ECONOMY

Is the Bubble Back?

John Rubino

Leading up to the 2008 crash, one of the highlights of Doug Noland’s Prudent Bear Credit Bubble column was his quarterly dissection of the Fed’s Z.1 Flow of Funds report, which revealed ridiculous, parabolic, trillion-dollar increases in mortgages, Treasury debt, business borrowing and so on. Something was always soaring, and total US debt was always climbing to absurd new heights.

Then came the inevitable crash and the “great deleveraging,” and the Z.1 report got boring. That might be changing, however. The latest Flow of Funds indicates that the bubble may be back. “The data,” writes Noland, “have again turned more interesting,” and credit expansion has become increasingly broad based.

The US reflation has required a doubling of federal debt coupled with bubble-inducing monetary measures. Household incomes, corporate earnings, equity and corporate debt markets have all benefited. Household net worth has increased in the process. Perceived gains in wealth and ongoing (government policy-induced) income growth have spurred spending levels, sustaining the consumption and services-based US economy in the process.

But 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 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.

The longer the current backdrop continues, the greater the eventual economic and financial turmoil. The Q4 2012 Flow of Funds confirms that policymakers have painted themselves into a corner.

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