For all the endless talk of a recovery during the past five years, there is a very tangible reason why for most people this is nothing but spin, propaganda and lies: when one strips away the retroactively adjusted GDP, the seasonally adjusted (and politically mandated) counting of temp jobs, the constantly upward revised jobless claims, the Fed's $4+ trillion balance sheet of course, and even the declining (yes, declining) real disposable income per capita, what one is left with is the lowest loan creation out of a recession (or depression) in history, and is at indexed levels last seen during the Lehman collapse over five years ago!
Why is loan creation important? Because in traditional economics (not their "New Normal" equivalent, where central planning decides everything), loans - i.e., money created by commercial banks - ultimately leads to GDP growth. It also has a direct bearing on the steepness of the bond curve and thus, inflation expectations. Conversely, lack of loan creation ultimately means the government is forced to adjusted the definition of GDP to make it seem as if there is growth, or to rely on an inventory stockpiling boost to "growth" and all other recently seen gimmicks to force the conviction of "growth."
There's more. As the charts below show, there is a direct link between loan demand (and thus creation), and EPS growth, Industrial Production, Employment and CRE development. Obviously, the lower the loan creation, the worse all of these will look.
But how is it possible that banks continue to function in an environment in which there has been zero loan creation for the past 5 years? Simple: the banks' excess deposits (a liability) has been pumped higher by about $2.5 trillion thanks to the Fed's excess deposits:
... and instead of lending out reserves, which banks don't do (for those still confused about this, read the following primer from S&P), banks instead use them as initial and maintenance margin for risk-chasing trades as JPM so kindly explained over a year ago.
... which is also why once excess deposit creation, i.e. "flow", slows down, halts or is put in reverse, watch out below.
Furthermore, as long as the Fed creates reserves, and excess deposits, banks have no incentive to force loan creation.
In other words, as long as QE continues, and the Fed injects however many tens of billions into the commercial bank balance sheets each month, all talk of an economic recovery will be bullshit, simply because all of the Fed's money makes it only into capital markets, resulting in asset inflation, but not into the economy, where it is up to commercial banks to create loans, and the resultant money that then leads to an increase in money velocity and ultimately, if allocated carefully, growth.
In the meantime, there will be no economic growth, period, as long as the loan creation in the top chart shown above refuses to move higher, and any talks of an economic recovery will be merely lies, propaganda and yes - more lies.
Charts: Barclays, JPM, Zero Hedge