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On The Verge Of A Historic Inversion In Shadow Banking
While everyone's attention was focused on details surrounding the household sector in the recently released Q1 Flow of Funds report (ours included), something much more important happened in the US economy from a flow perspective, something which, in fact, has not happened since December of 1995, when liabilities in the deposit-free US Shadow Banking system for the first time ever became larger than liabilities held by traditional financial institutions, or those whose funding comes primarily from deposits. As a reminder, Zero Hedge has been covering the topic of Shadow Banking for over two years, as it is our contention that this massive, and virtually undiscussed component of the US real economy (that which is never covered by hobby economists' three letter economic theories used to validate socialism, or even any version of (neo-)Keynesianism as shadow banking in its proper, virulent form did not exist until the late 1990s and yet is the same size as total US GDP!), is, on the margin, the most important one: in fact one that defines, or at least should, monetary policy more than most imagine, and also explains why despite trillions in new money having been created out of thin air, the flow through into the general economy has been negligible.
Before we get into the nuances, here, courtesy of Zoltan Pozsar is a reminder of the nebulous entity under discussion which is the definition of "baffle them with bullshit." We recommend only Intel chip technicians try to make any sense of this schematic.
As another reminder, US Shadow Banking liabilities - a combination of Money Market funds, GSE and Agency paper, Asset-Backed paper, Funding Corporations, Open market paper and of course, Repos - hit a gargantuan $21 trillion in March 2008. They have tumbled ever since, printing at just under $15 trillion at the end of March 2012, the lowest number since March 2005 when shadow banking liabilities were soaring. This is an epic $6 trillion in flow being taken out of credit-money circulation, with a $143 billion drop in Q1 alone! (blue line on the chart below).
In fact over the past 16 quarters there has not been a single increase in the total notional contained within shadow liabilities.The chart below shows perfectly just where the credit bubble popped: a bubble which has affected shadow banking far more than normal credit transformational conduits.
It is precisely this ongoing contraction that the Fed does all it can, via traditional financial means, to plug as continued declines in Shadow Banking notionals lead to precisely where we are now - a sideways "Austrian" market, in which no new credit-money money comes in or leaves.
In fact, as the chart below shows, while the collapse in shadow banking has been somewhat offset by increasing liabilities at traditional banks solely courtesy of the Fed, the reality is that for two years in a row, consolidated US financial liabilities amount to just shy of $30 trillion and have barely budged. As long as this number is not increasing (or decreasing) substantially, the US stock market has virtually no chance of moving higher (or lower) materially.
What is worse is that even when accounting for offsetting traditional bank liabilities, on a consolidated basis, the US total financial sector is still an epic $3.8 trillion below its all time highs, just above $33 trillion. Unless and until this $3.8 trillion hole is plugged, one thing is certain: risk is not going anywhere (also notable is that consolidated liabilities in Q1 declined by $86.2 billion at a time when the Fed was engaged in Twist but that is for Ben Bernanke to worry about, not us).
So what is this "historic inversion" referenced in the title?
As some may have noticed looking at Chart 1, as shadow banking continues to collapse, it has to be offset by increasing conventional bank liabilities: for the most part real cash (technically electronic) deposits. And as of March 31, the spread between Shadow Banking and traditional financial liabilities has collapsed to just $206 billion, after hitting a record $8.7 trillion in March 2008. It is also important because the last time shadow banking as notional overtook the conventional banking system was back in December of 1995. Next time we update this chart, the blue line will be below the red one for the first time in 17 years.
Here it is again in chart format:
(At this point it may be worth noting that the only reason why we are so close to this critical inflection point is because this past quarter the Fed shifted $2 trillion in liabilities away from the household sector and dumped them in the US depository sector; for the time being this reclassification is not relevant but may require some clarification down the line).
Why is any of this relevant?
Simple.
What shadow banking has been for America is nothing short of an inflation buffer. Recall what the primary characteristic of shadow banking is: it performs all the traditional credit intermediation transformations that conventional banking entities do: Maturity, Credit and Liquidity.
However, unlike traditional banks, shadow banking has one huge deficiency: it has no deposits! In other words, the entire rickety shadow banking system is based simply on the good faith and credit that rehypothecated assets, converted into liabilities, and so on (think repos and reverse repos) courtesy of fractional reserve credit formation (recall rehypothecation), are valid and credible sources of liquidity. While that may be the case in a leveraging environment, i.e., in the expansionary phase of the ponzi, it no longer works when systematically deleveraging, i.e., where we are now.
It also explains why with collapsing shadow banking system it is purely up to traditional banks to grow if not to create additional credit-money instruments, then simply to plug the hole that is created every quarter with the expiration of more shadow liabilities. Because, once again, these are not of the Federal Reserve note variety, but credit instruments themselves, which in time maturity, and effectively take money out of the system all else equal.
Most importantly, it also explains why Goldman IS right, and the Fed has no choice but to shift to a "flow" reserve creation format, at least until such time as the balance of shadow liabilities is offset by generic liabilities: i.e., deposits.
However, there is a rub. As we noted previously, shadow banking is simply an inflation buffer: since there are no deposits, there is little risk of the "money" contained in the banking system from furiously vacating and be used to spur purchases of everything from 1,000x P/E/ stocks, to overvalued housing, to just being packed away safely in a mattress. In other words, the Shadow Banking system is circular as the money contained therein is self-contained.
Not so for deposits. Just ask any banker, central or otherwise, especially in Europe, who has had to deal with the threat of bank runs.
The biggest paradox is that as the US financial system takes more and more steps back, and reverts to a more conventional system (look at Europe as a paradigm of what is coming), the risk that incremental money creation by the Fed will eventually spur inflation rises exponentially, as more and more "money" ends up residing within conventional bank deposit accounts.
That currently there are just shy of $10 trillion give or take in consolidated deposits across the US financial system, on total liabilities of $30 trillion, is the only reason why the Fed has still be unable to spawn the kind of "virtuous" inflation that Bernanke dreams about every night but is unable to create.
Said inflation buffer, however, is getting smaller and smaller every quarter, and at this rate, shadow banking as a transformational conduit will completely disappear in a few short years, at which point everything will be in the hands of fickle depositors.
It is then, that America will finally figure out why Germany and the Bundesbank, are so leery of runaway printing. Because while the US still has the benefit of shadow liabilities, Europe does not. And Schauble, Merkel, and Weidmann, not to mention the German population (at least subconsciously) all know this.
In a few years, when traditional bank liabilities have soared by another $10 trillion (think doubling of the current depositor base), and when shadow banking is essentially non-existent, and when the stock market is still where it is, then, and only then, will all those three-letter economic theories, which on purpose ignore the impact of shadow banking, be finally put to the test. We can only hope that by then the market still has some discounting capacity left in it, and can prevent the kind of final outcome that tens of trillions in deposits shifting from Point A to Point B on a whim will certainly create. Alas, with encroaching central planning having made discounting virtually meaningless and impossible, we wouldn't be surprised if once again the "capital markets" don't understand what has just happened before it is too late.
Appendix A:
Historical components of shadow liabilities.
Sequential change in the historical components of shadow liabilities.
Source of all the data used in this article: Fed's Flow of Funds, which for some reason no other financial analyst, let alone journalist, wants to touch with a ten foot pole.
Finally, anyone who wishes to learn some more, here is some additional info from Deloitte (generically correct perspective, but incomplete).
Finally, those who wish to learn the details of logic behind this analysis can do so courtesy of Zoltan Pozsar's latest report on Shadow Banking.
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War and Pain.
In the smoke of combat...no gods give you the guts.
http://www.youtube.com/watch?v=_64PBTgKUSE
Just hurry up and collapse, so we can get on with rebuilding a real sustainable system.
http://silverliberationarmy.blogspot.ca/
Time to come up with a new and exclusive banking system to cover shadow. Any suggestions on a name? Since shadow didn't work, maybe we can call it "screaming phoenix" or something.
Cloud sounds good to me.
A good article but it continues the misperception that money has to come out of the bank accounts and "chase" goods to cause price inflation. Similarly we continually hear analysts say that "inflation is low because monetary velocity is low".
The Austrian School has repeatedly shown that monetary velocity has nothing to do with the purchasing power of money. Prices are set simply by market forces of what market participants are willing to pay for various items. As such, purchasing power is directly related to the stock of money in the system and these measures have increased dangerously over the last two decades.
The question remains whether attacking prices of real good through the futures market can contain prices while the money stock is increased - and the answer to that question is k"no"wn.
http://mises.org/daily/918
http://mises.org/daily/2916
I hate to say I told you so but here on ZeroHedge and elsewhere I have been insisting that the Fed (and other central banks) cannot 'print money', they are balance sheet constrained.
As the Fed's balance sheet expands, the private sector balances contract. There is no new credit-money, it is impossible. What takes place is credit recycling.
Central banks lend against collateral that are in general loans previously made. Loans are made at face-price or less. It is the precious private sector that extends loans without collateral or upon the re-pledged/rehypothecated variety. Any inflation comes from the private sector, not the central banks.
The central bank cannot lend in excess of pledged collateral, it cannot leverage, it cannot offer unsecured loans. To do so means there is no central bank.
Central banks that extend unsecured credit are no different from the banks they intend to 'bail out'. These are banks that are insolvent because they have extended unsecured loans that have become non-performing. With no solvent bank there is no lender of last resort, the consequence is bank runs (as are underway in Europe right now).
The term 'bank' includes any lending finance institution.
The reason for the bank runs is the perception there is no lender of last resort, the perception that all the banks are insolvent, because the central banks at all levels are perceived to have made unsecured loans, just like 'Brand X' European banks.
You can go back to sleep now.
That is silly Steve.
The Fed creates digital money from nothing and buys previously created bonds or other assets and inject money into the economy.
And it does a very good job of this: http://research.stlouisfed.org/fred2/series/M2NS
The total notional value of the shadow banking system is contracting, but is there any evidenc that it is going into the M2 money supply instead of other M3 type investments that still pretty much keep it out of regular circulation?
Why are commodity prices for most commodities going down if all this is inflationary?
I am no economist, but am just asking some questions to try and understand this better.
Thank you to whomever answers my question.
In 2002 the CCI commodity index was 200.
Today it is 520.
Short term trend is down.
Long tem trend is up.
http://www.mrci.com/client/crb.php
i was just thinking: isn't this just like 1995?
...hard to believe, i know...
This is one of the more important articles of late here at ZH.
Robot Trader isn't going to be very happy to see this...
MF ZOLTAN!
Did anybody else find the diagram unreadable, not due to complexity, but simply due to the resolution being so poor, that all the labels are illegible?
oh, the diagram is utterly irrelevant, Tyler's take is what counts. Fantastic article, my compliments. The momentum that is building up in the decrease of the shadow banking system would then go on in the conventional banking system, like a racecar that has already built top speed at the start of a race... < shudders >
Long live King Dollar, long live King Dollar, long live...
LOL - meanwhile Mish's takes this article as deflationist proof that shows "...
why hyperinflationists are in an alternate universe and why proponents of "huge inflation but not hyperinflation" are on Mars"You can find a very high resolution pic of the diadram here, if you dare go here:
http://www.ny.frb.org/research/staff_reports/sr458.pdf
the real RT, or the current fantasm?
all of your plus-upz have no clue
don't cha' know.
- Ned
Yes, one of the more important, indeed...
While it could be argued that nearly every article on ZH is important, it is this type of deep, highly technical article that sets ZH above the crowd and gives it the credibility those who run the ponzi wish it didn't have.
Congratulation Tyler and company.
-30-
I feel like the kid in The King with No Clothes. I find the basic assumptions in this MMT man-love piece odd.
“What shadow banking has been for America is nothing short of an inflation buffer.” Really? Well perhaps the explosion in the size of the shadow banking system caused the debasement of fiat currency and led to the global currency war that ends with no winners.
It is some kind of tragedy if money is taken out of the system? Well most people are not beneficiaries of artificially inflated financial assets. Credit is tight anyway. Pop the bubble already. Let liabilities AND assets find their intrinsic levels. The back-end of dislocation will be better than the current shell game.
IMO
What the hell are you rambling about? Read and reread as many times as is necessary to actually grasp what is being said.
Now do you have any other witty "man-love" comments based on your complete lack of understanding (of not only this piece but of every other piece on shadow banking posted in the past two years) of what you pretend of have read and jumped straight into the comments?
Actually all that was not said. You are better off for having said it and I am glad my comment brought it out of you. You are welcome and I forgive you for spitting venom at me.
As was repeatedly said: reread.
You are welcome.
My main point of contention was:
"Most importantly, it also explains why Goldman IS right, and the Fed has no choice but to shift to a "flow" reserve creation format, at least until such time as the balance of shadow liabilities is offset by generic liabilities: i.e., deposits."
As you have now pointed out there is a choice; only one logical choice: stop trying to solve a debt problem with more debt. I mistook your explanation of a stupid system/strategy as support of the stupid system/strategy.
Thank you.
Reese Bobby, please don't get upset and beat up your poodle dog named rainbow just because you got bitch slapped by Tyler!
Tyler I can be polite to. Not so much an empty-headed, ass-kisser like yourself. Strive for an original thought kid. Get in the game.
I want to be bitch slapped by Tyler :(
Thanks for the excellent article! I would like future heads-up articles on the Total Shadow and Traditional Bank Liabilities Sequential Change. The ZH 9/20/2011 article had a nice graph with the probably QE2 related upward $337 billion Sequential Change that coincided with the fall 2010 to spring 2011 inflation:
http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2011...
The above pic is from this 9/20/2011 ZH article:
http://www.zerohedge.com/news/shadow-banking-system-imploded-q2-bernanke...
I am interested in when this current somewhat deflationary environment will change back to inflation. According to a May 2012 reuters article, there is supposed to be a 35 percent CME margins increase in all commodities on August 5, 2012. My guess is that this will bring temporary deflation on Monday August 6, 2012 as a selloff will occur so that the margin calls can be paid. With increased margins CME will lose some of its power to affect change in prices, and inflation may take hold again. I don't know if QE3 will be necessary for inflation, maybe this summer drought will have people move their monies into commodities again, or the treasuries bubble will burst, or something else.
If inflation is 'up' in the liabilities graph, and QE2 increased the liabilities and produced inflation then I don't see why we would need to wait years for the shadow banking liabilities to go down before inflation can occur. I would guess that if the shadow liabilities dropped in half, then another 600 billion QE3 could produce twice the inflationary pressure, but I don't see it necessary for a decrease in shadow banking liabilities before big inflation can occur. Maybe the shadow banking liabilities will not go down anymore because there is not enough money to pay them and liabilities will go up and lead to inflation. The liabilities could go up the stairs hyperbolically/exponentially and eventually the dollar could take the elevator down. When? After the election? Months or years from now?
If today is 1995 all over again.... ....
I CAN'T WAIT TO PARTY LIKE IT'S 19 99!!!!!!!
You have no idea how bad I want it to be the 90s all over again.
I'll pay extra for a window seat. Exit row only though. Thanks.
@Silver Bug- Agreed! However, keep in mind that the longer they manage keep this up, the more profit can be made from gold/silver.
If right now there actually IS 1 oz for every 100 oz 'they' CLAIM to be out there, that's an immediate profit of 100x when they hit the proverbial 'reset' button- and that ratio could easily continue to rise in our favor as they try harder and harder to conceal and maintain this shadow banking scheme.
This could very well end with people being made to believe there is 500 or 1000 times more gold/silver out there than there really is.
I would also like to add a quick 'thank you' to all contributors (articles, comments, etc.). I'm a new member but have been diligently reading here for about a year- Excellent stuff. Although, as a 19 year old in college, I doubt citing any of the brilliance seen here would sit too well with my economics professors....Keep up the good work trying to educate the masses.
Take out the GSE component, and the slide is about double. The FED is responsible for supporting the GSE component, which is basically Freddie Mac and related zombies etc.
Do those VOIVOD guys do weddings?
funny money nirvana country, the stuff that lurid wet dreams of virtual kings are made off. Ask MAdoff.
The magic of hyper-hypothecation. The slow death of shadow banking is the cushion and the difference between Europe and US.
well before shadow banking as conduit or otherwise will disappear, we will see a major market correction. at which point The Fed will print across several fronts and inflation will be achieved. this will happen well before the year is up.
So where does Gold correct to $5000? $10,000? $20,000?!?!?
Paper or physical? The former will continue to be manipulated. Physical PM's will be used in the black markets and central banks will continue to buy and probably encourage the governments they control to consider confiscation after imposing capital controls and price fixing. This has been played out numerous times before.
Only $'s accepted in blackmarkets... i hope they too wake up and convert their holdings to gold, this will be a true bitch
Physical of course. But even the market correction will need to be something like I listed correct?! Not sure how they go about confiscating the little there is out there? I was really hoping to pay off some of my debts with some of my physical when the prices really start correcting. Suggestions?!
Pay off debts with physical? You are insane man! Y
The beauty of inflation is you pay off in the worthless paper and hold onto the physical asset. Hell it might be a good time to borrow more and buy physical.
Loan balances don't inflate. What you pay them back with does.
Well I think like you do but my wife is a totally different kind of nut. She doesn't believe like me that gold will be rising exponentially pretty soon. So whe is hoping that we can sell some of the physical to pay off the debt before they make it illegal to have it written down or worse and make it impossible for me to file a chapter 7.
ATM would you be will to do a little back and forth with me through email about my situation?
Once you are competent in the law you will realize that "chapter 7" and other corporate mish mash is all smoke and mirrors. If you are the general executor of your estate, nobody can touch any assets you own.
If you want to be more competent in the law, check out university.ucadia.info ; all the answers you seek are in there, somewhere.
Think of the paper and the physical as two different worlds. Firewall them. Go BK in the paper world, but keep your physical.
"So where does Gold correct to $5000? $10,000? $20,000?!?!?"
Only The Shadow knows
There will be no dollar price for gold. No one will accept dollars in exchange for physical gold.
There will be no dollar price for gold. No one will accept dollars in exchange for physical gold.
ZIRP is QE, and you are correct. The Fed and all central banks have been "printing" in a coordinated effort. The problem now is their efforts are becoming uncoordinated and the world, and the U.S.S.A. in particular will see that "free money" coming back in the damnest places.
There is a cost for creating capital, especially if you don't actually creat anything of real value. ZIRP killed Japan and will now kill all those who have been using it.
Yeah, what would be interesting is a statistic showing the irony of QE to cover the shadow banking system. For every trillion Bernanke prints, how much do average citizens as a whole have to withdraw from the traditional banking system to cover their expenses rising. I wonder if he likes quick sand.
"Inflation doesn’t destroy wealth — inflation destroys dollars.
Every year people who are savers see their net worth decrease because of inflation.
Inflation doesn’t hurt everyone equally — it just hurts people with cash, and forces them to spend their money and get into debt. Inflation essentially forces people to become slaves to banks and to not have money.
If you save $1,000,000 for retirement over the course of 50 years, and inflation is 4.07%… you actually only save $136,000 in today’s money...."
http://standstrongresearch.com/inflation-saving-money/
Yeah, but what if it's "guaranteed" to go up 8% per year? /sarcasm.
Trillions out of thin air, Bankers got more of it than we did.
You know the old saying: "A trillion here, a trillion there and pretty soon you're talking about real money"
jekyll
some how I do not think Everett Dirksen would be all that suprised. The croaky senator from Illinois knew his fellow politicians well.
So this is all black market stuff, right? Like a bankers convention in Las Vegas with hookers and blow in every direction imaginable.
SALT by Skybridge was just last month, but they've got another one coming up in Asia during October.
Yabyum, for this very reason Milton Friedman argued that the "helicopter drop" was a more efficient way a enacting the central bank's liquidity injection into the economy.
The helicopter drop at least had the potential to temporarily and materially increase the velocity of money, as you cast a wider net when stimulating...well, at least the Keynesians think it works (i.e., then again, as PT Barnum said, a sucker is born evry minute).
The Fed's channel of liquidity is the set of primary dealers, who get first chance to dine on the beast before the beast's carcass is passed to the rest of the economy. Second to dine are the prime brokerage clients, who jack up their leverage and then pursue other asset classes.
Result: Monetary stimulus is impotent, and Keynesian policy is proven be nothin but propaganda-laden hokus pockus.
Extend unemployment payments (indefinitely), bailout pensions, forgive student loans: there are many ways to put money in the hands of people who will spend it. When Bernanke says it's up to fiscal policy, this is what he's talking about. Of course that creates an issue with the debt ceiling but Pelosi has floated the balloon on Obama bypassing that altogether. Bernanke can do his part by monetizing the debt necessary to fund these things--he can do this either directly or by providing free money to banks and dealers so they can buy it. I think at least some of this is coming but for Obama a politcal costs has to be weighed against how many votes he can buy.
The bankers and mult-nationals wouldn't profit enough under this model.
Payroll tax cut, increasing the minimum wage, and middle class tax cuts all increase the velocity of money. Whenthe muppets get money, they SPEND it.
So, the intent is not to increase the velocity of money.
"...something much more important happened in the US economy from a flow perspective, something which, in fact, has not happened since December of 1995..."
The "flow" has reached diarrhea level.
My advice is to stay up stream.
Guess we have to discern a bit. The shadow money system is one thing, the contraction of which Shalom Bernanke tries to buffer with printing money like mad.
The implosion - and the exponentially growing risk - of the derviatives world is a second threat he tries to battle from behind mountains of printed cash.
While he may be successful in stemming the first tide, the oncoming derivatives tsunami will sweep him away like every other fake debt on Earth.
CD:
"My advice is to stay up stream."
Rather obvious, n'est ce pas.
Got any insightful comments?
You've been underprerforming in this realm, imho, but, ... well ... wtf does a small piglet know????
- Ned
I love bacon. ;))
I admit I'm no expert in derivatives and the shadow banking system. But if there is no capital backing up any of these instruments, when a "bet" has to be paid, the capital has to come from somewhere right? Either they steal the money from the rest of us or they have to create it out of thin air. What the third option, JP Morgue pays it out of their own pockets? LMFAO
And since many of the derivatives are interest derivatives, it makes sense Uncle ben cannot ever the raise the rates again.
As long as we stick to non-fiat money and bartering...
When the derivatives collapse it will affect EVERYBODY around the world. The banks that issue these do NOT have even a fraction of the money needed to pay off these bets. And neither does the US govt. Those major banks will be going down and will cease to exist. There is no way that the US govt can backstop the casino. These derivatives have been spread throughout the world. That's when the civil unrest will really go viral all over he world. And that's when those bankers and their enablers better find a very deep hole to hide in.
At least with a casino, there is the possibility of winning...
When the derivatives collapse it will affect EVERYBODY around the world. The banks that issue these do NOT have even a fraction of the money needed to pay off these bets. And neither does the US govt. Those major banks will be going down and will cease to exist. There is no way that the US govt can backstop the casino. These derivatives have been spread throughout the world. That's when the civil unrest will really go viral all over he world. And that's when those bankers and their enablers better find a very deep hole to hide in.
They have their WW3 bunkers ready.
The banks that issue these do NOT have even a fraction of the money needed
Fractions can get really, really small . . .
Mad woman,I'm no expert.I believe we need the Salon moment.
It will because banks will all know eachother is insolvent and not honor letters of credit. Try buying a shipment of wholesale wheat in cash.
So....buy gold then?
Too bad we all can't move to the shadow world.
Quite a few here are pulling some income from the shadow economy already...
Funny how 1995 also happens to be the year that stock prices first went ballistic.
A co-incidence?
Rubin sworn in 1995...
http://en.wikipedia.org/wiki/Robert_Rubin
n January 1995, one year after the signing of the North American Free Trade Agreement (NAFTA) and immediately after Rubin was sworn in as Secretary of Treasury, Mexico was suffering through a financial crisis that threatened to result in it defaulting on its foreign obligations. President Bill Clinton, with the advice of Secretary Rubin and Federal Reserve Board Chairman Alan Greenspan, provided $20 billion in US loan guarantees to the Mexican government through the Exchange Stabilization Fund (ESF).
In 1997 and 1998, Treasury Secretary Rubin, Deputy Secretary Lawrence Summers, and Federal Reserve Board Chairman Alan Greenspan worked with the International Monetary Fund and others to effectively combat and contain financial crises in Russian, Asian, and Latin American financial markets. In its February 15, 1999, edition, Time Magazine dubbed the three policymakers "The Committee to Save the World."[7]
.... and Rubin, former head of GS, was the point man for the destruction of Glass-Stiegal while he was on Citi's payroll while Treasury Secretary. Rubin should be in jail getting gang raped every day.
yuh...Rubin will be the catcher and Bubba "don't know what sex is " Clinton can pitch. Phil Gramm can watch.
I still don't get it. Why can't they just say, "We have infinity dollars, there is no crisis, derivatives are all reset, and there's nothing you can do about it."
Lots of reasons why they can't say they have infinity dollars (the commmodity complex is but one), however, I wonder the same thing about derivatives. Derivatives are essentially insurance contracts. I can see a scenario where all the big player get together a simply say "call it even". The key to this would seem to be all players recognizing that they are all insolvent without the BRICs catching on to the plan.
hey everybody--lets call it even --ok? ok- you first.
Precisely why it must become painfully obvious that everyone is insolvent. What are the odds. Personally, I see WWIII happening first.
derivatives are linear in time, not simultaneous events that can be paired off. who gets paid what would fall into the realm of courts.
imo
there is a reason why TPTB lie... the alternative would be worse.
Please define "worse".
Laughable. In world of "mark to fantasy" who knows what the real liabilities and assets are? In addition, how much of these deposits or balance sheet entries are leveraged 10x, 100x, 1000x.
paper, and paper promises are all dead and dying.
more leveraged than Dirk Diggler's dick in a midget hooker...
If i was working with regulating financial markets i'm pretty sure i would buy that movie.
Are not most banks insolvent just on HELOC exposure already (minus FASB 157 in the equation)?
I'm guessing the average person has no idea what "shadow banking" is, as well as most politicians. There was a great link/guest post on this issue a short while ago IIRC.
*EDIT: Disregard my post, I was thinking "shadow inventories", my bad, I have no idea what shadow banking is.
it's quite simple - entities that take your money but have no discount window at (place to suck at the teat of) the Fed and are not covered by FDIC insurance.
Only partially correct. Many of the shadow banks were converted to FDIC insured deposit banks in 2008. FDIC will eventually be crushed by the collapse of derivatives. Then actual, physical, bank runs, then DEFLATION, then INFLATION, then (more) WAR.
US military has planned for mass unrest..they know , they plan. I for one do not give them much chance of stopping the worst from falling out of this smartest men on earth aka "long term capital', international bankster created crisis..we do live in interesting times, too bad.
"Unless and until this $3.8 trillion hole is plugged, one thing is certain: risk is not going anywhere."
Now, what is 'risk'? Buying real commodities sounds far less risky to me than holding fake paper money in fake and bankrupt money houses.
"In other words, the Shadow Banking system is circular as the money contained therein is self-contained."
A bit of wishful thinking. The boni paid out to the participants are real money, and the price of Caribbean islands is at record highs.
interesting article. good graphics.
Is there an actionable trade for the individual investor here?
...other than the usual zh response: buy yet another LGD bar to bury under the petunia bed?
Tired of getting the right advice?
You have to call your shadow broker to trade your dark pool account.
Kill it with fire, and poop on its dirty ashes.
"B.S." Bernanke. I'm slow, but I just figured that out.
And fuck you, too, Andy Abel!
Nuke it from orbit. It's the only way to be sure.
I remember I took a test based on an Andy Abel book in college economics. I failed that test.
I asked the professor why I failed, when I thought the answers were right.
I was told, "You are right in real world economics, but you are wrong in terms of the test based on the reading material provided."
I said, "If I am right, then why do you teach a class based on a view of economics that you think is wrong?"
His reply, "This is a low level economic course. We teach these simple concepts for people to grasp a simple understanding of the material. Also this is the curriculum the University wants me to teach at this level. In later courses you learn why these early assumptions were wrong, once you obtain the capability to understand why. Most high school students graduate still thinking George Washington chopped down a cherry tree, and Ben Franklin flew a kite in a thunderstorm. They are taught this because they didn't have the capacity to learn or even believe the truth. For most people a simple understanding is all they need to get by. The sad part is many people will graduate in economics still believing the economic equivalent of George Washington chopping down a cherry tree."
I'll never forget that. I also then said, "Well, do I still get an F on the test?"
lol man
this probably explains the mary shapiro's push by the SEC to change the rules on money funds to allow the NAV to float.
What Mary fails to appreciate is this that people still want control over their wealth. Only capital controls would keep people from moving things around "en masse" should they realize all the paper promises are bogus.
If she was really interested in restoring confidence and faith (which is the real issue) she would be indicting every player involved in the theft of real wealth since the creation of derivatives and repealing of Glass-Steagal. hanging John Corzine in Time's square would be a good start as well.
good article. I learned alot.
Good article - I read it twice and still don't understand it. Can I re-hypothocate my credit card bill for this month?
Borrow a few more billions and then you'll get that privilege.
Good point jonas large parts of the article are not that clear. I am really excited about the upcoming articles "Shadow Banking for Dummies/Fuckwits". Yes i understand that in general it provides a bufferzone for the fed and in effect gives them time to play with... whilst shielded from the normal laws of economics and free markets. USA has an unwind buffer whilst they are shielded from the true effects of money printing and it explains so much in the big picture analysis about why perhaps so much fed relief has been given to europe so far thus sharing the shadow umbrella and hiding the frightening reality from the world.
The shadow banking system will also give extra time for the elite to fuck with gold and silver creating the temporary illusion that safe havens do not exist lets just hope it is very temporary...
In a few years, when traditional bank liabilities have soared by another $10 trillion (think doubling of the current depositor base), and when shadow banking is essentially non-existent, and when the stock market is still where it is, then, and only then, will all those three-letter economic theories, which on purpose ignore the impact of shadow banking, be finally put to the test.
Few years?!
Few years?!
My thoughts precisely.
However if a $3.8 trillion dollar hole needs to be plugged I will gladly re-re-rehypothecate the four quarters in my pocket to near infininty to plug the gap of fake liabilities in exchange for some great fake assets! :)
In a few years time? Do we really have that long?
You are best hedged against the collapse that is coming to be in physical anything. Do you know how many toothbrushes you can buy at the dollar store for a few grand of this digital and paper money? More than a few thousand. You might be able to trade a toothbrush for a nice meal - let's say a modestly estimated 1800% increase in value. Sure, PMs are good, too, but central government isn't going to put out a special decree repatriating toothbrushes.
Awesome shelf life on tooth paste as well. You can make it from scratch but trust me, there will be a market for the real stuff.
Toilet paper on the other hand is overrated. You can use books and tax returns if you're in a bind. Leaves work as well and certain grass types. Grows practically everywhere and is free.
Think General Store inventory ca. 1930 for your family's survival and bartering needs.
And don't forget Tampons!
Phone books
No barriers to entry in toothbrushes.
Lots of barriers to entry in PMs.
And the best thing about toothbrushes is that if, by chance, there isn't a great crash, you'll still be able to earn a modest living cleaning the grout in my bathroom from time to time.
Boy, do I hate that job...
Lol. Great idea! Here's a tip - squeegy the water off the tiles after every shower/bath and buy a good-grips grout brush - much easier to use than a toothbrush.
I stocked up on toothbrushes, toothpaste and floss on a 3 for 2 dental promotion in a supermarket lately. Also washing powder, deodorant, soap etc.
so is the US like greece and does it have shadow GDP the size of real gdp, all made of funny shadow banking money, that is funnier than real funny money on official banking books?
the true story of funny money; both official and shadowy is a hitchcockian thriller.
This just reinforces our knowledge of shadow banking. For us here, mostly a refresher with new facts.
And, this just in, BREAKING NEWS, GM just became a teenager. How is that IPO working out for you Barry.
Why is the shadow banking decreasing? If it is all rehyphocated why don't they rehyphocate some more? How can something as unreal as the shadow banking dissapear when it never existed in the first place?
Non-cash based liabilities can and will mature, be prepaid, called, or otherwise extinguished.
When you don't trust that the SOB on the other side of the transaction can honor it you are much less likely to write anymore with them. Let's see, which of the large US and European banks would I trust?
Pilot asks: "How can something as unreal as the shadow banking dissapear when it never existed in the first place?"
FMR Bankster answers: "When you don't trust that the SOB on the other side of the transaction can honor it."
And the question and the answer sum this entire fiasco up: Ponzi systems based on faith alone will collapse when that faith/trust dies.
disapearing zeros equal deflation-- inject zeros (requires debt increase) --is inflationary-until repaid or defaulted which equals more deflation --
Great explanation Tyler. Add a debt Jubilee, put the Fed in Chapter 7 where it belongs, print a US Treasury dollar, and put the Banksters in Jail, and we have a sweet new reboot. Done, move on.
Unfortunately this would require CONgress to indicte themselves. End the lobbying connection, cut thing puppet strings then you might get some politicians willing to do such things.
That's ok. It is better than having the National Socialists of America indicting them in a few years.
Take that bag off your head and run for president. You have my vote and I don't give a shit what your opinion is on abortion or to what god you pray.
has there ever been a class action suit against the Fed?
I have heard the The Federal Reserve Act has never been brought before the Supreme Court of the United States to argue whether or not it is a Constitutional Act from our beloved and benevolent Congress.
Personally, I don't need the SCOTUS to determine that for me. I already know what it is in reality. The Ponzi Act.
Just the bigger wallet cash addiction.
The `other` free lunch illusion because all your showy friends are rich and eager to pick up the bill and everyone in town wants to be friend of you guys so no restaurant owner wannabe insider dares to even charge.
Treasury dollar is a great idea but will only work if introduced as a parrallel currency -- allowed to float against the Fed dollar and limited in quantity. One method of introduction might be to call it the Citizen dollar and only allow US citizens (not corps)to exchange FRNs with a limit, say 10,000 FRN per quarter per person at the float rate. Limit the territory( Citizen dollars must not be used for balance of payments but must first be converted to FRNs) make citizen dollar illeagal for use out side the US and subject to confiscation. Price all goods and services in both--ability to pay local, state and fed taxes in FRNs or Citizen dollars, disallow all banks using FRNs to hold or take deposits of Citizen dollars--State banks with charter to exchange Cd for FRNs should be only banks to take deposits of Cd or make loans with Cd. T bills and other gov't bonds (munis etc) denominated in Cd and in FRNs with different % return depending on the currency used for purchase--and on and on-- kind of let the fed and tbtf banks have theirs and everyone else have the option. who knows --just sayin
What are you smoking?
If you want a real alternative currency though, get some bitcoin.
Its almost 3:30pm, have you seen your PPT today?
well they sure stepped in to rescue oil $80 WTI must be defended at all cost.
"It's 4 o'clock on Wall St. Do you know what money is?"
Better get some affordable land and a house before inflation kicks in and makes rent rises untenable...?
(plus, putting solar panels, cisterns, chicken coops, etc. on a rental house is a waste of $$)
Their seems to be a disconnect on the use of Solar panels.
They do not have to be on your roof.
Your array can be mounted anywhere you want. They can also be put together on a rolling cart both for security and the ability to move them thruout the day for maximum exposure and just roll back into your garage/outbuilding for safety.
But we all remember these ACEDEMIC FUCKTARDS from Cambridge...
(Reuters) - The recession ended in June 2009, making it the longest downturn since the Great Depression of the 1930s, the National Bureau of Economic Research said on Monday.
The NBER, considered the arbiter of U.S. recessions, said its declaration did not mean the economy had "returned to operating at normal capacity" and cautioned that economic activity sometimes remains below normal well into expansion.
President Barack Obama, under pressure to speed up the pace of recovery and drive down unemployment as November congressional elections near, said the official end of the recession did not change the grim reality for many people.
"Economists may say that the recession officially ended last year," Obama said. "Obviously for the millions of people who are still out of work, people who have seen their home values decline, people who are struggling to pay their bills day to day, it's still very real for them."
The NBER's business cycle dating committee, a private sector group composed of academic economists, is notorious for taking its time in declaring the start and end of recessions.
The committee said it waited to make its decision this time because it wanted to review revised data on national income, released August 27, to get a clearer reading on the path of economic output in 2009.
After a meeting in April, some of the panel's members said they were concerned the economy could dip back into negative territory. In Monday's announcement, the NBER said any fresh downturn would mark a new recession, not a continuation of the one that began in December 2007.
"The basis for this decision was the length and strength of the recovery to date," the NBER said.
U.S. officials have been struggling to find a way to speed up a sluggish recovery that has left unemployment at a painfully high 9.6 percent. The U.S. Federal Reserve's policy-setting committee meets on Tuesday, and is widely expect to discuss whether additional measures are warranted to bolster the economy.
"Due to the lack of improvement in the labor market, particularly the stubbornly high unemployment rate, the recovery still feels like a recession to many households," said Harm Bandholz, chief U.S. economist at UniCredit Research in New York. "The NBER does not seem to be too enthusiastic about the economic outlook either."
Very interesting. Can anybody explain why it's happening? Is it basically a huge sustained margin call? Also, is it a de facto contraction of the money supply?
Let me try.I don't know if I'm correct.
There are no good or acceptable assets left to use as collateral in the REPO market
where the shadow banking system lurks.No collateral=no money
Thiat is what happened in 2008 when the credit markets froze.
Tylers charts only show the tail,not the dog.
Months not years in my opinion left, Tyler.
I suppose this the double edged sword of monetizing assets. What you're essentially doing is converting shadow banking notionals into Federal Reserve notes. The downgrades don't help, which are probably causing the amount of eligible assets to flow through shadow banking to be decreased.
But given that everyone expects Fed monetizations to continue, there really is no reason to access shadow banking. Or said another way: there's no reason for banks to lend to each other. The mechanism for inflation is destroyed by the expectation of money printing.
Wow, You just blew past my Econ 101 class education 25 years ago. I wish you could say that in English.
In the mean time, I'll do my best to try to figure it out.
Thanks, Tyler
That's the beauty of this ponzi. This important article is getting close to explaining how the system can operate long after it has essentially collapsed, but what hope is there for the 89.9999% to grasp how they are being deceived when the truth sounds so architecturally complex that even those of us hunting for answers struggle to comprehend?