Federal Reserve Q1 2005 Z.1 “flow of funds” report.
The Credit Bubble remains in a period of spectacular blow-off excess. First quarter Non-financial Debt increased at a 10.0% seasonally-adjusted annualized (SAA) rate. This was up from the fourth quarter’s 8.2%. One must go all the way back to 1986 (when 10-year Treasury yields averaged 7.66%) for a year of stronger Non-financial Debt growth (11.9%). It is also worth noting that the first quarter growth rate was almost double the ‘90s 5.37% average annual rate. First quarter Non-Financial Debt expanded a record $2.411 Trillion SAA. This compares to 2004’s $1.918 Trillion, 2003’s $1.668 Trillion, 2002’s $1.321 Trillion, 2001’s $1.115 Trillion and 2000’s $836 billion. During the decade of the nineties, Non-financial Debt expanded on average $700 billion annually. Blow-off Credit creation excess is now more than three times this pace.
The Credit system is certainly firing on all cylinders. Federal Government borrowings expanded 13.8% SAA, Households 9.3%, Corporate 7.5%, and State & Local 16.2%. Non-federal debt expanded 9.1% annualized, the strongest quarterly growth since Q2 2000. Non-financial Debt was up 8.9% y-o-y. For the quarter, Total Credit Market Debt (non-financial and financial) expanded at a 6.9% pace to $37.31 Trillion (306% of GDP).
The growth of Financial Sector Credit Market borrrowings slowed to a rate of 4.8%, as GSE asset growth turned negative. However, GSE stagnation was more than offset by a surge in Bank Credit expansion - bank asset growth predominantly financed by deposits, repos and other non-“Credit Market” borrowings.
Bank Credit expanded an amazing $1.054 Trillion seasonally-adjusted annualized during the quarter to $7.0 Trillion. This was a growth rate of 13.4%. One has to go all the way back to inflationary 1978 (13.6%) to find a year of stronger Bank Credit expansion. Bank Credit expanded at an 11.6% rate during the past six months. This is up from 2004’s blistering 9.2% increase and compares to the average annual 7.2% expansion during the five-year period 2000-2004. Bank Credit expanded by an average 6.2% annually during the (supposedly “disinflationary”) ‘90s and 8.5% during the (conspicuously inflationary) ‘80s. The first quarter’s record nominal Bank Credit increase of $225.6 billion exceeds the $215 billion average annual growth during the decade of the ‘90s (and there has been no letup in bank Credit growth during the second quarter!).
Bank Loans expanded at a 9.5% rate during the quarter and were up 9.9% y-o-y. Bank Loan growth averaged 5.8% annually during the ‘90s. Bank Loans were up 17.5% during the most recent two-year period. Bank Mortgages expanded at a 14.5% rate during the quarter to $2.69 Trillion, with a 12-month gain of 15.4% and two-year rise of 28%. For comparison, Bank Mortgage loans expanded an annual average 6.9% during the ‘90s. Bank Mortgage holdings have increased $360 billion over the past year. This compares to the nineties annual average of $72.5 billion (2000-2004 average $220bn). Or, from a different angle, Bank Mortgage loans expanded $727 billion during the past 10 quarters, compared to an increase of $725 billion during the ten years of the nineties. Bank Credit has now doubled over a period of just less than 10 years.
On the Bank Liability side, Total Bank Deposits expanded at a 9.0% rate ($113bn) during the quarter to $5.14 Trillion. Deposits were up 10% over the past year and 19% over two years. Certainly helping to explain the subdued monetary aggregates, Federal Funds and Securities RP (repo) expanded at a 20% rate during the quarter ($49.3bn) to $1.02 Trillion. In addition, Credit Market Instrument liabilities grew at a 19.7% rate ($36.4bn) to $775.2 billion and were up 10.2% over one year and 23.5% over two years. Bank Bond borrowings were up 17% over the past year to $456.3 billion.
Security Broker/Dealer Assets expanded 21% annualized ($436bn SAA) to $1.941 Trillion. Broker/Dealer Assets have expanded at a 23% pace over the past nine months. Broker/Dealer Assets increased $555 billion ($277.5bn annually) over two years, or 40%. This compares to total asset growth during the nineties of $764 billion ($76.4bn annually). Assets have almost doubled (up 94%) since the beginning of 2000. Increasing $96 billion during the quarter, the Liability “repo” expanded to finance all of Broker/Dealer Asset growth. “Repo” Liabilities were up $247.4 billion over the past three quarters to $623 billion. "Repos" were up 32% over the past year and 86% over two years. Miscellaneous Assets expanded $52.6 billion during the quarter to $1.047 Trillion.
Total Federal Funds and Security Repurchase Agreements (with bank and broker “repo” assets and liabilities netted) surged $137.4 billion – or 33% annualized – during the quarter to $1.788 Trillion. “Fed Funds and Repo” was up 10.5% y-o-y and 31.3% over two years. During the first quarter, REIT (real estate investment trust) Assets expanded at a 21% pace to $258.7 billion. REIT assets began 2002 at $83.9 billion. REITs expanded 53% over the past year and 137% over two years. REIT holdings of Home Mortgage assets more than doubled from one year ago to $103.7 billion. “Funding Corp” Assets expanded at a 17.5% rate to $1.286 Trillion (up 4.8% y-o-y). Finance Company Assets declined at an 8.8% rate to $1.424 Trillion. Credit Union Assets expanded at a 9.5% rate to $670 billion. Life Insurance Assets expanded at a 3.3% pace to $4.166 Trillion.
Asset-Backed Securities (ABS) ballooned a torrid $480.8 billion SAA during the quarter (17.2% rate) to $2.685 Trillion. For comparison, ABS grew $168.6 billion during 2000, $243.2 billion during 2001, $195 billion during 2002, $239.5 billion during 2003, and $309.2 billion during 2004. ABS was up 16.7% over the past year and 32% over the past nine quarters. It is interesting to note that (non-GSE) Mortgage holdings by ABS pools comprised 39% of ABS growth during 1999 and 47% during 2000 and 2001. During the first quarter (as well as full year 2004), the increase in Mortgage holdings was greater than the growth of outstanding ABS. Since the end of 2002, (“private-label”) mortgages have increased from 42% to 61% of total ABS assets. The ABS market has ballooned 88% since the beginning of year 2000.
The explosion of non-Government Sponsored Enterprise securitizations is coming at the expense of GSE asset and MBS growth. During the first quarter, GSE Assets contracted at a 1.0% rate to $2.872 Trillion, reducing one-year growth to 2.6%. GSE MBS expanded at a 0.6% rate to $3.548 Trillion, with 12-month growth of 1.1%. Since the beginning of year 2000, GSE assets have expanded 67% and MBS 55%.
First quarter Total Mortgage Debt expanded at a $1.127 Trillion seasonally-adjusted annual pace to $10.774 Trillion. For Comparison, Total annual Mortgage Debt growth averaged $270 billion during the nineties. Household Mortgage Debt (HMD) expanded at a 9.1% rate during the quarter to $8.282 Trillion. HMD was up 13.1% over the past year, 28% over two years, and 103% over seven years. Commercial Mortgage Debt (CMD) expanded $213.4 billion SAA during the quarter to $1.742 Trillion (up 12% y-o-y). For comparison, CMD grew $111.0 billion during 2000, $114.7 billion during 2001, $102.8 billion during 2002, $129.7 billion during 2003 and $177.1 billion during 2004.
Rest of World (ROW) holdings of U.S. financial assets increased $1.170 Trillion SAA during the first quarter, compared to nineties average growth of $388 billion. Holdings increased 17% annualized during the quarter to $9.72 Trillion, down slightly from the fourth quarter’s 20.2%. ROW holdings were up 13% over the past year and 27% over two years. Holdings of U.S. Credit Market Instruments expanded $848.6 billion SAA to $4.88 Trillion. This compares to 2000’s increase of $241.9 billion, 2001’s $305.3 billion, 2002’s $422.8 billion, 2003’s $538.2 billion, and 2004’s $776.7 billion. Holdings of Treasuries increased at a $372.6 billion annual pace and Corporate Bonds (includes ABS) at a $281.6 billion pace. ROW Credit Market Instruments holdings were up 40% in two years. “Official” holdings expanded at a 7.3% pace to $1.46 Trillion (up 15.8% y-o-y). Foreign Direct Investment (FDI) increased by an annualized $188 billion, which if it continues for the year would be the strongest FDI since 2000. “Other” ROW U.S. assets expanded at a $480 billion annualized pace.
Household Sector (including Non-profits) Assets increased $483.4 billion (3.3% annualized) during the quarter to $59.7 Trillion. The value of Household Financial Assets dipped $108.8 billion, or 1.2% annualized, to $36.5 Trillion. Meantime, Real Estate holdings surged $505.6 billion (11.4% ann.) to $19.25 Trillion. Real Estate holdings were up 26% over the past two years and 93% over seven years. And with Liabilities increasing $155 billion, Household Net Worth rose $327.9 billion (2.7% ann.) during the quarter to $48.8 Trillion. Net Worth was up $3.69 Trillion over the past year (8.2%) and $9.17 Trillion over two years (23%).
Credit inflation-enhanced GDP expanded 6.6% annualized during the first quarter to $12.19 Trillion. First quarter Personal Consumption Expenditures were up 6.0% from Q1 2004, with Durables up 4.8% to $1.02 Trillion, Non-durables up 7.5% to $2.49 Trillion, and Services up 5.5% to $5.03 Trillion. Gross Private Investment was up 14.6% to $2.08 Trillion, with Residential Investment up 13.6% to $709 billion. National Income was up 7.5% from Q1 2004, with Compensation of Employees up 7.4% to $6.967 Trillion. First quarter federal government expenditures were up 6.4% from Q1 2004, with State & Local spending up 5.7%.
To summarize the first quarter, Total Mortgage Debt ($1.127TN), Bank Credit ($1.276TN), and Rest of World Holdings of US Financial Assets ($1.170TN) each expanded at more than $1.0 Trillion annualized. This continuation of blow-off Credit and liquidity-creating excess goes a long way toward explaining the current extraordinary inflationary asset boom (includiing bond prices/yields!). The only conundrum is with respect to when and how this historic Bubble meets its fate.