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Here Is Why The Fed Will Have To Do At Least Another $3.6 Trillion In Quantitative Easing
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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In my simulation I enacted all cuts and got it down to 33 percent of GDP by enacting all cuts and the highest cuts possible in all situations where an option was granted. No increases to spending were selected. The simulation concludes the government will reach 60 debt of GDP in 2020 based on my choices. I did this in my free time in 1 minute.
Hope and Change.
I think you forgot to release a couple hundred thousand non-violent drug offenders in federal custody, but I'm green with this. Looks like my list. Probably Ron Paul's, too. It took me a little longer to come up with it, though. Now, take the next step. Count all the votes you can't get with this plan and develop a strategy that will lead to an election victory anyway.
Winning strategy for election victory?
Get an inside man or six at Diebold two years before the election, or just buy them like a regulator.
Maybe its too late at night because I'm missing something here.
That shadow banking money sits in the REPO market "parked" until an investment oppotunity comes along.
That REPO market is run by the banks and deposits are collaterised.When the REPO market froze in 2008
and nearly brought down everything it was because the depositors demanded over colateralisation and there were no
assets left to pledge,so the money stopped coming in.
The REPO market should be bigger than 2008 because we know that money sure as hell hasn't been going into
the stock 'market" or RMBS or USTs as the Fed is buying all of those.
So really the shrunken market is probaly a symptom of no good colateral ,but where's f..ing money gone ?
BS. Ben knows he gotta small pecker. He is looking for an out. He wants to go home.
"SHRINKAGE" <George Castanza>
While we have explained the methodology of approaching consolidated credit money in modern finance before
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!
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"Credit money" did you get that- akaka?
F*ck the Fed. Still think it was hilarious how JPM sideswiped them and got market juiced on a spec trade from hell.
And China, can the Fed take on China? In less than a min China drove the USD into orbit against it's CNY. Caused USTs to freak out and drove up yields, yes the 10yr will hit 3% again. The Fed is good at 2 things, money printing (obviously) and exporting inflation. The more those lunatics print the more China will kick the ballsack. The Fed would lose a war with China.
Interesting times about to get worst.
F*ck the Fed. Still think it was hilarious how JPM sideswiped them and got market juiced on a spec trade from hell.
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Do you actually believe there is a difference between those two?
The Fed makes the policies and JPM/GS etc front runs them-that's the game-The Fed losing money (expanding balance sheet) is backed by government and will be paid for by taxpayers (the fleecing)
Yes in someways, but you have it back to front. Wall Street runs the Fed, always has, always will. The JPM gaming the Fed just after the FOMC statement/bank stress tests is a good example. The Fed took it. Forced to release the bank stress test earlier.
The Fed is owned by Wall Street banks/investment banks etc. So policy occurs only with the yes of the private interests. What happed with the JPM trade the other day occurred quickly, notice how the Fed released their statement and stress tests very quickly after the JPM results. It's a game. The government is completely oblivious, or they don't know how to deal with it. Ron Paul knows the play, most of America is waking up to the con job. The taxpayer may still punish Obama make him a lame duck after the election, on allowing Wall Street to play him, the bailouts should have never happened and the Fed should have bee be audited in 2009 and 2010. He f*cked it. So, maybe he might not get in if he can't get the oil price down (he wants to release reserves very soon).
But, they (Wall Street/Fed) could take on Obama, he is weak. But not China. Oil is the issue, with the Fed still in lunacy mode of money printing. All you got to see is what is happening to the USD right now, it's super bid esp against the CNY (Yuan). Why? China is going to war against the Fed/Wall Street. Rates are going up. Should stress Obama out and the current market rally. Iran will take care of the rest and push the oil price further up.
System is stressed and at breaking point. I think it's ready to blow.
The Fed is owned by Wall Street banks/investment banks etc. So policy occurs only with the yes of the private interests. What happed with the JPM trade the other day occurred quickly, notice how the Fed released their statement and stress tests very quickly after the JPM results. It's a game.
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The Fed is the mule for sure-but-
I would call it an incestuous club and you and me ain't in the club but we are in the game-only to cover the losses-
I totally agree. I just trade ranges, but the Fed isn't bullet proof (pun) so we shall see what happens.
The economy is one great big fraud, and that is all it is.
http://www.amazon.com/Simple-Wealth-Mr-Andrew-Costello/dp/1463523017/ref
dont you understand how many young adults could die
My fear?
As this worm turns, Western world governments start getting rid of cash and coin, and at the same time pull a Roosevelt (make ownership/sales of Precious Metals against the law).
We are pretty close to this being implementable; debit cards, online accounts, everything in digital traceable fiat dollars.
I'd say they need five years maximum to implement a no cash system and proceed from there.
Look to the younger generations, using smart phones to do banking (commercials playing now).
With enough propaganda, anyone railing against the hegemony of no physical medium of exchange will be successfully painted as a tin foil hat wearer ready for the looney bin or a FEMA/DHS Domestic terrorist camp.
At that point everything will be fungible. No money? Ctrl +$P for TPTB and "loans" from the "bank" (central bank), etc., for the plebain sheeple (e.g. - student loans).
Kids get in trouble, Mom and Dad or Grandma and Grandpa putting up the house and any other assets as the bailout mechanism. This is happening now, but imagine when it is all trackable using FBI/FED databases.
They are licking their lips and rubbing their hands over the possible tax and confiscatory benefits.
ebworthen--
great post-
Your Droid and iPhone banking app is your frined... don't cha' know.
US can't stand the rising interest rate.
http://www.cnhedge.com/
http://www.jinrongbaike.com/
Tyler,
You have exceeded my pain threshold..
Once you close the loop, the amount of QE3/4/wtf must = the accumulating amounts of the fiscal deficit, less any treasuries that can be sold to people outside the US (sovereigns or other foreign investors). The same applies to Japan, Europe or the UK. The Fed is simply monetising what cant be sold. Just like Zimbabwe.
I dare the Fed to hike interest rates.
It takes a double dog dare to do that.
Bernanke is not looking at General Equilibrium but starting from an Objective Wall Street wishes to reach and thinking that is the control centre of the economic system. The fact that Banks are increasingly part of a parallel parasitic economic system does not occur to economists in the thrall of Bankers.
Pretty soon regional currencies will be needed even at city level to keep economic activity alive and Micro-Credit. The macro-economic model is beyond dead it is zombified. Bernanke still lives in the paradigm of Money flowing from banks into the wider economy; he does not see that it is a dam hoarding money and sucking every other river dry to stay alive. Banks are the giant Leakage of Keynesian Economics and are essentially creating a giant Liquidity Trap to stay afloat at the expense of the real economic activity that marked an industrial economy
VIX is at 15. things are gonna be just fine...
3.6 trillion??? Largely bullish. Bon apetite mf'ers!
Loan sharks knew that if they took the dollars printing machines under their control they could suffocate the world ...they could initially suffocate USA and after taking the USA from the Americans, they could move and suffocate the whole world and take the countries from their people.
FED printed cheap money and loansharking multiplied this money in an unnatural way within the American economy boarders and they discarded them abroad so that they did not threaten USA. USA became the first state in the world with artificial “breathing”...
It cannot be possible but just in the USA for only the last year, more than one million houses were seized. It cannot be impossible but the New World has returned to tents and shelters ..has returned to the ages of Columbus. It cannot be possible that we allow to a few loan sharks looting the toils and the assets of people...
http://eamb-ydrohoos.blogspot.com/2012/01/global-debt-crisis.html
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Authored by Panagiotis TRAIANOU
Money market funds are part of the shadow banking system, but their liabilities should not be included because that would double count the liabilities of the entities whose securities are the basis of the money market fund, which only functions as a conduit.
What fraction or part of the $3.6 trillion should be disregarded for this reason?
cali tax revenue down 22% from 2011!! you know that kick ass 2011..what a recovery. the Fed is going 24/7 to pick up States debt as they are the Fed Gov. another fact CNBC is not going to report.
Just when people think the luster of Gold, Silver and PM's is fading, another chart comes in and punches them in the nose. Nothing says buy PM's more than a redline GDP v.s. Total Debt chart.
The FT article hereafter does not tally with this ZeroHedge's analysis. Where does the difference come from?
http://www.ft.com/intl/cms/s/0/39c6a414-00b9-11e1-930b-00144feabdc0.html...
The Ft article does not tally with the ZeroHedge analysis. Where does the difference come from?
http://www.ft.com/intl/cms/s/0/39c6a414-00b9-11e1-930b-00144feabdc0.html...
I'm not sure what difference you're talking about, but the focus of the FT article is global, not just the US. As the article notes, the US's share of the global shadow banking system has fallen. That may explain the difference.
Thank you for the link to this article. It implies the situation is worse than Tyler thinks, because the assets of money funds have dropped by $900B. So whatever adjustment Tyler failed to make for money market funds (which do not create credit), that adjustment has fallen from 2008 to now by $900B, so a more accurate figure for Tyler would be that there is a $4.5 trillion gap to fill.
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