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Is the Bubble Back?

by John Rubino on March 10, 2013 · 7 comments

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.

Tagged as: credit bubble, debt, deficit, deflation, Doug Noland, inflation, Prudent Bear, systemic fragility

Bruce C.

Of course the controversial word here is “bubble”. The optimists and the monetarists resent that notion but how could it be otherwise? Even they admit that unprecedented monetary and fiscal stimulation has been going on for almost 4 years creating “financial repression” to essentially force investments in riskier assets (e.g., equities). That is classic “malinvestment” by definition, even if equities are “not over valued” (that’s a separate issue.) The only question now is for how long can this continue? How high will stock markets climb before something triggers a collapse? I say “collapse” because it is my contention that the growth of total global debt (and even more local and national debts) are exceeding even nominal (never mind real) economic growth by a large margin.

For example, in the US, just the official Federal debt of $16.5 T is growing at about $1 T per year, or about 6% per year, but US GDP of about $15.5 T is growing at only about 2-3% per year, at most, at least by most estimates.

Optimists point to the formation and growth of a middle class in most of the developing world as the source of continued economic growth and the solution to Western debt problems. That has been how the large S&P corporations have continued to show profit growth during the “Great Recession”, but the only way those developing countries can continue to buy from the West is for the West to be able to buy from them.

Personally, I see a lot of the same things from pre-’08: Easy credit issued to weak customers (e.g., student loans, FHA mortgages, and long-term LOW interest car loans) so I think things could fall apart again fairly soon given the slow growth in wages and personal debt and increased business payroll costs due to ObamaCare.
- http://twitter.com/pipefit Jason Emery
  
  Why can’t all the debt be inflated away? The fed is currently creating $85 billion/month to cover mortgage and treasury bond purchases. Why can’t they buy $185B/month, or $8.5 trillion/month? Who predicted they would even get to this point?
  Why does the DOW have to crash? Maybe someone with an off balance sheet account is propping it up, and it cannot possibly fail, no matter what.
  - Bill197511
    
    You keep talking like that and you too can win a Nobel Prize just like that idiot Paul Krugman. Read the story of the 1920s Weimar Republic in Germany, called “When Money Dies”. One person left his wheelbarrow full of paper money out in front of a store and when he returned, the wheelbarrow was stolen but the money was still there. People ended up burning it for heat and using it for toilet paper. I once met a woman who lived through it and was told it was horrible. That is where this massive spending is leading us. Its like watching a train wreck in slow motion.
    - http://twitter.com/pipefit Jason Emery
      
      The federal Govt. ran a GAAP fiscal deficit of $6.9 trillion for the fiscal year ended 09/30/2012. The total accumulated deficit, included the present worth of unfunded liabilities is way over $100 trillion. That money is never gonna get paid, except maybe in wheelbarrow dollars, to copy your metaphor.
      So the great debate on these boards is whether we crash and burn in a horrible deflation or hyper inflation. Either way we quickly fall into anarchy.
      Why not engage in a discussion of a course of action that could possibly have a chance of avoiding a complete breakdown of society? Like maybe a 2nd constitutional convention, where a controlled bankruptcy is hammered out in the fairest way possible, and the constitution rewritten to make hard money the law of the land.
      - Bill197511
        
        I admire your motivation, but with our present government refusing to come out of its cocoon of denial, I feel it is a bit premature. Most of the people in the country don’t even realize what the government is doing to our money, debasing it by adding uncounted trillions of “new” money to drive the stock market higher. What I personally am trying to do is to wake people up so they can get their money into investments like gold and silver that don’t depend on the dollar holding its value. Our government is driving us over a cliff, while encroaching on our freedom more and more each day.
Goldman

Yes- the bubbles are back. Every one is convinced real estate has bottomed and no one seem concerned what happens with higher interest rates. In many areas over bidding is back as people are convinced they need to own Real Estate now at lower prices and low interest rates. Investors are very bullish on home builders – even with home builders at these bubble like valuations. Talking Gold at a cocktail party is sure to make you look like some crazy person who believes the world is going to end. Sadly, nothing was learned from the real estate crash or the market crash!
retired

This whole business must soon come to an end.When the economic problems are viewed in small segments,one problem at a time,some of the superficial solutions seem to be reasonable.However,when the total picture is viewed,there seems to be no way out of the financial trap.Because of the central bank/reserve banking system & the huge amount of leverage piled on top of it, the debt is too great to be overcome.The system has to fail, The sums owed out are just too big to be paid.The only hope for the big financial oligarchs who presently hold these debts is to manipulate the financial system in such a way as to dump the debt onto the middle class/working segments of the population.This would impoverish a large part of the public,thiis will not happen!

1) All of this will spill over into the political arena,we are not in 18th century Europe where the peasants endured poverty as the natural order of things.

2)The force driving Keynesian economics is consumerism,impoverished peasants won’t have the wealth to buy consumer products.Who will the industrialists sell their products to?Who will the banks extend secured credit to? 3)Many of the investment analyst,after pointing out the problems in the advanced economies,tell of all the wonderful investments in East Asia.Of course they do!They make their money touting investments & if they can’t sell the EU & the USA they try to sell the”Asian Miracle”.The truth is the Global Economy is in this trap & the Asian countries are trapped like everyone else.East Asian export economies need customers with money to export to.Who will they sell to overseas if the US & the EU are bankrupt .They can’t sell much domestically because most of their people are impoverished & are not part of the consumer economy.Japan may be the only Asian exception. 4)What also has been ignored,as far as I can tell,is the fact that China,India & the other Emerging Asian economies have experienced huge population increases in the past century.They have many millions of impoverished people (their educated middle classes are only a minority of the total population) who will not willingly go back to starvation & a bare-bones existence!