247Bull.com Editor: Policymakers have indeed painted themselves into a corner. Their hope has always been that sufficient monetary stimulus would support the economy until it could stand on its own two feet. However, it is now almost four years since the US recession officially ended, and despite an increasing number of headlines telling us that the recovery is “gaining traction”, the fact remains that without the stimulus the US economy would fall flat on its face. Rather than admit defeat and allow “the great reset” to take place, the Fed and other central banks would rather cling to the belief that given a little more time and a little more QE the economic recovery will become self-sustaining. The problem of course is that it won’t. The era of debt-financed growth is over and the sooner our political leaders realize this the better.
For a decade or so leading up to the 2009 crash, one of the highlights of Doug Noland’s Prudent Bear Credit Bubble column was his quarterly dissection of the Federal Reserve’s Z.1 Flow of Funds report. This was pure finance-geek porn showing ridiculous, parabolic, trillion-dollar increases in mortgages or Treasury debt or business borrowing or whatever. Something was always soaring, and total US debt was always climbing to absurd, clearly-catastrophic new heights.
Then came the inevitable crash and the “great deleveraging,” and the Z.1 report got kind of boring. Household borrowing crept down as individuals defaulted on mortgages and credit cards, government debt rose by a nearly equal amount as federal deficits ballooned and total debt actually declined a bit. The economy stagnated, with fewer people employed full-time today than in 2007 and most other macro stats only recently getting back to pre-crash levels. In one sense this is healthy, since the debt has to be cut and doing it slowly is arguably less painful and chaotic than doing it all at once. But for bubble watchers it has been the equivalent of a long half-time show in an otherwise riveting game. Bor-ing.
That might be changing. The latest Flow of Funds just came out and, well, the bubble seems to be back. “The data,” writes Noland, “have again turned more interesting.” He notes the following:
“For Q4 2012, Total Non-Financial Credit expanded at a 6.4% rate, the strongest expansion since Q3 2008 (7.0%).
Total Household Borrowings expanded 2.4% annualized, the briskest pace going back to Q1 2008 (3.6%).
Household Mortgage Credit contracted 0.8% annualized, the smallest pace of decline since Q1 2009 (positive 0.2%).
Corporate borrowings grew at a blistering 10.7% pace, the quickest since Q4 2007 (11.5%).
Federal debt expanded at an 11.2% rate during the quarter. Bank Credit has quietly been showing a pulse.
Bank Assets jumped $226bn during Q4, or 6.1% annualized, to $14.992 TN.
For the first time since Q2 2008, Total (home and commercial) Mortgage Debt (TMD) actually posted a quarterly increase ($17bn). In nominal dollar terms – seasonally-adjusted and annualized (SAAR) – Q4 Total Non-Financial Credit expanded $2.536 TN. Looking at the main categories, Total Household debt increased SAAR $312bn, Total Business SAAR $1.076 TN, and Federal Government SAAR $1.259 TN. Credit expansion has become increasingly broad-based.”
Noland’s take on these numbers:
“A few years back I opined that it would take roughly $2 TN of annual system Credit growth to more fully reflate the deeply maladjusted economy. After four years of outrageous fiscal and monetary stimulus, our Credit system is poised to possibly reach this milestone in 2013. The good news is that jobs are growing at a decent clip. The bad news is that this reflation has required a doubling of federal debt coupled with incredible Bubble-inducing monetary measures. The government finance Bubble has significantly inflated household incomes and corporate earnings, a Bubble dynamic that has worked to incite speculation and inflation throughout equities and corporate debt markets. The reflation in securities and, increasingly, real estate markets has again inflated Household Net Worth. Perceived gains in wealth and ongoing (government policy-induced) income growth have spurred boom-time spending levels, in the process sustaining the consumption and services-based U.S. economy. Ignore the underlying Credit dynamics and things almost look OK.”
But of course you can’t ignore “underlying Credit dynamics.” If you have to borrow excessively to buy something, then the purchase is a bad deal that hurts you eventually. This pretty much sums up the US economy of the past few decades, where each increment in new “growth” has required ever-higher borrowing and each jump in debt increases systemic fragility and the odds of catastrophic failure. Noland’s conclusion:
“I don’t know if this historic Bubble will burst this year. But I am convinced the longer the current backdrop continues the greater the eventual economic and financial turmoil. The Q4 2012 “flow of funds” provides added confirmation that policymakers have painted themselves into a corner. It’s hard to believe the Fed will stick with $85bn monthly QE in the face of mounting Credit and market excess. On the other hand, the liquidity backdrop has created such unsettled global markets that central bankers will look for any excuse to avoid watering down the punch.”