Deflation or Inflation – Is Public Credit Setting Off Contraction in Private Credit?

posted by Nima

March 13, 2010 · Posted in General Economics 

I want to follow up on something Marc Faber said the other day in the second clip.

He said that it is true that private credit is contracting, but it is being offset by a government credit expansion.

Let’s examine this suggestion a little more closely.

I regularly publish the total contraction of total private loans and credit:

total-credit-feb-2010

This is, however, only a subset of the total credit picture. What is missing are things like corporate and government bonds, and probably some other non financial obligations.

The most comprehensive data on the total of pretty much ALL credit issued in the US is really the Federal Reserve’s Flow of Funds Report, in particular the subsection “Level tables”.

The current flow of funds report can always be accessed here and for March 11, the latest release shows us the following:

total-credit-all-sectors

Based on these numbers we can see that total credit, when measured across all sectors, has indeed been declining throughout 2009, by roughly $466 billion, in spite of a massive ramp up in public debt.

This simply shows us the magnitude of the deflationary forces in action.

I would also add to this that we could easily double the total credit outstanding above if we included the federal government’s Medicare and Social Security obligations which nominally amount up to $43 trillion and will never be fully paid back. There is no official number to track for this since these obligations are not reported on any balance sheet and are not traded on any markets. Thus we can only assume that their present value is declining by at least the current rate of decline in the remaining credit volume (about 0.8% through 2009).

This would bring the total contraction in credit up to around $810 billion through 2009.

I’m also not sure to what extent other municipal and state pensions are covered in the flow of funds number, but I rather doubt they are included at all. A lot of those lavish union pension plans are going to have to cut back on their commitments soon, probably the next big events to shake the markets, along with commercial real estate defaults and property values declining.

And last but not least, it is rather unlikely that the current numbers are all marked to market. Government regulations across the board have ensured that banks and corporations can be rather creative in their reporting.

Either way, all this is a rather strong indication that Marc Faber’s assertion may not me correct.

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