Shadow Banking Capitulates

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Jager06's picture
Jager06
Status: Gold Member (Offline)
Joined: Dec 2 2009
Posts: 395
Shadow Banking Capitulates

From Tyler Durden over at Zero Hedge....

The biggest piece of news in Thursday's Z1 statement was not that consumers continue to deleverage, that corporate cash levels are at $1.9 trillion (of which $1 trillion is financial and half of the rest is held offshore: maybe instead of copying Zero Hedge charts, the WSJ could have actually focused on the story behind the headlines) or that the stock market continues to be the only manipulated delta in household net worth (even as wealth in real terms is dropping). A far more relevant and important data highlight has to do with the only thing that actually matters for the reflation of the monetary bubble: namely the fact that the contraction in the shadow banking system is continuing. Or so was the conventional wisdom. As of September 30, Bernanke has successfully stopped the net decline of monetary aggregates even when including the massive shadow banking system.

As we have long claimed, every action by the Fed, every attempt at reflation, every bond purchase directly, and ES purchase indirectly courtesy of Citadel, have had the sole goal of counteracting the impact of the the collapsing shadow banking liabilities. Compared to shadow liabilities, which topped out at $21 trillion in March of 2008, all other monetary aggregates are irrelevant: this includes both their representation in bank balance sheets, such as traditional banking liabilities and the broadest representation of money stock tracked by the Fed, M2 (since as of 2006 M3 is no longer tracked due to the egregious costs of keeping track of this data). And the biggest, and so far most credible, argument that deflationists have had, is that the shadow banking system, and its reconstructed M3 proxy is plunging far faster than Bernanke is reflating other parallel aggregates. Well, that is now over. As of Q3 2009, the sequential change in shadow and traditional bank liabilities was net positive by $3.8 billion: this is the first time this number has posted an increase since December 2008! This fact should send a wedge of terror into the hearts of all those, both deflationists and inflationsts, who realize the significance of this inflection point: it appears that Bernanke has finally succeeded at offsetting the drop in the shadow banking system.

Up until now the one and only defense that those who anticipate continued asset price declines was that on a net basis, the monetary system was still contracting. That is now no longer the case. And now, ironically, all that remains is for a very much cornered Ben Bernanke to convince people that the economy is getting better, resulting in a surge in net borrowings, and a spike in monetary velocity, and... hello Weimar.

osb272646's picture
osb272646
Status: Silver Member (Offline)
Joined: Mar 14 2010
Posts: 120
Re: Shadow Banking Capitulates

I'm having trouble grasping the significance of this.  The supposed inflection point occurred in Q3, 2009 which is almost 15 months ago.  Is the new trend still in place?  Seems that there should be more current data available, and if not, then something that happened 15 months ago is probably not all that relevant to today?

Jager06's picture
Jager06
Status: Gold Member (Offline)
Joined: Dec 2 2009
Posts: 395
Re: Shadow Banking Capitulates

The underlying issue is that the shadow banking system is "fuller n a tick" with cash. This is important because the reason that Lehman crashed and the bailouts happened was due to shadow banking issues, fundamentally a liquidity crisis.

We now see that the liquidity crisis that came within hours of crashing the global banking system has not only been solved, but now re inflated with dollars that have been printed out of thin air, and all losses by the banks are now officially socialized by the citizens of the U.S.

And it has been solved for quite some time....but the money printing continues. Only now we are supporting US T-Bills, the bond market and bailing out Europe....all through the use of the once illiquid shadow banking system.

We are out of the deflationary danger zone and may be beyond recovery in the inflationary or hyper inflationary zone of monetary supply. As the article notes, the only thing we need now is a little velocity...people to realize their currency is completely debased, government bankrupt and start spending thier worth-less DOLLARS to get THINGS of true value.

If you look at the commodities futures markets (and shortages) and the recent bond market trend reversal, you will see that the groundwork for such a psychological change in spending habits and popular view of  fiat currency could be a train instead of what we thought was the light at the end of the tunnel.

But I am not an economist, a Harvard PhD or a congressman. Your mileage may vary!

Jager06

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