As the above Gordian Knot chart indicates, there is much as stake here, and much reason for the authorities to distract the general populace with such silly concepts as a Consumer Protection Agency and Healthcare Reform. Indeed, shadow economy investors stand to lose over $70 trillion dollars should the traditional-shadow banking linkage be broken and the cash flow transfer process be disrupted. The bigger question: how much longer will such cash flows sustain in the current day and age when real demand has collapse courtesy of record domestic unemployment. The biggest question: what happens when there is a secular change to the prevalent level of capital flows into shadow banking. One of the primary reasons for the massive expansion in the money system (via the credit pyramid), has been precisely the shadow banking system, which is second only to the credit and interest rate derivative market (incidentally we were fascinated by the race to the currency bottom, and the technical associated short squeezes in the Dollar and Euro, in May 2009, long before anyone even considered such now daily discussion pieces).Yet should shadow baning disappear, the tranche above it (or below it by seniority) would disappear as well. And with 90%+ of global liquidity gone, and no additional source of "credit" money to fill the Fed's infinite demand for monetary supply, asset prices will explode (forget about gold - one apple will be $6,000 an ounce). Deflationists are right that ceteris paribus asset prices will decline, and that the Fed is powerless to stop this. Yet deflationists take one huge variable for granted: that the existing liquidity pyramid will persist. It is obvious that should another systemic stress episode emerge and money contract by a massive amount, the end consumer will matter little when total global credit collapses from $600 trillion to mid double digits, thereby decimating the real shadow monetary base, and realligning global assets with a liability side in flux. After all, the key offset to CPI going stratospheric over the past 30, 50 and even 100 years has been precisely the emergence of the alternative banking system, with its influx of tens if not hundreds of trillions of "shadow" dollars, which almost ceased to exist in the 2007-2009 crisis. The netting of intangible money to tangible currency in circulation would be a forced explosion in the money multiplier by the same amount as the shadow economy has sucked out in a vacuum of expiring credibility overnight.For this, and much more we recommend a read of the attached "Q&A about the Financial Crisis" in which Gary Gorton discusses before the US Financial Crisis Inquiry Commission, in very clear language, the big dangers still facing shadow banking.
Tuesday, March 9, 2010
The Most Disconcerting thing I have ever Read
I have been in the deflationist camp for some time. That does not mean that I am overly confident in my position and that I don't question it every &^^%$! day (considering how goofy the system is at the moment, being confident of anything can really, really, REALLY get you in to deep doo-doo - and quick).
I love to read the "Zero Hedge" blog - it is brilliant, quirky, irreverent... and constantly questions its own assertions (and they use one of my favorite movie lines ever at the head line of their blog: "On a long enough time line the survival rate of everyone drops to zero". Isn't that just delicious?)
To cut to the chase, the following is a quote from a recent post that you should read in its entirety (and that I found to be the most disconcerting thing I have ever read - because I DID assume "that the existing liquidity pyramid would persist"):
Ouch. (BTW... "ceteris paribus" = all things being equal).
This is a critical point, and one that I thought would be an issue further out on the time line. This requires some noodling.
Posted by The Short Story Man at 4:19 AM