Doug Noland of the Credit Bubble Bulletin at the Prudentbear.com spectacularly demolishes the popular notion that the US has been deleveraging by delving into the nitty gritty of US systemic financing [bold mine]
The three Trillion-plus contraction in FSCMD did reduce Total System Market Debt – in the process seemingly improving debt-to-GDP ratios. It is not, however, indicative of true system deleveraging and surely doesn’t reflect an improvement in our nation’s overall Credit standing. Far from it. From a Macro Credit Analysis perspective, the decline in FSCMD is instead reflective of fundamental changes in both the type of debt now fueling the boom and the corresponding nature of system risk intermediation.First of all, mortgage debt is about to wrap up its fourth straight year of post-Bubble contraction. Problem loan charge-offs have played a significant role, as have individuals using lower debt service costs (and near-zero returns on savings!) to speed the repayment of outstanding mortgages. And, importantly, the decline in home values and the steep drop in transaction volumes have reduced demand for new mortgage debt – hence the need to intermediate mortgage Credit. That said, the biggest factor behind the drop in FSCMD has been the activist Federal Reserve.The Fed’s balance sheet is separate from the Financial Sector. Federal Reserve Assets ended 2007 at $951bn. Fed holdings ended Q2 2012 at $2.882 TN, up $1.931 TN, or 203%, in 18 quarters. The Fed essentially transferred $2 TN of Financial Sector liabilities to a secure new home on its balance sheet. Some may refer to this as “deleveraging,” but I won’t.Importantly, the Fed’s moves to collapse interest rates and monetize debt (in conjunction with mortgage assistance programs) incited a major wave of mortgage refinancing. And through the refi process, large quantities of private-label mortgages (previously included in FSCMD as ABS) were essentially transformed into sparkling new GSE-backed mortgage securities – and many then conveniently found their way onto the Federal Reserve’s rapidly inflating balance sheet. This provided critical liquidity that allowed highly-leveraged Wall Street proprietary trading desks, hedge funds and banks to de-risk/de-leverage. This bailout accommodated deleveraging for the financial speculators, yet for the real economy the boom in Non-Financial debt ran unabated.As noted above, Total Non-Financial Market debt ended this year’s second quarter at $38.924 TN and 249% of GDP – both all-time records. Garnering all the focus from the deleveraging crowd, Total Household Debt has indeed declined since 2008 – having dropped $787bn, or 5.8%, to $12.896 TN. At the same time, Federal debt has increased $4.689 TN to $11.050 TN. Non-Financial Corporate debt increased $434bn since ’08 to end Q2 2012 at a record $11.990 TN. State & Local debt has expanded $101bn since ’08, ending Q2 at about $3.0 TN. The data is the data - and Deleveraging is a Myth.A 100% increase in Federal debt and 200% growth in the Federal Reserve’s balance sheet are surely not indicative of system de-leveraging. Such extraordinary Credit developments do, however, have profound effects throughout the markets and real economy. The ongoing Credit expansion has inflated incomes, spending, corporate earnings and securities prices, in the process sustaining for now the U.S. economy’s Bubble structure. And I would argue strongly that the data support the thesis that our system remains dominated by Bubble Dynamics.Also keep in mind that, in contrast to risky mortgage debt, federal debt requires little intermediation. The marketplace absolutely loves it just the way it is, conspicuous warts and all. For now, at least, it is “money” and shares money’s dangerous attribute of enjoying virtually insatiable demand. The only alchemy necessary is to keep those electronic “printing presses” running 24/7. It is, after all, the massive inflation of federal debt that is inflating incomes, cash-flows and profits, equities and fixed-income securities prices, and government tax receipts and expenditures – in the process validating the “moneyness” of the ever-expanding level of system debt (Ponzi Finance).
To validate Mr. Noland’s point, here are some charts from the US Flow of Funds for the period ended September 28, 2012 (courtesy of Dr. Ed Yardeni’s Blog)
Total US Debt as % of GDP
Non financial debt broken down into domestic sectors as % of GDP
Transformation of US debts from the household to Federal Debt and…
…and the US Federal Reserve’s balance sheet. (also from Dr. Ed Yardeni’s Blog on Central Banks and QE)
And the Fed balance sheet assets has increasingly been concentrated on US Treasuries.
Systemic deleveraging has indeed been nonexistent.
2 comments:
I can not underscore how significant this article is...I had been under the impression, that at least consumers have been deleveraging...
At some point, the Central bank, will have to return those MBSs back to their original owners...It will have to be done prior to increasing of interest rates or the Federal Reserve will sustain losses..
Mr Te, the charts that you posted are truly frighting, to say the least..Have too many other nations seen the issue of debauchery debentures, as a means to propel their economy ?
Of course, the real solution is to reduce government spending, until a surplus develops, something that requires years of financial disciple..This is not only the best course of action, it is also the least painful...But it also requires a frank admission of failure, something many pols are loathe to do..
In the long run, capital markets and as well economic growth, will be better served, by much smaller government debt, which simply crowds out efficient money..
When governments can no longer tax, they borrow much to our horror...When they can no longer borrow, they steal. And when they can no longer steal, we shall be under their heel.
The deleveraging will occur when the fed forgives the gov of its US treasury debt obligations.
Consider when the gov (treasury) pays the fed interest on these holdings. That money is income to the fed. The fed gives its profits (after expenses) back to the treasury every year. So in effect they are taking money out of the left pocket, moving it to the right pocket, then moving it back to the left pockets loosing a few quarters on the way. The more US T's the fed holds the better, the interest money comes right back to the originator of the T's.
I believe it is the gov/fed strategy to get as many T's on the fed balance sheet as possible. At some point in the future, fed just says "forget it treasury, lets stop the circle jerk, we'll just throw these away, you owe us nothing".
Does it matter to the fed - nope. They created $ out of thin air to buy them.
The major downside is the $'s injected into the economy - they cause inflation (and speculation in commodities and stocks. But since they both lie with the PPI/CPI figures, they just tell us it doesn't exist. And the sheeple scratch their heads wondering whats going on.
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