Here Is Why The Fed Will Have To Do At Least Another $3.6 Trillion In Quantitative Easing

Tyler Durden's picture

As we have repeatedly said in the past, the quarterly Flow of Funds (or Z.1) statement is most interesting not for the already public household net worth and leverage data which serves to make pretty charts and largely irrelevant articles, but due to its insight into the stock and flow of both the traditional financial system but far more importantly - into shadow banking. And this is where things get hairy. Because while equities may have returned to 2008 valuations, the credit shortfall across combined US liabilities - traditional and shadow - still has a $3.6 trillion hole to plug to get to the level from March 2008 (see first chart). It is this hole that is giving equities, which have already surpassed 2008 levels, nightmares. Because while the Fed is pumping traditional commercial banks balance sheets via reserve expansion (read: fungible money that manifests itself most directly in $5 gas at the pump) resulting in a $2.3 trillion rise in traditional liabilities from Q3 2008 through Q4 2011, what it is not accounting for is the now 15 consecutive quarters of shadow banking system contraction, which peaked at $21 trillion in Q1 2008, and in Q4 2011 declined to $15.1 trillion... and dropping. It is this differential that will be the source of the needed "Outside" money, discussed yesterday, and that is only to get equity valuations to a fair level! But considering the Fed's propensity to print at any downtick, this is very much a given, much to the horror of Dick Fisher. Any additional increase in stock prices will require not only the already priced in $3.6 trillion, but far more direct Outside money injections.

While we have explained the methodology of approaching consolidated credit money in modern finance before (much more here), here is a quick rerun. In the chart below, conventional wisdom only focuses on the red line, which represents traditional commercial bank liabilities (L.110, L.111, L.112 and L.113 from the Z.1), where Fed reserves and other monetary expansion mechanisms manifest themselves. As can be seen this line is rising rapidly, as is to be expected - in tune with the US deficit spending and Fed reserve growth. That both the US debt chart and the consolidated global balance sheet have now entered an exponential phase is a topic for another discussion.

What, however, is always forgotten is the blue line, which represents the liabilities in the shadow banking system - all the credit money that has been used by various unregulated institutions to perform the traditional transformations of maturity, credit and liquidity that define a "bank." And this line is for lack of a better word, collapsing. It is this collapse that the Fed has yet to tackle, and it is the offset of this collapse which the equity market has somehow already priced in!

Focusing exclusively on shadow banks, here are the 6 distinct components that make up this universe.

Why does the Fed never discuss the shadow banking "conundrum" in public? Simple. The chart below should explain it.

Finally the chart that puts it all into perspective: here is a close up of the consolidated Shadow + Traditional liability total. The delta from the prior peak is an all too real hole of $3.6 trillion (and possibly more when accounting for the factor contraction at the Prime Broker level, a topic discussed previously when we spoke in length on the issue of rehypothecation). Yet it is this hole that the market is 100% certain that the Fed will plug. Because if it doesn't, watch out below.

And not only that, but since it is suddenly fashionable to sell US Treasurys, just who will step in to buy (not China) considering there is about $6 trillion in net new issuance over the next 4 years? Because if US GDP was at least rising faster than US debt one just may have made the case that there will be retained cash by various entities who can buy up US paper domestically. Alas, that is no longer feasible, and the only option is, you guessed it, for the buyer of last resort to step in - the @FederalReserve

In conclusion we wish to say - thank you Chairman for the firesale in physical precious metals. We, and certainly China, thank you from the bottom of our hearts.

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spiral_eyes's picture

Great work Tyler.

It's not just this, though.

I expect that in 5 years the Fed's treasury holdings will be towering over foreign treasury holdings. The name of the game is to keep rates as low as possible, and as real demand for Treasury paper collapses, the Fed will have to buy a lot more just to keep rates below 2%... 3%... 4%... 5%...

nope-1004's picture

QE till bust.  Benocide is lying with every statement he spews.  Banks are insolvent and now nations are teetering.  Of course, having "reserve currency" status only delays the inevitable.

JPN's bigger problem is demographics.  Both pigs are going down.  Election year is delaying action, but printing will come in force.


Harlequin001's picture

Of course, the problem with the Fed benefitting from increasing demand from a collapsing Europe is that the collapse needs to keep on rolling, otherwise demand disappears, interest rates pop and the whole game is over. Perhaps, now that Greece is 'fixed' demand will disappear. I know, let's start another probelm in... Spain.

Big Slick's picture

The Gods of the Copybook Headings

Rudyard Kipling - 1919


AS I PASS through my incarnations in every age and race,
I make my proper prostrations to the Gods of the Market Place.
Peering through reverent fingers I watch them flourish and fall,
And the Gods of the Copybook Headings, I notice, outlast them all.

We were living in trees when they met us. They showed us each in turn
That Water would certainly wet us, as Fire would certainly burn:
But we found them lacking in Uplift, Vision and Breadth of Mind,
So we left them to teach the Gorillas while we followed the March of Mankind.

We moved as the Spirit listed. They never altered their pace,
Being neither cloud nor wind-borne like the Gods of the Market Place,
But they always caught up with our progress, and presently word would come
That a tribe had been wiped off its icefield, or the lights had gone out in Rome.

With the Hopes that our World is built on they were utterly out of touch,
They denied that the Moon was Stilton; they denied she was even Dutch;
They denied that Wishes were Horses; they denied that a Pig had Wings;
So we worshipped the Gods of the Market Who promised these beautiful things.

When the Cambrian measures were forming, They promised perpetual peace.
They swore, if we gave them our weapons, that the wars of the tribes would cease.
But when we disarmed They sold us and delivered us bound to our foe,
And the Gods of the Copybook Headings said: "Stick to the Devil you know."

On the first Feminian Sandstones we were promised the Fuller Life
(Which started by loving our neighbour and ended by loving his wife)
Till our women had no more children and the men lost reason and faith,
And the Gods of the Copybook Headings said: "The Wages of Sin is Death."

In the Carboniferous Epoch we were promised abundance for all,
By robbing selected Peter to pay for collective Paul;
But, though we had plenty of money, there was nothing our money could buy,
And the Gods of the Copybook Headings said: "If you don't work you die."

Then the Gods of the Market tumbled, and their smooth-tongued wizards withdrew
And the hearts of the meanest were humbled and began to believe it was true
That All is not Gold that Glitters, and Two and Two make Four
And the Gods of the Copybook Headings limped up to explain it once more.

As it will be in the future, it was at the birth of Man
There are only four things certain since Social Progress began.
That the Dog returns to his Vomit and the Sow returns to her Mire,
And the burnt Fool's bandaged finger goes wabbling back to the Fire;

And that after this is accomplished, and the brave new world begins
When all men are paid for existing and no man must pay for his sins,
As surely as Water will wet us, as surely as Fire will burn,
The Gods of the Copybook Headings with terror and slaughter return!



exartizo's picture

Very nice. Never more true than now.

Harbanger's picture

Because we have the memory of a fruit fly.

exartizo's picture

Yes. I always did like the genetics experiments with those in High School. :)

Also, I'm a big fan of alliteration and a quirky turn of phrase.

I've actually written a few like this one.

GetZeeGold's picture



Fire will burn........let the ultimate game of chicken commence.


I have a plan.....guess what it involves?


If you said are wrong.


Clockwork Orange's picture

Spain it will be!!!!

Just wait until GS & MS can collect a few more call buyers into March EXP, then we can roll out the Spain headlines, spike the VIX and open up the trapdoor!!!


Let's rip it down for, what, say 6-10 trading days to collect some puts, then we can QE3 and launch pad it again.

I just love sound fundamental trading environments.

F-ing criminals.

GetZeeGold's picture



GS is a little busy trying to fish out the dagger planted in it's back yesterday.


JPM Hater001's picture one gets this it was brilliant!
B stood for binary and then
Run started the needed brun as code to run a binary program...

Please don't make me explain apple panic.

UP Forester's picture

Christ, I haven't seen that since BRUN BURGERTIME ....

Harbanger's picture

"Both pigs are going down."  -but: That night, the third little pig had wolf soup for supper.

spiral_eyes's picture

Japan ditched the dollar for bilateral trade with China. And they've suffered twenty years of Keynesian fail thanks to Bernank's "Rooseveltian Resolve" solutions. And they don't exactly like Okinawa girls getting raped and molested during downtime.

I think we can safely say where their real allegiance lies. But it's tough expressing those kinds of feelings under American military occupation....

ShankyS's picture

That is where the confiscation of all the retirement plans comes into play - that is whet they will "borrow" from the "patriotic" AmeriKans and use to buy UST. This is part of the master plan. Makes you feel good doesn't it, know ing they will do that and everything will still fail in the long run!

RafterManFMJ's picture



Looks like I'll be getting laid off here in 3 weeks; I'll empty my 401K as soon as I am able - only way to get it out is a long lay-off.  So being un-employed will have a silver lining..."And remember, always look on the bright side of life! 

TruthInSunshine's picture

I think that what you really meant to say is that the Japanese government in concerted action with the BOJ essentially turned Japanese domestic pension/other retirement funds into its captive source of 'go to' pool for offloading its bonds, right?

spiral_eyes's picture

That's another story, but yeah.

tarsubil's picture

Why do we build with steel and stone when you can stack bullshit to the moon? It will never fall over.

true brain's picture

I concur with precious metal gift from bernanke. But I will wait a little more may be in the 1500 range to plunge in big time. My grand children will surely thank me for it.

LowProfile's picture

Don't be surprised if it drops 200 more from there.  That would make an ~30% correction off the 1900 high, which is what happened the last time the SHTF.

Time to polish up those ZH Titanium Testicles (R).

Harbanger's picture

30% correction off of 1900?  That would be $1330, I always miss all the fkng sales.

LowProfile's picture

~30%...  That means +/-

BBBBBalls of Steel boys...

GetZeeGold's picture

That would be $1330


Maybe if they outlawed the Fed overnight.......good luck with that.


China would backstop $1500 all day long........and they would thank you.


spankfish's picture

Zero Hedge Titanium Testicles, trademark it while you can.

Race Car Driver's picture

The Comex may sell you nice little piles of paper for that price, but good luck getting yer grubby little dick-beaters on the phyzz.

pslater's picture

"I expect that in 5 years the Fed's treasury holdings will be towering over foreign treasury holdings."


It ain't gonna last five years.....

Future Tense's picture

Don't forget about the additional debt destruction coming from the muni defaults.  Merideth Whitney had a great interview with CNBC today saying, ""There's been so much backroom political maneuvering to keep these cities from going bust....There's been every effort on the part of states to prevent this tidal wave of defaults which is going to happen sooner or later. If people want to tell me 'you're wrong because this hasn't played out,' stay tuned."  Full interview here:

trebuchet's picture

i dont get the qe connection


That blue line to me is deleveraging in the RIGHT direction, bringing it back to trend, lower systemic risk, lower interest rates.

If anything, since its largely derivatives of the red line, revertign to trend gives scope for expansion again without qe

please explain. 

coz im a muppet. 

tickhound's picture

Zombie banks, bitchez.

brewing's picture

yamma hamma, it's fright night...

tickhound's picture

well put.  I'd also add that this passive game of hot potato lending is gonna speed up, and then freeze up quite nicely. 


Quantatative twisting clusterfuck-o-rama to infinity. 

SolidSnake961's picture

So is Tyler implying that dow 13200 is the top when he says "Any additional increase in stock prices will require not only the already priced in $3.6 trillion, but far more direct Outside money injections" ?

The trend is your friend's picture

I remember a whole 4 years ago when these clowns were debating a 750 billion bailout and now we're talking 3.6 trillion on top of the the 4-5 trillion already pissed away.  When will the shit end already.  2 years from now it will be a 10 trillion bailout.

Frustrated short

kridkrid's picture

That $750 billion was a distraction. It was the alphabet soup of other fed sugar that happened behind the scenes that mattered.

Palahniukophile's picture

Just one step closer to the coming economic collapse...

blunderdog's picture

In for a dime, in for a dollar.

UP Forester's picture

In for a dollar, worth a penny.

HungrySeagull's picture

evicted for not having 99 more.

GetZeeGold's picture



Make sure everything you have is stamped .999


Seer's picture

It's kind of funny reading the US Mint's web page on gold eagles:

Ever since its discovery 5,000 years ago, gold has been treasured for its unmatched luster, beauty and intrinsic value. Today, gold continues to enjoy widespread appeal as an investment and storehouse of value.  Gold is an internationally recognized monetary and financial asset held in reserve by major governments.  It is so rare that all the gold ever mined could fit into a cube measuring just 20 yards on each side.  Most importantly, gold can play a role in diversifying an investment portfolio, since it can move independently of stocks and bonds.  What's more, gold is a tangible asset - one whose beauty and artistry you can literally hold in your hands.

Are they, however, .999% pure?  They don't seem to advertize it as such.

Tsar Pointless's picture

Print it light, taking us through the night
Shadow banking, Benny you do it right
Give us more, QE behind closed door
Shadow banking, all this and nothing more

Sung to the tune of Andy Gibb's "Shadow Dancing", of course.

Or this.

Print, baby, print
Now that the game is over
I got a new printing press
In quantitation
Impossible not to use

Sung to the tune of Inxs' "New Sensation", of course.

LetThemEatRand's picture

Ben to the stock market:

Never gonna give you up
Never gonna let you down
Never gonna run around and desert you
Never gonna make you cry
Never gonna say goodbye
Never gonna tell a lie and hurt you

We've all been Bankrolled.

tom a taxpayer's picture


The bartender at 1:20 was the market reaction to Jamie Dimon's JPM stress test announcement.


BW's picture

The FED has been doing this for 99 years why the surprise.  Treasuries will rise until the Gold/USD revaluation is done, and Gold has a long way to go.  Gotta print to buy more treasuries to keep those rates low.