IS THE HIDDEN SYSTEM OF FINANCE BEGINNING TO SHOW…? BUT IF SO, WHAT IS IT SHOWING?

November 21, 2014 by Joseph P. Farrell in Bankers • http://gizadeathstar.com/2014/11/hidden-system-finance-beginning-show-showing/

This extremely important article was shared with me by a regular reader here, Mr. K.L., and it’s one of those articles that went immediately into my “finals” pile for my weekly blogging, it’s that important:
Shadow Banking Assets Increase By $5 Trillion To Record $75 Trillion, 120% Of Global GDP
I draw your attention to the first two paragraphs:

“Call it Monitoring Universe of Non-Bank Financial Intermediation (MUNFI), Other Financial Intermediaries (OFI), non-bank financial intermediation or, easiest of all, by its widely accepted name, Shadow banking. Whatever you want to call it, the latest just released estimate by the Financial Stability Board of how many assets current exist outside of the regular banking system (and are thus in the shadows) around the globe should explain why these day the one thing central bankers are most worried about is the uncontrolled proliferation of shadow assets (technically it is liabilities, but that is a different discussion). The reason: according to the broadest measure of shadow banking, it grew by $5 trillion in 2013 to reach $75 trillion. This represents some 25% of total financial assets and when expressed in terms of global GDP, it amounts some 120% of global GDP.
“We are not exactly sure which is scarier: that total financial assets amount to about 500% of world GDP or that about $75 trillion in financial leverage is just sitting there, completely unregulated and designed with one purpose in mind: to make billionaires into trillionaires (with taxpayers footing the bill of their failure).”

Note that Zero Hedge’s analysis here is somewhat conventional: the purpose of all this vast leverage and liquidity in the system is to make “billionaires into trillionaires (with taxpaers footing the bill of their failure).”
But is that really all, or even the major part of the picture? I am bold to suggest that it isn’t: the numbers simply don’t add up: there are too few “trillionaires” (indeed, none at all), so something else is going on. Indeed, it is precisely because of the vast numbers of liquidity and leverage sloshing around in the system that conventionally minded analysts have been predicting a collapse “any day now”, in the form of hyper-inflation and dollar-dumping, and a collapse of the US sovereign securities market. But as I pointed out a week ago in my blog Against Economic-Financial Chicken Littles, we’ve been hearing the stories of hyper-inflation and collapse since the Reagan era, if not before.
Now, as I noted, last week, I’m no financial expert, nor any other kind of expert, but it seems to me, that the analysts are right, on the face of it, and barring other factors: all the QE that has been going on should have shown up as extreme if not hyper-inflation, and that should have forced the value of the dollar down. But neither has happened. So something is wrong with the model: money (think of it as electric current) is being put in at one end, and yet, all that juice is not emerging at the load end. Following out analogy, this would mean that our circuit diagram is not complete; there is another load end in the circuit that is not shown.
Last week I suggested that at least part of this circuit diagram not showing up on our schematics was the hidden system of finance and the black budget. But would even this account for the vast sums of money? Would all the stealthy aircraft, reverse engineered UFOs, secret Lockheed fusion reactors, and so on, account for just the vast leverage noted in the Zero Hedge article? I suggest not (and let’s remember, we’re not even approaching any discussion of the amount of derivatives  – in the quadrillions of dollars – in the system). So the bottom line question is this: if all the derivatives in the system are in the quadrillions of dollars, not to mention the trillions of dollars suggested in the Zero Hedge article, and if these amounts are greatly in excess of the total GDP of planet Earth, then what is propping up the system? On any conventional model, it should have collapsed by now, and hence, like Sherlock Holmes, once we have eliminated the probable, we must begin to consider the impossible.
And like it or not – here comes the way-out-on-the-end-of-the-twig-speculation of the day – that means that there is another basis, a hidden basis, of the world economy that is not on this world at all. That money may be flowing off world, either in trade, or in tribute, but it is flowing somewhere, because like electricity, it has to have a load end, and if the load end were here, it would have shown up already in the form of the predicted collapse and hyper-inflation. On that score, the conventional analysts are correct. My only quibble with them is, that if the conventional model is correct, it is not about prediction; rather, it should have happened long ago, and we’d be analyzing it as history. The fact that it hasn’t, means to my non-expert’s mind, that the model is fundamentally flawed, and in a major, fundamental way.
Now you can all laugh and throw your rotten tomatoes at me, and frankly, I wouldn’t blame you nor be upset if you did.

Shadow Banking Assets Increase By $5 Trillion To Record $75 Trillion, 120% Of Global GDP

Submitted by Tyler Durden on 10/30/2014


http://www.zerohedge.com/news/2014-10-30/shadow-banking-assets-increase-5-trillion-record-75-trillion-120-global-gdp

Call it Monitoring Universe of Non-Bank Financial Intermediation (MUNFI), Other Financial Intermediaries (OFI), non-bank financial intermediation or, easiest of all, by its widely accepted name, Shadow banking. Whatever you want to call it, the latest just released estimate by the Financial Stability Board of how many assets current exist outside of the regular banking system (and are thus in the shadows) around the globe should explain why these day the one thing central bankers are most worried about is the uncontrolled proliferation of shadow assets (technically it is liabilities, but that is a different discussion). The reason: according to the broadest measure of shadow banking, it grew by $5 trillion in 2013 to reach $75 trillion. This represents some 25% of total financial assets and when expressed in terms of global GDP, it amounts some 120% of global GDP.
We are not exactly sure which is scarier: that total financial assets amount to about 500% of world GDP or that about $75 trillion in financial leverage is just sitting there, completely unregulated and designed with one purpose in mind: to make billionaires into trillionaires (with taxpayers footing the bill of their failure).



Some of the other findings:

• MUNFI assets grew by 7% in 2013 (adjusted for foreign exchange movements), driven in part by a general increase in valuation of global financial markets. In contrast total bank assets were relatively stable. Within the headline global growth figure of MUNFI assets exists considerable differences across jurisdictions and entities.
• This year, the FSB continued to refine the shadow banking measure to produce an estimate that more tightly focuses on shadow banking risks, narrowing down the broad MUNFI estimate by filtering out entities that are not part of a credit intermediation chain and those that are prudentially consolidated into a banking group. Using more granular data reported by 23 jurisdictions, the broad MUNFI estimate of non-bank financial intermediation was narrowed down from $62 trillion to $35 trillion.
• Based on the narrowed down estimate, the growth rate of shadow banking for this smaller sample in 2013 was +2.4%, instead of +6.6% for the MUNFI (using the same smaller sample). The narrowing down approach remains work in progress and will improve further over time.
• By absolute size, advanced economies have the largest shadow banking sectors, while emerging market jurisdictions recorded the fastest growth rates (albeit from a relatively small base). While the non-bank financial system may contribute to financial deepening, careful monitoring is still required to detect any increases in systemic risk factors (e.g. maturity and liquidity transformation, and leverage) that could arise from the rapid expansion of credit provided by the non-bank sector.
• Trust Companies and Other Investment Funds were the fastest growing sub-sectors globally in 2013. Trust Companies have consistently grown at a fast pace, whereas the 18% annual growth in Other Investment Funds, the largest sub-sector, was sharply higher than in the preceding years.
• The Hedge Funds sub-sector remains significantly underestimated in the FSB’s data collection exercise. Further refinement of the data for this sector could provide important additions to future editions of this report

And here is why even the report above is woefully underestimating to summarize the epic leverage in the system:

Hedge Fund assets amounted only to $0.1 trillion in 2013, according to jurisdictions’ submissions for the macro-mapping exercise. However, the size of the sector in the FSB’s exercise is significantly underestimated primarily due to two factors. First, off-shore financial centres, where most Hedge Funds are domiciled, are not included in the current scope of the exercise. Second, the Flow of Funds statistics are not granular enough in many jurisdictions to allow a separation between Hedge Funds and other sectors. Last year’s report referenced results from IOSCO’s Hedge Fund survey which provided a more representative picture of the sector. Updated estimates for 2014 are currently not available, but the IOSCO has launched a new survey which should provide an overview of the global Hedge Fund industry. Information is expected to be available in the first half of 2015. However, data from a private sector source (Hedge Fund Research) show that globally assets under management in this industry amounted to $2.6 trillion at the end of 2013. The U.S. and the United Kingdom, which hold the great majority of global Hedge Fund assets, published results from national Hedge Fund surveys in 2014. In the case of the United Kingdom, the Financial Conduct Authority’s report shows that approximately $470 billion of Hedge Fund assets were managed in the United Kingdom. While data collected by the US Securities and Exchange Commission (SEC) show that registered investment advisors managed $5 trillion of Hedge Fund assets. Note that these numbers are from different sources with generally different methodologies and survey coverage, and are therefore not necessarily comparable.

So just call it $80 trillion in shadow banking exposure.