Federal Reserve Q4 2010 Z.1 “flow of funds” report.
Total Non-Financial Debt (NFD) expanded at a 5.1% rate during Q4 2010, the fastest pace of quarterly expansion since Q4 2008’s 5.7%. For comparison, NFD increased at a 4.2% during Q3 and only 0.8% in the year ago quarter. For all of 2010, NFD grew 4.6%, up from 2009’s 3.0% but below 2008’s 6.0%. For comparison, NFD expanded 5.0% during year 2000 and 4.3% and 4.5% during the recessionary years 1991 and 1992. During the Credit boom years 2004 through 2007, NFD expanded 8.8%, 9.5%, 9.0% and 8.6%. Total system Credit market borrowings ended the year at $52.636 TN, just shy of a record level. NFD ended 2010 at a record $36.296 TN. Financial Sector borrowings closed the year at $14.236 TN, down significantly from the 2008 high of $17.1 TN.
And while rejuvenated Credit expansion is constructive for the ongoing recovery of GDP, the underlying composition of debt growth is less than encouraging. By sector, federal government debt expanded at a 14.6% rate during the quarter, with state & local borrowings growing at a 7.9% pace. It’s worth noting that state & local borrowings expanded at the fastest pace since Q4 2007, although growth slowed markedly during Q1 2011. Total (including financial subsidiaries) corporate borrowings increased at a 5.7% pace, the strongest growth since Q2 2008. Household debt contracted at a 0.6% pace during the quarter, down from Q3’s negative 2.0% and the mildest contraction since Q3 2008.
In seasonally-adjusted and annualized dollars (SAAR), NFD expanded $1.830 TN during Q4, the largest expansion since Q4 2008’s SAAR $1.897 TN. I have posited that NFD growth in the neighborhood of $2.0 TN is required to sustain the maladjusted U.S. “Bubble Economy,” and I don’t believe it is a coincidence that the employment backdrop has begun to stabilize now that the Credit system approaches this $2.0 TN threshold. At SAAR $1.320 TN and SAAR $191bn, federal and state & local debt growth combined for 83% of total NFD expansion during the quarter (down from Q3’s 102% but still an incredibly high government dominance of system Credit). Total corporate borrowings expanded SAAR $413bn during the quarter, while household sector borrowings contracted SAAR $78bn.
Federal government liabilities increased $1.692 TN, or 17.9%, in 2010 to $11.148 TN. Federal debt has increased $4.450 TN, or 66%, in just the past 10 quarters. Over this period, the increase in federal liabilities has exceeded 11% of GDP. Markets willing, federal borrowings remain on track to double in less than four years. During Q4, federal expenditures were up 6.6% y-o-y to $3.777 TN, while Q4 receipts rose 5.6% y-o-y to $2.356 TN. Comparing Q4 federal receipts/expenditures to pre-crisis Q4 2007, it is worth noting that receipts were down 12.1% from three years earlier, while expenditures were up 21.1%. Receipts would now have to increase 60% to match federal expenditures.
Outside of government borrowing and spending, most of the U.S. Credit system remains moribund. Total Mortgage Debt contracted SAAR $324bn during Q4, although this was down from Q3’s SAAR $486bn, Q2’s $502bn and Q1’s $620bn. This likely reflects reduced mortgage write-downs by lenders. Both Home and Commercial mortgage debt showed their smallest contractions in six quarters. For the year, Total Mortgage Debt dropped 3.4%, this following 2009’s 2.0% decline. From its peak at the end of Q2 2008, total Mortgage debt has contracted $872bn, or 6%, to $13.833 TN.
GSE Assets contracted at a 7.5% rate during Q4 to $6.691 TN, while GSE insured MBS expanded at an 18.3% rate to $1.166 TN. The wind-down of outstanding asset-backed securities (ABS) runs unabated. ABS contracted at a 14.7% pace during Q4 – and was down 28.3% y-o-y – to $2.454 TN. The ABS market has now almost been cut in half since its peak level back in 2007. While write-downs have been heavy, huge quantities of “private-label” mortgages have been “refied” and modified - and conveniently transformed into coveted government-backed securities (Fannie, Freddie, Ginnie and FHA). No doubt many of these securities now rest comfortably on the Fed’s balance sheet.
While we’re on the subject, the Federal Reserve balance sheet expanded (nominal) $127bn, or almost 22% annualized, during Q4 to a record $2.454 TN. In just 10 quarters, Fed assets have ballooned $1.502 TN, or 158%. During the fourth quarter, Treasury holdings jumped $210bn to $1.022 TN. Purchases by the Fed (57%) and Rest of World (33%) amounted to 90% of total Treasury debt issuance during the quarter. For the period, Agency and GSE-backed securities holdings declined about $93bn to $1.140 TN. The unwind of TALF and related crisis-period lending vehicles continues, with these assets shrinking $8bn to $98bn (down from $490bn to end 2008).
With the government sector (Treasury and Fed) in the midst of historic expansion, it’s not so easy for others to make headway. Banking system Assets contracted (nominal) $240bn during the quarter to $14.402 TN. Bank Assets are little changed now over the past seven quarters. On a seasonally-adjusted and annualized basis (SAAR), Bank Credit contracted a discouraging $755bn during the quarter to $9.5 TN. Mortgages dropped SAAR $229bn, Consumer Credit fell SAAR $142bn, and corporate and foreign bonds sank SAAR $618bn. On the growth side, Agency and GSE-backed securities expanded SAAR $151bn, Reserves at Fed SAAR $134bn, business Loans SAAR $16bn and Security Credit $15bn.
The Broker/Dealers, not surprisingly, have enjoyed better fortune when it comes to mustering some growth. Assets expanded (nominal) $47bn during the quarter (9.2% annualized) to $2.073 TN. On the growth side, Security Credit expanded a notable SAAR $178 during the quarter. At $278bn, Security Credit has doubled since Q1 2009 and now stands at the highest level since Q3 2008. Credit Market Instruments increased (nominal) $18bn during the quarter to $558bn, while Miscellaneous Assets fell $37bn to $1.025 TN. Elsewhere, Funding Corps expanded at a 7.1% rate during the quarter to $2.316 TN.
Searching for other signs of life, Credit Unions expanded assets at a 2.4% pace during the quarter to $911bn (up 3.2% for the year). REIT liabilities grew at a 1.5% rate to $493bn (up 4.2% y-o-y). Savings Institutions assets were little changed at $1.244 TN (down 0.8% y-o-y). Benefitting from the booming stock market, Life Insurance assets rose at a 10.2% rate to $5.177 TN (up 7.3% y-o-y).
Also boosted by big gains in equities, the Household sector saw its assets jump $2.164 TN during the fourth quarter to $70.740 TN – the first rise above $70 TN since Q3 2008. It is worth noting that Household Real Estate holdings declined another (nominal) $185bn during the quarter to $18.187 TN. Meanwhile, Financial Assets jumped $2.321 TN during the quarter to $47.639 TN, the high since Q2 2008. And with Liabilities little changed, Household Net Worth was up a robust $2.137 TN during the quarter to $56.823 TN. For the year, Household Net Worth jumped $3.166 TN.
Surging perceived financial wealth has clearly bolstered spending (hence GDP, with our nation’s consumption/services dominated economic output). There is, as well, no doubt that rising incomes have worked wonders in driving the recovery. National Income jumped (nominal) $125bn, or 4.8%, during Q4 to a RECORD $13.00 TN. National Income was up $590bn, or 4.8%, for all of 2010. Total Compensation expanded at a 3.4% pace during the quarter and was up 3.4% y-o-y to a record $8.101 TN. I would argue very strongly that the government sector’s borrowing and spending binge has been integral to the stabilization and reflation of incomes throughout the entire economy.
Rest of World (ROW) holdings of U.S. financial assets continue to inflate. Holdings expanded SAAR $1.258 TN during Q4. For the year, ROW holdings were up $1.136 TN, or 7.2%, to a record $16.952 TN, the largest growth since 2007. For the quarter, Treasury holdings increased SAAR $486bn and Miscellaneous Assets grew SAAR $451bn. For the year, ROW increased Treasury positions by $697bn, or 44% of net Treasury issuance during the period.