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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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+ 1
And refer to adr's post above about the sad state of the education system
Bernanke can't print fast enough to save the shit from hitting the fan. Where are those invading aliens when you actually need them so bad? Where are Bernanke 's fleet of blackhawk and those free $1,000,000 a pop FEMA Cash Cards? I need to visit my favorite whorehouse so bad but they don't honor my EBT cards any more. Fuck!
Bank chiefs enjoy double-digit pay rises Financial Times
"Shadow Banking" is a euphemism for THE EMPIRE's war machine AND the payoffs to the Godfathers....
Are you sure that the Traditional Liabilites haven't already crossed Shadow Liabilities?
The Feds "re-organized", ahem, the Z-1 this time and moved a few of the line items around that were used in the charts showing Traditional Liabilities in prior quarters. Specifically, the U.S.-chartered commercial banks (previously L.110) and the savings institutions (previously L.114) were combined into a new sector called U. S.-chartered depository institutions (new L.110). They also moved and renamed the bank holding companies (previously L.112) to holding companies (new table L.128).
If one were to reconstitute Traditional Liabilites to include the now aggregated but previously excluded savings institutions, as well as continue to include the holding companies in the calculation, then the data now shows that the crossover of Shadow Liabilites (which the feds managed to leave unchanged in all of the re-organizing....) and Traditional Liabilites occurred in Q2 2011.
L.128 is ex-deposit base (hence holdco, and from rating standpoint subordinated). Historically both Zero Hedge and Zoltan Pozsar have used the progenitors of L.110-114 as the sole sources of traditional liabilities as defined.
Thanks for your clarification.
I'm still an idiot. That was the most impenetrable sentence I've ever read.
and I thought I was starting to understand this stuff. Silly me...
CORRECTION: Using the revised data, the corssover occurred in the July quarter, or Q3 2011, not Q2 as stated above.
Is Opacity Hiding the Mother of All Ponzi Schemes?
Written by Desputatio Sapiens
http://econintersect.com/b2evolution/blog2.php/2012/06/24/jp-morgan-eight-challenging-questions
The scary thing about the recently announced trading losses at JP Morgan is not that a twenty or thirty something “rogue” trader in London can lose a lot of money. That has happened to many if not most of the Too Big to Fail Banks and the system keeps rocking along. The really scary thing is that, just as with the mortgage mess of the 2000s, we are left with the feeling that no one, including Mr. Dimon, really understands the accounting used to book derivatives transactions.
"There's gambling going on in here, I'm shocked" "Here's your payoff Sir" (the Roulette scene from Casablanca)
Mr. Dimon has criticized Paul Volcker for speaking out against a trading system he says Volcker doesn’t understand. What if no one can understand the system? If the models being used by the banks cannot be trusted, there is no way for anyone, including Mr. Dimon, to know with certainty what his real risks are. We can say with some certainty that for JP Morgan the risks are likely between their risk estimate of $348 Billion and total notional exposure of $71 Trillion, but that’s a pretty big range.
“Rogue” traders only come to light when someone loses money. Until then they typically appear to be making a lot of money for their employers and have the status of a Roman God. The wild trading comes about when one of these guys incurs a loss, hides it and scrambles to make it up. Things get out of hand and suddenly you’ve got headlines. It would be really interesting to know what was happening in the JP Morgan trading book in question before the “London Whale” began to do his thing.
Shadow Banking was invented by Bugsie Malone or was it Scarface?
Community bankers around the U. S. all tell the same story. They have a multitude of great opportunities, but no capital to fund them. As a country we’ve put the entire banking system at risk to the success of the derivatives traders and as a result it appears that a third of the community banks in the U. S. will be merged or go out of business over the next several years. If America wants to succeed in the 21st century, it’s time to turn the equation around and put capital in the hands of the guys who know how to produce real jobs, not just jobs for the seven figure traders at the big banks, if it is not too late
What? Isn't that what QE I-III was for?
The SUCKERS will find any excuse to apologize for the GODFATHERS....
Yours is an excellent post. As Taleb says, these large money center financial institutions with access to near unlimited free money and information need to be reorganized as utilities.
If you want to make big bets, go to work for a hedge fund where if the bet fails you go out of business or go to jail.
They are destroying the middle class with their monetary shenanigans. Bennie needs to go back to teaching, and soon, the hour grows late.
sschu
Man... to a "layman" this stuff is confusing as hell on a good day!
Same here, don't get one iota of it, all I know is, it's bad news. Take precautions.
Amen bro ... it's all tricknology ..... not Tyler , but Ben, The FED, WS ... it's all for them .lest us eat dust bunnies.
As a layman, not understanding a damn thing about this, I do know something I read.
Just about every government and governments within government is spending more than it takes it. Crete and Spain ask for bailouts and it looks like (Italy is next, yet no one has the money to bail them out. The UK, USA, China and a few others can print. California, Illinois and other states cannot, neither can the Euro countries.
As an individual I could not put a roof over my head and eat under these circumstances and no one would ever consider "bailing" me out on good faith alone.
To my mind, all this techno speak is telling us a very simple message.
The world is broke, into hock up to its eyeballs and we are going to reset, like the Great Depression and possibly worse.
This is not economics, just an observation from someone who lived a while.
"As an individual I could not put a roof over my head and eat under these circumstances..."
Obviously you're not cut out to be a successful politician. Plus, you're talking about spending your own money, not other peoples money; apparently that makes it easier on the conscience. All too many people, however, seem to fit the pattern lambasted in Shania Twain's song KaChing.
Here's more about the "flow": http://halfpasthuman.com/gift.html
Way, way, way too good. Thanks. Is there more from this dude?
SO............we still have a few more years. I can live the rest of my life and I am so tired of charts from ZH
Same thing from another angle:
http://news.goldseek.com/GoldSeek/1339766400.php
Conclusion:
The U.S. Bond market has been “gamed” beyond belief and the only institution in the world with the means and motive to conduct this business is the U.S. Treasury [ESF] in conjunction with/acting through the New York Federal Reserve. As such, U.S. bond pricing and interest rates are set 100 % arbitrarily and today represent the BIGGEST FINANCIAL HOAX ever perpetrated on mankind.
Rob Kirby
Shadow Banking and derivatives are two totally different things.
unless derivatives blow up in the faces of the major shadow banking players...then i would imagine one has something to do with the other......................
lest we forget that on The Fed's SHADOW BOOKS are quite a few of the banking industries (shadow-booked) DERIVATIVES.
shadow banking is 5 guys sitting in a circle selling each other the same rock back and forth and everyone making a profit on each sale.
dirivatives is everyone betting on who gets stuck with the rock and who gets stuck with the bill at the end of the game.
inscribed in each rock are inscrutable algos and other accounting math gimmicks.
so... can I convert to a "shadow" mortgage and send in virtual payments?
This (remarkable) post reminds me of Steve Keen back in ancient times:
"….The only way that Bernanke’s “printing press example” would work to cause inflation in our current debt-laden would be if simply Zimbabwean levels of money were printed—so that fiat money could substantially repay outstanding debt and effectively supplant credit-based money. Measured on this scale, Bernanke’s increase in Base Money goes from being heroic to trivial. Not only does the scale of credit-created money greatly exceed government-created money, but debt in turn greatly exceeds even the broadest measure of the money stock—the M3 series that the Fed some years ago decided to discontinue."
http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit...
I am bemused whem I wonder how it might be possible for any ordinary person to grasp even the faintest idea about how money is created, used, and destroyed. It seems to me that we have created an incomprehensible monster that exists almost independently of our needs, sucking our lives out of us. The average person's relationship to the money system is about the same as the relationship of Kilgore Trout's yeast to their champagne.
I know a little about rocket science. This financial jungle is far more arcane.
So how do I make money off of the shadow banking system collapsing? Short G$?
OTOH:
'The irony that ties it all together, is that if indeed for some reason retail investors do come back, and do pile their over $8.1 trillion in fungible money currently stored under the electronic cushion as we described in This Is Where "The Money" Really Is - Be Careful What You Wish For, which in turn would also unleash the titanic wall of money hidden behind the Shadow Banking dam wall (at last count about $35 trillion contained among the custodial holders of all securities why are quietly swept into the shadow banking system's re-re-rehypothecated pseudo asset pyramid and regulated by exactly nobody), which no conventional economic theories account for, yet which as Ben Bernanke this week, and Zero Hedge for the past 2 years, has been warning is the real catalyst of the (hyper) inflationary spark, then the Fed will be powerless to stop the biggest avalanche of empty artificially created fiat currency ones and zeros to ever hit the monetary system in the history of the world since Weimar. Only this time it will have the added benefit of HFT to accentuate every move imaginable as cash transitions from an inert form to an active, asset managed one.'
...and it was said " the deposit-free US Shadow Banking " I believe Vermont charges a 5% deposit on all refuse,including our fiat script.
It is all coming together now:
'The real story of the present is the shadow banking system, the unstable and massive repo market, and the apparent daisy chain of hyper-rehypothecated collateral. It looks like the sound bite version amounts to the fact that the European banking system is on the leading edge of collapse for the whole system. These institutions are by all evidence now badly deficient of the three hallmarks of real banks--deposits, capital and collateral.1
http://www.zerohedge.com/contributed/big-3-french-bank-assets-triple-frances-gdp-according-david-stockman
Yep. That excerpt sums it up in a slightly more bitesize version. It's a little crumb of the red pill and needs to be shoved down a billion gullets.
That chart looks like an 8086 layout.
So the Fed needs to open up a bunch of savings accounts at the banks?
Wall Street and Banksters gorge on all of Bernanke and the Fed's printing you can.
Remamber Bernanke and the Fed will just keep throwing (printing) money at you to bail you out.
Cook your books and post losses and you get more. Rinse and repeat! Clean up before the Fed's balance sheet gets insanely huge and the loss in confidence in fiat occurs.
Fatten up those private overseas accounts. Make the Fed's money disappear and ask for more!
So ahh, are all those repo liabilities dollar denominated? Or does that "legal tender" bullshit only apply to Americans?
Now that I think about it, they can't be dollar denominated, they're with foreign central banks, so they would be foreign currency denominated, should the dollar collapse our repo liability would skyrocket, unless our creditors collapsed and debased at the same rate.
I think that's the plan, debase globally-till somebody tries to foreclose and collect, then they get killed and replaced.
Thanks for the reply Tyler
[sic] "if there's a bustle in your shadow'd hedgerow,... don't be alarmed now... it's just a spring clean for the elusive May queen... rehypothecating its hive with a secretive amnesia love sting... hatchling drones swearing solemnly... as they find a sweet-smell flying blindly up a stairwell... to a heaven colonized in hell... oooh... it makes me wonder"
Stairway to Heaven inverse-rehypothecation for your pleasure http://www.youtube.com/watch?v=7YZb8s7Kxa4&feature=related
More posts about this in the future please
Great article substantiated by measurable facts. Let's see the Fed do this!
So..this article explains exactly why Hank Paulson ran into GWB's office and said (paraphrasing) "(Without TARP) there will be no milk and bread on the shleves within a week". Paulson knew that the banks would not be liquid enough for their shadow banking settlements and the house of derivative cards would bring down fixed income Mutual funds, Pension funds, IRA's, and indeed all the way down to letters of credit. Commerce could have indeed been disrupted in 2008 w/o the 3 page TARP.
Of course then the 3 page TARP bailout has turned into a no page print and twist debacle by the Fed, and a further bailout for the money center banks, GM, and a bunch of subsequently failed solar and alternative energy companies as Bernanke ande Obama try to get velocity in the money supply moving in order to raise cash for the banks....and hopefully have the banks lend and increase employment.
Alas, western economies are not that simplistic.
I visualize Ben Bernanke with his cyborg helmet on working the swap lines like Tom Cruise in Minority Reoprt waiving his arms around wildly.
Just a somewhat related comment from my personal experience and the early growth of the "Shadow Banking System":
I was working as a rookie stockbroker in 1978 at Paine Weber Jackson & Curtis , when they introduced the "Cash Fund"..... in response to Merrill Lynch's introduction of the "Cash Management Account" CMA Account which was the first to challenge the traditional "Banks" and "S & L's" in gaining the "Checking Accounts" and "Savings Accounts" deposits from ordinary citizens..
After a few years on having their accounts transferred out to these new accounts "Brokerages" the old line "Institutions" began to take more risks, in order to compete with the "Money Market" returns. Shortly thereafter we say the S& L pile-up which cost the American Taxpayers approx. ~ $ 500 Billion. What this did is increase the rtisk level that would have to be assumed by the traditional handlers of traditional "Deposits".
It was designed as a money market account , that paid more interest and allowed you to write checks, and the value of the fund would always maintain it's $1.00 value / per dollar invested.
It was all designed to take away the cash people had in N.O.W. Accounts and savings accounts, and bring it to the "Brokerage Firm's".
So, this it seems was an important part of the new "Shadow Banking System", to me a seemilgly important step along the way to where we are at now...? Do you agree?
Old memories, from the beginning of a career?
Shadow Banking - yet another parasitic Wall Street "invention".
"Deposits? Who needs deposits?"
http://ebworthen.cheezburger.com/6369327616
If you wanted to blame one "KEY" man for where we are and the present role and power of "Brokerage Firms" which are now "Bank Holding Companies" protected under FDIC, and the ENTIRE TO BIG TO FAIL Nightmare it would be Sandy Weill
Born on the day "Glass Stegal" was enacted, he spent his whole life working to undermine it and it's principals.
No matter how complicated a Western Economy gets, everyone can understand the statement, "You can not solve a debt problem with more debt."
It still does not mean they won't try, after all 95% of the public do not understand that statement.
Robbing Peter to Pay Ben, is the standard.
Cc
Thank goodness everything is going to be ok and those darn liabilities are getting paid off. But, how do you make money at S&P 1300-1350 all 2 years round.
I think the anonymous (for reasons of common sense) Tyler forgot to include the collapse of the EU in 3 days and then the collapse of China and the US and the world and the hereafter. No not the hereafter that's another subject. But anyhow doesn't the collapse affect anything? Not even an upset stomach or a headache or something. We are all just frozen in amber like stunned by a time beam for two more f'n years.
Dammmnnnn.
And upon further thought...Dodd Frank was supposed to directly address the shadow banking system, albeit in a very naive way.
This is why Dimon for example, said that he didn't understand fully Dodd Frank (are they still writing it?).Forget about what is or is not a proprietary trading position, the real question is whether Banks will have clear through a DTCC or other centralized clearing corp like the CME for their Int swap and CDS positions.
Through a central clearing facility like the CME, bvanks will have to deposit cash or USTs as collateral. Credit lines between banks for trading have up until now been based on interbank counterparty's balance sheet size / health (which of course has been subject to "mark to model"). Requiring cash or USTs as collateral changes the whole cost structure for the banks.
The unravelling of their shadow holdings to get more liquid or because of shadow inventory maturities is going to cost the banks a lot of margin, just based on the new clearing / collateral rules.
Is it any surprise that the banks are dragging their collective feet in instituting the new clearing / collateral rules?
So in other words when everything is humming along with no problem in the shadow banking system it's 'nothing to see here' and now that it's imploding "all of us" have a problem?
So, could you look at the monetary base as traditional bank liabilities + shadow bank liabilities and make the argument that this base has actually collapsed since its peak in 2008 and by not offsetting the decline of shadow banking completely, we actually have contractionary central bank policy which has contributed to the deflationary environment?
If you look at that total base in 2008 it was (guestimating by the charts) roughly $33 Trillion vs $30 Trillion today even after all the printing we have done.
Doesn't this make the case to print more money to get back to the effective monetary base we had?
To me it looks like that effective monetary base was increased due to financial engineering and mortgage backed securities that have imploded and been mostly swallowed up by the GSEs. The collapse of that market and effective monetary base has created a deflationary force due to monetary base contraction (maturing mortage backed securities without new ones to replace them) that hasn't been completely offset by traditional money supply growth.
Now I am not an expert and this article mentions that the 2 types of liabilities have different inflation characteristics, and I don't fully understand that aspect, but to me it looks like we need to print more money to stop this deflation that will continue to occur as long as those mortgage backed securities are maturing faster than we are expanding traditional monetary base, or mortgage backed security market. Either of which would fix the deflationary problem.
The other solution would be to regulate and fix the mortgage backed security market? What if with better regulation, lending standards, transparency etc. we grow the mortgage backed security base and get us back to where we were.
Thoughts?
I am a saver and therefore like deflation. Deflation is good. It increases the relative value of my savings. Inflation is a tax on my savings and others assets as well. Inflation leads to a total confiscation of wealth by the state. Inflation is killing savers, the elderly and fixed income retirees. Just my thoughts. Too bad there is no representation in congress for savers, other that Ron Paul.
Unless of course the U.S. Goverment passes laws under National Security saying that derivatives are a threat because threats do take different forms.All are then cancelled,everyone who is stupid enough to hold gold in paper has it confiscated and the FED continues on.Oh ya,can I have your gold and precious medals in your safety deposit box?And knock,knock,who's there?It's the police,we understand you own gold.Don't think it can happen?
Do we give a shit? One must have intelligience to care this much, we do not. God save us.
Er, I take that back. That's what got us in this problem, the belief in the unknown. Fuck Everybody.
Thanks for this education! ZH is wonderful!
So is it a bad thing if most of my retirement is in MMFs at the moment?
How much longer will the Gilt, Dollar and Danish money but considered a "safe haven" given the massive debt/GDP ratios of these nations?
I thought this was an interesting article:
The UK under the loop – Safe Haven for How Much Longer?One of the extraordinary effects of the euro zone debt crisis has been the manner in which the market and media have taken the notion of safe haven investment to heart. Consider for example the fact that the situation we are currently in largely comes down to too much debt tied to real estate, mortgages, and property development. Consider then Denmark with the largest ratio of mortgage and private household debt to income in the world and you wonder why international money is pouring into the Danist mortgage backed securities to such an extent that interest rates are now negative. I mean, wasn’t this the very products that got us here in the first place?
The same reverse logic can be applied to the UK where yields on Gilts are heading for new lows even as we learn from the most recent McKinsey study on global deleveraging that the UK is now the most indebted economy in the world even surpassing Japan.
http://www.citizeneconomists.com/blogs/2012/06/25/the-uk-under-the-loop-...!+Mail
The ZH articles and this one make me wonder (and worry) about this.....how can the dollar be so strong? Gilt?
PS: Sorry for the bag over my head...but my doctor said it may help block some of that Fuki radiation raining down on us from Japan.
I'm going to have to read and re-read this article so I can fully comprehend what is being said here. This is the kind of Zerohedge article I like which keeps me coming to this site.
Credit Derivatives Facilitate Extension of Credit
http://en.wikipedia.org/wiki/Shadow_banking_system
.
Shadow banking system
from Wikipedia, the free encyclopedia
....
The shadow banking system is the collection of financial entities, infrastructure and practices which support financial transactions that occur beyond the reach of existing state sanctioned monitoring and regulation. It includes entities such as hedge funds, money market funds and structured investment vehicles (SIV). Investment banks may conduct much of their business in the shadow banking system (SBS), but they are not SBS institutions themselves.[1] [2]
......Credit Derivatives Facilitate Extension of Credit
Less repo leverage is bad? Bank deposits are more mobile than MMMF's? I have no use for this MMT crap. It got us into this mess in the first place. More delerveraging, please! Bring back a world where financial instruments trade at intrinsic value.
Reread the article as many as time as necessary to actually grasp that it is MMT, and other idiotic pet theories, that never account for shadow liabilities as:
i) they simply don't grasp what they are, and
ii) shadow banking never existed in the days of various even more idiotic Neo-Keynesian formulations
which are saying that shadow banking deleveraging can be offset by traditional means.
I don't need to read it again. Reread my comment if you like. If your point is that this financial bubble can't be kept inflated without eventual hyper-inflation you had me at hello. The "highly technical" jargon other readers get woodies over doesn't change the basic situation. You refer to the system that allowed hyper-credit-expansion as a new mystery. It's just extreme leverage. I like simple. Shoot me if you want.
Tyler, from a general perspective the dwindling of the shadow banking system is a good thing - in my underatanding.
The growing possibility of bank runs is then only reverting to the historic mean.
So are you in summary saying the US banking and financial system is actually on the way of healing?
Gresham's law
From Wikipedia, the free encyclopedia
http://en.wikipedia.org/wiki/Gresham's_law
History of the concept
The law was named after Sir Thomas Gresham, a sixteenth century financial agent of the English Crown in the city of Antwerp, to explain to Queen Elizabeth I what was happening to the English shilling. Her father, Henry VIII, had replaced 40 percent of the silver in the coin with base metals, to increase the government’s income without raising taxes. Astute English merchants and even ordinary subjects would save the good shillings from pure silver and circulate the bad ones; hence, the bad money would be used whenever possible, and the good coinage would be saved and disappear from circulation.[6]
Gresham was not the first to state the law which took his name. The phenomenon had been noted much earlier,
........"
When physical is outlawed (and it will be) only outlaws will have physical. Fiat will be enforced at gunpoint, and gold owners will not be allowed to "win the game.'
Just my prediction, not my estimate of a just outcome.
""The reverse of Gresham's Law, that good money drives out bad money whenever the bad money becomes nearly worthless, has been named "Thiers' Law" by economist Peter Bernholz, in honor of French politician and historian Adolphe Thiers.[14] "Thiers' Law will only operate later [in the inflation] when the increase of the new flexible exchange rate and of the rate of inflation lower the real demand for the inflating money."[15]....."
"It don't make me no nevermind..." - Unknown Elder African American, New York circa 1987
Sophocles had nothing on that quote.
Why the shit should I care what these freakazoid Central Bankers and their cabal say or do? I don't. What I do know is that the deal is getting less and less opaque....nukes and chemical weapons are outmoded and way unsustainable. A Financial war campaign has been going on for years and now its getting clearer that is the case - and has been for a long time.
The Lieutenants at the craps tables, waging their war, are now accusing the house of having loaded dice, and each other of bad markers.
Solid report and commentary. This is a retrenchment (inversion), which planned or not, will have the effect of engendering a rush after the next collateral class....what can that be? I have my predictions...and they aren't pretty.
There are no more gullible/pliable first/second/third world countries to overburden with debt....pink houses in Gary, Indiana or Toledo, Spain to inflate...all the asset classes and targets are fcoktd. Execpt for PM's and toothbrushes, et al.
Breathe in, breathe out...do what's right...and say what's clearly wrong. Hopefully enough of us do and we can figure a way to un-fuck this thing. I wish I were more optimistic, but at least I am somewhat.
NRBQ Music Video
http://www.youtube.com/watch?v=w3J9Jx4SYNE
.
turn it all the way up to 11.
From back when one could sorta trust factory food.
Great song/band/images. Thanks.
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,
**********
Where is the inflation as compared to the debt spiral?
Remember-debt is the flip side to credit and credit expanded many multiples above the cash base and now-debt priced over collateral value overpowers any tiny amounts of printing or balance sheet expansion-
Missed mentioning-
Not only is there shadow banking-there is also the opaque monster called-
Level 3--that no one mentions anymore-
Good God, the light bulb came on just now ... the real job of all those people on the Street is to transfer money out of the Shadow banking system and into their income statements without pissing off the statist bankers so bad they clap regulations and a clearinghouse on them.
The rest is all BS ... and nobody calls their game.
Dear Tyler, this is a most interesting piece, thank you for the investigation.
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 sheet expands, the private sector balances contract. There is no new credit-money.
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.
You can go back to sleep now.
TD,
it's almost like you anticipate the gaps in janus's thinkin.
man-oh-man...ZH is just amazing.
sadly, though, this firms up my case. what case? that one about ole JPM advancing against capital markets. i suspect that the minds at JPM have seen this comin for a while as well.
the armies are gathered together...the battlements are being erected...the parapets of the citadels are being manned.
http://www.youtube.com/watch?v=Dm5sLB49-WY
fret not...in the end, the Good Guys always win.
this is america, GOD DAMN IT!
the days of central planning, algos and 'interventions' are at an end!
long live the Human-Being.
http://www.youtube.com/watch?v=D8Q1fDf0GeY
the quick brown fox jumped over the lazy dog,
janus
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