Quantitative Easing and Shadow Banking Liabilities

I have repeatedly been arguing that the US banking system cannot last in an environment without inflationism or money printing or Quantitative Easing or “cupcakes” (as Jim Rogers would call it) unless the US government would allow for a violent deflationary unwind (yes another crisis of greater proportion compared to 2008).

The latter seem as a NO OPTION—for ideological and political reasons—or a Hobson’s choice.

Zero Hedge’s Tyler Durden points out that the collapsing liabilities of the shadow banking system have essentially been offset by the recent US Federal Reserve’s QE programs. In short, to stave off a continuing meltdown that would negatively affect the US banking system requires continued rounds of QEs.

Mr. Durden writes, (bold highlights mine)

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...

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.

Take away the money printing or the “cupcakes” and the entire house of cards collapses.

Ben Bernanke seems trapped from his own actions. And that’s unless one believes that a Deus ex machina (god out of the machine) would emerge to save the day.