Shadow Bank Liabilities Plunge By $700 Billion In Q2, $2.1 Trillion Year To Date

[Ares]

Continuing the analysis of today's Z.1 report, we next focus on recent developments in the shadow banking system. And it's a bloodbath: total shadow bank liabilities dropped by $680 billion in Q2, and a massive $2.1 trillion YTD. If one wonders why Ben Bernanke (yes, it's technically TurboTim) continues to print trillions and trillions of debt, and it is still doing nothing (yet) to stimulate the system, here is your answer.

As credit will only exist if i) it is needed and ii) there are cash paying assets (or at least the myth thereof) to support its existence, the latest plunge in the shadow banking system is merely the most recent confirmation that the deleveraging in America is only just beginning. In fact, from the peak of the credit bubble in Q2 2008, through Q2, total bank liabilities (shadow and traditional) have plunged by $2.6 trillion, from $32.1 trillion to $29.5 trillion. Yet it is the collapse in shadow banking that was responsible, with shadow liabilities falling by a stunning 20% from $21 trillion to $17 trillion in just over two years even as banks have benefitted from the transfer of cheap government cheap on their traditional lending books (think Fed intervention and QE, leading to record low interest rates).

What this means is very clear: the shadow banking system is collapsing, period. Yes, the rate of collapse is slower than in Q1, but the total plunge was still a whopping $4.2 trillion annualized for 2010. And the delta between Shadow Banking and Traditional liabilities has collapsed from $10.7 trillion at the peak in March 2008, down to under $4 trillion. This is a record amount of "money" being removed from the system, and explains why, for now at least, the velocity of money is nothing faster than a crawl.

That said, if and when this indicator plateaus and recommences climbing, will be a very "sensitive" moment for all deflationists and inflationists as it will mark the inflection point from credit contraction to renewed credit creation. Alternatively, the Fed can merely force credit into traditional bank liabilities, which banks can then proceed to use and purchase stocks and commodities, at a zero cost of debt. What that will do to select asset prices, we leave to our readers' imagination.

Chart 1: Total sub-components of the shadow banking system
<img src="http://www.zerohedge.com/sites/default/files/images/user5/imageroot/shirakawa/Shadow%20Components%209.17_0.jpg"/>

Chart 2: Comparison of shadow banking and traditional commercial bank liabilities
<img src="http://www.zerohedge.com/sites/default/files/images/user5/imageroot/shirakawa/Shadow%20vsTraditional%20Liabilities_0.jpg"/>

Chart 3: Consolidated shadow and commercial bank liabilities and sequential change
<img src="http://www.zerohedge.com/sites/default/files/images/user5/imageroot/shirakawa/Total%20Shadow%20and%20Traditional%20Liabilities_0 .jpg"/>

http://www.zerohedge.com/article/shadow-bank-liabilities-plunge-700-billion-q2-21-trillion-year-date

[mamboni]

Yeah, I read this article yesterday and was going to post it here then decided not to - I needed time to absorb it's implications and meaning. In simple terms, it would appear that the massive debt pyramid house of cards owned by the bankers is collapsing. If this continues, they will implode financially. I would imagine that they are already putting pressure on Bernanke to commence QE2. I'm sure most here already know that the FED is presently monetizing half the treasury debt being rolled over plus new issuance. Chinese US treasuries are down about 10% YOY. The only reason this is not big news is the de facto MSM blackout. Occasional, this stealth monetization is alluded to by people like Pento. Anyway, it is clearly not enough to prop up the banks - they need a massive infusion of new money. John Williams said 6-9 months to hyperinflationary collapse. Me thinks he may be right.

[FunnyMoney]

...Anyway, it is clearly not enough to prop up the banks - they need a massive infusion of new money. John Williams said 6-9 months to hyperinflationary collapse. Me thinks he may be right.



Select banks will continue to get the infusion, but I do not believe the hyperinflationary collapse comes as quickly as Williams believes.

For hyperinflation to commence you need people to spend money, not just pay down debt. Currently the only people with any money to spend are already spending it as fast as they can (Chinese inner party investment funds and super wealthy elite). Plus they are buying things that are already owned by super wealthy entities and mostly outside the mainland. That money is staying in the hands of the rich and remaining mostly outside the borders.

For a hyperinflationary collapse to occur you need either a loss of faith in the monetary system at street level, at central bank to central bank transactions, or this massive amount of quantitative easing to buy things like fast food, gasoline, and the array of discretionary day to day purchases. Gold mine transfers from one set of PTB to another set of PTB is not enough to cause a hyperinflationary collapse unless one side is willing to push things so far as to start a major war over the QE adjustments or some possible future insertion of capital controls. But that won't likely happen either as the name of the game among TPTB is to fleece the sheep, not destroy each other.

The inflection point that the article talks about can be dragged out for some time as companies and individuals both go bankrupt and pay off debts, then after that it will take quite a while before the survivors of this blood bath start lending, borrowing and finally spending at the speeds required to spawn significant inflation. I am looking at 5-8 years down the road still and even then we may only see very severe inflation instead of a hyperinflationary collapse.

[FunnyMoney]

Hyperinflationary collapse, maybe not, but for the middle and lower classes it will probably feel just as bad.

[Joe King]

It seems to me there's a big collision coming between the deleveraging private sector and the inflation pumping public sector.

[FunnyMoney]

It seems to me there's a big collision coming between the deleveraging private sector and the inflation pumping public sector.






That is not a collision, it is more like a happy transaction. The public sector and mostly the central banks (which aren't really public) are buying. The private sector is selling, doing so to get out of debt and save what's left (if they can) from the periods of over leverage.

It is not a collision, but a transfer of wealth and ownership. Remember the quote by Thomas Jefferson: "If the American people ever allow the banking system to control their money, first by inflation, then by deflation; their children will one day wake up homeless on the continent their fathers conquered."

[Joe King]

Ok maybe collision wasn't the best term. I was looking at it more as which side is ultimately going to win out.
The deflation being pumped by the private sector or the inflation being pumped by the gov? Or does the gov actually have the ability to completely offset the deflationary pressures being placed upon the economy, which would then result in a balance between the two.

[Horn]

Hyperinflationary collapse, maybe not, but for the middle and lower classes it will probably feel just as bad.


Yeah just tip the scale a slight bit more to the right, and they'll be using their dollar store loan accounts to pay for yesterdays meals.

I dunno?

My guess is they'll form dollar poofness in a heartbeat.

[FunnyMoney]

...Or does the gov actually have the ability to completely offset the deflationary pressures being placed upon the economy, which would then result in a balance between the two.





The PTB have a lot of strings they can pull and can send things either way. But it's more like trying to control a dog sled with a million dogs attached to all sides. They can place their bets and collude with each other but a lot of the really big swings still require the working classes and the downstream private sector money to also make a move.

They have successfully created a major recession or depression if you want to call it that, which includes plenty of deflationary forces exactly where they intend those forces to remain. Now they are setting up for the next fleecing by way of inflation. They are building the momentum in that direction, but it will take a long time before this inflation begins to show up in the general economies of the world. Right now you see inflation in the areas where they play, the stock market, important commodities and so on, but it will be a while before all the dogs attached to the sled start running in the same direction.

I think you understand now how the deflation side of the coin makes them richer (they are buying the distressed assets and have access to credit still where others don't).
If you want to really understand how the inflation side of the coin works and makes them so rich too (when finally it begins to really pick up). Then view again the video by the economics professor "21 evils of inflation" which is a 1 hour lecture walking you through all the details and a must see video IMO.

But you really don't need to be an expert on all these macroeconomic details and how TPTB control and steer things. For right now what is important for us to remain focused on, and what is missing among the 80% spectator population is simply the recognition of this truth:


"If the American people ever allow the banking system to control their money, first by inflation, then by deflation; their children will one day wake up homeless on the continent their fathers conquered." - Thomas Jefferson

Everyone needs to get in agreement on this fundamental truth as a first step, then after that there's enough videos, books and lectures out there already (most of which have already been posted and linked to on these boards) to explain the details and inner workings of how that truth plays out and why.