Federal Reserve Q4 2005 Z.1 “flow of funds” report.
There is no mystery surrounding strong job creation, rising wage pressures, continued robust consumer spending, the resilient U.S. (Bubble) and global economies, rising bond yields, record U.S. trade deficits, over-liquefied and highly speculative international markets, or recent heightened global financial instability. Just take a close examination of the Fed’s most recent Z.1 “Flow of Funds” report. It’s a dandy.
A record fourth quarter concluded a historic year for the U.S. Credit system. During the quarter, Total (Financial and Non-Financial) Credit Market Debt (TCMD) expanded by a seasonally-adjusted and annualized record $3.827 Trillion, a growth rate of 10.1% (vs. Q3 2005’s $3.197TN and Q4 2004’s $3.095TN). For all of 2005, TCMD expanded $3.340 Trillion to $40.230 Trillion, with debt growth up more than $500 billion compared to 2004’s record increase ($2.818TN). For comparison, Annual Total Credit Market Debt Growth averaged $1.237 Trillion during the nineties. Bubble Dynamics are conspicuous in the data and, in particular, take note throughout this analysis of the progressive nature of Credit expansion. TCMD expanded $1.667TN during 2000, $1.929TN in 2001, $2.213TN in 2002, $2.713TN in 2003, and $2.818TN in 2004.
One has to go all the way back to 1986 to surpass 2005’s 9.5% rate of expansion in Non-Financial Debt. At a record $2.295 Trillion, Non-Financial Debt expanded at more than three times the nineties average ($710bn). Non-Financial Debt expanded $839bn during 2000, $1.117TN in 2001, $1.316TN in 2002, $1.608TN in 2003, and $1.948TN in 2004. Total Household Borrowings expanded 11.7% during 2005, the fastest pace since emerging from prolonged stagnation back in 1985. Total Business Debt expanded at the fastest pace (7.8%) since 2000. State & Local Debt expanded 10.6% during 2005, and Federal government borrowings grew 7.0%.
Not surprisingly, the Mortgage Finance Bubble went to only greater ("blow-off")extremes. Total Mortgage Debt (TMD) expanded an astounding $1.470 Trillion last year (14.0%). To put this number into perspective, it is five and one-half times the average annual mortgage debt growth during the nineties ($267bn). TMD expanded $546bn during 2000, $661bn in 2001, $822bn in 2002, $990bn in 2003, and $1.238TN in 2004. TMD ballooned 29% in just two years ($2.708 TN) and more than doubled in seven (up 107%). TMD increased to a record 96% of GDP during 2005, up from the 67% to commence Year 2000 and 51% back in 1982. Household Mortgage Debt expanded a record $1.133TN, or 14.1%, up from 2004’s record $992 billion growth and compared to the nineties average of $230 billion. Commercial Mortgage Debt expanded a record $266 billion, or 15.6%, to $1.968TN. This is ten times the $26 billion nineties annual average Commercial Mortgage Debt growth.
Financial Sector Credit Market Debt expanded 8.2%, up from 2004’s 7.4%, although keep in mind that this Credit aggregate excludes bank deposits (non-market debt). The Banking sector enjoyed banner growth. Bank Credit expanded 10.1% to $7.459 Trillion, the strongest rate of growth since 1985. In nominal dollars, Bank Credit increased $686 billion, up sharply from 2004’s record $571 billion and the $215 billion averange from the nineties. Bank Credit posted a two-year gain of $1.257TN, or 20.3%. Bank Loans grew 11.6% ($558bn) over the past year and 21.8% ($963bn) over two years, with Mortgage loans up 14.0% ($363bn) and 31.1% ($702bn) to $2.958TN. Corporate Bond (including ABS) holdings increased 22.8% during the year to $688 billion (up 43% in 2yrs), while Government Securities holdings were little changed over the past year (down 1.6%) and up only 4.7% over two years.
And what new financial claims/Credit instruments were created in the process of financing this spectacular Bank Credit inflation? Well, Total Deposits expanded $461 billion, or 9.2%, to $5.489TN, with a historic two-year gain of $974.1 billion, or 21.6%. Saving Deposits increased $271 billion (8.3%) to $3.531TN and Large Time Deposits grew $226 billion (20.2%) to $1.347TN. Large Time Deposits surged 44.2% over two years. The Liability “Federal Funds and Securities Repos (net)” expanded 12% during 2005 to $1.091TN, and Credit Instrument Liabilities increased 11.5% to $824 billion. Bond Liabilities expanded 13% to $494 billion.
“Structured Finance” (combined GSE, MBS and ABS) bounced back from a relatively slow 2004 (5.5% growth) to expand 8.1%, to $9.542TN. A small contraction (down 2.3%) in GSE assets and meager growth in agency MBS (up 3.8%) was more than offset by a historic expansion of the Asset-backed Securities (ABS) marketplace. ABS expanded $200 billion during the fourth quarter (28% annual.) and $646 billion for the year, or 26.7%, to $3.059TN. ABS increased $971 billion, or 46.5%, in just two years and is up almost 130% so far this decade. Examining ABS assets, Mortgage holdings increased $717 billion during 2005 (111% of asset growth). And after ending 2002 with Mortgages comprising 42% of ABS pool assets, this ratio surged to 70% by the end of 2005.
The Securities Broker/Dealer community boom runs unabated. Total Assets expanded in 2005 by a record $299 billion, or 16.2%, to $2.144TN. This compares to average annual growth of $76 billion during the nineties. Broker/Dealer Assets surged 33% ($531bn) in two years and 61% ($809bn) in just three years. On the Asset side, Credit Market Instrument holdings were up 23% last year to $486 billion. Miscellaneous Assets surged $226 billion (23%) to $1.220TN, with a two-year gain of 42%. Corporate Bond holdings increased $85 billion (34%) to $338 billion, while both the Treasury and Agency/GSE MBS categories posted small contractions. On the Liability side, Repos surged $209 billion (40%) to $736 billion. Security Credit gained $24 billion (3%) to $798 billion. “Due Affiliates” jumped $104 billion during the year (14%) to $835 billion.
Elsewhere, Money Market Funds (MMF) posted their first year of growth since 2001. MMF Assets increased $130 billion during the fourth quarter (27.8% annual.) and $127 billion for the year, or 6.8%, to $2.007TN. Fed Funds and Repos expanded $361 billion during the year, or 21.8%, to $2.011TN. “Funding Corp” Assets were up 15.7% for the year to $1.488TN. Savings Institution Liabilities expanded $140 billion, or 8.9%, to $1.789TN, with a notable two-year gain of 22%. Credit Union Assets expanded 4.7% to $686 billion, while Finance Company Assets contracted 8.4% to $1.335TN. Real Estate Investment Trust (REIT) Liabilities surged 26.5% to $581 billion, with a two-year gain of 86%. Life Insurance Assets expanded $250 billion, or 6.1%, during the year to $4.381TN.
As goes the U.S. Current Account Deficit, so go Rest of World (ROW) holdings of our assets. For the year, ROW holdings of U.S. Financial Assets surged $1.318TN to $11.154TN, with a stunning (and unfathomable) two-year gain of $2.774TN (33%). Of this, Total Credit Market holdings jumped $896 billion during the year to $5.576TN, with a two-year gain of $1.657TN, or 42%. ROW Treasury holdings increased $298 billion to $2.198TN, absorbing essentially all of 2005 Treasury issuance ($307bn). Agency holdings jumped $172 billion to $934 billion, significantly more than the new Agency debt issued during the year ($51bn). Holdings of U.S. Corporate Bonds (includes ABS) jumped a record $351 billion to $2.103 Trillion, while holdings of U.S. Equities increased $86 billion to $2.304TN. Over the past year, Foreign Direct Investment (FDI) rose $20 billion to $1.820TN. During the past four years, FDI increased $366 billion, while U.S. Corporate Bond holdings ballooned $987 billion and U.S. Equity holdings increased $237 billion (47%).
Once again, the Household (and Non-profit) Sector Balance Sheet provides a wealth of Credit Bubble insight. Household Liabilities expanded at a 12.9% rate during the fourth quarter and increased $1.181TN, or 11.0%, for the year to $11.916TN. Household Liabilities were up 24.1% in two years and 50.7% in four. Yet, during 2005 Household (“perceived”) wealth inflated almost five times the nominal amount of increased Household debt. For the year, Household Assets surged $5.038TN, or 8.5%, to a record $64.023TN. Real Estate Holdings jumped $2.803TN last year (14.9%) to $21.580TN, after inflating $2.304TN (14.0%) during 2004, $1.490TN (9.9%) in 2003, and $1.253TN (9.1%) in 2002. Household Real Estate holdings were up $7.850TN, or 57%, in four years. During 2005, Financial Asset holdings increased $2.036TN, or 5.6%. Deposits Assets jumped $433 billion (7.9%) to $5.888TN. Credit Market Instrument holdings gained $53 billion (2%) to $2.733TN. Mutual Fund Shares gained $256 billion to $4.208TN and “Equity of non-corporate business” jumped $850 billion to $6.678TN.
With Household Assets last year inflating $5.038TN and Household Liabilities increasing $1.181TN, Household Net Worth jumped $3.857TN during the year to a record $52.107TN (down somewhat from 2004’s $4.418TN expansion in Net Worth). In only three years, Household Net Worth has inflated $13.033TN, or 33%. This significantly surpassed the - at the time - unprecedented $11.904TN Bubble wealth surge in the years 1997 through 1999. Household Net Worth ended the year at 417% of GDP, up from 1995’s 351% and 1985’s 335%.
Government inflows and outflows provide another vantage point to view the current inflationary environment. Federal Government Receipts jumped 12.1% during calendar 2005 to $2.303TN, with a two-year gain of 23%. Federal Expenditures were up 7.7% during 2005 to a record $2.613TN, with a two-year rise of 16.1%. State & Local Receipts were up 5.7% to a record $1.719TN, with a two-year gain of 15.4%. S&L Expenditures jumped 6.8% during 2005 to $1.732TN, with a two-year gain of 14.5%