Federal Reserve Q4 2004 Z.1 “flow of funds” report.
Total (non-financial and financial) Credit Market Debt (CMD) increased a record $2.81 Trillion (24% of GDP!), or 8.2%, during 2004 to $36.912 Trillion. This is more than double the nineties average annual growth of $1.27 Trillion. The growth in CMD has averaged $2.28 Trillion annually during the past five years in a “textbook” Credit Inflation Blow-off. CMD has increased to 315% of GDP, after beginning year-2000 at about 275%. And during the fourth quarter, CMD growth accelerated to $856 billion, or 9.5% annualized.
Total Non-financial debt increased a record $573 billion, or 9.7% annualized, during the fourth quarter. Non-financial debt jumped a record $1.93 Trillion during 2004, or 8.7%. To beat this percentage gain, one must look all the way back to 1988’s 9.0% non-financial debt growth. In nominal dollars, 1988’s debt growth was $783 billion, or about 40% of last year’s increase. The Household sector continues to lead the debt binge. And to surpass 2004’s 11% increase in Total Household Debt one must go back 18 years to 1986’s 11.4%. Yet, in nominal dollars, 2004’s $1.02 Trillion Household Debt growth is almost four times 1986’s $260 billion. Federal government debt expanded at a 9% rate last year, down slightly from 2003’s 10.9% increase. Federal debt outstanding has increased 30% in just three years.
Only the uninformed or analytically stubborn fails to appreciate that we long ago exited the transitory disinflationary period. Interestingly, Corporate borrowings grew at an 8.4% rate during the fourth quarter, the strongest showing since the booming second quarter of 2000. For the year, Corporate debt increased a respectable 4.8%. This compares to 2003’s growth of 3.0%, 2002’s 0.6%, and 2001’s 4.9%. State & Local government debt increased 7.4% during 2004. State & Local Receipts were up almost 5% during the year, with Expenditures up 5.7%.
Household Mortgage Debt (HMD) increased at an 11.2% rate during the fourth quarter. For the year, HMD increased 13.3%, the strongest showing since 1987’s 13.4%. Total (home, multi-family, and commercial) Mortgage Debt (TMD)increased a record $1.19 Trillion, or 12.8%. TMD growth has averaged just above $1 Trillion during the past three years. To put this into perspective, TMD growth averaged $270 billion during the nineties. TMD is up 40% in three years and 104% in seven, in what is arguably one of history’s “great” inflations.
It is fascinating to examine the source and nature of the financial sector claims created in this massive Credit Inflation. For the year, Domestic Financial Sector Debt growth declined from 2003’s 10.4% to 7.2%. This is chiefly because of the abrupt slowdown in GSE asset growth and attendant Credit market borrowings. It is important to note, however, that the GSE slowdown has been more than compensated for by the ballooning of bank deposits (not included in the Fed’s tally of financial sector debt) and other financial sector claims.
Total GSE assets increased only $109 billion during 2004, or 3.9%, to $2.90 Trillion (and were basically flat during the fourth quarter). This compares to 1998’s growth of 28%, 1999’s 23%, 2000’s 15%, 2001’s 17%, 2002’s 11%, and 2003’s 9%. GSE mortgage-backs expanded only $54 billion during 2004, or 1.5%, to $3.54 Trillion. At the same time, outstanding ABS growth surged a record $331 billion, or 13.3%, to $2.82 Trillion. ABS is up $600 billion, or 27% in two years. During the past seven years, ABS is up 185%, GSE assets 164%, and agency MBS 94%.
And while “structured finance” was the financial genesis for the Great Credit Bubble, the banks (and brokers and their clients) are these days keeping it afloat. Bank Credit expanded by 9.2% during 2004, the strongest showing since 1997’s 9.2%. Bank Credit expanded 8.6% during 2000, 4.0% during 2001, 7.4% during 2002, and 6.7% during 2003. During 2004, Bank Credit increased a record $569 billion. This compares to 2003’s increase of $391 billion, 2002’s $400 billion, 2001’s $211 billion, and 2000’s $412 billion. Bank Credit expanded at a 9.4% rate during the fourth quarter, with Government Securities holdings increasing at a 9.3% rate, Bank loans at a 7.5% rate, and Corporate bonds at a 23% rate.
For the year, Bank Loans expanded a record $403 billion, or 9.1%, the strongest percentage increase since 2000’s 10.6%. Corporate bond (including ABS) holdings increased $77 billion, or 16%. Bank Mortgages surged a record $339 billion, or 15%, to $2.60 Trillion, with a two-year gain of 26%. For comparison, Bank Mortgage growth averaged $146 billion annually during the preceding eight years. On the Bank Liability side, total Deposits increased a record $510 billion, or 11.3%, during 2004 to $5.03 Trillion (up 19% in 2 yrs). Credit Market borrowings increased $77 billion, or 11.7%, to $739 billion. Misc. Liabilities jumped $165 billion, or 10.7%, to $1.72 Trillion.
Securities Broker/Dealer Assets expanded at a 14% rate during the quarter to $1.84 Trillion, and were up $223 billion, or 14%, for the year. Broker/Dealer assets were up $500 billion, or 37%, over two years. During 2004, Miscellaneous Assets jumped $130 billion, or 15%, to $989 billion. Repo assets were up $50 billon, or 11%, to $528 billion, with a two-year gain of 53%. Security Credit jumped $81 billion (44%) during the year to $263 billion, with a 2-year gain of 78%. Corporate bonds increased $24 billion, or 10%. Agency debt and MBS increased $24 billion, or 28%, to $107 billion. Treasury holdings dropped $77 billion. On the Brokers’ Liability side, Due to Affiliates increased $77.5 billion (13%) to $680 billion, Security Credit rose $78.5 billion (11%) to $767 billion, and Repos gained $50.3 billion (11%) to $528 billion.
Examining others within the financial sector, REIT assets expanded at a 21% rate during the fourth quarter, and were up 56% for the year to $223 billion. Finance Company assets increased at a 14.2% rate during the fourth quarter and were up 5.3% last year to $1.46 Trillion. During 2004, Life Insurance Assets surged $387 billion, or 10.3%, to $4.16 Trillion. Credit Union assets increased $37 billion, or 6.0%, to $654 billion. Funding Corporation assets increased $97.3 billion, or 8.3%, to $1.76 Trillion.
The Household Balance Sheet continues to offer invaluable Bubble Economy insights. For the quarter, Household (including “non-profits”) Assets jumped $2.27 Trillion, or 16% annualized, to a record $59.2 Trillion. During the year, Household Assets surged $5.07 Trillion, or 9.4%. This places the two-year gain at $10.9 Trillion (23%), surpassing the $9.4 Trillion rise during the 1998/99 Bubble Hyper-Inflation. Household Real Estate holdings increased a record $2.12 Trillion last year (12.9%) to $18.65 Trillion. This was 40% above 2003’s (previous record) $1.53 Trillion increase in real estate holdings. Household Real Estate asset values were up 24% in two years and 92% in seven years. Elsewhere, Household Financial Assets expanded $1.8 Trillion, or a rate of 21%, to $36.76 Trillion during the fourth quarter and were up $2.67 Trillion (7.8%) for the year. Bank Deposits expanded at a 15% rate during the quarter to $5.69 Trillion (up 8.4% for the year), while Credit Market Instruments grew at a 9.5% rate during the quarter to $2.27 Trillion (up 1% for the year).
Examining Household Liabilities, we see record growth of $336 billion during the fourth quarter, an eye-opening 13% rate to $10.7 Trillion. For the year, Liabilities increased $1.12 Trillion, or 11.7%. Debt growth was 24% greater than 2003’s (previous record) increase of $906 billion. For comparison, annual Household debt growth averaged $343 billion during the decade of the nineties. We now borrow this amount in one quarter.
In nominal dollars, Assets inflated almost seven times ($2.27TN) the amount of household borrowings ($336bn) during the fourth quarter. Oh, The Seductive Magic and Peril of Asset Inflation and Bubbles… Household Net Worth surged $1.94 Trillion, or 17% annualized, during the fourth quarter to a record $48.53 Trillion. For the year, Net Worth increased $3.95 Trillion (9%), almost four times the increase in Liabilities. Net Worth increased $8.9 Trillion (23%) over two years. This surpasses even 1998/99’s two-year $8.38 Trillion surge. During the past seven years, Household Liabilities increased $4.9 Trillion (84%), while Assets inflated $19.5 Trillion (49%). Over this period, Household Net Worth ballooned an historic $14.6 Trillion (43%).
Not coincidently, Rest of World (ROW) holdings of U.S. financial Assets last year expanded by a similar amount as Household Liabilities ($1.09TN vs. $1.12TN). ROW holdings of U.S. assets increased 13.4% for the year to $9.29 Trillion, with a two-year gain of 25% ($1.85TN). Official Holdings increased a record $290 billion, or 25.3%, to $1.44 Trillion during 2004, with an unprecedented two-year gain of $537 billion (60%). For comparison, Official Holdings increased $22 billion during 1998, $24 billion in 1999, $62 billion in 2000, $75 billion in 2001, and $67 billion during 2002. Official Holdings now rise more in one quarter than they did on average each year from 1998 to 2002. It is also worth noting that ROW Repo holdings jumped 41% during 2004 to $647 billion and have more than doubled in two years.
For the year, ROW holdings of U.S. Credit Market instruments expanded a record $807 billion (21%) to $4.7 Trillion, while Foreign Direct Investment (FDI) increased $163 billion (10.5%) to $1.72 Trillion. Over two years, Credit Market holdings jumped 39%, while FDI increased 14%. If the U.S. is in reality perceived to be the “best place in the world to invest,” then foreigners much prefer Treasuries, agencies and ABS to direct investment. And, increasingly, this supposed love affair with U.S. “investment” largely touches the hearts of “Official” foreign central bankers. This is much more a case of a shot-gun wedding of dollar “recycling” than agreeable “investment.”
During the fourth quarter, ROW holdings of U.S. financial assets increased at a record (seasonally-adjusted) annualized pace of $1.33 Trillion. By major category, Net Interbank Assets increased an annualized $118 billion, Checkable Deposits $103 billion (ann.), and Security Repos $189 billion (ann.). Holdings of Credit Market Instruments increased a record $937 billion annualized, with Treasuries holdings increasing $226 billion (ann.), Agencies $264 billion (ann.), and Corporate bonds (including ABS) $329 billion (ann.). Foreign Direct Investment increased at an annualized $268 billion during the quarter. The scope of these financial flows (dollar recycling) is becoming incomprehensible.
Curiously, ROW dollar liabilities increased only $52 billion during 2004, down from a 1996-2002 annual average of $280 billion. As such, ROW net holdings of U.S. financial assets surged an unprecedented $1.04 Trillion during 2004. This was 55% above 2002’s record $670 billion increase in Net Holdings, and compares to the 1996-2002 annual average growth of $292 billion. ROW Net holdings increased a staggering 25% during 2004 to $5.17 Trillion. Net holdings increased an amazing 50% in two years and better than 150% since the beginning of 1998. Mr. Greenspan and Dr. Bernanke, there is no room for either complacency or disinformation on this issue.
According to the “flow of funds,” nominal GDP expanded 6.6% during 2004, the strongest showing since 1989’s 7.5%. Fed funds began 1989 at 9.0% and rose to as high as 9.75%. Not that rates will anytime soon approach such levels, but it does provide historical perspective with respect to today’s extraordinarily low market yields.
Never ceasing to amaze, Dr. Bernanke last night claimed that a “global savings glut” was largely responsible for the U.S. Current Account Deficit. In a separate speech, Mr. Greenspan refined his incredible Pollyannaish view of the U.S. Current Account and global imbalances. I proffer tonight, with rising confidence, that such nonsense is corrosive to market confidence.
Our leading Fed officials – individually and as a group - are either misinformed or obfuscating. And especially now with heightened unrest in the bond and currency markets, the marketplace is left fearing that the Fed has simply checked out. They seemingly don’t grasp important issues and developments, let alone have any strategy for dealing with them. There is, as well, a curious contempt for straight talk. Sure, Fed nonsense sufficed just fine during 2004 – The Year When Things Didn’t Matter. But it will be an increasing cause for lament now that Things are Beginning to Matter.
Last night from Dr. Bernanke: “Over the past decade, a combination of diverse forces has created a significant increase in the global supply of saving – a global saving glut – which helps explain both the increase in the U.S. current account deficit and the relatively low level of long-term real interest rates I the world today.”
Well, from the Fed’s own “Flow of Funds” we know that – “over the past decade” - Total U.S. Credit Market Debt has increased $19.4 Trillion, or 115%. Broken down, Non-financial Credit Market Debt increased $11.2 Trillion, or 86%; while Financial Sector Credit Market Debt jumped $8.2 Trillion, or 214%. What Dr. Bernanke refers to as a “global glut of savings” is actually a historic surfeit of dollar IOUs. That these IOUs are predominantly backed by non-productive assets is a huge problem. That a large amount of these IOUs are held by foreigners compounds the problem. That a significant but unknown portion of these IOUs are held or, importantly, hedged by highly leveraged financial players and speculators creates – in the words of Hyman Minsky – “acute financial fragility.”