Federal Reserve Q4 2014 Z.1 “flow of funds” report.
The Federal Reserve released its Q4 Z.1 “flow of funds” report Thursday. Total Non-Financial Debt (NFD) expanded at a seasonally-adjusted and annualized (SAAR) rate of $1.938 TN, the strongest growth since Q4 2012. Total Business borrowings expanded SAAR $845bn, up from Q3’s SAAR $581bn to the highest level since Q1 2008. Federal government borrowed at SAAR $700bn, down from Q3’s SAAR $913bn. Total Household borrowings increased SAAR $361bn, little changed from Q3.
For all of 2014, NFD expanded $1.701 TN, up from 2013’s $1.463 TN. With 2014 federal borrowings ($667bn) about half the 2012 level, 2014 NFD growth somewhat lagged 2012’s $1.828 TN. Yet 2014 Household borrowings of $376bn were up significantly from 2013’s $197bn to the highest level since 2007 ($913bn). Total 2014 Business borrowings of $672bn were up from 2013’s $546bn to the strongest growth since 2007 ($1.116 TN).
On a percentage basis, NFD expanded 4.3% in 2014, up from 2013’s 3.8%. Business debt growth accelerated to 7.2% from 2013’s 5.0%. Although mortgage debt growth remained below 1%, total Household borrowings increased 2.9%. Outstanding State & Local borrowings contracted 0.5% in 2014.
Bank Credit growth slowed during Q4, with Banking Assets expanding $954bn during 2014, or 6.0%. Bank loans, however, posted another strong quarter, with notable 2014 growth of 12.3% ($308bn). For the year, Credit Union assets expanded 5.9%, REIT liabilities 8.3%, and Security Credit 7.7%. A significant Q4 decline pushed Securities Broker/Dealer Assets to a 4.5% 2014 contraction.
Despite only modest growth from most traditional sources of system Credit, inflationary forces continue to buttress securities markets. My proxy for “Total Debt Securities” – Treasuries, Agency Securities, Corporate Bonds and Muni debt – increased $1.25 TN during 2014 to a record $36.15 TN. Total Debt Securities have increased $8.075 TN, or 29%, since the end of 2008. Total Equities have jumped $20.816 TN, or 133%, since 2008. As such, my proxy of “Total Securities” jumped $4.08 TN in 2014 to a record $72.608 TN. Total Securities have increased $28.9 TN since the end of 2008, or 66%.
“Total Securities” as a percentage of GDP is helpful Bubble Analysis. After beginning the nineties at 173% of GDP, “Total Securities” ended the Bubble year 1999 at an unprecedented 341%. The bursting “tech” Bubble saw this ratio decline to 267% to end 2002. Mortgage finance Bubble reflation then pumped this ratio to a record 360% by the end of 2007. This Bubble burst, and “Total Securities” ended 2008 at 297% of GDP. Six years of incredible monetary inflation had Total Securities ending 2014 at a record 417% of GDP.
I have on a quarterly basis chronicled the inflation of Household sector Net Worth as a key facet of Federal Reserve reflationary policies. Household Assets inflated another $1.61 TN during Q4, with a 2014 gain of $4.431 TN. For the year, Household Real Estate assets increased $1.223 TN and Financial Assets rose $3.045 TN. And with Household Liabilities growing $363bn, Household Net Worth (assets minus liabilities) jumped another $4.068 TN in 2014 to a record $82.912 TN. Since the end of 2008, Household Net Worth has inflated $26.403 TN, or 47%. This “wealth creation” goes a long way in explaining the economic recovery – as well as its vulnerability to asset market weakness.
As a percentage of GDP, Household Net Worth began the nineties at 379% ($21.5 TN). Net Worth rose to 446% ($43.1 TN) of GDP to end 1999, only to fall back down to 398% ($43.7 TN) to close 2002. Net Worth inflated to a record 479% ($66.3 TN) to end 2006 (thanks L.M. for catching my error). Household Net Worth closed 2014 at a record 476% of GDP ($82.9 TN).
Federal Reserve Asset growth slowed to $48bn during the quarter, with 2014 growth of $482bn, or 11.8%. Amazingly, the Fed’s balance sheet inflated $1.601 TN, or 54%, over the past two years. And since the end of 2007, Fed liabilities have inflated $3.604 TN, or 379%.
Curiously, GSE borrowings (debt as opposed to MBS) expanded SAAR $316bn during Q4, the most rapid GSE growth in years. Is the GSE ramp up coincident with the wind down of Fed QE? The GSEs posted three straight quarters of strong growth. As hard as it is to believe, GSE activities should be monitored closely in 2015.