June 14, 2011
While the rest of the economic world was staring transfixed at the ongoing collapse in American home equity disclosed by the most recently Z.1, we were busy analyzing the as always far more important liability side of the ledger. After all, the quarterly Z.1 update provides the only undisputed update of the state of the Shadow Banking system, or more specifically, Shadow Liabilities. Not only that, but it also fully exposes the periodic changes in the “overt” Commercial Banking system’s liabilities. The results as always hold some very dramatic surprises, although those who read and understood our recent expose on the surge in foreign-banks’ cash courtesy of the Fed spike in reserves, may have a sense of what is coming. In a nutshell, and not very surprisingly, Shadow Liabilities dropped once again, and for the 12th consecutive quarter (or 3rd year in a row), although the $81 billion decline was the smallest since the $604.9 billion rise (the last one recorded) in Q1 2008. The drop since then is now a total of $5.1 trillion, and the total now stands at $15.8 trillion, a far cry from the all time high of $20.9 trillion just before the 3 years of consecutive declines. That the shadow system continues collapsing is no surprise: after all with the securitization machine dead, and the nationalized GSEs (with $6.6 trillion in liabilities) unable to relever there is little marginal debt that can be accrued to the shadow banking system. Yet oddly enough, despite drops across most other shadow liability verticals, there were some very strong performers, with Open Market Paper seeing the biggest surge since Q2 2007 at $74 billion. Though what was most surprising (or least, considering that it is Bernanke’s only role now, as we have said since last July, to reflate the conventional banking system liabilities, and thus assets, through QE) is that traditional liabilities of Commercial Banks exploded by $424 billion in Q1, more than offsetting the drop in the shadow banking system, and leading to a $343 billion jump in the liabilities of the consolidated financial system. To all those wondering, here is your answer where the inflation in Q1 came from. Yet the biggest stunner in the data set is just where the biggest jump in commercial bank liabilities came from. Jumping from $19.4 billion to $232.4 billion over the quarter, accounting for two thirds of the Q1 “inflation” was… interbank liabilities due to foreign banks. And there you have that foreign bank smoking gun again…
First, we present consolidated shadow banking by segments since 1960. As noted above, we have just completed the 12th consecutive quarterly decline.
Spreading the actual sequential changes in the 6 shadow liability components:
But more importantly, here is the comparison of the shadow and traditional bank liabilities: even as the shadow debt is plunging, conventional liabilities have just hit an all time record of $13.2 trillion.
And the most important chart: consolidated financial liabilities (total credit money) and the sequential change. Note that in Q1, courtesy of QE2, we have just experienced a jump in this series of a whopping $343 billion. Absent this jump the economy would have plunged into a deflationary collapse… And Ben Bernanke knows this.
And the megabonus – as mentioned above – can be found on Line 23: Net Interbank Liabilities to Foreign banks of L.109 (page 71) of the just released Flow of Funds report. Go ahead, look – the link is here. In Q1 foreign banking offices in the US transferred $210 billion in cash to their host headquarters (ergo recording a liability on the US hosted entities’ balance sheets). Keep in mind that this is data as of March 31, 2011. Were one to extend this to Q2, or whatever the most recent comparable H.8 report is, we would be willing to wager that this $210 billion number increased by at least another $300 billion as the bulk of the cash was transferred offshore, with the only asset remaining being”Reserves at the Federal Reserve” which increased by $430 billion in the quarter. But of course, those who read our previous expose on the topic of where the “money” from QE2 went will know this data well in advance.
What are the implications of this data: more or less the same as before. With the shadow banking system continuing to be in freefall primarily due to the ongoing crunch at the GSEs which are no longer relevant debt-creating entities, with Money Markets hounded by the administration, and every attempt made to transfer capital held there into equities and bonds, with ABS issuance dead, or at best comatose, there is no hope that the bulk of unregulated credit money can awake any time soon.
Which leaves just one option: the Federal Reserve… Whose ongoing boost in excess reserves (its Liability) for the pendancy of any monetary easing episode, results in an increase in Reserve assets at Commercial Banks (their asset), but more importantly, a boost in Commercial bank liabilities, be they US (which is not the case) or (foreign) which we have now proven twice is what is happening. Simply said, absent the ongoing transfer of credit money liabilities, so critical to keep the economy growing, from the Fed to private institutions, there will be no marginal growth in the consolidate financial system’s liabilities. Which in turn means outright deflation.
And you can bet your bottom fiat piece of linen and cotton that Ben Bernanke knows this all too well.
With QE2 ending just as Q2 ends, we are convinced that the next Z.1 report, due out in early September, will show another massive jump in liabilities… And that’s it. It’s all downhill from there. Unless, of course, the Fed comes up with another Fed to Commercial Bank liability transfer program, which the Fed can call it whatever it wants. The point is: it is critical for it to materialize soon or else, the economy, without a marginal source of new debt, will plunge in the deflationary abyss that the $5.1 trillion plunge in shadow liabilities would have created had it not been for Ben Bernanke.
Our prediction, as it has been from January 2011, expect more of the same, as the only thing more nightmarish to Ben Bernanke than hyperinflation is hyperdeflation.
This article was posted: Tuesday, June 14, 2011 at 3:38 am