Last week the federal Reserve released its quarterly flow of funds data. I have been unusually slow to parse the numbers. But I did do a very comprehensive sweep of the historical data in an October 2009 post called A brief look at the Asset-Based Economy at economic turns.
The overall conclusion of this analysis was that the consumer was not deleveraging significantly yet, but that the financial sector was deleveraging for the first time since 1982 when the so-called Great Moderation began. The government was filling in the difference and keeping the economy afloat with an unprecedented increase in debt.
Ultimately, however, the financial sector data were the key to the entire analysis:
Financial Services Debt
This is probably the key damning piece of data confirming the asset-based economy thesis. The data are much worse than I expected. Not only do Financial Sector debt levels rise from negligible to percentages well over 100% of GDP, but the entire post-1982 period sees zero decline compared to nominal GDP until last quarter.
What conclusions can one draw here?
- The financial services sector is six times more important than in 1982 when its debt is measured as a percentage of GDP.
- The financial sector protected the American economy since 1982 by increasing its debt burden relative to nominal GDP even during recession.
- The financial services sector contracted in Q2 relative to GDP for the first time since 1982. If this is a rear-view mirror view, that means recovery could continue. However, if this is a canary in the coalmine, that is negative for the U.S. economy. This number bears watching.
I said watch these numbers to see if Q2 2009 was a rear-view or a front-view mirror. So, what are the numbers saying now? Annaly Salvos has the chart.
The data are not good.
First of all, what this chart shows you is that the consumer is not deleveraging significantly (see Consumer credit down, but does it show deleveraging? and Why is everyone saying consumer credit is falling? It’s not). Sure revolving debt (read: credit card debt) has fallen. But mortgage debt is still sky high. And on a debt to GDP basis, there really isn’t a huge come down. Sorry, but that’s what the data are saying. For an indebted household sector, this is bad news.
But, then you look at the other sectors and you see that the financial sector is deleveraging in a massive way. When I last looked the data, I concluded that the U.S. economy was wholly dependent on leverage in the financial sector to continue growing. So, the decreased financial sector leverage spells a lower growth future.
Finally, the government sector debt load continues to surge upward. Keynesians will tell you that the deficit spending that is the source of this increasing debt load is needed to increase savings in the private sector. However, it appears that most of the savings is being done in the financial sector and not in the household sector where it should be.
I see the data as an indication the private-sector deleveraging is only in its beginning stages and has much farther to go.