America's engine of credit creation, housing, is still flat on its back despite recovery from the bottom

America's engine of credit creation, new housing starts, is still flat on its back despite a recovery from the bottom. The fact of the matter is, we have recovered TO the historic lows, that is all, to 955,000 annualized through the first half of 2014.

The total level of mortgage liability, a key component of total credit market debt outstanding, the growth of which has hit the wall, has been in steady decline over the period as well. Since 2008 it has declined from peak level at $10.7 trillion then to $9.4 trillion today, down over 12%. In the prior 6 year period, by contrast, total mortgage liability level increased 90% during the so-called housing bubble, and for the 6 year period prior to that 60%.

US Federal Reserve continues to fail against deflationary headwinds

Bloomberg reports here:

The Fed needs a clear strategy for getting the inflation rate higher after falling short of its 2 percent target for 28 consecutive months. ...

Prices fell 1.2 percent for the 12 months ending in July 2009, when the economy had just exited the recession, according to the inflation measure the Fed uses, the personal consumption expenditures price index. Unemployment that month was 9.5 percent. Since Fed officials first published their inflation target in January 2012, the index has averaged 1.5 percent. ...

The 2 percent inflation objective first appeared in a January 2012 statement on longer-run policy goals, and has been restated each January since. The statements say nothing about tactics for returning inflation to 2 percent over the medium term.


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The all-items consumer price index shows the same thing, with the average of the annual average change at just +1.59% for each of the five years 2009-2013. In the most recently completed year, 2013, the change from 2012 was just +1.46%. And year over year on August 1, 2014, the change has been just +1.69%.

Despite a balance sheet for all Federal Reserve banks which appears to have peaked at $4.459 trillion on September 24th as QE prepares to end and excess reserves only slightly off peak at $2.677 trillion, inflation is slim to none in this economy, and slim just left the building.

In point of fact, these numbers are nearly meaningless in the face of the real deflation in the economy, which has nothing to do with prices but with credit. Total credit market debt is hardly expanding at all. Compared to the post-war record, where credit creation has doubled on average about every eight years, we have hit a brick wall since 2007.

At that time total credit market debt outstanding stood at $50 trillion. Seven years later it is barely $57.5 trillion, and there isn't a snowball's chance in hell that next year it will be at $100 trillion or anywhere close to that.

What we are witnessing is the unraveling of the post-war credit based economy, and no one seems to have a clue how to fix that, least of all the US Federal Reserve.

PIMCO's Bill Gross wakes up to the wall hit by TCMDO, but not fully

Others saw this in April 2013.

Here's Bill Gross in September 2014:

The current outstanding total [credit] approximates $58 trillion and has been expanding at an average annual rate of 2% for the past five years, and 3.5% for the most recent 12 months. Put simply, if credit needs to expand at 4.5% per year, then the private and public sectors in combination must create approximately $2.5 trillion of additional debt per year to pay for outstanding interest. They are underachieving that target in the U.S., which is the reason why GDP growth struggles at 2% real or lower and nominal GDP growth seems capped at 4.5% or lower. Credit creation is essential for economic growth in a finance-based economy such as ours. Without it, growth stagnates or withers.

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What Bill Gross doesn't seem to appreciate is the gravity of this slowdown historically to total credit expansion of just $1.14 trillion annually. TCMDO, total credit market debt outstanding, in the post-war DOUBLED every 6 to 11 years until 2007. That implies that normal credit expansion until 2007 was between 6% and 11% PER ANNUM. At 8.5%, an average level, TCMDO should grow well in excess of $4 trillion annually at these levels. 4.5% isn't going to cut it. And the actual 2% or even 3.5% is a catastrophe compared with the historical record.

By 2013, according to historical norms, TCMDO could have already reached $100 trillion if it matched the fastest pace on record under Jimmy Carter and Ronald Reagan. Instead it's stuck at $58 trillion in 2014.

The system has hit the wall. Decades of economic shrinkage, to borrow Chris Whalen's phrase, lie ahead, and we're already in the first one.

Incidentally, nonfinancial corporate debt has grown on average $567 billion annually between 2010 and 2014, accounting for about 50% of the average increase in TCMDO. And in 2013, corporations bought back something like $600 billion worth of their own stock. 

A Lovely Question: Why Is Interest Income, Perhaps 10 Percent of GDP in the Past, Trivial to Savers but Ever So Important to Banks?

Jeffrey Snider wants to know, here:

I think everyone understands that credit is vital to businesses, but they also intuitively understand that customers are probably more vital (and the largest problem for businesses of all sizes since 2008). I don't think Chairman Bernanke can claim that interest income is trivial and therefore not really a consideration, both in an empirical sense (the numbers don't bear that out, especially at the margins) or, perhaps more importantly, in the perceptions of the voting public. If he does, then why is such a trivial amount to savers so important to banks? It cannot be the money multiplier effect since bank net income (the pivot in this trade-off) plays no role in that presumed multiplier - ZIRP is a technique of expanding bank balance sheet capacity. It is the method of circulation that is at issue here, and the Fed and its global central bank cousins are placing all their chips on circulating money indirectly through credit creation. If that is a superior option, then they should be able to demonstrate it.

Make No Mistake About It: The Federal Reserve Is The Enemy Of The People

From another insightful meditation by Jeffrey Snider, this time on the consequences of trying to make the artificial financial economy and the real economy one:

The Federal Reserve has gone far beyond TARP into ZIRP (zero interest rate policy). ZIRP is a direct tax on savers, figuratively taking money out of the pockets of those who have acted responsibly in the real economy, transferring it to the banking system (especially the largest investment banks, the very banks responsible for most of the credit creation and monetary imbalance of the past asset bubbles) that was negligent, reckless and complicit in this disaster. Monetary policymakers, the gatekeepers to the realm of the monetary or financial economy, now intentionally and directly penalize real economy actors in favor of financial economy actors. They do so with this narrative that as the financial economy goes, the real economy will follow. Very few people seem to challenge this as backwards, certainly not anyone in a policymaking role.

Irrational Exuberance In Credit Creation Has Stalled

Yet one more metric showing how a new trend line began in the mid-1990s coincident with dramatic new housing and banking legislation of the time. A reversion to the status quo ante implies an overall reduction in asset values of at least 33 percent to 42 percent, and perhaps more in a crash which over-corrects below the more modest trendline set by bank credit of approximately $5.5 trillion.

Quality Collateral is King

From another in a series of incisive meditations upon the continuing global banking crisis from Jeffrey Snider, here:

The collateral problem is not going away no matter how authorities on either side of the Atlantic try to dress up fake guarantees. The system of wholesale lending through repo is terminally broken, since both quality reputations as well as quality collateral are in short supply. In other words, the inside participants of the global banking scheme know all too well that the system pyramided far too much paper on top of far too little actual cash flow. Liquidity is not the real problem since all the worthless collateral still stuck inside the system is likely worthless because the mathematical predictions of 2005 and 2009 proved utterly inept. Those accounting notions of equity during the credit bubbles were just as phantom as the valuations of the assets that were created from it. This coming year will be just a dance or game of musical chairs to determine who gets stuck with the bill. ...

As the progression of crisis has moved from paper asset to paper asset, from banks to countries and back to banks again, the trajectory is entirely clear. Some form of actual, exogenous restraint on credit creation will be imposed, either by someone currently in power that finally "gets it", or by a free market shaking free from the shackles of the over-enlarged financial economy and its hell-bent attempts toward unlimited money. Collateral is king in this banking world, and the rapid decay of "quality" is a testament to the intentional imbalance of finance over economy, to the hubris of modern economics and monetary "science". Unfortunately for the dreamers of true money elasticity, and too late for the rest of us, this was never supposed to happen.

The Fed's Dollar Swap Operation in Europe is a Sign of the Desperation of Monetarism

So says Jeffrey Snider, here:

Rising credit equals rising economic activity, so the advancement of the banking system necessarily and uniformly leads to advancement in the real economy. This is a pervasive belief that is accepted in too many places without critical questioning, especially in the political arena.

As I (and many others) have said numerous times, it is a deliberate prevarication. The Fed and central banks around the world coordinate dollar swap lines to save the banking system from its umpteenth moment of illiquidity simply because the banking system, through credit creation, equals control over the economies those central banks are supposed to serve. ...

The Fed, the economics profession and the financial media spread the idea that this unfettered credit creation paradigm is part and parcel to the basic economic philosophy of capitalism. It is not. Capitalism represents the free expressions of a free society, so leeching onto it achieves another shortcut to allow free people to accept a degree of economic central control. ...

The central control of modern economics seeks to control credit independent of actual demand; indeed, it seeks to create demand from nothing.

If a housing bubble achieves the philosophical aims of "stimulating" the economy to some predetermined target or range, then the political aims of the central bank are fulfilled no matter how shortsighted that may be. ...

The detachment of credit money from actual money demand to engage in productive transactions is both the glaring difference between capitalism and monetarism, and the ultimate weakness of superimposing the latter on the former. ...

As the façade plummets to earth in the messy aftermath of what it, not capitalism, has wrought, the central authorities cling desperately to their system. It matters little if bailing out the eurodollar market for the fifth time actually advances the real economy. All that matters is that the tools for maintaining the elitist utopia are preserved for future use. They just want us to accept that they know better, having already crowned themselves Lords of the global economy.

Fight The Will-Try-ANYTHING Fed

From Bill Julian, making the contrarian case here that it's already winter:

M3, the broadest definition of money that includes credit creation, is still well off its peak of 2008 and is no higher than it was when QE2 was instituted. ... This is unprecedented and is consistent with the current flurry of poor economic data. It is almost certainly a huge disappointment to the FED.

The meaning of this is that the asset prices which have been inflated by Federal Reserve policies look less and less sustainable.