Federal Reserve Q1 2022 Z.1 “flow of funds” report.
Inflation dynamics are complex. There are myriad facets to analyze and contemplate. Yet the key dynamic is rather straightforward: inflation is a monetary phenomenon. To help us better conceptualize how consumer price inflation could possibly reach a 41-year high of 8.6% last month, look no further than this week’s Federal Reserve Q1 Z.1 “flow of funds” Credit report.
Non-Financial Debt (NFD) expanded at a 10.2% rate during the quarter. Excluding 2020’s extraordinary first-half Covid stimulus period, there has been only one quarter (Q2 2003’s 10.7%) of double-digit NFD growth since 1986. Total Household Borrowings expanded at an 8.32% rate, the strongest growth since peak housing boom Q2 2007. Household Mortgage borrowings expanded at an 8.62% rate, the high since Q3 ’06. Non-mortgage Consumer Credit grew at an 8.73% pace - strongest in over two decades (Q4 2001).
In seasonally-adjusted and annualized (SAAR) dollars, NFD expanded $6.640 TN, second only to Q2 2020. For perspective, peak growth during the mortgage finance Bubble period was Q2 2007’s SAAR $2.770 TN.
In nominal dollars, NFD expanded $1.659 TN during Q1 to a record $66.744 TN, second only to Q2 2020’s off-the-charts $3.745 TN. For perspective, the previous cycle peak was Q3 2008’s $754 billion. NFD expanded $2.499 for all of 2007 (to $33.359 TN).
Total System Credit (Non-Financial, Financial Sector and Foreign U.S. borrowings) expanded nominal $2.132 TN during the first three months of the year. Annual System Credit growth averaged $2.019 TN during the decade 2010 through 2019.
Treasury Securities increased a nominal $732 billion during the quarter (11.6% annualized) to a record $26.017 TN. This boosted one-year growth to $2.074 TN, or 8.7%. Over the past nine quarters, Treasuries expanded $6.998 TN, or 36.8%. And since 2007, Treasury Securities ballooned $19.965 TN, or 330%. Treasuries ended Q1 at 107% of GDP, up from 41% to end 2007 and 87% to conclude 2019.
The lack of capital has certainly not constrained the GSE’s (debt backed by the U.S. Treasury). Agency Securities expanded another $228 billion during the quarter to a record $10.927 TN, with one- and two-year growth of $700 billion and $1.158 TN. Combined Treasury and Agency Securities expanded $960 billion during Q1 (to $36.943 TN), with one-year growth of $2.774 TN.
While we ponder the monetary forces fueling our dire inflation predicament, it’s worth examining some 11-quarter data (recall the Fed’s Q3 2019 QE restart). Over 11 quarters, Fed Assets inflated $4.623 TN, or 115%. The Fed’s Treasury and Agency holdings rose $3.536 TN and $1.034 TN. Over this period, total outstanding Treasury Securities rose $8.202 TN (46%) and Agency Securities gained $1.663 TN (18%).
There’s a reality that can’t be denied: The Fed’s aggressive accommodation of Washington’s historic $9.965 TN 33-month borrowing binge is directly responsible for epic monetary disorder - including historic speculative manias and 40-year-high consumer price inflation.
Total Debt Securities increased $1.071 TN during the quarter to a record $57.211 TN, with one-year growth of $3.486 TN. Over 11 quarters, Debt Securities inflated $11.466 TN, or 25%. At 235%, the Total Debt Securities-to-GDP ratio compares to 201% at the end of 2007, 158% to end the nineties, and 124% to conclude the eighties.
Broker/Dealer Assets surged nominal $192 billion (17.6% annualized) during Q1 to a record $4.573 TN, with one-year growth of $328 billion. Miscellaneous Assets jumped $171 billion and “repo” Assets rose $69 billion, while Debt Securities contracted by $58 billion. The asset Loans added $16 billion to a record $853 billion, with notable seven-quarter growth of $479 billion, or 128%. The lack of any contraction in Broker/Dealer Loans in the face of unstable markets is not a bullish dynamic.
Bank lending and asset growth slowed, though Q1 is typically a seasonally weak period. At $159 billion, Asset growth was the slowest since Q3 2020. Assets expanded $1.561 TN, or 6.4%, over the past year to a record $25.788 TN. Over 11 quarters, Bank Assets inflated an unprecedented $6.276 TN, or 32.2% - including a $2.176 TN increase in Reserves at the Fed. Over this period, Total Deposits inflated a historic $6.288 TN, or 42%, to $21.269 TN. Monetary Inflation Running Wild.
Bank Mortgage Loan growth slowed, but at $82 billion still accounted for half the quarter’s asset gain. Total system Mortgage Credit expanded $343 billion during Q1, second only to Q4 2021 in the period since 2006. Total Mortgage Credit expanded $1.383 TN over the past year, also the strongest since 2006. Household Mortgages expanded $240 billion during the quarter (7.7% annualized), with one-year growth of $995 billion (8.4%) near 2006 peak levels. Commercial (up 7.6% y-o-y) and Multi-housing (up 7.8% y-o-y) lending slowed somewhat but remained strong.
Rest of World (ROW) holdings of U.S. Financial Assets contracted $1.888 TN to $45.630 TN, the first decline since Q1 2020’s $2.703 TN. Almost half of this drop is explained by the $867 billion fall in Equities holdings. More importantly, ROW holdings of Debt Securities dropped a record nominal $467 billion during Q1. This was led by a $252 billion decline in Corporate bond holdings, surpassing even the $223 billion drop during de-risking/deleveraging Q1 2020. Furthermore, ROW reduced holdings of Treasuries (-$136) and Agencies (-$81) during Q1, in contrast to expanded holdings of both during 2020’s first quarter.
Household Assets contracted $260 billion during Q1 to $167.917 TN, though one-year growth was still 9.1% ($14.025 TN). With Household Liabilities increasing $284 billion to $18.638 TN, Household Net Worth declined $544 billion to $149, 279 TN. Nonetheless, Household Net Worth was up $12.706 TN (9.3%) over one year, and $37.830 TN (33.9%) over three years – in history’s greatest inflation of perceived wealth. Household Net Worth-to-GDP declined to 612% (from 624%). But this compares to 491% at cycle peak Q1 2007, and 445% during peak Q1 2000. Years of asset inflation have fueled a consumer spending boom. The downside of the cycle will see sinking asset prices and tightened Credit conditions significantly restrain household spending.