Federal Reserve Q1 2006 Z.1 “flow of funds” report.
With attention understandably fixated on wild global financial market action, few will give much attention to the most recent Credit data from the Federal Reserve. That’s unfortunate. The data continue to provide the best glimpse of a Credit system run amuck and so far demonstrating no capacity for adjustment or moderation. Moreover, record first-quarter Credit growth and the ongoing massive outflow of finance from the U.S. financial system to the Rest of World go a long way toward identifying the epicenter of the destabilizing liquidity that fueled wild (“parabolic”) speculative runs in markets around the world.
The numbers have gotten so big. Total Non-Financial Debt (NFD) expanded at an 11.0% seasonally-adjusted and annualized (SAA) pace during the first quarter, up from the fourth quarter’s 9.4% and likely the strongest quarterly pace in nearly twenty years. Non-financial debt has not posted a year of double-digit growth since 1986’s 11.9%. NFD averaged 5.4% annual growth during the (“dis-inflationary”) 1990s.
In nominal (SAA) dollars, Non-Financial debt expanded $2.914 Trillion during the quarter, up from the fourth quarter’s $2.434 Trillion and Q1 2005’s $2.351 Trillion. For comparison, Non-Financial debt expanded $2.30 TN in 2005, $1.945 TN in 2004, $1.648 TN in 2003, $1.323 TN in 2002, $1.099 TN in 2001, and $827 billion during 2000. For added perspective, Total Non-Financial Debt increased on average $706 billion annually during the nineties. Our system now creates approximately this amount of Credit every three months.
Interestingly – and in “Classic” Credit Bubble Blow-Off Dynamic Fashion - Household Mortgage Debt expanded at a 13.6% rate during the quarter, up from the fourth quarter’s 13.4% and Q1 2005’s 11.8%. I suggest that Ongoing Massive Mortgage Credit Inflation explains why general home prices have held up so well - to this point. Total Household debt expanded at an 11.6% rate, up from the fourth quarter’s 11.1%.
Corporate debt expanded at a 9.5% rate, up from the fourth quarter’s 5.2% pace to the strongest growth since the booming second quarter of 2000. If the current pace of corporate borrowings holds, 2006 will mark the strongest annual rate of growth since 1999’s 9.9%. It is worth noting that Corporate debt expanded 5.5% in 2005, 3.7% in 2004, 1.9% in 2003, 0.7% in 2002, 4.9% in 2001, and 8.3% during 2000. We cannot dismiss the current momentum of corporate borrowings.
State & Local Governments increased borrowings at a 5.8% pace, down from the fourth quarter’s 8.6%. State & Local first-quarter Receipts were up 5.7% from one year ago, and Expenditures were up 4.9%. Federal Government borrowing expanded at a 12.9% SAA pace. First quarter Federal Receipts were up 9.3% from a year earlier, with Expenditures up 5.7% y-o-y.
Total (Non-Financial and Financial) Credit Market Debt (TCMD) increased a nominal $1.004 Trillion during the quarter – a rate of 9.9% - to $41.698 Trillion. TCMD was up $3.700 Trillion over the past four quarters, or 9.7%. During this period GDP expanded $839 billion, or 6.9%, to $13.037 Trillion. Or, from another angle, the past year’s (“parabolic”) increase in Total Credit Market Borrowings was equal to almost 30% of GDP.
Financial Sector borrowings expanded at an 11.5% pace. Over the past four quarters, Financial Sector market borrowings have increased $1.179 Trillion, or 9.8%, the strongest pace of growth since 2003. Outstanding Asset-backed Securities (ABS) expanded at a SAA $663 billion to $3.200 TN during Q1. ABS expanded at a 21% pace during the quarter, with a one-year gain of almost 28% and a two-year surge of 51%. And, for the quarter, almost 90% of the assets collateralizing ABS were mortgage or mortgage-related. Outstanding (agency-related) Mortgage-Backed Securities (MBS) expanded at a SAA $348 billion, the strongest pace in over two years. MBS expanded at an 8.2% pace during the quarter, with a four-quarter rise of 5.8%. The GSEs expanded at a 3.3% rate to $2.29 TN during the quarter, with assets about unchanged over the past year.
During the first quarter, Commercial Banking’s “Net Acquisition of Financial Assets” jumped to a blistering SAA $957 billion. This is a continued (sharp) acceleration from 2005’s $791bn, 2004’s $739bn, 2003’s $506bn, 2002’s $477bn, and 2001’s $350bn. And, for comparison, Bank Assets expanded on average $275 billion (6.4%) annually during the decade of the nineties. Bank Credit accelerated to an eye-opening 11.3% rate during the quarter to $7.668 TN, with a one-year gain of 9.7% ($675bn). Bank Credit is up 19.8% in eight quarters. Bank Loans expanded at a 10.5% rate (up from the fourth quarter’s 9.6%) to $5.527 TN, with a one-year rise of 11.8% ($584bn). Over the past year, Bank holdings of Corporate Bonds were up 13.9% to $711 billion, and Mortgages were up 12.5% to $3.025 TN. Holdings of Government Securities were down 1.7% y-o-y to $1.225 TN.
What Monetary Liabilities were created through this historic Bank expansion? Total Deposits expanded at an 8.4% rate during the quarter to $5.604 TN. Total Deposits were up 9.1% over the past year, with Checkable Deposits down 6% (to $585bn), Savings Deposits up 7.3% ($3.581bn), and Large Time Deposits up 22% ($1.438TN). “Federal Funds and Repos” expanded at a 15% pace during the quarter to $1.131 TN, with a one-year gain of 11%. Bank Credit Market Borrowings increased at a 13% pace to $837 billion, with a one-year gain of 7.8%. Miscellaneous Bank Liabilities expanded at a 28% pace during the quarter to $1.720 TN, although this was basically a reversal from the fourth quarter’s decline.
Echoing global market excess, Security Brokers and Dealers’ “Net Acquisition of Financial Assets” surged to a record $611 billion SAA during the quarter to $2.296 Trillion. Broker/Dealer Assets expanded at a 28% rate during Q1, with a one-year gain of 18% and a two-year surge of 35%. Miscellaneous Assets were up nominal $101 billion during the quarter to $1.323 Trillion, with a one-year gain of 26%. Holdings of Credit Market Instruments increased at a 14.8% rate during the quarter to $504 billion. Over the past year, Credit Market holdings were up 15%, Agency/MBS 20% (to $129bn), Security Credit Assets 24% ($249bn), and Corporate Bonds 27% ($345bn). On the Liability Side, “repos” jumped 32% over the past year to $818 billion, Security Credit 8% ($847bn), and Due Affiliates 25% to $1.089 TN. Broker/Dealer Assets have more than doubled in six years.
Elsewhere, Savings Institutions’ Assets expanded at an 8.8% rate during the quarter to $1.829 TN, with a one-year gain of 11.0%. Life Insurance Assets expanded at an 11.9% rate during the quarter to $4.80 TN, with a one-year rise of 7.3%. Real Estate Investment Trust (REIT) Assets expanded at a 35% rate during the quarter to $385 billion (up 44% y-o-y), and Finance Company Assets declined at a 7.8% rate to $1.30 TN (down 8.2% y-o-y). Credit Union Assets expanded at a 9.9% rate during the quarter to $703 billion (up 4.8% y-o-y).
Money Market Funds Assets expanded at a 1.4% rate during the quarter to $2.014 TN, although assets were up 9.4% from a year ago. “Funding Corporations” (“Funding subsidiaries, nonbank financial holding companies, and custodial accounts for reinvested collateral of securities lending operations”) Assets expanded at an 18% rate during the quarter to $1.963 TN, with a one-year gain of 19% ($314bn) and a two-year rise of 55% ($700bn). The largest “Funding Corp” Asset – “Investment in Brokers and Dealers” – was up 23% over the past four quarters to $808 billion.
The Mortgage Finance Bubble relentlessly dominates the Credit system. Total Mortgage Debt (TMD) expanded at a seasonally-adjusted and annualized $1.596 Trillion, second only to Q3 2005’s $1.677 SAA. This compares to the $267 billion annual average from the nineties and at this pace even surpasses 2005’s record $1.484 Trillion mortgage debt growth. In nominal dollars, first quarter TMD expanded at a 12.2% pace to $12.329 Trillion, with a one-year gain of 14.7%. Home Mortgage Debt expanded at a 12.2% rate during the quarter (up 14.8% y-o-y). Commercial Mortgage Debt expanded at a 12.4% rate during the quarter, with a noteworthy one-year gain of 16.4%.
It is largely mortgage Credit excesses that fuel Asset inflation and attendant over-consumption, in the processes fostering ongoing unprecedented Current Account Deficits. The Current Account, along with rampant outflows to play the global market boom, largely explain the massive financial flows out to the “Rest of World” (ROW) - that are represented by the ROW accumulation of U.S. asset holdings.
“Rest of World” “Net Acquisition of Financial Assets” surged to a SAA $1.492 TN, ending the first-quarter at an unfathomable $11.4 Trillion. This compares to the fourth quarter’s $889 billion SAA and Q1 2005’s $1.025 TN. What did they acquire? U.S. Corporate Bonds (including ABS) increased $398 billion SAA during the quarter, Security Repos $245 billion SAA, U.S. Corporate Equities $227 billion SAA, Treasury Securities $185 billion SAA, Agency & MBS $193 billion SAA, and Foreign Direct Investment $187 billion SAA. ROW holdings were up $1.246 Trillion over the past year (12%), with a two-year gain of $2.7 Trillion (31%). ROW holdings of U.S. financial assets have almost doubled in six years. Amazing.
As always, the Household (and Non-Profit) Balance Sheet offers Invaluable Bubble Economy Insight. Household Liabilities expanded at a 9.2% pace during the quarter, providing much of the liquidity fueling a 10.4% rate of Household Assets inflation. Yet in nominal dollars, Liabilities increased $273 billion to $12.199 TN, while Asset values surged six times this amount - $1.674 TN - to $66.03 TN. The upshot is a blockbuster $1.40 Trillion (10.7% rate) increase in Household Net Worth during the quarter to a record $58.83 Trillion. Over the past year, Household Liabilities increased $1.279 TN (11.7%), as Household Asset values surged $6.196 TN (10.4%). During this 12-month period, Net Worth jumped $4.918 TN (10.1%), surpassing even 1999’s record $4.812 TN increase. Household Net Worth has inflated a staggering $9.177 TN, or 20.6%, in just two years to approach 500% of GDP. There is no mystery surrounding the resilient consumer. Could the Bubble be any more conspicuous?
Examining Household Assets, it is worth noting that Real Estate values increased $529 billion during the quarter, a rate of 9.8%, to $22.177 TN, with a one-year gain of $2.819 TN, or 14.6%. Real Estate values were up $5.389 TN, or 32%, over two years and $8.158 TN, or 58%, over four years. Household Financial Asset holdings jumped $1.077 Trillion, or 11.1% annualized, to $39.81 TN during the quarter. The value of Financial Asset holdings gained $3.185 TN (8.7%) over the past year and $5.871 (17.3%) in two years.