• Steve H. Hanke
    05/04/2016 - 08:00
    Authored by Steve H. Hanke of The Johns Hopkins University. Follow him on Twitter @Steve_Hanke. A few weeks ago, the Monetary Authority of Singapore (MAS) sprang a surprise. It announced that a...

US Credit Formation And Destruction Since The Second Great Depression

Tyler Durden's picture


On September 15, 2008 (aka Q3) 2008 everything broke. What happened next has been a piecemeal triage by one (then all) central banks to stop the crunch in the world's credit markets, by monetizing the bulk of public issuance (i.e., creating money out of thin air), and thus keeping GDP from collapsing, while private sector debt creation has stalled and in many cases has been put in reverse. And while the US household balance sheet which we showed earlier is important from a stock perspective of asset, liability and wealth allocation, as everyone knows money (if not wealth) comes from credit, and should the credit formation system be shuttered it means game over. So what, according to the Fed's Flow of Funds, has been the credit creation, and destruction, since Q3 2008, i.e., during the neverending Great Depression Ver 2.0? Well, of the $2.8 trillion in total debt created (table L.1 in Z.1), $5.8 trillion or 208% has come from, you know it, Uncle Sam: this is the amount by which US Treasurys have risen, and will continue to rise as long as the two key sectors continue to delever. These sectors are the Household at $855 billion in deleveraging in the past 4 years, but most importantly the Financial Sector who have unwound a whopping $2.9 trillion in debt since Q3 2008. Which brings up an interesting question: why has the Financial Sector refused to lever, and why did it delever by $162 billion in Q2 2012 - the most since Q2 2010? Simple - regulations such as Basel III (which will eventually be scrapped) and lack of confidence in a system, in which the central counterparty is and will be the central bank. In other words, the more Treasury issuance is monetized by the Fed, the greater the penetration of central-planning, the lower the confidence in the system, the greater the deleveraging by everyone else, until finally, as David Rosenberg predicted, the Fed owns everything! Is this the biggest Catch 22 of the modern Depressionary market? You bet.

And this is how the quarterly change in credit has looked like in the past 6 years.

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Thu, 09/20/2012 - 14:36 | 2815726 slaughterer
slaughterer's picture

OMFG, Potter is going to make it GREEN today despite the shit-macro-news!  QE3 has started toay!

Thu, 09/20/2012 - 14:37 | 2815729 Hedgetard55
Hedgetard55's picture

It's a fugazy market, dog.

Thu, 09/20/2012 - 14:58 | 2815800 CvlDobd
CvlDobd's picture

It amazes me every time how strong their grip on the market is.

Thu, 09/20/2012 - 15:14 | 2815860 seek
seek's picture

When there's no one left in it but them, any grip is strong.

Thu, 09/20/2012 - 15:25 | 2815865 Comay Mierda
Comay Mierda's picture


Thu, 09/20/2012 - 15:52 | 2815995 disabledvet
disabledvet's picture

The Fed has a complaint department too. Don't forget the stamp tho! I recommend "postage due" myself. One penny sounds exorbitant when dealing with this guy.

Thu, 09/20/2012 - 15:05 | 2815827 Stoploss
Stoploss's picture

Better get what you want to get now, and stay out of debt, because 50% + interest rates are a commin' down da mountain.  Fast..

Thu, 09/20/2012 - 15:43 | 2815965 CvlDobd
CvlDobd's picture

"10 minutes?!!!! This thing will be over in two!"

Bald Dude in Top Gun

Thu, 09/20/2012 - 15:59 | 2816009 lasvegaspersona
lasvegaspersona's picture

Stop loss

no way

if interest rates move up even slightly we will see loss of confidence in the currency. I do not think interest rates have ever gone near that high. Even in the late 70s   16 to 18% was max but that was when America had a relative healthy economy (it was, as now, just a sick currency.)

When this baby blows be ready, it will not just get "a lot worse"...it will BLOW...as in Hyperinflation here we come...and in HI one does not get high interest rates because NO ONE will be lending money...it will all be base money from Ben.

Having said that I'd stay away from loans with any kind of variable rate!!!

Thu, 09/20/2012 - 20:19 | 2816603 RiskAverseAlertBlog
RiskAverseAlertBlog's picture

Agree 100%. Hyperinflationary breakdown of the banking system following on hyperinflationary breakdown of the physical economy over the past 40 years will send interest rates through the roof, making even the likes of Volcker blush. Collapse in confidence has nothing to do with "central planning." Rather, the hyperinflationary gutting of the physical economy reached its zenith in the 2006-2008 period (that is in terms of capacity to mask reality of astronomically growing risk of total economic and societal collapse on account of a debt trap erected over preceding decades), while Ponzi finance the physical economy's gutting sustained was forced to turn to sovereign issuers in order to prop up core debt securities whose parabolic issuance Ponzi finance first made possible (and indeed required for the sake of dynamic hedging of private label garbage it produced like so much candy). Without willingness of national treasuries to add core debt securities to the mountain already built up during the past 40 years' expansion of Ponzi finance (again, this expansion occurred at the expense of the physical economy via its hyperinflationary gutting), central banks more or less would be rendered impotent. If there was any "central planning," it occurred as a result of the symbiotic relationship King Ponzi, Alan Greenspan, developed with Congress during his reign at the Fed.

Thu, 09/20/2012 - 14:38 | 2815731 centerline
centerline's picture

Household deleveraging via default?  That's about the only way I see anything meaningful occuring therein.

Thu, 09/20/2012 - 14:38 | 2815733 pods
pods's picture

It would be perfect if the FED sucked up all available debt, then a Jacksonian got in there and crawfished on the deal.

I would then proclaim, like Mrs. O, that I was finally proud of my country.


Thu, 09/20/2012 - 14:43 | 2815743 EmmittFitzhume
EmmittFitzhume's picture

How did the Federal Reserve get the power to print money without authorization or oversight????????  Who the fuck was so stupid to allow this to happen? 

Thu, 09/20/2012 - 14:53 | 2815781 LawsofPhysics
LawsofPhysics's picture

your grandparents or great grandparents, depending on your age.  

Thu, 09/20/2012 - 15:10 | 2815831 Landotfree
Landotfree's picture

"How did the Federal Reserve get the power to print money without authorization or oversight????????  Who the fuck was so stupid to allow this to happen? "

The Fed does not print "money", sorry but that is impossible.   Stupid hairless monkets have been using this system for thousands of years. The hairless monkeys can close the Fed today if they want, their won't be a credit system tomorrow if you do so.   

Eventually the power needed to sustain the system will be too great and the downward tread will then continue.   There is no defeating the equation, you can only prolong the collapse.  The system has hit it's max potential upward now it will have to hit it's max potential downward.... my guess 1-3 billion hairless monkey unfunded liabilities will have to go.  



Thu, 09/20/2012 - 14:46 | 2815745 SDRII
SDRII's picture

No mention of the next great financial arbitrage swindle: non-financial corporate debt exceeds peak - > never stopped growing

Funding buybacks and dividends.

The corporate carry trade: who needs revenue

Thu, 09/20/2012 - 14:43 | 2815748 slaughterer
slaughterer's picture

I am PROUD of this SHITHOLE BANANAREPUB 3rd world/1st world hybrida called the U.S. of Obamahood.  

Thu, 09/20/2012 - 14:45 | 2815755 mayhem_korner
mayhem_korner's picture

"Since the Second Great Depression"


I suggest inserting the words "Onset of The" between "the" and "Second". 

Thank you, that is all.

Thu, 09/20/2012 - 14:46 | 2815760 slightlyskeptical
slightlyskeptical's picture

Fed and other central banks will own all the debt eventually. and then with a simple computer stroke or two will wipe the whole thing off the board and give the world a fresh start. If this isn't their plan, then we have a whole bunch of hurt coming sooner than later.

Thu, 09/20/2012 - 15:20 | 2815891 Landotfree
Landotfree's picture

What is one person's debt is another person's credit or asset.  So, you are going to have 7 billion people that are not living off of interest?   Good luck to all that, that's called a credit system collapse.   Remove the global credit system and someone is going to go hungry.   

The only way the system would be sustainable is if the credit system continues to expand exponentiallly.   

Thu, 09/20/2012 - 15:27 | 2815915 Pseudo Anonym
Pseudo Anonym's picture


that's called a credit system collapse

credit created for govt = $5.8T since Q3 '08

that's still credit creation

Thu, 09/20/2012 - 16:03 | 2816033 lasvegaspersona
lasvegaspersona's picture


all that stuff being created is NOT credit money...it is real, convertible to cash, base money. The only kind the fed knows how to make.

Thu, 09/20/2012 - 14:47 | 2815762 ptoemmes
ptoemmes's picture

Speaking of Catch-22...one could have some fun assigning symbolism.


Thu, 09/20/2012 - 14:52 | 2815777 SoundMoney45
SoundMoney45's picture

Central bank stockholders owning everything is the plan.  The central bank stockholders will have purchased everything for nothing.  

Thu, 09/20/2012 - 15:04 | 2815822 Hedgetard55
Hedgetard55's picture

Not true.


They will have appropriated the cost from you and me by debasing the value of our savings and investments. When they wind up with everything, everyone else has nothing.

Thu, 09/20/2012 - 15:41 | 2815954 DOT
DOT's picture

Screw the MBS racket. I'm going to buy my own assets for six bazillion clownbucks.

I can set up a program to pay me automatically; I can set up a program to pay me.

I win.

Thu, 09/20/2012 - 15:06 | 2815833 Pseudo Anonym
Pseudo Anonym's picture

ok, by

The central bank stockholders will have purchased everything for nothing.

you meant hofjuden; were you aware of that?

Thu, 09/20/2012 - 14:54 | 2815785 Jason T
Jason T's picture

How much of that is interest?  A good deal.  

Thu, 09/20/2012 - 15:01 | 2815806 lolmao500
lolmao500's picture

And Congress yesterday screwed the American taxpayers once again....



Basically, it exempts from fiduciary responsibility...

`(i) any broker, dealer, or municipal securities dealer (or person associated with such broker, dealer or municipal securities dealer);

`(ii) any investment adviser registered under the Investment Advisers Act of 1940 or with a State or territory of the United States (or person associated with such an investment adviser);

`(iii) any commodity trading advisor, swap dealer, major swap participant, futures commission merchant or introducing broker registered under the Commodity Exchange Act (or person associated with a commodity trading advisor, swap dealer, major swap participant, futures commission merchant or introducing broker) who is providing advice related to, engaging in, or arranging any swap;

`(iv) any security-based swap dealer or major security-based swap participant registered under the Securities Exchange Act of 1934 (or any person associated with a security-based swap dealer or major security-based swap participant) who is providing advice related to, engaging in, or arranging any security-based swap;

`(v) any attorney offering legal advice or providing services that are of a traditional legal nature;

`(vi) any engineer providing engineering advice;

`(vii) any financial institution or person associated with a financial institution; or

`(viii) any elected or appointed member of a governing body of a municipal entity, with respect to such member's role on the governing body;'.

But ehhhhhh nothing is going on... and both parties voted for it in massive numbers... with a voice vote... so NO RECORD of the vote was taken. But eh, keep voting republicans and democrats, I'm sure it's gonna matter!

Thu, 09/20/2012 - 15:15 | 2815866 centerline
centerline's picture

I say pull out all the stops.  Shut down all regulatory agencies overnight.  Repeal all legislation aimed at "safeguarding" the system.

Thu, 09/20/2012 - 15:47 | 2815973 grid-b-gone
grid-b-gone's picture

Own outright everything you need or want to keep.

If MF Global is the new standard of stewardship, and legislation like that above is codifying that new paradigm, be prepared.

Liquidity was injected at the top, but will be drained from the level most of us are at.

Thu, 09/20/2012 - 15:03 | 2815811 Crtrvlt
Crtrvlt's picture

TPTB should create Fed 2.0 to monetize the Fed

Thu, 09/20/2012 - 15:05 | 2815828 SoundMoney45
SoundMoney45's picture

That is the one world government.

Thu, 09/20/2012 - 15:38 | 2815851 steve from virginia
steve from virginia's picture


The basic premise is iron-clad at issue is whether the private sector is actually deleveraging or not.


Monetization and the careful coordination of redemption claims has put a wet blanket on deleveraging in real estate and related asset markets. Banks sit on foreclusures rather than 'sell at the market', for instance.


Nevertheless, the mortgage sector has lost US$4 - 6 trillion in worth since 2008 and has barely recovered. This is greater than the US$2.8 trillion that the Federal Reserve has added to its own balance sheet in the way of 'replacement credit'.


Credit formation ipso-facto supports bond markets and stock markets as well  ... in the US and elsewhere. Credit formation allows asset managers to meet the price of commodities (while allowing the same managers to bid up the prices of the same commodities as a form of credit-rationing). It isn't supposed to be this way: credit is intended to meet prices not push them.


What has changed is that constrained credit is effecting prices rather even as actors are willing to bid them higher. Rule of the convoy is in effect: the lowest good bid, the lowest amount of available credit -- that of the end users -- is what sets the marginal price of a good. Asset managers have lost control. That can be 'called' delevaging but is really asset managers' customers 'going broke'.


Bottom line is asset managers' credit formation versus the credit availability of the asset managers' customers (not their clients).


What remains is a Catch 22: asset managers supplied w/ credit succeed at the expense of those whom the managers depend upon for cash flow.  No credit for asset managers and their firms unravel. There are no products for customers.

Thu, 09/20/2012 - 15:39 | 2815952 jimmyjames
jimmyjames's picture

Nevertheless, the mortgage sector has lost US$4 - 6 trillion in worth since 2008 and has barely recovered. This is greater than the US$2.8 trillion that the Federal Reserve has added to its own balance sheet in the way of 'replacement credit'.


Not to forget the SIV'S 30+ times leverage that's hinged on the mortgage market that sits unseen in level 3 assets-

What would the deflation/inflation ratio of that be- marked to market-weighed against the Feds puny balance sheet-

Thu, 09/20/2012 - 15:12 | 2815853 new game
new game's picture

time for nap; this shit is same ol shit. we all understand that we are witnessing the

erosion of freedom in the market and ultimatly how we live. wish i could sleep for 20 years and wake up

somewhere in the wilderness with mama bear close by...

Thu, 09/20/2012 - 17:05 | 2816260 exi1ed0ne
exi1ed0ne's picture

"So do all who live to see such times. But that is not for them to decide. All we have to decide is what to do with the time that is given to us. There are other forces at work in this world Frodo, besides the will of evil."

Gandalf - The Lord of the Rings.

Thu, 09/20/2012 - 15:29 | 2815916 Solon the Destroyer
Solon the Destroyer's picture

So what, according to the Fed's Flow of Funds, has been the credit creation, and destruction, since Q3 2008, i.e., during the neverending Great Depression Ver 2.0? Well, of the $2.8 trillion in total debt created (table L.1 in Z.1), $5.8 trillion or 208% has come from, you know it, Uncle Sam: this is the amount by which US Treasurys have risen, and will continue to rise as long as the two key sectors continue to delever.

This statement is the Ponzi in a nutshell.

Total credit cannot contract or the whole pyramid comes crashing to earth. In an irredeemable debt-based system, one cannot pay off old debt without an expansion of new debt. At some point debtholders will reject this pyramid as unsustainable. Right now they are being bribed with the "perpetual" halving of Treasury yields. While yields can be halved into perpetuity without fear of counterparty risk due to the short term nature of the holdings, one of two things will stop the Ponzi:

1. The dollar's devaluation will become either large enough or fast enough, that it makes more sense to hold PMs than paper. Essentially a bank run on the Fed and the Government

2. The public perception of the Fed's ability to expand its balance sheet safely or adequately, reaches its limits. This could even occur in the midst of a deflationary episode (for eg. The PIIGs).

Thu, 09/20/2012 - 15:47 | 2815975 CustomersMan
CustomersMan's picture

A simple Example Of What I See:

Let's say the entire world is one Island with 1,000 people on it. Each person starts with $ 1,000. let's say through treachery, dirty deals, and corruption, it all  leads to 4 people having all the money. The design by the 4 with all the money was part of a pre=meditated plan unknown to the other 96 %, everyone else was going on about their lives and family, while the 4% were planning, playing monopoly, and colluding amongst themselves to accumulate all wealth. They say too bad, the others should have been aware.


Through a diabolical series of moves, over a hundred plus years, bribing, coercion, murder, blackmail, extortion, rigging the courts and twisting the law,, buying elections were all employed to achieve their ends, and  they achieve total dominance.


They believe they have won the game, and should be respected and given special status as winners, even though the masses are living in poverty and dispute the methods used in order to achieve this winning position.

Of course those 4 people will try and buy the loyalty through perks, work, influence, wine , women and song, to get enough of the remaining 96% to protect them, meanwhile these servants will not be considered equals, just bought help.


That's where we are. The 4% is the FED and International Banking Colluders.


At some point a group within the 96% decide enough is enough and the game needs a reset. The 4% and their minions, who won the last round,  will not be available for any future  play.

Thu, 09/20/2012 - 22:35 | 2816797 Mediocritas
Mediocritas's picture

Then that group within the 96% decide that they like their newfound power and they become the new 4%. 

That's the usual historical story. "Say hello to the new boss, same as the old boss".

Sometimes, very rarely, the revolutionaries prove to be the good guys and actually do implement a fairer system. The USA was an example of that. Eventually though, the clear minds die out and the system decays back into the bad old ways.

I'd say it to the potential revolutionaries out there. If you want to tear down the system without a plan to implement a better one, then you're going to make things even worse. Know how to win and keep the peace before you start a war.

Thu, 09/20/2012 - 15:50 | 2815979 JohnKozac
JohnKozac's picture

JC Penny nosediving:


"...today’s big loser is JC Penny (NYSE:JCP), whose stocks took a nose-dive today falling 3.20 or 11% in response to negative information released yesterday on its analyst day."

Read more: http://www.minyanville.com/business-news/markets/articles/255EGSPC-INDEXSP253AINX-The-S2526P-500-JC/9/20/2012/id/44211#ixzz272c70UsJ ....and how about Bed Bath and Beyond down 10% !! http://finance.yahoo.com/q?s=BBBY&ql=1 Wait until the online sales tax....hubba, hubba.....
Thu, 09/20/2012 - 15:54 | 2816001 q99x2
q99x2's picture

Time has stopped. We're dead.

Thu, 09/20/2012 - 16:21 | 2816104 Colonel Klink
Colonel Klink's picture

I can't wait until the MASSES finally wake up and realize their wealth has evaporated!!!

Reality will be a bitch.

Fri, 09/21/2012 - 02:14 | 2817043 HardlyZero
HardlyZero's picture

Every other house and every other piece of land eventually government owned.  Then the cities will pucker up into the city center and survive.  If you live a few miles out from city center...watch out...you will lose your utilites, police and fire departments.

The value of property will all become equal across all cities and states because every other parcel will have the same government owner ("its gone!")

There will be no value in land assets in 10 years time.

Its going to be difficult to retain wealth in land value, maybe farming is a good survival tactic compared with making money on property.

Somehow get portable, durable, valuable store of wealth...maybe gold, diamonds and art are a way to go ?  (and some silver along the way).

Thu, 09/20/2012 - 20:34 | 2816622 Heavysword
Heavysword's picture

If the private sector is deleveraging, when the FED/ECB stop or can no longer provide liquidity, wont we go from hyperinflation very quickly to hyperdeflation?

Thu, 09/20/2012 - 21:34 | 2816685 LibertarianX
LibertarianX's picture

I figure serious destruction of debt / money - hyperdeflation as you say will effectively destroy the currency, as would hyperinflation 

In both serious inflationary and deflationary episodes gold has historically done it's job in preserviing your wealth

So either way - I'm still going to accumulate gold

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