Largest Credit Contraction in History

By Jeff Harding

There is a lot of interesting information this morning. I apologize for doing a bit of news “scraping” from other sites, but I’m still on holiday.

There was a report from Mish’s Global Economic Trend Analysis who in turn was commenting on a report from Martin Weiss who publishes research at his Money and Markets site. Weiss takes a look at the Flow of Funds report for Q1 published by the Fed. Weiss’s conclusion: The first quarter brought the greatest credit collapse of all time.

Open Market Paper: Instead of growing as it had in almost every prior quarter in history, it collapsed at the annual rate of $662.5 billion. (See line 2.)

Banks lending: Credit markets [collapsed] at the astonishing pace of $856.4 billion per year, their biggest cutback of all time (line 7).

Nonbank lending: (line 8.0) pulled out at the annual rate of $468 billion, also the worst on record.

Mortgage lenders: (line 9) pulled out for a third straight month. (Their worst on record was in the prior quarter.)

Consumers: (line 10) were shoved out of the market for credit at the annual pace of $90.7 billion, the worst on record.

The ONLY major player still borrowing money in big amounts was the United States Treasury Department (line 3), sopping up $1,442.8 billion of the credit available — and leaving LESS than nothing for the private sector as a whole.

Here’s Weiss’s chart:

Click to Enlarge

Weiss goes on to say in his flamboyant style:

• Asset-backed securities (ABS) got hit even harder.
• US security brokers and dealers were smashed.
• Government agencies got killed.
• Mortgages got chopped again.
• Trade credit is dying.

I’ll let you go to Weiss’s site to get the details on the above.

Weiss also says that:

In U.S. households alone, the losses have been massive: $1.39 trillion in the third and fourth quarters of 2007 (not shown on page 105) … a gigantic $10.89 trillion in 2008 …$1.33 trillion in the first quarter of 2009 … $13.87 trillion in all, by far the worst of all time.

And these losses have equally massive consequences for 2009 and 2010:

• Deep cutbacks in consumer spending ahead, plus a virtual disappearance of conspicuous consumption …
• More massive sales declines at most of America’s giant manufacturers, retail firms, transportation companies, restaurants, and more, plus …

Then, in this morning’s Wall Street Journal was the employment report:

The number of U.S. workers filing new claims for jobless benefits rose slightly last week, suggesting that while job losses have moderated since the beginning of the year, a rapid turnaround in labor-market conditions is unlikely.

Initial claims for jobless benefits rose 3,000 to 608,000 in the week ended June 13, the Labor Department said Thursday. The four-week average of new claims, which aims to smooth volatility in the data, fell 7,000 to 615,750, the lowest level since mid-February.

The tally of continuing claims — those drawn by workers for more than one week — fell 148,000 during the week ended June 6 to 6,687,000, the first weekly decline since the Jan. 3 week and largest since Nov. 24, 2001.

Separately, personal income fell in 37 states during the first quarter, the U.S. Commerce Department said Thursday.

Big losses replacing profits at most U.S. corporations!

And:

The unemployment rate in the West jumped over 10% last month, the first time that regional threshold has been broken in about 25 years. On the state level, eight set record-highs and only two — Nebraska and Vermont — didn’t report increases.

The Labor Department reported Friday that 48 states and the District of Columbia saw employment conditions deteriorate last month. The fallout from the longest recession since World War II, was the worst in Michigan as automakers cut tens of thousands of jobs. Its unemployment rate rose to 14.1%.

The West region reported the highest jobless rate at 10.1%. The last time any region had a rate of at least 10% was September 1983, when the country was emerging from a severe recession. …

The national jobless rate has hit a quarter-century high of 9.4%, and there’s more pain ahead as millions of unemployed Americans find scarce opportunities to land new jobs.

Let me remind you that I’ve been arguing that we are currently still in a deflation, not inflation. Banks are still sitting on a pile of credit waiting … I argue that this has been the biggest credit boom and bust in history and that the “bust” part is still going on, “green shoots” notwithstanding.

The excellent Austrian economist, Robert Murphy, argues that there is inflation as a result of the huge pump priming by the Fed. He argues that the reason we are not seeing inflation is that the deflation is masking its effects. That is, we would have much greater deflation without the inflation, and that the inflation would be much greater without the deflation.

I feel like Cassandra this morning.