from Zero Hedge
For over a year we have been cautioning that even more than a “liquidity versus solvency” debate, the biggest unspoken factor (though slowly gaining prominence) not only for Europe, although manifesting itself there most prominently, but all across the developed world is the quality of the (deteriorating) asset base, thanks mostly due to the Fed’s influence over corporate cash misallocation, and courtesy of the fact that the bulk of credit money creation in the past decade has come via the shadow banking system, broad asset collateral. Last year MF Global taught us that it is this shadow collateral which exists merely in ledger entries between fractional reserve entities (mostly broker dealers and hedge funds), that is now extremely scarce and has to be pledged and repledged in daisy chains of ultra rehypothecation, and which just like robosigning exists until it is actually called for delivery, when the entire collateral<->money linkage falls apart. It is this intersection of traditional monetary liabilities and new shadow aggregates that is completely undiscussed by conventional economic literature, and is why traditional monetary theory is completely helpless in coming up with credible and effective means of returning the world to a growth state. In other words, the Krugmans of the world are absolutely unable to explain how shadow banking should be accounted for when explaining something as simple as the leverage collapse, first in Europe, and then in the US (we have covered the collapse of shadow banking repeatedly, most recently here).