Federal Reserve Q2 2012 Z.1 “flow of funds” report.
As you read my opening summary of the Fed’s latest quarterly Z.1 “flow of funds” report, keep in mind the Fed’s recent decision to move to an altogether more aggressive monetary policy stance.
For the second quarter, Total Non-financial Credit market debt expanded at a 5.0% rate, the strongest expansion since Q4 2008 (14 quarters ago). Debt growth increased from Q1’s 4.4% rate and was almost double Q2 2011’s 2.6%. Corporate Credit market borrowings expanded at a 6.9% pace, up from Q1’s 4.7%. Total Household debt expanded at a 1.2% pace, the strongest growth since Q1 2008. Consumer Credit grew at a robust 6.2% rate, the strongest in 19 quarters (Q3 ’07). Home mortgage Credit contracted at a 2.1% pace, an improvement from Q1’s 3.3% pace of decline. State & Local borrowings increased at a 0.8% pace, compared to Q1’s 1.2% rate of contraction.
For the quarter, Total Non-Financial Credit expanded at a seasonally-adjusted and annualized (SAAR) $1.946 TN. This was the strongest debt expansion since Q4 2008’s SAAR $2.082 TN. And for comparison, the current pace of debt growth compares to 2008’s total growth of $1.906 TN, ‘09’s $1.063 TN, 2010’s $1.437 TN and 2011’s $1.326 TN. In the past, I’ve posited that our maladjusted Bubble economic structured requires in the neighborhood of $2.0 TN annualized Credit growth to retain reflationary momentum throughout the economy and asset markets.
And while Corporate and Consumer Credit (non-mortgage: i.e. credit cards, student loans, auto and installment debt, etc.) are now expanding robustly, the Credit system remains largely dominated by the historic expansion of federal debt. Federal borrowings expanded SAAR $1.183 TN during the quarter, down from Q1’s SAAR $1.428 TN, but up notably from Q2 2011’s $792bn pace. Federal borrowings expanded at a 10.9% pace during the quarter, up from the 8.2% rate from a year ago. In 16 quarters, Treasury debt has expanded a historic $5.775 TN, or 110%, to $11.026 TN. Outstanding Treasury debt expanded 24.2% in ’08, 22.7% in ’09, 20.2% in ’10 and 11.4% in ’11.
Consensus thinking has it that our system is progressing through a difficult “deleveraging” process. In contrast, I see much more system reflation than actual deleveraging. Sure, Household debt has declined $800bn since the end of 2007 to $13.456 TN. Meanwhile, federal debt has expanded more than seven times the decline in household borrowings. Indeed, Total Non-Financial debt ended Q2 at a record $38.924 TN, having expanded $6.550 TN, or 20.2%, in 16 reflationary quarters. As a percentage of GDP, total Non-financial debt has increased from 124% of GDP in June of 2008 to 249.4% to end 2012’s second quarter.
The ongoing inflation of system incomes made possible by the historic expansion of federal debt has been the key dynamic of this latest reflationary cycle. For the five Bubble years 2003 through 2007, National Incomes jumped 32% to $12.396 TN, with Compensation rising 29% to $7.856 TN. National Income and Compensation dropped 3.8% and 3.3%, respectively, during the recessionary year 2009. Importantly, however, over the past 12 quarters National Income has jumped 13.7% ($1.662 TN) to a record $13.791 TN, while Compensation has risen 9.5% ($743bn) to a record $8.563 TN. Q2 National Incomes were up 3.7% y-o-y, with Compensation 3.3% higher.
Income gains have supported spending growth, corporate profits and renewed asset inflation. This reflationary cycle has seen Household Net Worth bounce back strongly. Household assets ended Q2 at $76.127 TN, up $1.423 TN y-o-y and are now only about 3% below the late-2007 peak. At $62.668 TN, Household Net Worth (assets minus liabilities) has inflated $9.335 TN, or 17.5%, over the past eight quarters to less than 3% below Bubble period highs. And while Real Estate values remain significantly below Bubble highs, the value of Household sector Financial Asset holdings has reached new records at about $52 TN. Household Financial Asset holdings have inflated $8.505 TN in 24 months, or 19.6%...
Oh, I guess I failed to mention that total (financial and non-financial) Credit ended Q2 at a record $55.031 TN, or 353% of GDP. And Rest of World holdings of our financial assets ended the quarter at a record $19.100 TN, a $3.860 TN increase from the end of 2008.