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Credit

Update:
Whos Going To Lend The Money
To Drive Economic Growth?

Macro Watch
Third Quarter 2015

hEps://www.richardduncaneconomics.com
Total Credit/Debt
US$ million, 1952 to Q1 2015
70,000,000
Credit Growth Drives Economic Growth. $59 trillion
60,000,000 This process requires both borrowers
and lenders. Normally I focus on the
50,000,000 borrowers. Today, we are going to
take a look at the lenders.
40,000,000

This way of looking at the credit


30,000,000
market is interesXng and important
because it highlights how
20,000,000
vulnerable the economy
10,000,000 is if interest rates rise.

0
1952Q1
1954Q1
1956Q1
1958Q1
1960Q1
1962Q1
1964Q1
1966Q1
1968Q1
1970Q1
1972Q1
1974Q1
1976Q1
1978Q1
1980Q1
1982Q1
1984Q1
1986Q1
1988Q1
1990Q1
1992Q1
1994Q1
1996Q1
1998Q1
2000Q1
2002Q1
2004Q1
2006Q1
2008Q1
2010Q1
2012Q1
2014Q1
2015Q1
2014Q3
2014Q1
2013Q3
2013Q1
2012Q3
2012Q1
Total Credit/Debt, Annual $ Change

2011Q3
2011Q1
2010Q3
2010Q1
US$ millions, 2000 to Q1 2015

2009Q3
2009Q1
2008Q3
2008Q1
2007Q3
2007Q1
2006Q3
2006Q1
2005Q3
2005Q1
2004Q3
2004Q1
2003Q3
2003Q1
2002Q3
2002Q1
2001Q3
2001Q1
2000Q3
2000Q1

-1,000,000

-2,000,000
5,000,000

4,000,000

3,000,000

2,000,000

1,000,000

0
Total Credit/Debt, Annual % Change
Not Adjusted for InaXon
%, 2004 to Q1 2015
12.0% Credit growth remains too weak to
generate solid economic growth.
10.0%
When credit growth (adjusted for
inaXon) is less than 2%, the US falls
8.0%
into Recession. That means Borrowing
and Lending must both increase by
6.0%
at least 2% (aber adjusXng for inaXon.)
4.0% 3.4%

2.0%

0.0%
2004Q2

2004Q4

2005Q2

2005Q4

2006Q2

2006Q4

2007Q2

2007Q4

2008Q2

2008Q4

2009Q2

2009Q4

2010Q2

2010Q4

2011Q2

2011Q4

2012Q2

2012Q4

2013Q2

2013Q4

2014Q2

2014Q4
-2.0%

-4.0%
The Debt Instruments
When we talk about Credit Market Debt, these are the debt instruments we are discussing.

These are the debt instruments available for investors to buy.


h"p://www.federalreserve.gov/releases/z1/

Note: This is
the source of
all the charts
in this video,
unless other-
wise indicated.
Table L.1
Top Half of Table

Who Owes The Debt


Who Owes The Money?
Total Debt: All Sectors
1990 to Q3 2014, US$ billions
14,000

12,000

10,000
Household

8,000 Federal Government


GSEs

6,000 Corporate
Non-Corp. Business
State & Local Govt.
4,000
ABS Issuers
Others
2,000

Source: Fed, The Financial Accounts of The United States


0
1990Q1
1991Q1
1992Q1
1993Q1
1994Q1
1995Q1
1996Q1
1997Q1
1998Q1
1999Q1
2000Q1
2001Q1
2002Q1
2003Q1
2004Q1
2005Q1
2006Q1
2007Q1
2008Q1
2009Q1
2010Q1
2011Q1
2012Q1
2013Q1
2014Q1
The Other Side Of The Balance Sheet

Today we are going to look at the other side of


the coin.
Instead of looking at who borrows the money and
owes the debt as we normally do, were going to
see who lends the money, i.e. who owns the debt
instruments.
Lending = Borrowing
Someone Has To Buy The Debt
Instruments To Fund The Borrowing

Well consider:
Whos been buying the Debt since the crisis?
Whos going to buy the debt instruments during
the years ahead?
L.1 Credit Market
Debt Outstanding.
Bo"om Half of
the Table.
Who Owns The Credit Market Instruments?
US$ millions, 1952 to Q1 2015
12,000,000

10,000,000

8,000,000 Households
Monetary Authority
Banks
6,000,000
Life insurance co
Mutual funds
4,000,000 Total GSEs
ABS Issuers

2,000,000 Rest of the world

0
1952Q1
1954Q1
1956Q1
1958Q1
1960Q1
1962Q1
1964Q1
1966Q1
1968Q1
1970Q1
1972Q1
1974Q1
1976Q1
1978Q1
1980Q1
1982Q1
1984Q1
1986Q1
1988Q1
1990Q1
1992Q1
1994Q1
1996Q1
1998Q1
2000Q1
2002Q1
2004Q1
2006Q1
2008Q1
2010Q1
2012Q1
2014Q1
Monetary Authority

Rest of the world


Life insurance co
Mutual funds
Households

ABS Issuers
Total GSEs
Banks
Who Owns The Credit Market Debt?

2014Q1
2012Q1
2010Q1
2008Q1
2006Q1
2004Q1
2002Q1
2000Q1
% Breakdown

1998Q1
1996Q1
1994Q1
1992Q1
1990Q1
1988Q1
1986Q1
1984Q1
1982Q1
1980Q1
1978Q1
1976Q1
1974Q1
1972Q1
1970Q1
1968Q1
1966Q1
1964Q1
1962Q1
1960Q1
1958Q1
1956Q1
1954Q1
1952Q1

50%

45%

40%

35%

30%

25%

20%

15%

10%

5%

0%
Summary Table
Percent Ownership of
Total Credit Market
Q1 2015 Instruments

Banks 18%
Rest of The World 18%
Total GSEs 13%
Mutual Funds 8%
The Fed 7%
Life Insurance Co.s 6%
Household 6%
ABS Issuers 2%
Others 22%

Total 100%

Were going to look at the size and growth rate of each of these.
The Three Sources of the Funds
Used to buy the Debt Instruments
Where does the money come from?

1. Savings: Households, InsPtuPons & Businesses (i.e. Net NaPonal Savings)


2. Fiat money creaPon: Central Banks
3. Credit creaPon: Banks, GSEs and other Financial InsPtuPons

Note:
Savings are limited by income.
There are no limits on how much at money can be created by central
banks.
There are no limits on the amount of credit that can be created by banks
through fracPonal reserve banking other than the ability of the
borrowers to repay the credit that has been created and lent to them.
2014Q1
2012Q1
2010Q1
2008Q1
2006Q1
2004Q1
2002Q1
Ownership of Credit Market Instruments

2000Q1
1998Q1
1996Q1
1994Q1
US$ millions, 1952 to Q1 2015

1992Q1
1990Q1
Source of Funds: Credit CreaXon

1988Q1
Banks: Size

1986Q1
1984Q1
1982Q1
1980Q1
1978Q1
1976Q1
1974Q1
1972Q1
18% of the Total

1970Q1
1968Q1
$10.9 trillion

1966Q1
1964Q1
1962Q1
1960Q1
1958Q1
1956Q1
1954Q1
1952Q1

12,000,000

10,000,000

8,000,000

6,000,000

4,000,000

2,000,000

0
Banks: Growth
Annual $ Change, Purchase or Sale of Credit Market Instruments
US$ millions, 2000 to Q1 2015
1,400,000
The Banks are acquiring more
1,200,000
debt instruments than any
1,000,000
other sector now.
800,000 $717 bn

600,000

400,000

200,000

0
2000Q1
2000Q3
2001Q1
2001Q3
2002Q1
2002Q3
2003Q1
2003Q3
2004Q1
2004Q3
2005Q1
2005Q3
2006Q1
2006Q3
2007Q1
2007Q3
2008Q1
2008Q3
2009Q1
2009Q3
2010Q1
2010Q3
2011Q1
2011Q3
2012Q1
2012Q3
2013Q1
2013Q3
2014Q1
2014Q3
2015Q1
-200,000

-400,000

-600,000
Rest Of The World: Size
Ownership of Credit Market Instruments
US$ millions, 1952 to Q1 2015
12,000,000
$10.4 trillion
18% of the Total This has grown very rapidly
10,000,000
Source of Funds: Primarily since 1980 when the US
started running large
8,000,000 Fiat Money CreaXon
Current Account decits.
6,000,000 I esXmate that 80% of this
$10.4 trillion in investments was
4,000,000 made by the central banks of
other countries, nanced by at money
2,000,000
they created (to depress the value of
their currencies by buying dollars).
0
1952Q1
1954Q1
1956Q1
1958Q1
1960Q1
1962Q1
1964Q1
1966Q1
1968Q1
1970Q1
1972Q1
1974Q1
1976Q1
1978Q1
1980Q1
1982Q1
1984Q1
1986Q1
1988Q1
1990Q1
1992Q1
1994Q1
1996Q1
1998Q1
2000Q1
2002Q1
2004Q1
2006Q1
2008Q1
2010Q1
2012Q1
2014Q1
Rest Of The World: Growth
Annual $ Change, Purchase or Sale of Credit Market Instruments
1,400,000
Latest, $400 billion.
ROW was once the largest
Determined primarily
1,200,000 buyer of US debt instruments.
by the size of the US
Their purchases peaked
Current Account
1,000,000 at $1.3 trillion in 2007.
decit.
800,000

600,000

400,000

200,000

0
2000Q1
2000Q3
2001Q1
2001Q3
2002Q1
2002Q3
2003Q1
2003Q3
2004Q1
2004Q3
2005Q1
2005Q3
2006Q1
2006Q3
2007Q1
2007Q3
2008Q1
2008Q3
2009Q1
2009Q3
2010Q1
2010Q3
2011Q1
2011Q3
2012Q1
2012Q3
2013Q1
2013Q3
2014Q1
2014Q3
2015Q1
-200,000

-400,000
2014Q1
2012Q1
2010Q1
2008Q1
2006Q1
2004Q1
2002Q1
Ownership of Credit Market Instruments

2000Q1
1998Q1
1996Q1
1994Q1
US$ millions, 1952 to Q1 2015

1992Q1
1990Q1
Total GSEs: Size

1988Q1
1986Q1
1984Q1
1982Q1
1980Q1
1978Q1
1976Q1
1974Q1
13% of The Total
Source of Funds:

1972Q1
Credit CreaXon
1970Q1
1968Q1
$7.6 trillion

1966Q1
1964Q1
1962Q1
1960Q1
1958Q1
1956Q1
1954Q1
1952Q1

12,000,000

10,000,000

8,000,000

6,000,000

4,000,000

2,000,000

0
Total GSEs: Growth
Annual $ Change, Purchase or Sale of Credit Market Instruments
US$ millions, 2001 to Q1 2015
1,400,000 The GSEs were major buyers of Now that they are in
debt instruments (mortgages). $1.1 trillion Conservatorship their
In that way, they fuelled the acquisiXon of mortgages
900,000 US housing bubble and drove is much smaller.
economic growth.

400,000

$107 bn

-100,000
2001Q1
2001Q3
2002Q1
2002Q3
2003Q1
2003Q3
2004Q1
2004Q3
2005Q1
2005Q3
2006Q1
2006Q3
2007Q1
2007Q3
2008Q1
2008Q3
2009Q1
2009Q3
2010Q1
2010Q3
2011Q1
2011Q3
2012Q1
2012Q3
2013Q1
2013Q3
2014Q1
2014Q3
2015Q1
-600,000

-1,100,000
2014Q1
2012Q1
2010Q1
2008Q1
2006Q1
2004Q1
2002Q1
Ownership of Credit Market Instruments

2000Q1
1998Q1
1996Q1
1994Q1
US$ millions, 1952 to Q1 2015

1992Q1
Mutual Funds: Size

1990Q1
1988Q1
1986Q1
1984Q1
1982Q1
1980Q1
1978Q1
1976Q1
1974Q1
1972Q1
Source of Funds:
1970Q1
8% of The Total

1968Q1
1966Q1
1964Q1
$5 Trillion
1962Q1

Savings
1960Q1
1958Q1
1956Q1
1954Q1
1952Q1

12,000,000

10,000,000

8,000,000

6,000,000

4,000,000

2,000,000

0
Mutual Funds: Growth
Annual $ Change, Purchase or Sale of Credit Market Instruments
US$ millions, 2000 to Q1 2015
1,400,000

An increasingly signicant buyer.


1,200,000
Mutual Funds acquired more debt
instruments than any other sector
1,000,000
except the banks during Q1 2015.
800,000

600,000
$513 bn

400,000

200,000

0
2000Q1
2000Q3
2001Q1
2001Q3
2002Q1
2002Q3
2003Q1
2003Q3
2004Q1
2004Q3
2005Q1
2005Q3
2006Q1
2006Q3
2007Q1
2007Q3
2008Q1
2008Q3
2009Q1
2009Q3
2010Q1
2010Q3
2011Q1
2011Q3
2012Q1
2012Q3
2013Q1
2013Q3
2014Q1
2014Q3
2015Q1
-200,000
Monetary Authority (i.e. The Fed): Size
Ownership of Credit Market Instruments
US$ millions, 1952 to Q1 2015
12,000,000
$4.2 trillion
10,000,000 7% of The Total
Source of Funds:
8,000,000
Fiat Money CreaXon
6,000,000
Note: The Fed cant run down its balance sheet
unless someone else buys the debt instruments
it owns. That will make it very dicult for the Fed
4,000,000
to normalize its balance sheet. This explains why
the Fed plans to Xghten monetary policy by raising
2,000,000
interest rates before it sells its QE-acquired assets.
0
1952Q1
1954Q1
1956Q1
1958Q1
1960Q1
1962Q1
1964Q1
1966Q1
1968Q1
1970Q1
1972Q1
1974Q1
1976Q1
1978Q1
1980Q1
1982Q1
1984Q1
1986Q1
1988Q1
1990Q1
1992Q1
1994Q1
1996Q1
1998Q1
2000Q1
2002Q1
2004Q1
2006Q1
2008Q1
2010Q1
2012Q1
2014Q1
Monetary Authority: Growth
Annual $ Change, Purchase or Sale of Credit Market Instruments
US$ millions, 2000 to Q1 2015
1,400,000

1,200,000 Since the crisis, the Fed has been


the main purchaser of debt.
1,000,000

800,000

600,000

400,000

200,000

0
2000Q1
2000Q3
2001Q1
2001Q3
2002Q1
2002Q3
2003Q1
2003Q3
2004Q1
2004Q3
2005Q1
2005Q3
2006Q1
2006Q3
2007Q1
2007Q3
2008Q1
2008Q3
2009Q1
2009Q3
2010Q1
2010Q3
2011Q1
2011Q3
2012Q1
2012Q3
2013Q1
2013Q3
2014Q1
2014Q3
2015Q1
-200,000

-400,000
Monetary Authority: Growth
Quarter on Quarter $ Change, Purchase or Sale of Credit Market
Instruments, US$ millions, 2000 to Q1 2015
350,000

300,000
However, Fed purchases
stopped when QE 3 ended
250,000
at the end of October 2014.
200,000
Who will replace the Fed
150,000 as the major buyer of Debt?
100,000

50,000

0
2000Q1
2000Q3
2001Q1
2001Q3
2002Q1
2002Q3
2003Q1
2003Q3
2004Q1
2004Q3
2005Q1
2005Q3
2006Q1
2006Q3
2007Q1
2007Q3
2008Q1
2008Q3
2009Q1
2009Q3
2010Q1
2010Q3
2011Q1
2011Q3
2012Q1
2012Q3
2013Q1
2013Q3
2014Q1
2014Q3
2015Q1
-50,000

-100,000

-150,000
2014Q1
2012Q1
2010Q1
2008Q1
2006Q1
2004Q1
2002Q1
Ownership Of Credit Market Instruments

2000Q1
Life Insurance Companies: Size

1998Q1
1996Q1
1994Q1
US$ millions, 1952 to Q1 2015

1992Q1
1990Q1
1988Q1
1986Q1
1984Q1
1982Q1
1980Q1
1978Q1
1976Q1
1974Q1
1972Q1
Source of Funds:
6% of The Total

1970Q1
1968Q1
$3.6 trillion

1966Q1
1964Q1
1962Q1

Savings
1960Q1
1958Q1
1956Q1
1954Q1
1952Q1

12,000,000

10,000,000

8,000,000

6,000,000

4,000,000

2,000,000

0
Life Insurance: Growth
Annual $ Change, Purchase or Sale of Credit Market Instruments
US$ millions, 2001 to Q1 2015
1,400,000

1,200,000

1,000,000

Slow, but steady, accumulaXon


800,000
of debt instruments.
600,000

400,000

200,000

0
2001Q1
2001Q3
2002Q1
2002Q3
2003Q1
2003Q3
2004Q1
2004Q3
2005Q1
2005Q3
2006Q1
2006Q3
2007Q1
2007Q3
2008Q1
2008Q3
2009Q1
2009Q3
2010Q1
2010Q3
2011Q1
2011Q3
2012Q1
2012Q3
2013Q1
2013Q3
2014Q1
2014Q3
2015Q1
2014Q1
2012Q1
2010Q1
2008Q1
2006Q1
2004Q1
2002Q1
Ownership Of Credit Market Instruments

2000Q1
1998Q1
1996Q1
1994Q1
US$ millions, 1952 to Q1 2015

1992Q1
Households: Size

1990Q1
1988Q1
1986Q1
1984Q1
1982Q1
1980Q1
1978Q1
1976Q1
1974Q1
1972Q1
Source of Funds:
6% of The Total

1970Q1
1968Q1
$3.3 Trillion

1966Q1
1964Q1
1962Q1

Savings
1960Q1
1958Q1
1956Q1
1954Q1
1952Q1

12,000,000

10,000,000

8,000,000

6,000,000

4,000,000

2,000,000

0
Households: Growth
Annual $ Change, Purchase or Sale of Credit Market Instruments
US$ millions, 2000 to Q1 2015
1,400,000

1,200,000

1,000,000

800,000
Households are reducing
their ownership of debt
600,000
instruments at a signicant
400,000 rate.
200,000

-200,000

-400,000

-600,000
-$395 bn
-800,000
2000Q1
2000Q3
2001Q1
2001Q3
2002Q1
2002Q3
2003Q1
2003Q3
2004Q1
2004Q3
2005Q1
2005Q3
2006Q1
2006Q3
2007Q1
2007Q3
2008Q1
2008Q3
2009Q1
2009Q3
2010Q1
2010Q3
2011Q1
2011Q3
2012Q1
2012Q3
2013Q1
2013Q3
2014Q1
2014Q3
2015Q1
ABS Issuers: Size
Ownership Of Credit Market Instruments
US$ millions, 1952 to Q1 2015
12,000,000

$1.3 trillion (down from $4.4 tr)


10,000,000
2% of The Total
8,000,000 Source of Funds: Credit CreaXon

6,000,000

4,000,000

2,000,000

0
1952Q1
1954Q1
1956Q1
1958Q1
1960Q1
1962Q1
1964Q1
1966Q1
1968Q1
1970Q1
1972Q1
1974Q1
1976Q1
1978Q1
1980Q1
1982Q1
1984Q1
1986Q1
1988Q1
1990Q1
1992Q1
1994Q1
1996Q1
1998Q1
2000Q1
2002Q1
2004Q1
2006Q1
2008Q1
2010Q1
2012Q1
2014Q1
ABS Issuers: Growth
Annual $ Change, Purchase or Sale of Credit Market Instruments
US$ millions, 2000 to Q1 2015
1,400,000

900,000

400,000

-100,000

The sharp reducXon in the debt


-600,000
holdings by the ABS Issuers has
severely deterred credit growth
-1,100,000 (and, therefore, economic
growth) since 2008.
-1,600,000
2000Q1
2000Q3
2001Q1
2001Q3
2002Q1
2002Q3
2003Q1
2003Q3
2004Q1
2004Q3
2005Q1
2005Q3
2006Q1
2006Q3
2007Q1
2007Q3
2008Q1
2008Q3
2009Q1
2009Q3
2010Q1
2010Q3
2011Q1
2011Q3
2012Q1
2012Q3
2013Q1
2013Q3
2014Q1
2014Q3
2015Q1
Who Will Buy The Debt Now?
The Fed was buying up much/most of the credit
market instruments between 2009 and 2014, but
that has stopped.
Leading up to the crisis, the GSEs and the Issuers of
ABS rapidly expanded their holdings of debt
instruments, but the GSEs are buying much less and
the ABS Issuers are selling.
So, who will take over as buyers?
Where Will The Money Come From?
1. Savings
2. Fiat Money CreaPon
3. Credit CreaPon
1. Savings
This can be esPmated based on recent trends
in Net NaPonal Savings.
In 2015, this should amount to approximately
$400 billion, similar to 2014.
2013
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
Net NaXonal Saving
US$ billions, 1929 to 2014

1983
1981
Annual $ Change

1979
1977
1975
1973
1971
1969
1967
1965
1963
1961
1959
1957
1955

Source: Bureau Of Economic Analysis


1953
1951
1949
1947
1945
1943
1941
1939
1937
1935
1933
1931
1929

-200

-400
800

600

400

200

0
2. Fiat Money CreaXon
Here we will assume there will be no more
QuanPtaPve Easing from the Fed (although I sPll
believe there will eventually be QE 4).
So, that leaves the Fiat Money created by central
banks outside the US. We can assume that this will
be roughly the same size as the US Current Account
decit (since that has been the case in the past). This
is likely to be between $400 billion and $500 billion
in 2015.
Mirror Image
Current Account Decit = Financial Account Surplus
1980 to 2014, US$ billions
1,000
800
The larger the current account decit
became, the more money ooded
600
into the United States to nance it.
400
200
0
-200
-400
-600
-800
The Financial Account includes StaPsPcal Discrepancies & net transacPons on nancial derivaPves.
-1,000
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: Bureau of Economic Analysis Current Account Financial Account
3. Credit CreaXon I
Liquidity reserve requirements and gold-backed
money used to limit how much credit could be
created.
But now, there is no limit as to how much credit
banks (and other nancial insPtuPons) can create.
However, there is a limit as to how much of the
credit they create and lend will be repaid. That limit
is set by the ability of the borrowers to repay the
credit, which, in turn, is determined by the Income of
the borrowers.
3. Credit CreaXon II
Credit creaPon by banks generally sets o a boom that
eventually ends in a bust when the credit cannot be
repaid. Lending by banks, GSEs and ABS Issuers was
the major cause leading to the crisis of 2008.
Credit induced boom and bust cycles recur regularly.
However, the amount of credit that will be created in
any parPcular year is more dicult to predict than the
amount of money that will be saved by households or
created by central banks.
In fact, it is probably impossible to predict with any
accuracy.
Borrowing Is Easier to Forecast
Than Lending
I believe that Credit Growth drives Economic Growth.
Because of the diculty (impossibility?) of
forecasPng how much credit will be created, I have
always focused on esPmaPng how much money will
be borrowed.
Borrowing = Lending.
It is easier to forecast how much money will be
borrowed than lent.
How Much Debt Will Be Bought in 2015?
Net NaPonal Savings = $400 bn
Fiat Money CreaPon = Current Account decit = $500 bn
Credit CreaPon by Banks, GSEs & other Financial InsPtuPons = $1,200 (?)

Total: Approximately $2,100 billion.

If we assume the Fed will not create more at money through QE this year,
that means the banks and other nancial insPtuPons will have to create
more credit.
If they dont, then total credit/debt will not grow enough to keep the
economy out of recession.
This is what we are seeing. The banks assets have begun to grow
signicantly faster that the other sectors. The quesPon is: Can this
conPnue without leading to a new banking crisis?
Summary Table
Percent Ownership $ Change during
of Total Credit past 12 months
Q1 2015 Market Instruments (US$ billions) Source

Banks 18% 718 Credit Creation


Rest of The World 18% 398 Money Creation
Total GSEs 13% 108 Credit Creation
Mutual Funds 8% 514 Savings
The Fed 7% 258 Money Creation
Life Insurance Co.s 6% 105 Savings
Household 6% -395 Savings
ABS Issuers 2% -68 Credit Creation
Others 22% 322

Total 100% 1,960

Source of Funding in order of size:


1. Credit CreaXon
2. Fiat Money CreaXon
3. Savings
Total Credit Market Debt vs.
CumulaXve Net NaXonal Savings
US$ billions, 1952 to 2014
60,000

50,000

At one Xme, Savings


40,000
used to fund all the
30,000 Debt.
20,000

10,000

0
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
Total Credit Market Debt CumulaXve Net NaXonal Savings from 1929

Source: Fed and Bureau of Economic Analysis


Net NaXonal Savings as a % of
Total Credit Market Debt
1952 to 2014
120%

100%
Not any more.
80% Only 21% in 2014.

60%

40%

20%

0%
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
Source: Fed and Bureau of Economic Analysis
Where Does The Money Come From To Fund The Debt?

120%
Source of Funding: % Breakdown from 1952
Now, 54% of all the Debt is funded by Credit CreaXon.
100%

80%
54%

60%

40% 7%

18%

20%

21%

0%
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
-20%
CumulaXve Net NaXonal Savings from 1929 Rest of The World Fed Credit CreaXon

Source: Fed and Bureau of Economic Analysis


Conclusions
It is dicult to forecast the rate of credit market debt accumulaPon
(i.e. lending growth).
But, with the GSEs accumulaPon slow, the ABS Issuers selling and
Fed purchases through QE ended, the burden will be on credit
creaPon by the Banks and the other smaller Financial InsPtuPons.
The quesPon is: Will the people they lend to be able to repay the
money? If not, there will be another systemic nancial sector crisis.
Borrowing used to be funded by savings. Now it is funded primarily
by credit creaPon. This makes the economy much more sensiPve to
interest rates.
If the Fed hikes rates, the shock to the economy and the nancial
markets could be severe.
The economy would not be able to tolerate signicantly higher
interest rates without collapsing into a severe recession/depression.