"Bagehot Was A Shadow Banker" - A Monetary System That Is Only As Good As Its First Broken Promise

Zero Hedge ^ | 27 July, 2013 | Tyler Durden

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Over two years ago, in March of 2012, when it was taboo to even suggest the Fed may be forced to admit failure once again with its then "final" monetary intervention Operation Twist (following similar failures with QE1 and QE2), we explained clearly "Why The Fed Will Have To Do At Least Another $3.6 Trillion In Quantitative Easing." The premise was simple: while the Fed had succeeded in raising the notional amount of traditional bank liabilities, primarily deposits (through a matched reserve expansion) courtesy of unsterilized QE, it was failing to expand the universe of money-equivalent collateral in the shadow banking system. In fact, as the following chart shows, the deleveraging in shadow banking has continued, and aside for a tiny bounce in Q4 2012, resumed its downward path in Q1 2013, recording 19 of 20 consecutive quarterly drops (primarily on the back of nearly $3 trillion in ABS deleveraging and $1.2 trillion in repos).

Regardless, we were right, and as of last Friday, the Fed's balance sheet was $750 billion higher, and rising at $85 billion each month, confirming that the true underlying economy is now worse than ever before, and to all those claiming the US is recovering we have a simply thought experiment (because it will never become an actuality) - have the Fed halt and undo its monetary interventions. Yeah... That's what we thought.

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Stated simply: the modern monetary system based on "promises to pay" only works as long as nobody actually demands payment, and especially not all at the same time which is what happened in 2008. It also explains why the only way to mask the fundamental insolvency of the modern monetary experiment, is to keep creating money-equivalent credit at all times and costs.

In short: a system based on faith.

In even shorter: a religion.

Any stop to such "money creation" and the false idol of monetary voodoonomics falls.

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fascinating ping

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Reference with PDF flowcharts: The Full Layout Of Modern Shadow Banking

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Commenter at ZH... lol

"Tyler, that previous article was one of the best articles I ever read on zero hedge. I read it like three times and still don't understand"

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In short also, COMEX.

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Yep, I think something major is getting ready to happen with PM markets.

Link to the latest euro economy happenings:

Alasdair Macleod Interviewed: Europe is a Hot Mess

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Before you shrug off talk complaining about the top 1% in this country, watch this little video: Wealth Inequality in America

It kind of helps explain a few things, and how hard it will be to fight off those at the bottom who are pushing for socialism. It has been seen by almost 7 million people.

The rich do get richer...