Z1 and the Doves
by Doug Noland
September 27, 2013
With taper worries out of the way for now, the markets will watch to see if Washington can avoid a government shutdown.
From the Federal Reserve’s Q2 2013 Z.1 “flow of funds” report, Total (non-financial and financial sector) System Credit increased $176bn during the quarter to a record $57.563 TN. Total Credit jumped $1.971 TN over the past year.
Non-Financial Sector Borrowings increased at a 3.1% rate, down from Q1’s 4.5%. Corporate borrowings accelerated to an 8.4% pace, up from Q1’s 6.8%. Federal borrowings expanded at a 2.5% rate, slowing sharply from Q1’s 10.1%. State & Local debt growth slipped from Q1’s 2.4% to 1.1%. Total Household Sector borrowings expanded at a 0.2% rate compared to Q1’s 0.5% contraction. Non-mortgage Consumer Credit grew at a 5.6% pace, down slightly from Q1’s 6.2%. Surprisingly, mortgage Credit still hasn’t been able to turn the corner. Household Mortgage Debt contracted at a 1.7% pace, somewhat less than Q1’s 2.1% rate of decline.
Total Non-Financial Debt (NFD) expanded at a seasonally-adjusted and annualized rate (SAAR) of $1.251 TN (down from Q1’s SAAR $1.974 TN) to a record $40.938 TN. During the past year, NFD expanded $1.678 TN, or 4.3%. Despite all the talk of “de-leveraging,” NFD has inflated $6.679 TN, or 19.5%, over the past four years. While Household Sector Liabilities declined $686bn in four years, during that period outstanding Treasury securities jumped $5.550 TN.
Already strong business Credit growth accelerated. Total Business borrowings increased SAAR $742bn during Q2, up from Q1’s $594bn. Though little changed for the quarter, Corporate bonds were up $879bn, or 7.2%, over the past year to a record $13.026 TN.
Financial Sector borrowings increased at a 0.5% rate to $13.902 TN during the quarter. With the Federal Reserve’s balance sheet excluded from Financial Sector tabulations, the rapid expansion of Fed holdings continues to restrain overall Financial Sector growth. And chiefly because of Fed balance sheet inflation, Financial Sector borrowings remain today significantly below the $17 TN level reached back in 2007.
Financial Sector Credit market borrowings increased only SAAR $63.6bn during the quarter. As for detail, GSE securities jumped SAAR $137bn and Other Loans and Advances gained SAAR $126bn. Corporate (financial sector) Bonds declined SAAR $250bn. MBS increased SAAR $40bn and Depository Institution (bank) Loans gained SAAR $28.1bn.
Meanwhile, Federal Reserve assets expanded SAAR $1.116 TN during Q2, with holdings of Treasury Securities growing SAAR $548.5bn and GSE-backed Securities expanding SAAR $548.7bn. In nominal dollars, Federal Reserve assets increased $283bn during the quarter to a record $3.526 TN. Fed assets were up a whopping $571bn in two quarters. In five years, Fed assets have inflated $2.574 TN, or 270%.
Bank (“Private Depository Institutions”) assets increased nominal $351bn during the quarter to a record $15.595 TN, a notably strong 9.2% growth rate. However, over half of this expansion is explained by the ballooning of reserves held at the Fed. Yet Bank Loans did expand SAAR $206bn and Consumer Credit SAAR $47bn. Mortgages contracted SAAR $16bn, while Miscellaneous Assets expanded SAAR $436bn.
There continues to be scant evidence of a general upswing in traditional lending. Beyond slow growth in Bank loans, Credit Union liabilities were little changed during the quarter (up $54bn, or 5.8% y-o-y) to $997bn. Finance Company assets were down slightly for the quarter and shrank $39bn, or 2.6%, from a year earlier.
Elsewhere, Security Credit expanded at a 5% rate during the quarter to $1.512 TN, with year-over-year growth of $101bn, or 7.2%. Funding Corps were little changed during Q2, with assets up $101bn y-o-y, or 4.7%, to $2.232 TN. Real Estate Investment Trust (REIT) liabilities were down slightly during the quarter, yet jumped $69bn, or 9.5%, from a year ago to $794bn. Security Broker/Dealer assets declined slightly during the quarter to $2.083 TN, although assets were up $30bn, or 1.5%, from Q2 2012.
Despite the ongoing contraction in mortgage Credit, the GSEs continue to grow. Agency Securities (debt and MBS) increased a nominal $58bn during Q2 to $7.648 TN. Agency Securities increased $107bn over the past year.
Rest of World (ROW) holdings of U.S. assets increased (nominal) $216bn during Q2 to a record $21.437 TN. Interestingly, Interbank Assets increased $267bn (to $588bn). Treasury holdings declined by $121bn to $5.601 TN. Uncharacteristically, “official” (central bank) Treasury holdings declined $81bn (to $4.009 TN) after having increased $368bn during the previous four quarters. ROW Agency Securities holdings dropped $65bn during the quarter to $876bn, with a two-quarter decline of $130bn.
Belying weakened Credit growth, National Income increased $123bn during the quarter, or 3.4% annualized, to a record $14.448 TN. Total Compensation increased $63.4bn, or 2.9%, to a record $8.812 TN. On a year-over-year basis, National Income gained 4.1% and Total Compensation rose 3.0%. It is worth noting that National Income increased about 50% in the 10 years leading up to the 2008 crisis. National Income dropped 3.8% in 2009 – only to then fully recover in seven quarters.
While Credit and economic growth may be relatively restrained, perceived Household wealth is going gangbusters. Household Sector Assets increased another $1.343 TN during Q2 to a record $88.369 TN. Household Assets were up a notable $7.692 TN, or 9.5%, over the past year. Over two years, Household Assets inflated $13.389 TN, or 17.9%. Since the end of ’08, Household Assets have jumped $16.921 TN, rising from 498% of GDP to 530%. Meanwhile, Household Liabilities were little changed both during the quarter and over the past year at $13.548 TN. Since the end of 2008, Household Liabilities have declined $686bn, or 4.8%.
Household Net Worth (assets less liabilities) has become a focal point of my Macro Credit Analysis. For the quarter, Household Net Worth inflated another $1.342 TN, or 7.3% annualized, to a record $74.821 TN. At 449% of GDP, Household Net Worth is within striking distance of the record 470% of GDP back at the 2007 peak of the mortgage finance Bubble. Over the past year, Household Net Worth jumped $7.690 TN, or 11.5%. Net Worth rose a notable $13.388 TN, or 21.8%, over two years. In arguably the single most pertinent macro data point, Household Net Worth has surged $17.607 TN, or 30.8%, since the end of 2008.
It’s worth our time to dig just a little into the composition of Household Assets. At the end of Q2, Financial Assets accounted for 70%, and Non-Financial Assets 30%, of Total Assets. This compares to a 65%/35% split at the end of 2008. In nominal dollars, Financial Assets increased $15.237 TN, or 33%, since 2008, while Non-Financial Assets gained $1.684 TN, or 7% to $26.516 TN (Real Estate, at $21.123 TN, comprises about 80% of Non-Financial Assets).
Even more striking is the growth divergence between Household Financial Assets categories since 2008. In particular, safer “money”-like holdings have notably lagged the historic expansion in “risk assets.” Total Deposits (bank and money market), the bedrock of perceived safe and liquid “money,” increased $982bn since the end of 2008, or 12%, to $9.026 TN. Treasury holdings rose about a Trillion to $1.2 TN, and agency securities increased $597bn to $1.65 TN. In total, deposits, Treasuries and agencies rose $2.58 TN, or 28%, to $11.865 TN.
Meanwhile, since ’08 Household holdings of mutual funds and equities have surged $10.640 TN, or 85%, to $23.191 TN. Pension Fund Entitlements jumped $4.675 TN, or 33%, to $18.737 TN. It’s no longer true that American households have the majority of their wealth in savings and real estate. These days, and much the product of experimental monetary policy, Household perceived wealth is wrapped up in the risk markets.
Post-crisis Macro Credit Analysis has provided myriad curious anomalies. Incomes have grown steadily in the face of stagnant Household debt growth. Real estate price inflation has reemerged despite an ongoing contraction in mortgage Credit. Household Assets and Net Worth have surged in the face of ongoing weak private-sector debt growth. In sum, there’s been a resurgent Bubble Economy in the face of relatively modest overall system debt growth. This is definitely not how it traditionally works.
Those of a bullish persuasion would argue these dynamics confirm the underlying strength and stability of the U.S. economy. I’ll counter with the view – one supported by Fed data - that massive federal deficits and Federal Reserve monetization have created unprecedented and deeply systemic financial and economic distortions.
An economy on firm footing would be one demonstrating at least a reasonable balance within the real and financial sectors. One would hope to see sound money and productive Credit financing capital investments throughout the economy - liquidity/spending power entering the system primarily in the process of financing economic wealth creation in the real economy (as opposed to financing consumption and asset speculation).
We instead these days see unprecedented government liquidity injections directly into securities markets, with resulting asset inflation and myriad distortions. In the real economy, massive federal deficits and ultra-low interest-rates have inflated incomes, corporate cash flows and earnings. Inflating asset markets and Household Net Worth drive sufficient consumption to sustain a deeply imbalanced economic structure.
Not unpredictably, after about five years of unmatched debt monetization and liquidity injections, the Federal Reserve today struggles with even the most timid reduction of monetary inflation. Perhaps Fed officials appreciate the dependency U.S. and global economies have developed to speculative and inflating securities markets, along with the dependency inflated markets have to ongoing Fed and central bank liquidity injections.
From the Federal Reserve’s Q2 2013 Z.1 “flow of funds” report, Total (non-financial and financial sector) System Credit increased $176bn during the quarter to a record $57.563 TN. Total Credit jumped $1.971 TN over the past year.
Non-Financial Sector Borrowings increased at a 3.1% rate, down from Q1’s 4.5%. Corporate borrowings accelerated to an 8.4% pace, up from Q1’s 6.8%. Federal borrowings expanded at a 2.5% rate, slowing sharply from Q1’s 10.1%. State & Local debt growth slipped from Q1’s 2.4% to 1.1%. Total Household Sector borrowings expanded at a 0.2% rate compared to Q1’s 0.5% contraction. Non-mortgage Consumer Credit grew at a 5.6% pace, down slightly from Q1’s 6.2%. Surprisingly, mortgage Credit still hasn’t been able to turn the corner. Household Mortgage Debt contracted at a 1.7% pace, somewhat less than Q1’s 2.1% rate of decline.
Total Non-Financial Debt (NFD) expanded at a seasonally-adjusted and annualized rate (SAAR) of $1.251 TN (down from Q1’s SAAR $1.974 TN) to a record $40.938 TN. During the past year, NFD expanded $1.678 TN, or 4.3%. Despite all the talk of “de-leveraging,” NFD has inflated $6.679 TN, or 19.5%, over the past four years. While Household Sector Liabilities declined $686bn in four years, during that period outstanding Treasury securities jumped $5.550 TN.
Already strong business Credit growth accelerated. Total Business borrowings increased SAAR $742bn during Q2, up from Q1’s $594bn. Though little changed for the quarter, Corporate bonds were up $879bn, or 7.2%, over the past year to a record $13.026 TN.
Financial Sector borrowings increased at a 0.5% rate to $13.902 TN during the quarter. With the Federal Reserve’s balance sheet excluded from Financial Sector tabulations, the rapid expansion of Fed holdings continues to restrain overall Financial Sector growth. And chiefly because of Fed balance sheet inflation, Financial Sector borrowings remain today significantly below the $17 TN level reached back in 2007.
Financial Sector Credit market borrowings increased only SAAR $63.6bn during the quarter. As for detail, GSE securities jumped SAAR $137bn and Other Loans and Advances gained SAAR $126bn. Corporate (financial sector) Bonds declined SAAR $250bn. MBS increased SAAR $40bn and Depository Institution (bank) Loans gained SAAR $28.1bn.
Meanwhile, Federal Reserve assets expanded SAAR $1.116 TN during Q2, with holdings of Treasury Securities growing SAAR $548.5bn and GSE-backed Securities expanding SAAR $548.7bn. In nominal dollars, Federal Reserve assets increased $283bn during the quarter to a record $3.526 TN. Fed assets were up a whopping $571bn in two quarters. In five years, Fed assets have inflated $2.574 TN, or 270%.
Bank (“Private Depository Institutions”) assets increased nominal $351bn during the quarter to a record $15.595 TN, a notably strong 9.2% growth rate. However, over half of this expansion is explained by the ballooning of reserves held at the Fed. Yet Bank Loans did expand SAAR $206bn and Consumer Credit SAAR $47bn. Mortgages contracted SAAR $16bn, while Miscellaneous Assets expanded SAAR $436bn.
There continues to be scant evidence of a general upswing in traditional lending. Beyond slow growth in Bank loans, Credit Union liabilities were little changed during the quarter (up $54bn, or 5.8% y-o-y) to $997bn. Finance Company assets were down slightly for the quarter and shrank $39bn, or 2.6%, from a year earlier.
Elsewhere, Security Credit expanded at a 5% rate during the quarter to $1.512 TN, with year-over-year growth of $101bn, or 7.2%. Funding Corps were little changed during Q2, with assets up $101bn y-o-y, or 4.7%, to $2.232 TN. Real Estate Investment Trust (REIT) liabilities were down slightly during the quarter, yet jumped $69bn, or 9.5%, from a year ago to $794bn. Security Broker/Dealer assets declined slightly during the quarter to $2.083 TN, although assets were up $30bn, or 1.5%, from Q2 2012.
Despite the ongoing contraction in mortgage Credit, the GSEs continue to grow. Agency Securities (debt and MBS) increased a nominal $58bn during Q2 to $7.648 TN. Agency Securities increased $107bn over the past year.
Rest of World (ROW) holdings of U.S. assets increased (nominal) $216bn during Q2 to a record $21.437 TN. Interestingly, Interbank Assets increased $267bn (to $588bn). Treasury holdings declined by $121bn to $5.601 TN. Uncharacteristically, “official” (central bank) Treasury holdings declined $81bn (to $4.009 TN) after having increased $368bn during the previous four quarters. ROW Agency Securities holdings dropped $65bn during the quarter to $876bn, with a two-quarter decline of $130bn.
Belying weakened Credit growth, National Income increased $123bn during the quarter, or 3.4% annualized, to a record $14.448 TN. Total Compensation increased $63.4bn, or 2.9%, to a record $8.812 TN. On a year-over-year basis, National Income gained 4.1% and Total Compensation rose 3.0%. It is worth noting that National Income increased about 50% in the 10 years leading up to the 2008 crisis. National Income dropped 3.8% in 2009 – only to then fully recover in seven quarters.
While Credit and economic growth may be relatively restrained, perceived Household wealth is going gangbusters. Household Sector Assets increased another $1.343 TN during Q2 to a record $88.369 TN. Household Assets were up a notable $7.692 TN, or 9.5%, over the past year. Over two years, Household Assets inflated $13.389 TN, or 17.9%. Since the end of ’08, Household Assets have jumped $16.921 TN, rising from 498% of GDP to 530%. Meanwhile, Household Liabilities were little changed both during the quarter and over the past year at $13.548 TN. Since the end of 2008, Household Liabilities have declined $686bn, or 4.8%.
Household Net Worth (assets less liabilities) has become a focal point of my Macro Credit Analysis. For the quarter, Household Net Worth inflated another $1.342 TN, or 7.3% annualized, to a record $74.821 TN. At 449% of GDP, Household Net Worth is within striking distance of the record 470% of GDP back at the 2007 peak of the mortgage finance Bubble. Over the past year, Household Net Worth jumped $7.690 TN, or 11.5%. Net Worth rose a notable $13.388 TN, or 21.8%, over two years. In arguably the single most pertinent macro data point, Household Net Worth has surged $17.607 TN, or 30.8%, since the end of 2008.
It’s worth our time to dig just a little into the composition of Household Assets. At the end of Q2, Financial Assets accounted for 70%, and Non-Financial Assets 30%, of Total Assets. This compares to a 65%/35% split at the end of 2008. In nominal dollars, Financial Assets increased $15.237 TN, or 33%, since 2008, while Non-Financial Assets gained $1.684 TN, or 7% to $26.516 TN (Real Estate, at $21.123 TN, comprises about 80% of Non-Financial Assets).
Even more striking is the growth divergence between Household Financial Assets categories since 2008. In particular, safer “money”-like holdings have notably lagged the historic expansion in “risk assets.” Total Deposits (bank and money market), the bedrock of perceived safe and liquid “money,” increased $982bn since the end of 2008, or 12%, to $9.026 TN. Treasury holdings rose about a Trillion to $1.2 TN, and agency securities increased $597bn to $1.65 TN. In total, deposits, Treasuries and agencies rose $2.58 TN, or 28%, to $11.865 TN.
Meanwhile, since ’08 Household holdings of mutual funds and equities have surged $10.640 TN, or 85%, to $23.191 TN. Pension Fund Entitlements jumped $4.675 TN, or 33%, to $18.737 TN. It’s no longer true that American households have the majority of their wealth in savings and real estate. These days, and much the product of experimental monetary policy, Household perceived wealth is wrapped up in the risk markets.
Post-crisis Macro Credit Analysis has provided myriad curious anomalies. Incomes have grown steadily in the face of stagnant Household debt growth. Real estate price inflation has reemerged despite an ongoing contraction in mortgage Credit. Household Assets and Net Worth have surged in the face of ongoing weak private-sector debt growth. In sum, there’s been a resurgent Bubble Economy in the face of relatively modest overall system debt growth. This is definitely not how it traditionally works.
Those of a bullish persuasion would argue these dynamics confirm the underlying strength and stability of the U.S. economy. I’ll counter with the view – one supported by Fed data - that massive federal deficits and Federal Reserve monetization have created unprecedented and deeply systemic financial and economic distortions.
An economy on firm footing would be one demonstrating at least a reasonable balance within the real and financial sectors. One would hope to see sound money and productive Credit financing capital investments throughout the economy - liquidity/spending power entering the system primarily in the process of financing economic wealth creation in the real economy (as opposed to financing consumption and asset speculation).
We instead these days see unprecedented government liquidity injections directly into securities markets, with resulting asset inflation and myriad distortions. In the real economy, massive federal deficits and ultra-low interest-rates have inflated incomes, corporate cash flows and earnings. Inflating asset markets and Household Net Worth drive sufficient consumption to sustain a deeply imbalanced economic structure.
Not unpredictably, after about five years of unmatched debt monetization and liquidity injections, the Federal Reserve today struggles with even the most timid reduction of monetary inflation. Perhaps Fed officials appreciate the dependency U.S. and global economies have developed to speculative and inflating securities markets, along with the dependency inflated markets have to ongoing Fed and central bank liquidity injections.
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