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Nearly every day I am writing for enrolled members in the Martenson Insider area of the site. Here is an example from today. ~ Chris.
The Flow of Funds report covering the second quarter of 2009 (through June) was released today by the Federal Reserve and it revealed yet another retreat in total credit despite the heroic levels of state and federal government borrowing.
One of the better windows we have into the macro credit and borrowing universe is a quarterly report put out by the Federal Reserve called the "Flow of Funds" report. While it is a bit dated already (the report covers through the end of June) it is a great snapshot of the big trends and can tell us much about the general direction in which we are headed. This report was released today (9/17/2009) at 12:00 p.m.
Here are a few of the fascinating findings…
While total credit market debt was down by -$122 billion from Q1 to Q2, or slightly less than a quarter of one percent overall, there was quite a bit of variability across all the sectors.
A quick explanation: the Flow of Funds report has two main sectors; "non-financial" and "financial."
- In the non-financial sector (about 2/3rds of the total) we have households, non-financial businesses, and government (state and federal).
- In the financial sector (the remaining 1/3rd) we have banks, holding companies, insurance companies, and the like.
Interestingly, the financial sector recorded an amazing -$493 billion dollar drop (or 2.9%) in the total amount of credit from the first quarter to the second.
The non-financial sector, naturally, made up the difference and had a $316 billion dollar increase.
However, there's a wrinkle to the story about this increase.
It's a tale of two parts. The government part (state and federal combined) increased by +$390 billion while the household and business parts fell by -$74 billion. Summed together we get the $316 billion increase.
As I wrote a while back in one of the more important reports I wrote this year entitled "It's Not Over - The Collapse in Household Credit Says So" , the most important determinant of recovery will be whether or not consumer credit will expand.
After all, since our money is debt, then increasing the amount of debt is an essential component of the very basis of our financial markets. After all, if everybody is expecting a few percent return on their bonds and equities, but the money supply is contracting, then quite a bit of disappointment is in store for whomever is expecting positive returns.
For now, the government and the Federal Reserve, like nearly all of their major foreign counterparts, are busy stimulating and bailing and borrowing to fill the void left by the dearly departed corporate and public borrowers.
These next two figures showing the year over year change in household vs. government borrowing tell nearly the entire tale.
That's the big story right there, in bold green and red lines.
Households have reversed their previously uninterrupted, decades-long accumulation of ever more debt and government borrowing has countered this by a nearly ten to one margin.
This is really just a continuation of yesterday's post about the cost of the recovery (The Recovery Cost Too Much), but I've been anxiously awaiting today's report so that I could show it to you in pictures.
Conclusion
The Flow of Funds report for 2Q 2009 reveals that credit market borrowing has been shrinking for nearly every sector but government.
While it is certainly possible for the government to apply such Keynesian heroics for a while, it is also true that it cannot do so forever. Sooner or later the sputtering consumer portion of the economic engine is going to have to catch to life or the government's efforts will prove to be an expensive and possibly dangerous miscalculation.
Every report that you will soon read about a recovery in GDP must be assessed against the charts above. Can we really call an enormous increase in government borrowing the same thing as legitimate economic growth?
If the answer is "yes" then why do we even bother with working for pay when the answer is that nobody needs to work and we can all live off of fat government contracts? Obviously that is a fantastically out-of-kilter world-view but if we are to count the next few positive GDP readings as real, then it means that we accept this view as legitimate.
Since it is not possible for the government to become the perpetual source of all new borrowing, for the old economic paradigm to work it is imperative that consumers and businesses pick up the borrowing baton and race off with it.
However, as many outside of the main economic echo chambers have already divined, it may simply be that there is a "new normal" out there that does not include a return to the former trajectory of borrowing. If so, then the government attempts to "plug the gap," while crossing their fingers and waiting for everyone to get back in the race, will fail.
I have resolved myself to a new normal, a much lower normal, and my main concern centers on whether the government will arrive at the same conclusion before the dollar is ruined, or after.
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CM wrote: "I have resolved myself to a new normal, a much lower normal..."
I think that sums up what the most rational and constructive response to the present/future is. It where my wife & I are going (and increasingly, where we are).
Viva -- Sager
"Show some !@#$%^ ADAPTABILITY!!" -- Sergeant Jack Shaftoe, USMC ("Cryptonomicon")
"It's all goin' *down*, man! Martha Stewart's polishing the brass on the Titanic!" -- Tyler Durden
"Have the courage to use your own understanding!' -- Immanuel Kant
"Dreams are the seedbed of the possible." -- William Greider
"One day you finally knew what you had to do, and began, though the voices around you kept shouting their bad advice." -- Mary Oliver
It does indeed look like a deflationary mindset has been adopted by the banks and the consumers, but the government has taken this as an opportunity to go on a spending spree and force us to take on more debt.
Save OR Perish -vs- Spend OR Perish
The Fed/Gov have done an outstanding job at making us fear what we know is the right thing to do, which is to save our money and avoid more personal spending and debt. In just 6 months the fear of losing money by being in the market has been completely usurped by the fear of losing money by not being in the market.
Unbelievable.
Captain Sheeple
Delevering and yes the goverment is trying to pick up the slack. The economic cycle has turned up and bank lending as it always does will lag. Keep in mind and I'm not sure how this factors into Chris's flows. But credit spreads have tightened dramatically. BBB bonds yielding 25% six short months ago are now yielding 10%. What does this mean? Money is pushing out of treasuries and into riskier asset classes. This actually started to occur late in 08 and we are now starting to see the benefits...and the goverment spend is adding a kicker. Banks are stuffed with cash and I suspect demand for that cash will pick up as many of 10 15 20% of the people un-employed will surely start business's inovate ect. and existing business will borrow and invest. The "growth" is only now just getting started.
If you are truly concerned and think the US will implode have some physical gold to hedge that risk. But depending on your situation if you put to much capital to work in any one are than you likely are creating a risk somewhere else.
In my first post someone asked me to debate Chris’s points: So here goes. By all means please debate.
First is Chris's chart he states by knowing upper limits the chars are valid. Please tell me how you can you even begin to know upper limits? People, population, or M3. You cannot know the upper limits because u can't begin to know through human innovation how much can be produced with new technologies. Ie...how much corn did an acer of land yield in 1930 vs 2010? Peak oil??? First how much oil can we now get at with new technology and furthermore how many miles can we now get out of a carbon molecule? On upper limits of currency? He is right in saying inflation is always a monetary phenomenon. Too much money chasing to few goods you get inflation and deflation the other way. We have enormous capacity right now. Oh and the 342% of debt to GDP is joke. To factor in future liabilities of s.security and Medicaid programs makes a HUGE assumption that we will not be able to take steps to pay for those. Ie...push out benefits from 62 to 67. What would that do. Absolute debt right now is maybe 11t in a 14t trillion economy. So more like 90% public to GDP. Oh and by the way US household NETWORTH is just below an all time high. Do you think maybe this country has a few assets behind that personal debt that might be of value? Chris do me a favor add up all the tangible assets the US owns than subtract the debt. Do this so your readers will know the US by far is net richest of any place on the planet or in history for that matter.
On the dollar? How many times have you heard we are losing or manufacturing edge to cheap labor around the world? For decades. Well what actually has occurred we have outsourced production and we reap the benefits through cheap labor along with real productivity gain we now enjoy much more material than we did even 20 30 years ago. No as the dollar weaken our incredibly hard working efficient work force gains a pricing edge around the world and at the margin our exports absolutely soar with each tick down of the buck. The downside is it does work to reduce our wealth as what we import cost more. But frankly many other countries (china) anyone has been pegging their currency while we let ours float. I would much rather have a strong dollar but the bullish secular increase of the dollar is over and I agree will see an orderly decline might even get a bit scary…but keep mind the US has tremendous assets and our dollar weakens they become cheaper to the world which like the S&P at 666 cooler heads will prevail.
In my first post someone asked me to debate Chris’s points: So here goes. By all means please debate.
First is Chris's chart he states by knowing upper limits the chars are valid. Please tell me how you can you even begin to know upper limits? People, population, or M3. You cannot know the upper limits because u can't begin to know through human innovation how much can be produced with new technologies. Ie...how much corn did an acer of land yield in 1930 vs 2010? Peak oil??? First how much oil can we now get at with new technology and furthermore how many miles can we now get out of a carbon molecule? On upper limits of currency? He is right in saying inflation is always a monetary phenomenon. Too much money chasing to few goods you get inflation and deflation the other way. We have enormous capacity right now. Oh and the 342% of debt to GDP is joke. To factor in future liabilities of s.security and Medicaid programs makes a HUGE assumption that we will not be able to take steps to pay for those. Ie...push out benefits from 62 to 67. What would that do. Absolute debt right now is maybe 11t in a 14t trillion economy. So more like 90% public to GDP. Oh and by the way US household NETWORTH is just below an all time high. Do you think maybe this country has a few assets behind that personal debt that might be of value? Chris do me a favor add up all the tangible assets the US owns than subtract the debt. Do this so your readers will know the US by far is net richest of any place on the planet or in history for that matter.
On the dollar? How many times have you heard we are losing or manufacturing edge to cheap labor around the world? For decades. Well what actually has occurred we have outsourced production and we reap the benefits through cheap labor along with real productivity gain we now enjoy much more material than we did even 20 30 years ago. No as the dollar weaken our incredibly hard working efficient work force gains a pricing edge around the world and at the margin our exports absolutely soar with each tick down of the buck. The downside is it does work to reduce our wealth as what we import cost more. But frankly many other countries (china) anyone has been pegging their currency while we let ours float. I would much rather have a strong dollar but the bullish secular increase of the dollar is over and I agree will see an orderly decline might even get a bit scary…but keep mind the US has tremendous assets and our dollar weakens they become cheaper to the world which like the S&P at 666 cooler heads will prevail.
matthewr99 -
One question, have you watched the Crash Course in its entirety?
Peace - DIAP "Handle every stressful situation like a dog. If you can't eat it or play with it, just pee on it and walk away."
Start to finish...and back through a few times. I'm a Keynsian atleast I want to be. I do think the fed can effectively control the money supply and therefore maintain realatively stable prices. The key is realitive! Chris and others make it clear that on absolute basis prices have risen dramatically as we gotten completely away from the gold standard. But so to have incomes. And net net people are much more prosperous today then 100 years ago from a material stand point. From a moral and spiritual stand point that is a different story and I will refrain from going there.
I also believe that goverment should in fact step in x of panic. Why would I not? Since the creation of the fed in the early 1900 we have had more innovation and life expectancy leaps in 100 years than the last 1000. I am also not naive enough to appreciate the risks to this method. No system is perfect. Therefore I maintain a 10% waiting to the hard asset yellow metal as an insurance policy. But beyond that I try and stay away from extreme views. With all due respect Chris's views are extreme like Schiff Ron Paul and some others. History is littered with the like. Diversification and systematic intelligent tatical allocation is key to long-term success. Will the next 20 years be as prosperous from a material stand point? Don't know. Although I do believe that people are waking up to the fact that material wealth is an illusion. True happines is learning to be content with very little material wealth. Like playing catch with your kid or going for a walk with your daughter ect. This work til you drop hysteria in this country is pathetic. People have put there treasure/heart in money and it's a joke. Frankly I think the Omish have it much better than us. There are days I long for a farm horse and buggy that I could spend my next 60 years with my children and someday grandchildren on.
Oh one more thing...the fed can print money till the cows come home but until joe banker decides to lend it we will not see one lick of inflation. We might see commodity inflation but that will only go so far as price increases will snuff out demand. 150 oil anyone? I actually think we are in the very early stages of a strong cyclical recovery. Why? Well lots of capacity has been destroyed. Demand is starting to pick up savings rate is nearly 5-6% and going higher. Job cuts continue to fall and in many cases workers are being brought back. Banks will start to lend again the cycle will begin to feed on itself. But the key is banks will have lend not crazy stupid like they did before but for projects and business investment the productive side. The hours cut and 10-20% pay cut that everyone and there brother took last year will be returned in many cases and along with it confidence and more yes CONSUMER DEMAND contrary to poplular lies the vast majority of consumption in this country is derived from INCOMES. Not debt. And as those hours are returned and pay cuts given back that will be a very strong reversal in incomes. The linchpin in this will be access to capital markets and banks lending. I can tell you for certain the captial markets are better. Just look at bbb spreads to cd's they have closed. Mainly since the god forsaken fasb 157 was put to death. Do not get me started on that. Fasb 157 was a libetarian dream. Trouble it almost wrecked the entire economy. You see we just can't go from Keynsian to Austrian economics overnight. Why would we anyhow. Yeah the theory (austrian economics) sounds good. But please give me one example where it has been applied and much wealth and human health have benefited such as it has under the keynsian model?!
"The next 20 years won't be like the next 20 years"
Your arguments may have once been valid, but we have built a very fragile global system (food, manufacturing, etc) based on cheap energy. The days of cheap energy are gone and with them the inexpensive food and lifestyle we have enjoyed. The recovery you predict will likely occur, until it bumps its head on limited resources like oil, and down we go again. Each cycle the damage to the economy (closed businesses, etc) will accumulate; there will likely only be a long, bumpy road downwards.
And then there's the environment...
Predicting the world's economic future needs to incorporate more perspectives than simple economics.
"LAST" 20 years. Sheesh!