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Great obituary for a Wall Street legend — Chris

James A. Lebenthal (June 22, 1928-November 14, 2014)

November 15, 2014

There are iconic names in nearly every discipline and specialty. The municipal bond world just lost one.

James Lebenthal devoted his long professional career to Munis. He was the center point of a three-generation effort in the Muni corner of the financial markets. The family history started in the days when tax-free municipal bonds were denominated in $1000 units and issued in bearer form, when one had to obtain the interest payments by clipping off a coupon with a pair of scissors and presenting it to a paying agent.

For longer than a half century, everyone in the Muni world knew the name Lebenthal. He was their champion in a highly public way and advertised on behalf of tax-free bonds with great creativity. He explained how the Muni bond paid for the infrastructure of state and local governments. And he defended Munis from political attacks that would have removed their tax-exempt status.

His firm’s national recognition was as a Muni “bond shop.” Their reputation was for fairness in pricing and for honoring their executions. Their service was responsive, whether the transaction involved $50,000 or $5 million. Cumberland Advisors, its principals, and portfolio managers knew the firm’s leaders for decades and still maintain that contact with James’s daughter, Alexandra.

My partner John Mousseau and I were discussing the great personalities in the Muni world. John had this recollection of Jim:

Back in the early 1990s I was giving lectures sponsored by the Bond Market Association to new people in the municipal bond industry. Much to my surprise, my co-lecturer was Jim Lebenthal. He was already a legend and still a major force in the business. Being on a pretty low rung compared to Jim, I was apprehensive. Jim could not have been more gracious. He introduced me as “my friend John from Shearson.” He gave me more than half the presentation time, and he continued to be inclusive later on when we answered questions – he would turn and say, “What do you think, John?” It was a singular act of politeness and kindness that I have never forgotten.

Later, when I met Jim at an industry event, I thanked him for his earlier kindness and remarked how great it was that he had been in the business such a long time and yet retained such a great passion for it. And he said, “John, don’t you love investments that you can drive on, drive over, go to school in, and get well in?” I’ve co-opted Jim’s line many times, and my advice for anyone in the Muni business is, BE LIKE JIM.

Cumberland Advisors, its partners, and associates extend our condolences to Alexandra and all those in the Lebenthal family. Our industry has lost a legacy creator. May he Rest in Peace.

David R. Kotok, Chairman and Chief Investment Officer

via Zero Hedge http://ift.tt/1wLzTdf rcwhalen

Submitted by Llewellyn Rockwell via The Ludwig von Mises Institute,

This talk was delivered at the Costa Mesa Mises Circle on Society Without the State, November 8, 2014.

The term “anarcho-capitalism” has, we might say, rather an arresting quality. But while the term itself may jolt the newcomer, the ideas it embodies are compelling and attractive, and represent the culmination of a long development of thought.

If I had to boil it down to a handful of insights, they would be these:

(1) each human being, to use John Locke’s formulation, “has a property in his own person”;

 

(2) there ought to be a single moral code binding all people, whether they are employed by the State or not; and

 

(3) society can run itself without central direction.

From the original property one enjoys in his own person we can derive individual rights, including property rights. When taken to its proper Rothbardian conclusion, this insight actually invalidates the State, since the State functions and survives on the basis of systematic violation of individual rights. Were it not to do so, it would cease to be the State.

In violating individual rights, the State tries to claim exemption from the moral laws we take for granted in all other areas of life. What would be called theft if carried out by a private individual is taxation for the State. What would be called kidnapping is the military draft for the State. What would be called mass murder for anyone else is war for the State. In each case, the State gets away with moral enormities because the public has been conditioned to believe that the State is a law unto itself, and can’t be held to the same moral standards we apply to ourselves.

But it’s the third of these ideas I’d like to develop at greater length. In those passages of their moral treatises dealing with economics, the Late Scholastics, particularly in the sixteenth and seventeenth centuries, had been groping toward the idea of laws that govern the social order. They discovered necessary cause-and-effect relationships. There was a clear connection, for example, between the flow of precious metals entering Spain from the New World on the one hand, and the phenomenon of price inflation on the other. They began to understand that these social regularities were brute facts that could not be defied by the political authority.

This insight developed into fuller maturity with the classical liberals of the eighteenth century, and the gradual emergence of economics as a full-fledged, independent discipline. This, said Ludwig von Mises, is why dictators hate the economists. True economists tell the ruler that there are limits to what he can accomplish by his sheer force of will, and that he cannot override economic law.

In the nineteenth century, Frédéric Bastiat placed great emphasis on this insight. If these laws exist, then we must study them and understand them, but certainly not be so foolish as to defy them. Conversely, he said, if there are no such laws, then men are merely inert matter upon which the State will be all too glad to impose its imprint. He wrote:

For if there are general laws that act independently of written laws, and whose action needs merely to be regularized by the latter, we must study these general laws; they can be the object of scientific investigation, and therefore there is such a thing as the science of political economy. If, on the contrary, society is a human invention, if men are only inert matter to which a great genius, as Rousseau says, must impart feeling and will, movement and life, then there is no such science as political economy: there is only an indefinite number of possible and contingent arrangements, and the fate of nations depends on the founding father to whom chance has entrusted their destiny.

The next step in the development of what would later become anarcho-capitalism was the radical one taken by Gustave de Molinari, in his essay “The Private Production of Security.” Molinari asked if the production of defense services, which even the classical liberals took for granted had to be carried out by the State, might be accomplished by private firms under market competition. Molinari made express reference to the insight we have been developing thus far, that society operates according to fixed, intelligible laws. If this is so, he said, then the provision of this service ought to be subject to the same laws of free competition that govern the production of all other goods. Wouldn’t the problems of monopoly exist with any monopoly, even the State’s that we have been conditioned to believe is unavoidable and benign?

It offends reason to believe that a well-established natural law can admit of exceptions. A natural law must hold everywhere and always, or be invalid. I cannot believe, for example, that the universal law of gravitation, which governs the physical world, is ever suspended in any instance or at any point of the universe. Now I consider economic laws comparable to natural laws, and I have just as much faith in the principle of the division of labor as I have in the universal law of gravitation. I believe that while these principles can be disturbed, they admit of no exceptions.

 

But, if this is the case, the production of security should not be removed from the jurisdiction of free competition; and if it is removed, society as a whole suffers a loss.

It was Murray N. Rothbard who developed the coherent, consistent, and rigorous system of thought — out of classical liberalism, American individualist anarchism, and Austrian economics — that he called anarcho-capitalism. In a career of dozens of books and thousands of articles, Rothbard subjected the State to an incisive, withering analysis, unlike anything seen before. I dedicated Against the State to this great pioneer, and dear friend.

But can it work? It is all very well to raise moral and philosophical objections to the State, but we are going to need a plausible scenario by which society regulates itself in the absence of the State, even in the areas of law and defense. These are serious and difficult questions, and glib answers will naturally be inadequate, but I want to propose at least a few suggestive ideas.

The conventional wisdom, of course, is that without a monopoly provider of these services, we will revert to the Hobbesian state of nature, in which everyone is at war with everyone else and life is “solitary, poor, nasty, brutish, and short.” A ceaseless series of assaults of one person against another ensues, and society sinks ever deeper into barbarism.

For one thing, it’s not even clear that the logic behind Thomas Hobbes’s fears really makes any sense. As Michael Huemer points out, Hobbes posits a rough equality among human beings in that none of us is totally invulnerable. We are all potential murder victims at the hands of anyone else, he says. He likewise insists that human beings are motivated by, and indeed altogether obsessed with, self-interest.

Now suppose that were true: all we care about is our own self-interest, our own well-being, our own security. Would it make sense for us to rush out and attack other people, if we have a 50 percent chance of being killed ourselves? Even if we happen to be skilled in battle, there is still a significant chance that any attack we launch will end in our death. How does this advance our self-interest?

Hobbes likewise speaks of pre-emptive attacks, that people will attack others out of a fear that those others may first attack them. If this is true, then it’s even more irrational for people to go around attacking others: if their fellows are inclined to preemptively attack people they fear, whom would they fear more than people who go around indiscriminately attacking people? In other words, the more you attack people, the more you open yourself up to preemptive attacks by others. So here we see another reason that it makes no sense, from the point of view of the very self-interest Hobbes insists everyone is motivated by, for people to behave the way he insists they must.

As for law, history affords an abundance of examples of what we might call trickle-up law, in which legal norms develop through the course of normal human interaction and the accumulation of a body of general principles. We are inclined to think of law as by nature a top-down institution, because we confuse law with the modern phenomenon of legislation. Every year the world’s legislative bodies pour forth a staggering number of new rules, regulations, and prohibitions. We have come to accept this as normal, when in fact it is, historically speaking, an anomaly.

It was once common to conceive of law as something discovered rather than made. In other words, the principles that constitute justice and by which people live harmoniously together are derived from a combination of reflection on eternal principles and the practical application of those principles to particular cases. The idea that a legislative body could overturn the laws of contract and declare that, say, a landlord had to limit rents to amounts deemed acceptable by the State, would have seemed incredible.

The English common law, for example, was a bottom-up system. In the Middle Ages, merchant law developed without the State at all. And in the US today, private arbitration services have exploded as people and firms seek out alternatives to a government court system, staffed in many cases by political appointees, that everyone knows to be inefficient, time-consuming, and frequently unjust.

PayPal is an excellent example of how the private, entrepreneurial sector devises creative ways around the State’s incompetence in guaranteeing the inviolability of property and contract. For a long time, PayPal had to deal with anonymous perpetrators of fraud all over the world. The company would track down the wrongdoers and report them to the FBI. And nothing ever happened.

Despairing of any government solution, PayPal came up with an ingenious approach: it devised a system for preemptively determining whether a given transaction was likely to be fraudulent. This way, there would be no bad guys to be tracked down, since their criminal activity would be prevented before it could do any harm.

Small miracles like this take place all the time in the free sector of society, not that we’re encouraged to learn much about them. Recall that as the Centers for Disease Control issued false statements and inadequate protocols for dealing with Ebola, it was a Firestone company town in Liberia that did more than any public authority in Africa to provide safety and health for the local population.

There is a great deal more to be said about law and defense provision in a free society, and I discuss some of this literature at the end of Against the State. But the reason we focus on these issues in the first place is that we realize the State cannot be reformed. The State is a monopolist of aggressive violence and a massive wealth-transfer mechanism, and it is doing precisely what is in its nature to do. The utopian dream of “limited government” cannot be realized, since government has no interest in remaining limited. A smaller version of what we have now, while preferable, cannot be a stable, long-term solution. So we need to conceive of how we could live without the State or its parasitism at all.

via Zero Hedge http://ift.tt/1qasTKj Tyler Durden

According to the International Centre for Prison Studies, nearly a third of all female prisoners worldwide are incarcerated in the United States of America. There are 201,200 women in US prisons, representing 8.8% of the total American prison population. As Forbes’ Niall McCarthy reports, China comes a very distant second to the US with 84,600 female prisoners in total or 5.1% of the overall Chinese prison population. Russia is in third position – 59,000 of its prisoners are women and this comes to 7.8% of the total. Either American women are the worst-behaved in the world, or the politically-expedient “prisons-first” culture has gone too far.

 

 

And here is Al-Jazeera’s Heather Schoenfeld explaining five things everyone should know about US incarceration:

Since the late 1980s, the US federal and state governments have sold imprisonment as the solution to myriad problems that have their roots in much more complex social and economic conditions.

 

The criminalisation tendency is politically expedient. This “prisons-first” political culture has one big downside: it has created mass incarceration.

Here are five things that everyone should know about mass incarceration in the United States.

1. The US incarcerates more people per capita than any other nation in the world: Approximately 1 in 100 adults or more than 2.2 million people are behind bars in the US, according to the Pew Center on the States. In addition, another 4.6 million (or a total of almost 7 million) people live under some form of correctional supervision.

Although the US is widely recognised as a “land of liberty”, it could also be described as a nation of prisons. It incarcerates more people per capita than any other nation. Its imprisonment rate (per capita) is almost 50 percent higher than Russia’s and 320 percent higher than China’s.

Within the western hemisphere, the US incarcerates five times as many people per capita as Canada and almost 2.5 times as many as Mexico.

2. Mass incarceration is not a result of higher crime rates: The US has the highest incarceration rate in the world not because it has higher crime rates, but because it imprisons more types of criminal offenders, including non-violent and drug offenders, and keeps them in prison longer.

With the exception of homicide, US crime rates are comparable to other European countries with much lower incarceration rates.

High incarceration rates are the result of “truth in sentencing”, “mandatory minimum” and “three strikes” laws which have limited judicial discretion in sentencing and parole release. As a result, sentences are now mainly determined by what the prosecutor decides to charge. And prosecutors routinely over-charge defendants in order to encourage plea agreements.

An egregious, but not unusual, recent example illustrates this point. In 2012, a Florida woman, who fired a “warning shot” in the direction of her physically abusive ex-husband (who was not hit by the bullet), was charged with aggravated assault with a deadly weapon.

The judge, as a result of mandatory sentencing legislation, was given no discretion in her sentencing. He sentenced her to 20 years in prison.

3. Mass incarceration disproportionately impacts US racial minorities: Mass incarceration has had a devastating effect on blacks and Hispanics in the US. African Americans are six times more likely to be incarcerated than a white person and non-white Latinos are almost three times more likely to be incarcerated, according to the Pew Center on the States.

Incarceration hits hardest at young black and Latino men without high school education. An astounding 11 percent of black men, aged between 20 and 34, are behind bars.

Much of the racial disparity is a result of the US’ war on drugs – started by President Ronald Reagan in the 1980s. By 1988, blacks were arrested on drug charges at five times the rate of whites.

By 1996, the rate of drug admissions to state prison for black men was 13 times greater than the rate for white men. This is despite the fact that African Americans use drugs at roughly the same rate as white Americans.

4. Mass incarceration is expensive: Imprisoning people is not cheap. The average cost of housing an inmate is approximately $20,000 to $30,000 per year. This price tag comes at the direct expense of public money that could be spent on public education, medical care and public assistance. And it is one reason why so many states face fiscal crises today.

To put this in perspective, the state of California spends 2.5 times more money housing and feeding its inmates than it does educating students. California is not alone: five states “spend more on corrections than higher education”, a 2008 Pew Center study revealed.

5. Mass incarceration disguises the US’ real unemployment rate and exacerbates inequality: The current unemployment rate in the US is high. And if we factored in all the people who are not looking for work because they are behind bars, it would be higher – especially among young black Americans and people without a high school diploma.

A recent research by Becky Petit reveals:

“Employment-population rates adjusted to include inmates suggest that only 26 percent of young black, male dropouts were employed in 2008, while over 37 percent were in prison or jail. Over half of the joblessness of young, black, and male dropouts is linked to incarceration.”

Incarceration also negatively impacts former prisoner’s ability to earn a decent living. Several studies suggest that there are at least six million “ex-prisoners” living within society and when they look for a job, they are 50 percent less likely to be hired than job seekers without a criminal record.

Former prisoners are paid less than those who have not been to prison. In addition, incarceration of a parent reduces a child’s prospects for economic mobility.

*  *  *

via Zero Hedge http://ift.tt/1yaaUCI Tyler Durden

A little more than a year ago, I did a post with a typically subtle headline: “Why Google Glass Will Fail Miserably“. Well, this just appeared in Reuters, and although its headline isn’t as blunt as mine, the article pretty much states that Glass is every bit the flop I predicted it would be.

Some highlights from the article……

+ “Of 16 Glass app makers contacted by Reuters, nine said that they had stopped work on their projects or abandoned them, mostly because of the lack of customers or limitations of the device.“

+ Among the developers, one small, unimportant outfit that’s ditched Glass is a firm named Twitter

+ Glass now sells on eBay for as little as half list price.

+ “Alex Foster began See Through, a Glass advertising analytics firm for business, after a venture firm earlier this year withdrew its offer to back his consumer-oriented Glass fitness company when it became clear no big consumer Glass release was imminent.”

+ And the corker: “It looks super nerdy,” said Shvetank Shah, a Washington, DC-based consultant, whose Google Glass now gathers dust in a drawer. “I’m a card carrying nerd, but this was one card too many.”

So there.

via Zero Hedge http://ift.tt/1xN3yHa Tim Knight from Slope of Hope

Submitted by Adam Taggart via Peak Prosperity,

 

via Zero Hedge http://ift.tt/1uvNkkV Tyler Durden

While Americans are preached that “free market capitalism is the best path to prosperity,” it appears that not everyone is buying it. Whether it is the failure of prosperity to trickle down (and the inequality that has been created) or just the herd-like need to be told what to do (and never take risks), Pew Research finds a stunning 25% of Americans do not believe people are better off in a free market system – implicitly preferring centrally-planned lives. Ironically, belief in the free market tends to be highest in developing countries while in Japan and Spain, a majority prefer to be managed than free.

 

Belief in the free market tends to be highest in developing countries (median of 71%). Nearly two-thirds or more in all nine of the developing economies surveyed agree that most people benefit from capitalism, including 80% of Bangladeshis, 75% of Ghanaians and 74% of Kenyans.

Advanced economies are somewhat more divided over the free market. At least seven-in-ten in South Korea, Germany and the U.S. say most people are better off under capitalism, but fewer than half in Greece, Japan  and Spain agree.

There has been moderate change in support for the free market between 2007 and 2014 among the countries surveyed in both years. The Spanish (-22 percentage points) and Italians (-16) stand out for their declining belief in capitalism over the course of the global recession.

Source: Pew Global

 

It appears it is time to change America’s subtitle to “the land of the centrally-planned.”

*  *  *

Perhaps – once again – Monty Python summed it up perfectly in Life of Brian…

via Zero Hedge http://ift.tt/1t0seWt Tyler Durden

via Zero Hedge http://ift.tt/1vgd8Dy williambanzai7

Via Paul Craig Roberts,

As most Americans, if not the financial media, are aware, Quantitative Easing (a euphemism for printing money) has failed to bring back the US economy.

So why has Japan adopted the policy? Since the heavy duty money printing began in 2013, the Japanese yen has fallen 35% against the US dollar, a big cost for a country dependent on energy imports. Moreover, the Japanese economy has shown no growth in response to the QE stimulus to justify the rising price of imports.

Despite the economy’s lack of response to the stimulus, last month the Bank of Japan announced a 60% increase in quantitative easing–from 50 to 80 trillion yen annually. Albert Edwards, a strategist at Societe Generale, predicts that the Japanese printing press will drive the yen down from 115 yen to the dollar to 145.

This is a prediction, but why risk the reality? What does Japan have to gain from currency depreciation? What is the thinking behind the policy?

An easy explanation is that Japan is being ordered to destroy its currency in order to protect the over-printed US dollar. As a vassal state, Japan suffers under US political and financial hegemony and is powerless to resist Washington’s pressure.

The official explanation is that, like the Federal Reserve, the Bank of Japan professes to believe in the Phillips Curve, which associates economic growth with inflation. The supply-side economic policy implemented by the Reagan administration disproved the Phillips Curve belief that economic growth was inconsistent with a declining or a stable rate of inflation. However, establishment economists refuse to take note and continue with the dogmas with which they are comfortable.

In the US QE caused inflation in stock and bond prices as most of the liquidity provided went into financial markets instead of into consumers’ pockets. There is more consumer price inflation than the official inflation measures report, as the measures are designed to under-report inflation, thereby saving money on COLA adjustments, but the main effect of QE has been unrealistic stock and bond prices.

The Bank of Japan’s hopes are that raw material and energy import prices will rise as the exchange value of yen falls, and that these higher costs will be passed along in consumer prices, pushing up inflation and stimulating economic growth. Japan is betting its economy on a discredited theory.

The interesting question is why financial strategists expect the yen to collapse under QE, but did not expect the dollar to collapse under QE. Japan is the world’s third largest economy, and until about a decade ago was going gangbusters despite the yen rising in value. Why should QE affect the yen differently from the dollar?

Perhaps the answer lies in the very powerful alliance between the US government and the banking/financial sector and on the obligation that Washington imposes on its vassal states to support the dollar as world reserve currency. Japan lacks the capability to neutralize normal economic forces. Washington’s ability to rig markets has allowed Washington to keep its economic house of cards standing.

The Federal Reserve’s announcement that QE is terminated has improved the outlook for the US dollar. However, as Nomi Prins makes clear, QE has not ended, merely morphed.

The Fed’s bond purchases have left the big banks with $2.6 trillion in excess cash reserves on deposit with the Fed. The banks will now use this money to buy bonds in place of the Fed’s purchases. When this money runs out, the Fed will find a reason to restart QE. Moreover, the Fed has announced that it intends to reinvest the interest and returning principle from its $4.5 trillion in holdings of mortgage backed instruments and Treasuries to continue purchasing bonds. Possibly also, interest rate swaps can be manipulated to keep rates down. So, despite the announced end of QE, purchases will continue to support high bond prices, and the high bond prices will continue to encourage purchases of stocks, thus perpetuating the house of cards.

As Dave Kranzler and I (and no doubt others) have pointed out, a stable or rising dollar exchange value is the necessary foundation to the house of cards. Until three years ago, the dollar was losing ground rapidly with respect to gold. Since that time massive sales of uncovered shorts in the gold futures market have been used to drive down the gold price.

That gold and silver bullion prices are rigged is obvious. Demand is high, and supply is constrained; yet prices are falling. The US mint cannot keep up with the demand for silver eagles and has suspended sales. The Canadian mint is rationing the supply of silver maple leafs. Asian demand for gold, especially from China, is at record levels.

The third quarter, 2014, was the 15th consecutive quarter of net purchases of gold by central banks. Dave Kranzler reports that in the past eight months, 101 tonnes have been drained from GLD, an indication that there is a gold shortage for delivery to physical purchasers. The declining futures price, which is established in a paper market where contracts are settled in cash, not in gold, is inconsistent with rising demand and constrained supply and is a clear indication of price rigging by US authorities.

The extent of financial corruption involving collusion between the mega-banks and the financial authorities is unfathomable. The Western financial system is a house of cards resting on corruption.

The house of cards has stood longer than I thought possible. Can it stand forever or are there so many rotted joints that some simultaneous collection of failures overwhelms the manipulation and brings on a massive crash? Time will tell.

via Zero Hedge http://ift.tt/1tZs5mf Tyler Durden

It is probably not a coincidence that just as we learn that “China’s bad loans jumped by the most since 2005 in the third quarter, fueling concern that a cooling economy will be further weakened as banks limit lending to avoid credit risks” that we also learn that in the month of October, China once again slammed the brakes on credit creation, with total new loans dropping to RMB548 billion from RMB857 BN, below the RMB626 BN expected, the lowest monthly expansion in 2014...

… and with the broader Total Social Financing aggregate also tumbling from RMB1050 billion to RMB663 BN, and well below the RMB888 BN consensus estimate.

 

As the following chart shows the main reason for China’s relentless slowdown in its growth pace, which only two years ago was expected to rebound back into the double digits soon (at least according to the IMF), is the ongoing contraction in credit formation, which rising at 13.2% for new loans and 15.4% for TSF outstanding, was the lowest credit expansion recorded in China also since 2005.

So what is the main culprit for the contraction in China’s all important credit formation? In two words: shadow banking. As Bank of America summarizes “shadow banking is being tamed” because “the changing structure of TSF suggests that Beijing’s efforts in controlling some types of shadow banking have made some achievements. Two major drivers for the steep decline of TSF from Sept to Oct were the falling of non-discounted bills (down RMB241bn) and falling trust loans (down RMB22bn). By contrast, new corporate bonds were at RMB242bn, a sharp rise from RMB151bn in Sept.”

Breaking this further down:

• New trust loans posted a negative RMB22bn in October compared with a fall of RMB33bn in September. New entrusted loans declined to RMB138bn in October from RMB161bn in September.
• Non-discounted bankers acceptance (BA) decreased by another RMB241bn in October after decreasing by RMB669bn between July and September. The new deposit deviation ratio regulation has significantly restricted those manipulations via BA issuance, which may boost balance sheet.

In other words, China’s shadow banking not only ground to a halt, it actually continued moving in reverse!

A better explanation comes from JPMorgan:

The monthly Chinese money and credit figures released this week showed continued contraction in the share of shadow bank intermediation in new credit creation. Figure 6 shows that the share of shadow banks, proxied by the ratio of monthly total social financing over monthly new bank loans, has been on a downward trajectory since the end of 2013, experiencing its fourth episode of slowing since 2010. As of October this year, our smoothed trend in the share of shadow bank intermediation (blue line in Figure 6) stood at its lowest level since 2009. The previous episodes of slowing in shadow bank intermediation during the first halves of 2010, 2011 and 2013 did not see such a sustained pace of contraction. This likely reflects the impact of regulatory tightening on shadow banking activity. With the ratio in Figure 6 approaching 1.0, the picture we are getting is of almost all of new credit creation in China being intermediated via traditional rather than shadow banks currently.

 

In other words, as China finally reveals little by little the true extent of its gargantuan bad debt problem (which is far worse than ever in history, although Beijing is taking its time in making the necessary revelations: and after all Chinese banks are all SOEs – if needed they can all just get a few trillions renminbi in in liquidity injections a la the “developed west”), it is also slamming the breaks on the shadow banking system that for years what the sector where marginal credit creation, and thus growth as well as bad debt formation, was rampant.

And as Japan showed so clearly just 48 hours after the end of America’s own QE3, reserves, like credit and money, are infinitely fungible in the global interconnected market. And infinitely, no pun intended, in demand, because if one central bank ends the goosing of risky assets, another has to immediately step in its place.

So while it has been widely documented that Japan is doing all in its power to crush the Japanese economy and in the process to send the Nikkei to all time highs, little has been said about a far greater slowdown in domestic (and indirectly global) credit creation using the “China” channel, where shadow banking has just slammed shut.

Finally recall: it was the epic collapse in America’s own shadow banking liabilities in the aftermath of the Fannie and Freddie, and shortly thereafter, Lehman bankruptcy, which wiped out $8 trillion from the US shadow banking peak, that was the main reason for the Fed’s relentless intervention and attempts to reflate systemic funding since then.

If the shadow banking collapse virus has finally jumped to China, there is no saying just how far Chinese GDP can drop if it is now constrained on the top side by surge in bad debt. One thing is certain: Japan’s paltry, in the grand scheme of things, expansion in its own QE will barely be felt if the record Chinese credit creation dynamo is indeed slamming shut.

via Zero Hedge http://ift.tt/1ESYSSa Tyler Durden