $26/gallon biofuel and thousands of acres marred by useless wind-turbines whose hulking forms will stand for centuries!

Mon, 07/02/2012 - 19:23 | 2582113 eddiebe
eddiebe's picture

Excellent point, but even more so, it is both of the above, with the sweat equity of producers in the real economy value added.

Tue, 07/03/2012 - 01:31 | 2582797 blindman
blindman's picture

from the first link
"..Credit creation through maturity, credit, and liquidity transformation can significantly
reduce the cost of credit relative to direct lending. However, credit intermediaries’ reliance on shortterm
liabilities to fund illiquid long-term assets is an inherently fragile activity and may be prone to
1 There is a large literature on bank runs modeled as multiple equilibria initiated by Diamond and
Dybvig (1983). Morris and Shin (2004) provide a model of funding fragility with a unique
equilibrium in a setting with higher order beliefs. Martin, Skeie and von Thadden (2011) provide a
theory of runs in the repo market.
As the failure of credit intermediaries can have large, adverse effects on the real economy (see
Bernanke (1983) and Ashcraft (2005)), governments chose to shield them from the risks inherent in
reliance on short-term funding by granting them access to liquidity and credit put options in the
form of discount window access and deposit insurance, respectively..."
are they using the correct terms here? is the cost
of credit being reduced? or is the creation of credit
being divorced from legitimate and discernible evaluation?
the assumption is that this failure is undesirable so "government" intervenes, at gun point, to "shield the process from risk".
the same "government", fed res, that upholds the
mandate of price stability.
but does the fed ask what does this
rehypothecated credit creation process do to the
price/s? the prices of the underlying of the securities
needing stability? the price of a house? the price
of a rented room? the cost of this, their financial
engineering of credit, on the communities that sustain
their existence by working for wages and paying taxes
in the real , non-off shored worlds.
tyler says the shadow system is one of credit with no
deposits and is/has been a buffer to the expected/feared/eventual inflation. but ...
it has also been the source of income for maybe 20%
of the highest paying jobs in the financial sector that
might be entirely eliminated as it collapses.
the inflation we have already seen may be underestimated
and the inflation, change in price over time to the
higher extreme, may be offset by even worse employment
realities. one thing is for sure, the systemic, banks,
get the bailout and the money, the "real" stuff from the
sovereign, first. everyone else is on their own, certainly welcome to apply for a loan so long as the
bank and its owner have not fled the country with the
up top in figure 2. the chain. if you substitute
the word collateral with the word fraud the dynamics
remain the same, no? i think that is part of the problem.

Mon, 07/02/2012 - 14:49 | 2581337 FL_Conservative
FL_Conservative's picture

What I REALLY want to know is whether he wore his big shoes, red hair and rubber nose.

Mon, 07/02/2012 - 14:49 | 2581340 YesWeKahn
YesWeKahn's picture

Assuming that they aren't stupid. They have done all this for one goal: enrich their banker buddies.

Mon, 07/02/2012 - 14:51 | 2581341 0z
0z's picture

Opening a new account in US. They want to open a "seggregated account" for me at JPM. Not an expert on US banks, and as it is most banks in the world could, because of reflexivity, be considered insolvent. But which bank would you or do you hold your margin accounts with in the US?

Thanks, appreciated.

Mon, 07/02/2012 - 15:40 | 2581502 bank guy in Brussels
bank guy in Brussels's picture

Foreigner opening a bank account in the USA, ha! ... Soon some people who are bribing the US judges will take it away from you.

Like with MF Global, you may soon be 'Corzined', your account 'vaporised'.




Mon, 07/02/2012 - 16:15 | 2581601 NotApplicable
NotApplicable's picture

Rehypothetically speaking...

Mon, 07/02/2012 - 19:02 | 2582054 0z
0z's picture

Where does everyone keep their futures account?

Mon, 07/02/2012 - 19:01 | 2582052 Diogenes
Diogenes's picture

First it will be frozen, then it will be liquidated, then it will evaporate.

Mon, 07/02/2012 - 14:51 | 2581345 bigdumbnugly
bigdumbnugly's picture

san francisco fed head opens mouth long enough to spit out what?

Mon, 07/02/2012 - 14:51 | 2581346 orangedrinkandchips
orangedrinkandchips's picture


So he is like Homer Simpson and while he is spewing shit like a muppet, this is what happens inside his brain!~

Mon, 07/02/2012 - 14:52 | 2581349 jaap
jaap's picture

He could start reading "modern money mechanics" by..... the FED

Mon, 07/02/2012 - 14:53 | 2581350 Martial
Martial's picture

The REAL John Williams (and no, still not talking about the composer):

Mon, 07/02/2012 - 16:05 | 2581578 Comay Mierda
Comay Mierda's picture

this John Williams is a rockstar

Mon, 07/02/2012 - 14:56 | 2581361 centerline
centerline's picture

Been saying for years that the net effect of actions to date was akin to fueling a rocket.  Not going anywhere until a point of ignition occurs.  Is it their intention to create some sort of "jump" to a new steady-state of economic measure?

Just to give everyone a warm-fuzzy feeling... the rocket scientists who built this thing are the same ones who continue to exclude banking in the economic blueprints that are being used to build said rocket.  Seems more likely the rocket is going to denonate on the pad.  But, this might be the intention as well - either directly or indirectly... never knowing who really is running the show or what the plot is all about.

Mon, 07/02/2012 - 14:56 | 2581363 Temporalist
Temporalist's picture

And still the Fed is focusing 80% of its time on "message" rather than substance.

Mon, 07/02/2012 - 15:00 | 2581374 SemperFord
SemperFord's picture

That was a long freaking read...The majority of Americans are happily ignorant so even if the Fed did say the truth would the majority even be able to comprehend it? I doubt it.

Mon, 07/02/2012 - 15:00 | 2581375 LawsofPhysics
LawsofPhysics's picture

Proving once again that it isn't what you know so much as who you know.  fuck the paper-pushers.

Mon, 07/02/2012 - 15:04 | 2581386 TonyCoitus
TonyCoitus's picture

I don't have many ah ha moments, so this is a monumental achievement. Thanks be to Tylers.

Mon, 07/02/2012 - 15:04 | 2581388 reader2010
reader2010's picture

It's God's Work. Let em eat cakes instead.

Mon, 07/02/2012 - 15:05 | 2581390 SDShack
SDShack's picture

Well when the exclude food and energy from official inflation calculations, and with housing collapsed anywhere from 25-65% from the peak, and wages stagnant, it's no wonder the Fed can't find any evidence of inflation. Consumers are squeezed with bi-flation every where. Inflation in necessary goods and services for day to day living, and deflation in income and property.

Mon, 07/02/2012 - 16:31 | 2581637 green888
green888's picture

Someone from Phoenix said house prices going up 10% per month currently, nearly back to peak- anybody know? 

Mon, 07/02/2012 - 17:16 | 2581796 NidStyles
NidStyles's picture

This is true. Phoenix is still growing, because it's the only state that isn't ridiculous with it's firearm laws. 

Mon, 07/02/2012 - 17:40 | 2581875 LawsofPhysics
LawsofPhysics's picture

Big cash economy in Arizona and Nids is correct about the firearms laws.  We have very productive property there.  It may suprise some people to learn that everyone is considerably more polite when everyone is well-armed and on the same footing.  People seem to actually treat one another with respect, imagine that.

Mon, 07/02/2012 - 15:08 | 2581396 Quinvarius
Quinvarius's picture

I feel like some dirtbag car salesman in an over expensive suit is trying to sell me a lemon with no warranty when I hear Fed nonsense like this.

Mon, 07/02/2012 - 15:13 | 2581407 aerial view
aerial view's picture

"...until one day, ...hyperinflation the inevitable answer!" They understand this but this is all they can to do as their masters will not take their due losses; perfectly summed up by the pyschotic megalomaniacal mindset of: the whole system will crumble before I do!

Mon, 07/02/2012 - 15:24 | 2581431 yogibear
yogibear's picture

Bernanke and the Federal Reverve lies and scams don't end until they trigger a US dollar collaspe.

With banks leaning towards negative rates Bernanke and the Fed is doing everything they can to get savers out of the US dollar.  

Who wants to hold the US dollar anymore with a Federal Reserve determined to destroy it through devaluation?


Mon, 07/02/2012 - 15:20 | 2581432 Zymurguy
Zymurguy's picture

I love how they won't include the cost of fuel in the inflation index... but will use the drop in the cost for fuel for the reason of the public spending decline recently.

and yeah... with the Fed's logic why the fuck go to work or have the govt collect taxes?  Just print money, beam it into our accounts, send most of it to the govt. so they can keep playing their games.  We'll all just go to the stores vs. go to work.  Wait... shit... who's going to build my Aston Martin that I'm going to purchase with all the free money I just got?

Damn.  Hey Fed' got any other wise ideas?

Mon, 07/02/2012 - 15:22 | 2581444 riley martini
riley martini's picture

 The first public Dodd-Frank requirements for the TBTJ banks are due July  3 . Assets , Business Plan , Orderly unwind plan ect As long as member banks own the Federal Reserve Bank they will print to reward member banksters at the expence of the labor that gives money its value . Changing the ownership of the Federal  Reserve is the only way to slow down the wealth transfer corruption.

Mon, 07/02/2012 - 16:08 | 2581586 bagehot99
bagehot99's picture

Labor doesn't give money its value.

Mon, 07/02/2012 - 16:13 | 2581600 LawsofPhysics
LawsofPhysics's picture

Then you should have no problem with the collapse of all fiat "money".  Let us know how that works out for you.  personally, I know the value of my labor and that of my employees is real, fucking bring it.  fuck the paper-pushers.

Mon, 07/02/2012 - 15:26 | 2581461 Shizzmoney
Shizzmoney's picture

It really is gross that A) The Fed is printing money not for people, but for corporations and banking entities (at interest) to prop up their stock market, the only thing holding Amercia apart.  They print only for the stock market (the reason why it's held steady after today's shitty ISM numbers are b/c people expect QE3 to happen by August).

And that B) "liberals" like MDB actually applaud the Fed's actions.

When Joesph "My cock was born leaning left" Stiglitz is shitting on the Federal Reserve (as he did today, correctly, on Bloomberg) know Central Banking is failing.  And not becuase they just just print unlimited amounts of green pieces of paper.....but because they are corrput motherfuckers who are printing unlimited amounts of green pieces of paper for their friends. 

Imagine if we did that for the unemployed? Or healthcare?  If Congress actually had the right, as they sued to, to print money (and not raise interest rates, when needed)?  Instead, we do it for Jaime Dimon, hoping he throws the people crumbs.  Gimme a fuckin break.

Mon, 07/02/2012 - 15:34 | 2581472 Shizzmoney
Shizzmoney's picture

It really is gross that A) The Fed is printing money not for people, but for corporations and banking entities (at interest) to prop up their stock market, the only thing holding "Amercia" together.  They print only for the stock market (the reason why it's held steady after today's shitty ISM numbers are b/c people expect QE3 to happen by August).

And that B) "liberals" like MDB actually applaud the Fed's actions.

When Joesph "My cock was born leaning left" Stiglitz is shitting on the Federal Reserve (as he did today, correctly, on Bloomberg) know Central Banking is failing.  And not becuase they just just print unlimited amounts of green pieces of paper.....but because they are corrput motherfuckers who are printing unlimited amounts of green pieces of paper for their friends. 

Imagine if we did that for the unemployed? Or healthcare?  If Congress actually had the right, as they sued to, to print money (and not raise interest rates, when needed)?  Instead, we do it for Jaime Dimon, hoping he throws the people crumbs.  Gimme a fuckin break.

Mon, 07/02/2012 - 15:34 | 2581484 adr
adr's picture

Last December a bag of Doritos cost $3.39 and it was easy to find 2 for $5 sales. The new bag, which is three ounces smaller, now costs $4.79 for one bag. The new sale price is 2 for $7.

Not only did the price go up, but you also get less for your money. I guess that isn't called infation anymore. In Fed world it is bargain shopping. You pay more and eat less, making Michelle Obama happy because it's harder to fill your pie hole with calories.

Mon, 07/02/2012 - 15:47 | 2581523 ebworthen
ebworthen's picture


Look at ice cream ("1/2 gallon" is now 48 oz. instead of 64 oz.) and cheese and bread and lunch meat.

All up by 30-40% and/or smaller containers/portions.

I bought my Daughter a hamburger happy meal at Wendy's the other week and the patty is approching Eisenhower dollar size, looked like a "slider", and there were like seven french fries - and the price had gone up.

What bubble do these fools at the FED live under?  (oh wait...)

Mon, 07/02/2012 - 15:49 | 2581530 bank guy in Brussels
bank guy in Brussels's picture

Wow, 3 USA Bernanke Bux and more for a bag of Doritos.

Guess it is a long time since I was visiting and staying awhile in the USA ... I remember something like 89 cents.

Here in Europe I still get a large bag of paprika-flavoured crisps (potato chips) for 55 euro-cents. And flavoured corn-chips, the Doritos-type stuff, are 1-euro-something in a European marque. And 39 euro-cents for the bottle of beer to go along.

America really is doomed.

Mon, 07/02/2012 - 17:15 | 2581793 emersonreturn
emersonreturn's picture

in canada carney did away with the penny which meant that everything cost at least 4cents more and no one noticed...they are actually content no longer having to deal with pennies!

Tue, 07/03/2012 - 08:38 | 2583240 cents gradeschool
cents gradeschool's picture

With 47 million on food stamps, govt involvement in price inflation has got to be a factor.

Mon, 07/02/2012 - 15:37 | 2581491 Fix It Again Timmy
Fix It Again Timmy's picture

I'll take about $10 Billion Frogskins [American Indian term for dollars] since it won't cause inflation.  Sent them to.....

Mon, 07/02/2012 - 15:40 | 2581504 Ted Baker
Ted Baker's picture


Mon, 07/02/2012 - 15:42 | 2581508 Temporalist
Mon, 07/02/2012 - 16:02 | 2581567 LawsofPhysics
LawsofPhysics's picture

and they are not afraid to use debt-slaves to fight a real one.  same as it ever was.

Mon, 07/02/2012 - 15:42 | 2581514 ebworthen
ebworthen's picture

"This time it's different."

Classic line of the self-delusional.

So money printing and debt creation doesn't debase the currency or cause inflation?

In what universe?

Mon, 07/02/2012 - 15:45 | 2581520 CosmicDebris
CosmicDebris's picture


Mon, 07/02/2012 - 15:47 | 2581524 bdc63
bdc63's picture


Mon, 07/02/2012 - 15:51 | 2581534 kevinearick
kevinearick's picture

Go Get

The empire enters into a contract, with a promise it has no intention of keeping, to keep you in its time, which it breaks every time, because nature, and God move forward at all times. The empire is a test of your intent. I call the humans behind the forward event horizon robots because they are in no position to make decisions, and the farther behind they are, the more desperately they want to make decisions, to assert control.

The contract, for peer pressure, requires you to ensure that all your contacts stay in empire time, and that you report them if they do not. The process simply gets more subtle over time, so that the individual not only does not feel guilty for reporting others, but also actually feels REDEEMED, self-actuated, hence Apple, Google, and Facebook.

The empire finances the operation by borrowing from Peter to pay Paul interest, then borrows from Fred to pay Peter interest to pay Paul interest, and so on, right up until nature destroys the empire and it starts over again. Fred is future generations. Krugman is absolutely correct; the empire can print to infinity, within the empire, and the robots will never see what’s coming, “act of God,” which is really act of stupidity.

The US was built, like the Euro, to provide artificial demand for an ever-dying empire. Life is in the opposite direction, whatever dimension you choose to proceed forward. Let the empire have your body, to test intent. With spirit, you can always re-format your mind and body, which is required to adapt in any case. Turn the other cheek, once. When you have two points on a line, you may confidently expect the third.

The instant robot actions do not match robot words, step forward, in spirit, leaving the empire to break the contract and destroy itself. You don’t have to physically or mentally do anything to bring down an empire because its masters are always “pushing” the edge, with increasing momentum, assuming your foundation will always be there, because it always is, until it’s not.

The economy depends upon go-getters. All others are robots trying to pull each other into their own peer pressure black hole. The Church loses access to free money, its faith collapses, and the Ponzi economy crashes, surprise, surprise. Call the church Catholicism, Socialism, Capitalism, or whatever serves the purpose.

You have an individual relationship with God, aggregated. Everything else is empire misdirection, middlemen, which may be added to or removed from at will, depending upon the gravity you want, to do whatever it is you want to do, aggregated. Funny, how big an effect the weather has on the economy…

Mon, 07/02/2012 - 15:56 | 2581550 Gief Gold Plox
Gief Gold Plox's picture

Dear Tylers thank you! I learn something new every day on ZH.

Mon, 07/02/2012 - 17:19 | 2581805 emersonreturn
emersonreturn's picture

absolutely, thank you tylers...i learn something every article.

Mon, 07/02/2012 - 15:57 | 2581552 john_connor
john_connor's picture

This makes sense to me however it is not clear to me traditional deposits will rise from the current level of 7 Trillion to 20 Trillion in a few years, unless one is counting QE that is redeposited at the Fed as a traditional deposit.  The article even states as such:

"The ‘kinks’ in the red line (Figure 4) M2 expansion due to QE but much of the ‘easing’ for good collateral is deposited with the central banks and is not available to fund lending. As of end-2011, the overall financial lubrication is back over $30 trillion but the ‘mix’ is in favour of money which not only has lower re-use than pledged collateral but much of it ‘sits’ in central banks."

Therefore if the banks feel like it is safer to hold the money at the Fed and earn interest than to lend out money to the real economy, then it seems that the bulk of the "traditional" deposits could be considered non-inflationary, at least in a relative sense.

I do agree a shift from shadow liabilities to "traditional" liabilities increases the risk of inflation however.

It is interesting to note that the parabolic rise in the equity markets since the early 80's nearly matches the parabolic rise of shadow banking.  It also follows that since total liabilities have fallen by approx. 11% that equity markets are roughly the same from their all time nominal highs.    

Mon, 07/02/2012 - 15:56 | 2581556 CuriousPasserby
CuriousPasserby's picture

So how does this play out? What are the most likely hyperinflation triggers?

Mon, 07/02/2012 - 16:05 | 2581582 Flakmeister
Flakmeister's picture

The game ends when the US military can no longer enforce the majority of exported oil on the market to be traded in dollars...

Until then it's all good, sit back and grab some popcorn....

Mon, 07/02/2012 - 16:10 | 2581591 LawsofPhysics
LawsofPhysics's picture

Correct, in many ways, oil is a reserve currency.  Any country with seems to have no problem finding buyers and trading oil for other assets (unless of course the U.S. labels them a terrorist).  The BRICs are alread saying "fuck you, we will still do business with these countries (see Iran) and each other".

Mon, 07/02/2012 - 16:43 | 2581681 ParkAveFlasher
ParkAveFlasher's picture

The game ends when one side of a transaction refuses to utilize the dollar, in the balance of transactions. 

Mon, 07/02/2012 - 16:42 | 2581674 malek
malek's picture

Simple indicator: when the first US aircraft carrier is sunk, it will be the beginning of the end of worldwide US military dominance.

Mon, 07/02/2012 - 16:56 | 2581736 MethodMan
MethodMan's picture

Give the Meister a prize.

The Fed cabal thinks they are geniuses, but it is the military-backed petrodollar that allows them the seigniorage.

Japan is an exceptional case that started with huge per-capita savings and an excellent export markets. They've used that up now, and they will show us the termination point of continual ZIRP with nothing more to back the printing. All those worthless bonds go on the market, at once, and all paper wealth is debased, at once, and all purchasing power flies into real good in attempt to save itself --- at once.

It will not be a crack up boom for Japan it will be a crack-up supernova. 

And what does Japan -- or any energy importer for that matter -- ulitmately need to do with its dollars and $ bonds when it can't convert its own currency to dollars? Oil shocks will make this recession an outright depression, because although we may be able to force the denomination for some time, we cannot force the price.

Mon, 07/02/2012 - 16:04 | 2581572 bagehot99
bagehot99's picture

I have tried to create my own collateral chain by repledging my home to several different lenders. For some reason this technique is not available to retail borrowers.

Mon, 07/02/2012 - 16:11 | 2581593 TonyCoitus
TonyCoitus's picture

Maybe QE3 will have looser standards!

Mon, 07/02/2012 - 16:06 | 2581577 Ignorance is bliss
Ignorance is bliss's picture

Prepare for QE in 1.2.3. ....

Mon, 07/02/2012 - 16:05 | 2581581 yogibear
yogibear's picture

The Fed will dilute and debase until they die.  Money printers Fraud,  Obfuscation, Money, Criminals (FOMC) knows what's best for it's banksters.

Mon, 07/02/2012 - 16:12 | 2581596 steve from virginia
steve from virginia's picture


Hey Mr Zero-Hedge Man you produce analysis that contradicts your own primary thesis: that the central banks 'print' money and cause inflation.

The private sector creates money/credit against repledged collateral, that is, unsecured loans. It is unsecured loans that are 'new money'. Central banks cannot make unsecured loans (and remain central banks). Take fifteen minutes and think about it and you will realize it is so.

In the traditional money creation process, collateral consists of central bank reserves; in the modern private money creation process, collateral is in the eye of the beholder.

Reserves here means gold, silver and government bonds (in limited amounts). Traditional money means redeem paper certificates for gold or silver on demand. The ledger-entry 'reserves' of today do not represent anything real, they are 'phantom phunds' that appear only when the balance sheet of the institution that 'posts' them is collapsing.

See 'Target 2' and you will get the idea. The system liabilities only appear when there is no euro with which to denominate them. At which point whomever has responsibility for them is bankrupted by them.

ZeroHedge needs to jettison the 'money-printing Fed' meme and move onto something else. Right now, the argument reduces credibility. It is simply another form of peak oil denial and comes across as dumb, frankly.


Have a nice day :)

Mon, 07/02/2012 - 16:32 | 2581642 Tyler Durden
Tyler Durden's picture

Yes, precisely. No liabilities unless they are liabilities. And the wave function collapses. Sadly, this only works in theoretical quantum worlds. In the context of finance, it is about the dumbest thing one can utter... or believe in.

And re-re-read what has been written here on TARGET2. There is no such thing as a free lunch, and there is no such thing as kinda sorta non-existent liabilities. TARGET2 is sowing the seeds of yet another inflationary implosion.

Mon, 07/02/2012 - 17:05 | 2581767 LawsofPhysics
LawsofPhysics's picture

So the balance sheets of central banks, corporations, and sovereigns hasn't been growing?  Where did that money come from?  If it wasn't printed then it was loaned into existance, what is the collateral?

Are you saying that there really is no cost associated with capital creation even if you don't create anything of real fucking value?

Sounds like capital and resource mis-allocation and mal-investment to me.  Might want to pull your head out fo the sand before you become soylent green.

Mon, 07/02/2012 - 16:28 | 2581628 alfred b.
alfred b.'s picture


    I'd gladly open an account at the Fed Reserve as long as they provide me with a checkbook.

    It would be like getting a bottomless cup of coffee


Mon, 07/02/2012 - 16:31 | 2581636 allocater
allocater's picture

Printing money does not cause inflation if the money never arrives at the people. If the printed money just stalls at the banks why would the price of bread increase? Banks don't want bread. Demand in bread does not rise. Price stays the same. Same with all other goods that humans want/need. The money supply of the humans did not increase. Only the money supply of the banks did increase.

Mon, 07/02/2012 - 17:02 | 2581753 ParkAveFlasher
ParkAveFlasher's picture

I believe, and correct me if I'm wrong, but the article points out that shadow banking screens prices from being directly impacted by the REAL cost of risk, by basing credit on "what-if" or "as-if" collateral.  "Let's issue credit as if there really was collateral".  Central banks are prohibiting discovery of the REAL cost.  Hence the constant referencing of the Titanic.


Mon, 07/02/2012 - 17:12 | 2581778 LawsofPhysics
LawsofPhysics's picture

Bullshit.  Inflation can come very quickly if people decide not to sell because the commodites or assets are of more value to the seller than the paper. There are several ways in which this can occur and has occured throughout history. Usually occurs when people have no confidence in the rule of law and contracts. Where is Jon Corzine?

Pull your head out of your ass.

Tue, 07/03/2012 - 00:29 | 2582727 jimmyjames
jimmyjames's picture

Usually occurs when people have no confidence in the rule of law and contracts


That could well happen at some point in the future but at this point-deflation is the play and paper money is in demand-just like gold-

Mon, 07/02/2012 - 16:32 | 2581641 thunderkiss
thunderkiss's picture

He's gonna wish he could take that speech back once the velocity of money picks up someday....

Mon, 07/02/2012 - 16:38 | 2581663 malek
malek's picture

Tyler, an excellent article! Thank you very much.

I especially like your consise 5 point list.

It only makes me wonder if you aren't a bit too quick on your conclusion in point 3:
The disappearance of shadow liabilities which are deposit-free, and thus not a cause of inflationary concern, means their replacement will naturally have to come courtesy of deposit-backed conventional money replacements.

Do you believe it to be guaranteed that deposit-free liabilities will be replaced directly with real-deposit-backed ones?
I imagine there might be some middle-ground where TPTB could invent something fake within...à la SSTF (not an empty lockbox, but not containing real backed financial instruments either)
Sure, that's by definition not going to work in the long run, but for a while (decades) it might.

Mon, 07/02/2012 - 17:29 | 2581841 Snakeeyes
Snakeeyes's picture

I am not defending Williams or Fed monetary policy (with which I fundamentally disagree). But I will interpret Williams as saying that The Fed couldn't create inflation if it tried!!!!

And here is why. Money multipliers and velocities are stalling. And so is the economy. You need aggregate demand GROWTH to get inflation greater than current levels.


Mon, 07/02/2012 - 22:41 | 2582524 jimmyjames
jimmyjames's picture

And here is why. Money multipliers and velocities are stalling. And so is the economy. You need aggregate demand GROWTH to get inflation greater than current levels.


Very good-

Money is piled up at banks as you say and it ain't moving through the economy-as velocities show-

If the money doesn't end up in the peasants hands-there is no inflation and there will be no inflation-

This is Bernankes problem-

If people don't start or are unable to borrow and there is weak economic growth-then there can be no inflation-

It's as simple as looking at a counterfeiter-

He prints money in his basement-he plans on spending the money and so his counterfeit money will increase the supply of money-if-he spends it-

Now say he gets a twitch of paranoia and is afraid to start passing the dollars off-

His house is still full of the money-but has it increased the supply of money in circulation?

All of these reports are talking about contracting credit- that is deflation--not inflation-


Mon, 07/02/2012 - 17:44 | 2581889 yogibear
yogibear's picture

" If the printed money just stalls at the banks why would the price of bread increase? " 

Printing money ends up in investments like stocks and commodities (wheat, commecial real estate, etc) . Banks just don't sit on it. The printed money is put to use in riskier assets.  

Mon, 07/02/2012 - 17:51 | 2581905 JR
JR's picture

Inflation is the central bank’s primary weapon in its fight to transfer the wealth of citizens to the pockets of its owners and the projects of its friends.

While inflation may be the bank’s primary weapon, its second most effective weapon is the Big Lie, practiced rather crudely here by the Fed’s John Williams.

IOW, inflation or, as the common man refers to its results, rising prices is obviously greater than the government and the Fed proclaim but the entire debt management aspiration depends on an operating inflation number that is kept criminally low.

The mythical inflation dog of the Fed’s John Williams doesn’t bark; but the real dog, as described by Shadow Stats’ John Williams has more than a bark, it is a severe bite on hardworking Americans.

The Fed’s Williams cites Keynesian and Harvard professor N. Gregory Mankiw, who for a long time has promoted negative interest rates, as a reference.

Those Mankiw cites while arguing for a tax on holding money to keep people from hoarding it (saving it) are the German economist Silvio Gesell who argued for a tax on holding money and, of course, John Maynard Keynes who “approvingly cited the idea of a carrying tax on money.”

Mankiw in 2009 wrote in the NY Times in It May Be Time for the Fed to Go Negative:

 “Ben S. Bernanke, the Fed chairman, is the perfect person to make this commitment to higher inflation. Mr. Bernanke has long been an advocate of inflation targeting. In the past, advocates of inflation targeting have stressed the need to keep inflation from getting out of hand. But in the current environment, the goal could be to produce enough inflation to ensure that the real interest is sufficiently negative.”

Rep. Ron Paul writes: “If you think about what this 2% inflation target actually is, you realize that it is an explicit policy to devalue the dollar and reduce its purchasing power. And it adds up quickly over time. Two percent annual price inflation means that prices rise 22% within a decade, and nearly 50% within two decades.

“It is worse than that, however. This explicit 2% target fails to take into account that whatever measure is used to determine price inflation, be it CPI, core CPI, PCE, etc., will always be chosen with an eye toward underreporting the true rate of inflation and price rises. Pressure will be exerted on those calculating the price indices, so as not to alarm the public when prices begin to accelerate.”

Mon, 07/02/2012 - 17:58 | 2581927 luna_man
luna_man's picture



And, if you ever wonder why MY MAIN MAN is MY MAIN MAN!...


no half steppin with MY MAIN MAN

Mon, 07/02/2012 - 23:27 | 2582621 honestann
honestann's picture

While everything out of everyone at the fed is absurd, disingenuous, and designed to cover for planned atrocities, there are certain ways in which the general point is true.  For example, if you totally destroy an economy, and lure substantial percentages of the population into humongous debt, there is less spending (on anything but interest payments to the banksters for previous loans "out of thin air"), which tends to increase competition for the fewer remaining customers.

Of course, what everyone here in ZH understands is, the size and scope of the short-term "print-print-print" solutions must be forever increased to prevent complete collapse as the efficiency of the economy goes down the tubes... and eventually that will lead to hyperinflation unless the banksters truly let the entire world economy collapse.

What cannot be escaped is the collapse, whether it be inflationary or deflationary is a minor concern.  And the predators-that-be really don't care that much, because their goal is even more overt enslavement of mankind with the collapse being their reason "we have no choice but to enslave you and destroy you".

Sadly, what is completely clear to most everyone now, is that the vast majority of mankind is absolutely, completely and utterly braindead, and will sanction if not support anything and everything the predators propose or do.  Thus the tiny minority of humans who remain honest, ethical, productive and benevolent are royally screwed beyond words, unless they find ways to escape to the extreme boonies and live mostly disconnected lives of solitude.  What I have found amazing is what vanishingly tiny percentage of honest, ethical, productive, benevolent humans are willing to cooperate or collaborate with each other.  Perhaps this is simply a consequence of being trashed by so many people in the past who pretended to be kindred spirits.  I'm not sure, but this inability to collaborate is a serious inefficiency.

Mon, 07/02/2012 - 23:39 | 2582638 Jstanley011
Jstanley011's picture

As one of your "endgame: deflation friends," Mr. Durden, I must point out some basic errors in your analysis:

"In the traditional money creation process, collateral consists of central bank reserves;..."

This is wrong. Reserves are reserves and collateral is collateral. The latter, in traditional fractional reserve banking, consists of the liquidation value of the assets against which money is loaned. This is banking 101.

" the modern private money creation process, collateral is in the eye of the beholder."

Wrong again. In the modern private so-called "money creation" process, the collateral is allowed to be fraudulent. Simple as that.

The errors in your thinking about what are, actually, the deflationary implications of the above, are reflected by the backwardness of your metaphors. When bubbles burst they don't inflate, they deflate. Furthermore inflation does not implode, it explodes.

Additionally, inflationistas such as yourself fail to give due weight to the political repurcusions that the real world is bound to provide. Which will intrude upon any central banker hitting CTRL + P, in the form of a crowd breaking into the room where his keyboard sits carrying pitchforks, torches and a rope.

Recall with me if you will, that the last developed economy that printed to the point of hyperinflation, Weirmar Germany, collapsed politically from democracy into dictatorship.

Tue, 07/03/2012 - 15:09 | 2584721 Bill Shockley
Bill Shockley's picture


I find your comment right on if you are saying that hyperinflation will awake the Sheeple because they are hungry or pissed because inflation ate their savings or their kids don't have work.

I believe you are correct that they will stop the process and may break or modify the Union ala the USSR. No need to sink our aircraft carriers, economics will force us to sail them home.

Now comes the depression and the reset. No need to swing the bankers, just take their money and make them work for the min wage at 7-11's, after all they are good with numbers. Let them eat frozen pizzas.

So it will come down this way for the USA, hyperinflation then deflation as we take our rightful productive place in the 'knew' world order.

Plant the garden, buy a gun, buy some gold, get some cash.

Remember peace and love rules your day.

Read 1984 and A Tale of Two Cities.


Tue, 07/03/2012 - 02:54 | 2582854 blindman
blindman's picture

" ..This means that the historical relationships between the amount of reserves, the money supply, and the economy are unlikely to hold in the future. If banks are happy to hold excess reserves as an interest-bearing asset, then the marginal money multiplier on those reserves can be close to zero. As a result, in a world where the Fed pays interest on bank reserves, traditional theories that tell of a mechanical link between reserves, money supply, and, ultimately, inflation are no longer valid. In particular, the world changes if the Fed is willing to pay a high enough interest rate on reserves. In that case, the quantity of reserves held by U.S. banks could be extremely large and have only small effects on, say, the money stock, bank lending, or inflation.

As I noted earlier, inflation and inflation expectations have been low for the past four years, despite the huge increase in the monetary base. Of course, if the economy improved markedly, inflationary pressures could build. Under such circumstances, the Federal Reserve would need to remove monetary accommodation to keep the economy from overheating and excessive inflation from emerging. It can do this in two ways: first, by raising the interest rate paid on reserves along with the target federal funds rate; and, second, by reducing its holdings of longer-term securities, which would reverse the effects of the asset purchase programs on interest rates.

In thinking of exit strategy, the nature of the monetary policy problem the Fed will face is no different than in past recoveries when the Fed needed to “take away the punch bowl.” Of course, getting the timing just right to engineer a soft landing with low inflation is always difficult. This time, it will be especially challenging, given the extraordinary depth and duration of the recession and recovery. The Federal Reserve is prepared to meet this challenge when that time comes. Thank you. "
he said this, the williams, i would like to see if i can understand it......
off the cuff my bias tells me he is saying that fictitious collateral held by the banks, developed in
the shadow banking system, will be converted into deposits and the central banks will pay them more and
more interest on those deposits should they, the banks,
decide that prices in markets are not where they should
be. thank you. this will correct imbalances in the
economy because the central banks will be giving so
much fucking free money to the banks that they will
nary be inclined to even bother buying politicians and
judges anymore. (that can't be right, i missed a step)
the banks will be controlled by free money, not
printed out of nothing, but sucked from labour and the future generations? (oh fuck, that isn't it either)
the fed res will control inflation by raising interest
rates on government spending, austerity imposed and
taxes on the interest it will pay for reserves held
at the central bank? (jesus no)
the fed will give their fraud securities, no, they
will pay the insolvent banks to take the fraud loaded
mbs off their hands thereby reducing the balance sheet
of the central bank and unleashing a giant wave of
fraudclosure sure to stimulate the entire re litigation sector while simultaneously stomping down inflation.
or some coordinated version of all or none of the above. the basic idea remains the same, recapitalize
the banks for creating fraudulent securities and deposit free credit, thus taking over the world of finance
and accomplishing price control, leveraging and subordinating every financial instrument, by other means, allowing cartels to continue to immerse their
sick psyches in snuff type endeavours, fully financed
oh shit, i'm gonna have to read this again...
stealing and control fraud remain the operative terms.
but this rings a bell.
Mein furher! I can walk!
Dr. Strangelove's Astonishingly Good Idea
"You'll have to answer to the Coca-Cola company"

Tue, 07/03/2012 - 04:34 | 2582921 blindman
blindman's picture

let's add to the list of terms we no longer/do not
sovereignty ....
with person
and money.
i'm sure there are many more.

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