Federal Reserve Q2 2021 Z.1 “flow of funds” report.
And speaking of (bipolar) massive monetary inflation, let’s take a look at the Fed’s Q2 2021 Z.1 “flow of funds” report.
Non-Financial Debt (NFD) increased a nominal $1.002 TN during Q2 to a record $63.254 TN. This would have been a pre-pandemic record expansion. On a seasonally-adjusted annualized pace, NFD expanded $4.013 TN. For perspective, NFD on average gained $1.842 TN annually for the decade 2010-2019. NFD surged an unprecedented $8.755 TN over just the past six quarters ($1.459 TN quarterly average). While slightly below recent record highs, Q2’s 278% ratio of NFD to GDP compares to previous cycle peaks 227% to end 2007 and 184% to conclude 1999.
Treasury borrowings continue to command system Credit growth. Outstanding Treasuries gained nominal $359 billion during Q2 to a record $24.302 TN. Treasuries surged $6.487 TN, or 36%, over the past two years. Treasuries to GDP slipped slightly during the quarter to 107%. This ratio ended 2007 at 41% and was up to 87% prior to the pandemic.
Agency Securities gained another $181 billion during the quarter to a record $10.408 TN. At $663 billion, one-year growth was the strongest since 2007. Agency Securities jumped $1.144 TN over the past two years. Combined Treasury and Agency Securities swelled an unparalleled $7.631 TN over two years to a record $34,709 TN (153% of GDP).
Total Mortgage borrowings rose $308 billion during the quarter, more than double Q2 2020 growth to the largest increase since Q3 2006 ($343bn). Home Mortgages rose $238 billion during Q2 (strongest since Q3 ’06) and $687 billion for the year (largest since 2006).
Total Debt Securities (TDS) expanded $747 billion during the quarter to a record $54.539 TN. Debt Securities jumped $3.377 TN, or 6.6%, over the past year. Prior to the pandemic, 2007’s $2.671 TN was the largest annual increase in TDS. TDS swelled $8.794 TN, or 19.2%, over two years. At 240%, TDS to GDP compares to 201% to end 2007 and 158% to finish the nineties.
Total Equities surged $5.709 TN during Q2 to a record $75.392 TN. Total Equities were up $23.407 TN, or 45%, over the past year and $24,624 TN, or 49%, over two years. For comparison, Total Equities peaked at $27.263 TN during Q3 2007 and $20.957 TN during Q1 2000. Ending Q2 at a record 332%, Total Equities to GDP compares to previous cycle peaks 188% (Q3 ’07) and 210% (Q1 2000).
Total (Debt & Equities) Securities jumped $6.455 TN during the quarter to a record $129.931 TN, ending the quarter at a record 572% of GDP. Total Securities ended Q3 2007 at $56.192 TN (387% of GDP) and 1999 at $35.598 TN (360% of GDP). Total Securities surged $33.418 TN, or 35%, over the past two years.
As I’ve communicated on a quarterly basis, the Household Balance Sheet is a focal point of Credit Bubble analysis. Household Assets jumped $6.196 TN, or 16.2% annualize, during Q2 to a record $159.342 TN. Household Assets inflated $24.269 TN over the past year. Household Liabilities rose $347 billion during the quarter to $17.674 TN, the strongest growth since Q1 2006. Liabilities were up $1.093 TN over four quarters, the strongest annual growth since 2006.
Household Net Worth (Assets less Liabilities) jumped $5.849 TN to a record $141.668 TN. Net Worth surged $23.176 TN, or 19.6%, over the past four quarters. For perspective, Household Net Worth gained $4.501 TN and $3.960 TN in boom years 2006 and 1999. Household Net Worth to GDP ended Q2 at a record $623%, having increased from 537% to end 2019 (pre-pandemic). This compares to previous cycle peaks 491% (Q1 ’07) and 445% (Q1 2000).
House price inflation fueled a $1.218 TN (13% annualized) increase in Household Real Estate holdings during the quarter to a record $38.706 TN. Real Estate holdings jumped $3.901 TN, or 11.2%, over four quarters – surpassing 2006’s record $3.122 TN increase. At 171%, the ratio of Real Estate to GDP is up from cycle trough 125% (Q2 2012) - yet remains below the cycle peak 190% from Q3 2006.
Meanwhile, Household Financial Asset holdings are inflating wildly. Household Assets jumped $4.552 TN during the quarter to a record $113.149 TN, having more than doubled from 2009 trough $46.780 TN - as well as cycle peak $54.377 TN (Q3 ’07). Household Financial Assets to GDP ended Q2 at a record 498%, up from cycle peaks 374% (Q3 ‘07) and 354% (Q1 2000).
Household Equities (Equities & Mutual Funds) holdings ended Q2 at a record $42.780 TN, having increased $3.188 TN for the quarter and $13.239 TN, or 44.8%, over the past year. Equities holdings dropped to a cycle trough $7.768 TN during Q1 2009, following cycle peaks $15.023 TN (Q3 2007) and $11.532 TN (Q1 2000). Household Equities holdings ended Q2 at a record 188% of GDP – having risen from 142% to end 2019 – and up huge from previous cycle peaks 104% (Q2 ’07) and 115% (Q1 2000).
Banking (“Private Depository Institutions”) system assets expanded $227 billion during the quarter, or 3.8% annualized. Loans expanded $48 billion, with Mortgage loans up $50 billion and Consumer Credit surging $84 billion (2nd strongest Q ever). Meanwhile, Loans (not classified elsewhere/business) sank $87 billion.
Why lend when it’s easier to simply own securities? Banking Debt Securities holdings surged $265 billion (17% annualized) during the quarter to a record $6.453 TN, with Agency/MBS up $125 billion (to $3.730 TN), Corporate bonds up $33 billion (to $833bn), and Treasuries up $93 billion (to $1.349 TN). Debt Securities holdings were up $1.224 TN, or 23%, over four quarters, led by a $809 billion jump in Agency Securities.
Banking’s Repurchase Agreement (“Repo”) Asset sank $295 billion during the quarter (to $577bn), as the marketplace shifted to the Fed’s repo facility.
On the Bank Liability side, Total Deposits expanded $232 billion, during the quarter to a record $19.938 TN. Total Deposits were up a stunning $4.4 TN, or 28.4%, over six quarters.
Federal Reserve Assets jumped $489 billion during Q2, the largest expansion in a year, to a record $8.258 TN. Treasury holdings rose $323 billion (to $5.597 TN) and Agency Securities jumped $143 billion (to $2.414 TN). Fed Assets were up $894 billion y-o-y (Treasuries up $789bn and Agencies rising $378bn) and $4.248 TN over eight quarters (Treasuries $3.281 TN and Agencies $829bn). Fed Assets have gained $7.307 TN, or 768%, since midyear 2008.
The Liability side of the Fed’s balance sheet has become intriguing. The Treasury’s account at the Fed (“Due to Federal Govt”) dropped $270 billion during the quarter and $877 billion through the first half. Meanwhile, the Security Repurchase Agreement (“Repo”) Liability surged $909 billion during the quarter (to $1.261 TN) and $1.045 TN during the first half. In simple terms, the Treasury has spent funds that were being held at the Fed, “money” that was dispersed throughout the markets and economy only to be recirculated back into “Repos” held at the Fed. The Fed’s “Repo” facility has basically allowed Fed-created liquidity to be intermediated directly back to the Fed, bypassing the typical process of liquidity funneled to the banking system where it would then be converted into bank “Reserves” held at the Fed.
Rest of World (ROW) holdings of U.S. Financial Assets surged $2.542 TN during Q2 to a record $43.592 TN. Amazingly, ROW holdings began year 2000 at $7.310 TN and first surpassed $10 TN in Q3 2004. ROW holdings to GDP ended Q2 at a record 192%, up from 161% to end 2019. This ratio was at 108% at the end of 2007 and 74% to conclude the nineties. ROW holdings of Treasuries ($7.202 TN), Agency Securities ($1.145 TN), Corporate bonds ($4.435 TN), and Total Equities ($13.321 TN) all ended Q2 at all-time records. In yet another incredible data point, ROW holdings of U.S. Financial Assets inflated $13.625 TN, or 46%, in just 10 quarters.
As always, Z.1 data is invaluable in shedding light upon the historic U.S. Credit Bubble.