The US Deleveraging Is Now Over

Today the Fed released its quarterly Flow of Funds report, also known as the Z.1., which is mostly tracked to show quarterly changes in consumer net worth (and which we find far more valuable to show changes in shadow banking liabilities - more in that in a later post). So while in Q4 household net worth did increase by $1.2 trillion to $58.5 trillion, all of this change, and then some, was purely driven by the central bank induced ramp in the stock market: $1.3 trillion of the $1.2 trillion increase in Net Worth was from the change of value in equity shares at market value which at December 31 was $17.3 trillion. In other words, the illusion of wealth is and continues to be merely a iCTRL+P keystroke away. Yet the one finding that is truly surprising is that in Q4 for the first time since Q1 2008, debt across all holder classes increased: debt held by Households, Nonfinancial corporate business, nonfinancial noncorporate business, state and local governments and of course the Federal government, all rose in the quarter. In other words, the US deleveraging is now over as everyone adds debt for the first time since before the crash. The credit bubble is now officially back.

Here is the sequential change in credit market debt for all domestic non-financial sectors:

And a chart showing the assets and liabilities of the US household since 2004.