Why QE Is Not Working

Up until now we were a lone voice in the wilderness, with our "dry-humored" Transatlantic colleagues, working for a newspaper funded with Goldman Sachs advertisements, periodically mocking our "misunderstanding" of credit and money creation. We are now delighted that none other than one of the foremost opinions on all topics "shadow" stood up this week, and admitted that indeed, it is Zero Hedge whose view on money creation is the correct one. Behold several absolutely critical observations by Citi's Matt King. The same Matt King who a week before the collapse of Lehman wrote "Are The Brokers Broken" and explained to all those who had heretofore been reading and basing their understanding of finance on the above-mentioned Transatlantic newspaper, why everything they know about the modern financial system is wrong. Lehman filed for bankruptcy 12 days later.

Since early 2010 Zero Hedge has said that for the Fed's QE efforts to be successful in stimulating the economy, and rekindling inflation, it has to focus on not only stimulating traditional bank liabilities but far more importantly offsetting the collapse in shadow bank liabilities. As we observed in July, when the latest Z.1. update was made available, there is still a nearly $4 trillion hole that has to be be plugged on a condolidated basis from the all time "credit money" high of $33 trillion in 2008. Until such time as the Fed's largesse pumps enough to fill this void, the US economy will be mired in deflation.

To wit:

"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)."

In fact, the misconception is so bad, that even the Fed's own John Williams recently confirmed the Fed itself has no idea how money creation in the New Normal, where the bulk of "credit money" exists in shadow aggregates, actually works. We explained this in "Fed's John Williams Opens Mouth, Proves He Has No Clue About Modern Money Creation"

The Problem (How Large Will The Losses Be - and can the reaction be contained?):

The Impact (Fear of losses mean private sector is running for the exits...):

...and TARGET2 (official sector) is forced to pick up the slack...

The Band-Aid Fix (print money into traditional banking system):

Is NOT Working (global equities range-bound on policy action, economies remain in slump, and money multipliers are broken):

Because (they are simply impacting the wrong system):

and more and more - funding depends on collateral...

and there is only one 'funder' - the collateral-taker-of-last-resort (as unsafe assets can only be funded at Central Banks)...

Credit Growth will remain 'stalled' until 'risky' is made safe - by on-boarding 'risk' to infinitely expanded CB balance sheets (credit-easing) with its consequent total and utter break-down of every asset class reality (and bank encumbrance); or a cataclysmic price mark-down and 'creative destruction' allowing the savers to scoop up the assets at 'reasonable' levels.

Charts: Citi

Comments

[EmileLargo]

There are three ways of getting rid of debt: (1) payment; (2) default; (3) steath default (aka inflation). Our policy makers have chosen (3).

There is no painless way of getting rid of debt. Debt accumulated at several multiples of GDP growth and income growth for decades. Now it has to be wiped out. Most here would prefer (2) or (1) if the borrower can pay (impossible if credit in the system is 45X base money). But those are not painless either. This was going to happen when all connection between paper money and something tangible (gold post-Bretton Woods) was completely severed.

[newworldorder]

Your comment has identified our current predicament.

-  Financial/ecomomic and political elite know the problems but can't voluntarily come up with anything other than the status quo that will maintain their power.

-  Middle income/productive sector has not yet felt the pain in large enough numbers to understand what is going on and to induce panic.

-  Poor and or un-informed do not care. For them it will take the stopage of goodies from the government dole to get their attention.

There are strong financial rumbligs, but faith in the financia/political  systems  still prevails.

[blindman]

to dispose of fraudulently induced debt
one must first identify the fraud. the
resolution or disposition method then becomes
clear.

[dcb]

I think Qe is working. My analysis is rather simple. the have public metrics. they do QE none of those metrics happen. they do it multiple times (UK, USA). Which means the public metrics, resons aren't the real reasosns. so you follow the money. I sugguest you look at the metric of banker pay and QE and I will bet there is a lrge correllation. It's about the banksters,not the economy stupid

[Quinvarius]

The solution.  Buy gold and jam it up to where it should be anyway.  It worked in 1980.  It will work again.