Federal Reserve Q1 2009 Z.1 “flow of funds” report.
Total Domestic Non-Financial Debt (NFD) expanded at a 4.1% seasonally-adjusted and annualized rate (SAAR) during the first quarter. This was down from Q4 2008’s 6.2% and was below Q1 2008’s 5.4%. Total system Credit (non-financial and financial) increased $371.8bn, or 2.8% annualized, to a record $52.904 TN – and was up $2.238 TN over the past year, or 4.4%. Talk of “Credit collapse” has been overdone.
During the first quarter, total Household Sector debt contracted at a 1.1% rate, with household mortgage borrowings unchanged during the quarter. Flat household mortgage debt growth compares to Q4’s negative 1.7%, Q3’s negative 2.4%, and Q2’s negative 0.3%. Home mortgage borrowings declined 1.6% over the past year. Total mortgage debt was down only $67.2bn y-o-y, or 0.5%. Total Business Borrowings declined at a 0.3% rate during the quarter, although Corporate debt expanded at a 2.0% pace during the quarter. Total Business borrowings were up 3.2% over the past year.
Rapidly expanding government debt more than offset the small first quarter declines in Household and Business borrowings. State & Local debt expanded at a 4.9% rate - a notable bounce back from Q4’s 0.4% contraction and the strongest growth since Q4 2007. Yet most of the Credit for Q1’s respectable NFD growth goes to our federal government, where borrowings surged at a 22.6% annualized pace.
Treasury debt outstanding increased a nominal $466bn during the quarter to $6.804 TN. Over the past year, Treasury debt expanded an unprecedented $1.505 TN, or 28.4%. But Washington’s giant Credit footprint is not confined to the Treasury issuance boom. GSE borrowings expanded SAAR $259bn during the quarter to a record $3.452 TN. In percentage terms, GSE debt expanded at a 7.6% rate during the quarter and was up 7.2% y-o-y. Agency MBS growth was even stronger, expanding SAAR $300bn during Q1 to surpass $5.0 TN ($5.052 TN) for the first time. Agency MBS expanded at a 6.5% rate during the quarter and was up 9.6% from a year earlier. During the past eight quarters, the GSEs have expanded 19.5% and agency MBS 27.5% - a massive and ongoing nationalization of mortgage Credit and interest-rate risk.
First quarter combined Treasury, GSE debt, and agency MBS growth surged to SAAR $2.0 TN. In nominal dollars, total combined Treasury, GSE and MBS expanded $612bn during the quarter, or 16.7% annualized, to $15.298 TN. These “federal” debt obligations ballooned an alarming $2.177 TN over the past year, or 16.6%. This was just below 100% of one-year total system Credit growth, highlighting the most conspicuous aspect of an expanding Government Finance Bubble.
Analyzing the financial sector these days is fraught with challenges. I feel for the staff at the Federal Reserve responsible for aggregating the data. And despite my years of dissecting the “flow of funds,” this quarter’s financial sector data has me stumped. Examining the “L” (level) pages, Total Financial Sector Credit market borrowings contracted a meager $72bn to $17.015 TN (up 3.7% y-o-y). Yet the “F” (flows) pages show a huge (SAAR $1.792 TN) decline for financial sector borrowings during the quarter. The “level” page has bank Financial Assets up almost $500bn during the quarter (almost $700bn increase in Misc. Assets), while the “flow” page has bank assets contracting. Hopefully we’ll have more clarity with Q2 data and revisions.
Securities Broker/Dealer Assets contracted a nominal $305bn during the quarter to $1.913 TN, bringing the one-year drop to $1.332 TN (although some of this has moved to bank and Federal Reserve balance sheets). And Open Market Paper (CP) fell $175bn during the quarter to $1.424 TN, with a one-year decline of $361bn (20.2%). And Fed Funds & Repo contracted $201bn during Q1 to $1.055 TN, with a notable one-year drop of $1.086 TN (50.7%). Federal Reserve assets declined $149bn during the quarter to $2.122 TN, although assets were up $1.190 TN, or 128%, over the past year.
So with recent bank Credit stagnation and contractions experienced by the Wall Street firms, the commercial paper market, and the Fed - some analysts see support for the Credit collapse viewpoint. But this ignores the massive ongoing issuance of Treasuries, GSE debt and agency MBS – not to mention a more recent booms in corporate and muni debt issuance. Again, keep in mind that Non-financial debt did expand at a 4.1% rate during the quarter, a pace of Credit expansion that I expect is being exceeded during the current quarter.
National Income declined a modest $48bn (annualized) during the first quarter to a $12.255 TN pace. This was a slower contraction than Q4’s $189bn (annualized), with National Income declining 1.6% y-o-y. Total Compensation was up 0.2% y-o-y to $8.024 TN. From my analytical perspective, the massive - almost $2.2 TN - “federal” Credit boom has for now stabilized system-wide Compensation and Income. Yet the sustainability and consequences of the Government Finance Bubble create – at best - great uncertainty. I’ll stick with the analysis that two Trillion-plus of government Credit creation is necessary to hold Bubble Economy implosion at bay – and that this amount of Washington-based finance comes with its own set of serious issues (including exacerbating global financial and economic distortions).
It is a primary theme of current Credit Bubble analysis that the unfolding Government Finance Bubble-driven global reflation will be of an altogether different nature than previous Fed/Wall Street-induced reflations. For one, the major reflationary monetary mechanism has shifted from Wall Street finance (securities firms’ balance sheets and securitizations, “repo” finance, hedge funds, etc. - to various avenues of government finance. As such, we are expecting a lasting shift in the flow of finance away from the asset markets, with important ramifications for household wealth and spending. The Flow of Funds provides confirmation of this analysis.
Household Balance Sheet data make for dreadful analysis. Despite incredible government stimulus, Household sector Assets declined a further $1.444 Trillion during the quarter. This brought the one-year drop to an unrivaled $10.075 Trillion (13.5%). At $64.517 TN, Household Assets have returned to year-end 2005 levels. Over the past year, Financial Assets declined $7.869 TN (16.3%) to $40.296 TN and Real Estate dropped $2.279 TN (10.3%) to $19.819 TN. Household Liabilities contracted at a 3.2% rate during the quarter to $14.141 TN, with a one-year drop of 2.1% ($301bn). As such, Household Net Worth contracted $1.330 TN, or at a 10.3% rate, during Q1 to $50.376 TN. Household Net Worth dropped $9.774 TN over the past four quarters, or 16.2%, deflating back to about the Q3 2005 level.
There are also indications of potential trouble from Rest of World (ROW) flow analysis. ROW holdings declined for Agency/GSE-backed securities, Open Market Paper, U.S. Time Deposits, Inter-bank Assets, Corporate Bonds, and Loans to Corporate Business. Meanwhile, Treasury holdings expanded SAAR $636bn during the quarter to $3.341 TN. Our foreign Creditors may be content to recycle dollar flows back into Treasuries, but they are thus far in no mood to return to financing our business or household sectors. This may prove a major factor contributing to an altered flow of finance throughout the U.S. economy. It can also be read as a warning that the crucial process of dollar recycling rests increasingly on market perceptions of the soundness of one single market – U.S. Treasuries.