The $30 trillion demand gap

The good news: outstanding credit is still growing. L1 grew 0.69 percent in Q1-2014. This is still credit disinflation, as it is below the 60-year 2.36 percent quarterly growth rate, but it is not outright deflation.

The bad news: all of that growth comes from the federal and corporate sectors. Household was positive flat, state and local government was negative flat, and financial went negative again after five months of being positive flat. The worse news is that the credit demand gap is growing; it has now reached $30 trillion.

In other words, that’s how far off the US economy is from one that continued at its 60-year pace of growth. That’s why things look and feel so terrible despite the nominally positive economic statistics. Were it not for the $2.4 trillion in new corporate debt and the $7.1 trillion in new federal debt since 2008, the ongoing state of economic depression would be obvious. As one can see from the chart, there is absolutely no indication of any recovery for either US households or US financial institutions.

So, there are two obvious questions:

  1. How much more debt can the Fed force-feed the federal government and the corporations before they can’t service it?
  2. Will that new debt be a) defaulted or b) rolled-over when it becomes due?

The idea was that federal debt-spending would jump-start the two more important sectors. But not only has that not happened, but now the two government sectors combined are larger as a percentage of the total than either Household or Financial sectors. And at the current rate, the Federal sector alone will be bigger than the Household sector by Q2-2015 and the Financial sector by the end of next year.

And the really bad news? Of the $13.1 trillion in Household debt, 8 percent of it is student debt. Which means the credit demand has been pulled forward, as those indebted students are much less likely to be able to take on credit card, auto, and mortgage debt in the future. In fact, without the tripling of student loan debt in the last decade, the Household sector’s decline would be twice what it is now: it would be 10 percent credit deflation despite a growing population.

Data released by the Federal Reserve Bank of New York suggests that the relationship between student loan debt and the housing market has turned ugly fast. People with student debt used to buy homes at higher rates than peers who had not taken out loans, partly because going to college meant earning more money, according to the report.

But in 2012, the New York Fed reported that for the first time in at least a decade, 30-year-old student borrowers were less likely to take out home mortgages than other young people.  Among people around 30 years old, homeownership was plunging fastest for student debtors.

Having already devoured the weak, the starving debt-predators are now being forced to devour the young before they are capable of being safely milked for decades.