Federal Reserve Q3 2005 Z.1 “flow of funds” report.
Total Non-Financial (household, government and non-financial corporate) Debt expanded at a blistering 9.1% rate during the quarter, up from the second quarter’s 8.1% and the year ago rate of 8.3%. To find a year of greater non-financial debt growth, one must return almost 20 years to 1986’s 11.9%. Thumbing its nose at quaint little Federal Reserve baby-steps, 2005 debt growth is running ahead of 2004’s 8.7%, which was the strongest percentage debt expansion since 1988. Household Mortgage Debt expanded at a rate of 14% during the quarter. One has to go back to 1985’s 14.1% rise for greater annual percentage growth. Corporate debt expanded at a 6.7% rate during the quarter, with 2005’s corporate borrowings on pace for the strongest year since 2000. State & Local Government borrowings increased at a 12.6% pace and one has to go all the way back to 1985… Federal Government borrowings expanded at a 5.1% rate during the quarter, benefiting from surging receipts.
It is analytically worthwhile to highlight the progressive acceleration in debt growth over the past few years. Examining third quarter rates of debt growth, 1999’s 6.6% compares to 2000’s 3.7%, 2001’s 6.5%, 2002’s 6.3%, 2003’s 7.5%, 2004’s 8.3%, and 2005’s 9.1%. Or, by – seasonally-adjusted and annualized rates (SAAR) – third quarter dollars, 1999’s $1.094 Trillion compares to 2000’s $662 billion, 2001’s $1.197 Trillion, 2002’s $1.238 Trillion, 2003’s $1.606 Trillion, 2004’s $1.923 Trillion, and 2005’s $2.297 Trillion. The nature of Credit Bubbles is starkly illustrated by the almost doubling (up 86%) of net annual Credit growth comparing 2002’s third quarter to 2005’s.
Total (Non-financial and Financial) Credit Market Debt (TCMD) expanded $799 billion (nominal) during the quarter, or 8.4% annualized, to $38.829 Trillion (308% of GDP). TCMD was up $3.123 Trillion over the past year (8.7%) and $5.541 Trillion over two years (16.6%). For perspective, TCMD expanded $1.679 Trillion during 2000, $1.929 Trillion during 2001, $2.213 Trillion during 2002, $2.733 Trillion during 2003, and $2.837 Trillion during 2004. Total Non-financial Debt increased $2.162 billion over the past year, or 9.2%, to $25.664 Trillion, with a two-year gain of 17.9%. Financial sector Credit market borrowings increased $854 billion over the past year, or 7.5%, to $12.219 Trillion. Financial Sector Credit Market Borrowings have been somewhat held in check by GSE stagnation, along with the rapid growth in banking sector Deposit liabilities (which are not included in Credit mkt borrowings).
Total Mortgage Debt (TMD) expanded a record $1.574 Trillion SAAR during the third quarter. To put this rampant debt creation into some perspective, it is an almost six-fold increase from the nineties’ annual average TMD growth of $271 billion. Over the past year, TMD has expanded $1.357 Trillion, or 13.4%, to $11.500 Trillion. TMD has increased 27% over the past two years and has more than doubled (104%) in seven. TMD is running more than double the pace from just four years ago (2001’s $661bn), and at the current pace we’ll match TMD from the entire decade of the nineties in less than seven quarters. Wow…
Home Mortgage Debt (HMD) growth expanded a record $1.225 Trillion SAAR during the quarter, up from the previous quarter’s $1.137 Trillion and the year ago $1.098 Trillion. HMD was up 13.6% over the past four quarters to $8.821 Trillion (up 27% in two years). But excesses are anything but confined to the residential sector. Commercial Mortgage Debt (CMD) expanded a record $303 billion SAAR, compared to the previous quarter’s $271 billion and the year ago $200 billion (CMD grew $114bn during 2001, $103bn during 2002, $131bn in 2003 and $181bn last year). CMD expanded 15% over the past year to $1.888 Trillion.
Almost half of new Total Mortgage Debt was intermediated through the Asset-Backed Securities (ABS) marketplace during the quarter. ABS expanded $621 billion (SAAR) during the quarter to $2.836 Trillion, for the first time surpassing the size of combined GSE balance sheets ($2.754TN). ABS expanded at a 22.4% rate during the quarter and ballooned 22.8% ($527.2bn) over the past year. ABS has increased 36% in just seven quarters. ABS is on pace to expand more in 2005 than it did during the three years 2000-2002 ($578bn).
Agency MBS expanded at a 5.5% rate during the quarter to $3.167 Trillion, with a one-year increase of 2.1%. GSE holdings declined at a 6.7% rate during the quarter to $2.754 Trillion, with a one-year contraction of 3.8%.
GSE retrenchment has been more than mitigated by the ballooning Banking and Broker/Dealer sectors. Bank Assets expanded $719 billion SAAR during the quarter to $9.156 Trillion. This compares to average annual growth of $456 billion during the first four years of the decade and the $275 billion average annual Bank Asset expansion during the nineties. Bank Credit expanded at a 10.7% pace during the quarter, up from the previous period’s 9.5% growth rate and the year ago 4.9%. Bank Credit was up 11.0% over the past year and 21.3% in two years. For perspective, Bank Credit expanded on average 6.2% annually during the nineties and 8.5% annually during the inflationary eighties. For the quarter, Mortgage Assets expanded at a 15% pace to $2.895 Trillion. Mortgages increased 15% over the past year and were up 27.9% in two years. Corporate bond (which includes ABS) holdings expanded at a 17.2% rate during the quarter to $699 billion, with a four quarter rise of 32% and a two-year surge of 52%.
On the Bank Liability side, Total Deposits expanded at an 11.3% rate during the quarter to $5.37 Trillion. Total Deposits expanded 9.8% during the past year and were up a noteworthy 21.1% over two years. Commercial Banks’ net “Repo” Liability expanded at a 9.7% rate during the quarter to $1.10 Trillion (up 4% y-o-y and 17.7% in two years). Bank Credit Market Liabilities expanded at a 9.4% pace during the quarter to $811 billion. These Liabilities were up 12.1% during the past year and 26.9% over two years.
Securities Broker & Dealer Assets expanded at a 10.9% rate during the quarter to $2.105 Trillion. Broker/Dealer Assets were up 19% y-o-y, with a two-year gain of 35%. Garnering much insight from the third quarter will not be easy. The Asset “Credit Market Instruments” dropped $322.3 billion SAAR (after rising $316bn SAAR during the Q2), with Treasury Securities sinking $262 billion SAAR. Meanwhile, Miscellaneous Assets ballooned $483 billion SAAR. Over the past year, “Misc. Assets” increased 30% to $1.224 Trillion (up 48% in 2 yrs), Credit Market Instruments rose 18% to $443 billion, Corporate & Foreign Bonds rose 17% to $294.8 billion (up 40% in 2 yrs), and Security Credit increased 21% to $254.5 billion. On the Liability side, Security “Repos” were up 44% over the past year to $686 billion, with a two-year gain of an astonishing 67%. “Due to Affiliates” expanded 17% over the past year to $861.7 billion (up 47% in 2 yrs). Security Credit Liabilities increased 5% over the past year to $812 billion.
But rapid growth is not limited to the Banks, Securities Brokers and ABS. Funding Corp (“Funding subsidiaries, nonbank financial holding companies, and custodial accounts for reinvested collateral of securities lending operations.”) Assets expanded at a 19.6% rate during the quarter to $1.572 Trillion. Funding Corp Assets ballooned 22.5% over the past year and 34% in two years. The largest Funding Corp Asset categories were Money Market Fund Shares ($377bn), Credit Market Instruments ($443bn), Investment in Foreign Banking Offices ($187bn), and Investment in Brokers and Dealers ($565bn). On the Liability side, the largest items included Credit Market Instruments ($499bn) and Securities Loaned ($978bn). It is interesting, although not surprising, to note that the Securities Loaned Liability was up 32% over the past year.
Federal Funds and Security Repurchase Agreements (“repo”) expanded at a 10.7% rate during the quarter to $1.963 Trillion. “Repos” were up 17% y-o-y and 35% over two years, although we have to keep in mind that Bank and Broker/Dealer “Repo” positions are reported after having netted “Repo” Assets against “Repo” Liabilities. Rest of World “Repo” holdings have swelled to $688 billion, after beginning 2001 at $91 billion. Over the same period, Money Market Fund “Repo” holdings grew from $183 billion to $301 billion. The Fed notes a $447 billion “Discrepancy – unallocated assets,” apparently because it cannot identify a large share of “Repo” holders.
Elsewhere, Real Estate Investment Trust (REIT) Assets expanded at a 37% annualized rate during the quarter to $327 billion (up 61% y-o-y). Credit Unions expanded Assets at a 6.7% pace during the period to $688 billion (up 6.1% y-o-y). Finance Company Assets expanded at a 5.4% rate during the quarter (up 2.2% y-o-y) to $1.439 Trillion. Money Market Funds expanded Assets at a 9.7% rate to $1.877 Trillion, posting its first significant growth in some time. Life Insurance Company Assets expanded at a 10.9% rate to $4.351 Trillion (up 8.7% y-o-y).
Also illuminating the inflationary forces percolating throughout the economy, third quarter Federal Government Receipts were up 9.5% from the year ago period, with Expenditures up 7.5%. From two years ago, Receipts were up 19% and Expenditures 14%. State & Local Government Receipts rose 7% from one year ago and 11.5% from 2003 Q3. State & Local Expenditures increased 5.9% and 12.1% over one and two years.
The Household (including Non-profits) Balance Sheet continues to provide a wealth of insight with respect to Credit Bubble and Bubble Economy Dynamics. Household Liabilities expanded at a robust 11.0% rate during the quarter to $11.40 Trillion, with a one-year rise of 11.1% and two-year jump of 20.8%. This debt surge played a prominent role in fueling a 10.8% rate of inflation in Household Assets. And while Household Liabilities increased $331 billion during the quarter, Household Assets inflated multiples of this amount ($1.644TN!), to $62.485 Trillion. Third quarter growth easily exceeded the previous quarter’s Asset growth of $1.366 Trillion and the year ago $959 billion. Household Assets jumped $6.170 Trillion, or 11%, over the past year (almost 50% of GDP!). For perspective, Household Assets increased on average $2.554 Trillion during the decade of the nineties ($1.746TN avg. 1990-96), although this was heavily skewed by the end-of-decade technology Bubble (Household Assets increased $5.439 Trillion during 1999). Certainly explaining the resiliency of consumer expenditures, over the past year Household Net Worth surged $4.38 Trillion, or 9.7%, to $51.086 Trillion (2-yr gain of $8.372TN). Real Estate holdings increased $2.785 Trillion (16.1%) during the past year to $20.778 Trillion, with a two-year gain of 29.5%. Household holdings of Financial Assets increased $2.468 Trillion (7.2%) in a year, with a two-year rise of 16.7%. Since 1994, Household Net Worth has increased from 349% of GDP to 410%.
Rest of World (ROW) increased positions in U.S. Financial Assets during the quarter by $1.006 Trillion SAAR to $10.681 Trillion, with holdings of Credit Market Instruments expanding a record $827 billion SAAR. Foreign Direct Investment increased $83 billion SAAR. ROW U.S. holdings were up a record $1.588 Trillion over the past year, or 17.5%. This compares to an average annual increase of $388 billion during the nineties and an average $651 billion during the first four years of this decade. During the quarter, ROW increased holdings of Treasuries $211.6 billion SAAR, just short of total Treasury new issuance. ROW holdings of Agency/GSE MBS surged $225.6 billion SAAR, significantly greater than new issuance. And ROW increased Corporate Bond (including ABS) holdings $418.1 billion SAAR, a significant percentage of total issuance.