The year-over-year rate of growth of the money stock measures has never declined during the Great Recession of 2008-2009.
The recession began in December 2007. In January 2008 the year-over-year rate of growth of the M2 measure of the money stock was 6.0%; the M1 measure was growing at 0.5%. Currently, the M2 measure is growing at a 3.0% year-over-year rate of growth; the M1 measure is growing at 6.3%
The interesting thing about the behavior of these money stock measures is what happened within each measure. I have regularly reported on this behavior over the past 18 months or so. (See, for example, “The Recent Behavior of the Monetary Aggregates”: http://seekingalpha.com/article/218818-the-recent-behavior-of-the-monetary-aggregates.)
Looking at the monetary aggregates over this period of time reveals two movements. The first movement is the transferring of funds from small time and savings deposits and short-term money funds into transaction balances. The second movement is the transferring funds from thrift institutions to commercial banks. These movements can be attributed to the low interest being paid on these accounts and in these funds and to the employment uncertainty that hovers over many families in the United States. This is not a real positive sign in terms of a country attempting to get its economy going again.
Over the past three months, the Federal Reserve System has ended its “exit strategy” and taken a more neutral stance with respect to monetary policy. (See http://seekingalpha.com/article/233760-federal-reserve-non-exit-watch-part-3.) At the present time, the world seems to be waiting for another effort at Quantitative Easing. (See http://seekingalpha.com/article/233773-bernanke-s-next-round-of-spaghetti-tossing.)
Regardless of what these “grand” strategies are and what they might accomplish…or, not accomplish…it is still instructive to see what people actually seem to be doing with their money.
Basically, when looking at the monetary aggregates we see the same behavior over the past several months that we have seen exhibited by the private sector over the past twenty-four months. People continue to transfer their wealth into transactions balances and currency holdings while reducing wealth held in the smaller savings deposits and in retail money funds.
That is, the families and individuals still believe that they can most be prepared for the future by keeping their money is ways that can be spent without having to transfer funds from other accounts in order to be able to spend them. Any interest that might be earned on these latter balances is just too small to warrant these people from being any more less liquid.
Overall, the M1 measure of the money stock in the third quarter of 2010 was 5.3% higher than it was one year ago. The quarterly year-over-year growth rates for M1 fell during the year, averaging 7.9% in the first quarter of 2010 and 5.5% in the second quarter.
The M2 measure remained relatively constant in the first and second quarter of this year, averaging 1.9% and 1.6% respectively, but increased at a 2.5% rate in the third quarter. The non-M1 component of the M2 measure only increased at a 0.5% year-over-year rate of growth in the first quarter; it rose to 0.7% in the second quarter; and rose by 1.8% in the third quarter.
The biggest change contributing to the rise in the non-M1 component of M2 was the slowdown in the rate of decline in money held in Retail Money Funds. In the six months of the year, these accounts declined at a rate slightly more 25%. However, the rate of decline dropped to about 22% in the third quarter. Overall, retail Money Funds dropped by more than $160 billion from September 2009 to September 2010.
The decline in small time deposits stayed around 22% all year. Small time deposits fell by almost $280 billion from September 2009 to September 2010.
Where have these funds gone? Primarily into transaction balances.
The growth rate of demand deposits at commercial banks has remained relatively robust over the past year. This growth, connected with the decline in small time accounts and retail money funds, is the reason why the rate of increase in the M1 measure was greater than the growth rate of the M2 measure.
Demand deposits rose at a 7.6% year-over-year rate of increase in the first quarter of 2010; the growth rates for the rest of the year were 6.3% in the second quarter and 8.5% in the third quarter.
The interpretation of all this is as follows: people have, once again, begun re-allocating more of their wealth into transactions balances and currency. Although this movement slowed earlier this year, it began to pick-up once again in the third quarter.
In a real sense, this is not encouraging. To me this movement is what happens when people and businesses transfer their wealth into forms that are convenient for daily needs in order to purchase necessities. This deposit growth is not coming because the Federal Reserve is pumping a lot of base money into the banking system. The growth is not coming because the commercial banks are lending…they are not lending. This movement of funds seems to be to purchase the basic goods needed to live and survive.
The good news is that the money stock measures are growing. The not-so-good news is that the money stock growth is growing because people and businesses need to keep their funds very liquid for the purpose of daily living.
I cannot believe that a new round of quantitative easing is going to change this picture.
NOTE: Money going to Institutional Money Funds actually began to increase in absolute value in July 2010 and continued to increase through September. The year-over-year rate of decline in these monies is still quite large (-23% in the third quarter) but it is a smaller decline than from the first two quarters of the year.
Showing posts with label Household wealth. Show all posts
Showing posts with label Household wealth. Show all posts
Wednesday, November 3, 2010
Thursday, June 17, 2010
No Housing Recovery In Sight
Households, as a group, are gaining ground financially, but are still far below where they were in 2007. This, along with other weaknesses in the economy, is going to continue to contribute to the weakness in the economic recovery now taking place.
One place this weakness is particularly evident is in the housing sector. The recovery of the housing market helped to lead the economy out of every previous recession in the post-World War II period. In the recent experience, this has not been the case, even with special incentive programs created by the federal government to spur along a rebound.
The figure on housing starts in May 2010, an annual rate of 593,000, confirmed this continued weakness.
One place this weakness is particularly evident is in the housing sector. The recovery of the housing market helped to lead the economy out of every previous recession in the post-World War II period. In the recent experience, this has not been the case, even with special incentive programs created by the federal government to spur along a rebound.
The figure on housing starts in May 2010, an annual rate of 593,000, confirmed this continued weakness.
The recession ended in July 2009, yet housing starts have hovered around a 600,000 unit annual rate ever since. The highest figure recorded during this time period was an annual rate of 659,000 in April of this year, but the pace dropped off once again in May.
At this time, Americans are just not in a position to acquire housing. If we look at the financial position of United States households since the year 2007, according to the Flow of Funds accounts released by the Federal Reserve, the net worth of households has decline by slightly less than $10 trillion. Year-over-year, from the first quarter of 2009 through the first quarter of 2010, household net worth has risen by a little more than $6 trillion, but almost all of this increase has been in the value of equity shares, something that is not a part of the balance sheets of Main Street America. The value of tangible assets, including the value of homes, has fallen by $5 trillion since 2007 and increased only modestly year-over-year. Again, the beneficiary of any gain here has not been Main Street America.
The plight of the American household is captured in the percentage of households owning their own home and who actually have no equity in the home they are living in. David Wessel captures this dilemma in his Wall Street Journal article this morning, “Rethinking Part of the American Dream,” http://online.wsj.com/article/SB10001424052748703513604575310383542102668.html?mod=WSJ_hps_RIGHTTopCarousel_1. He cites data from the Federal Reserve Bank of New York: for example, in San Diego, 55% of households owned their own home, but the fraction of these households that had equity in their homes was between 35% and 39%; in Las Vegas, only 15% to 19% of households had equity in their homes, even though 59% of those households owned their own home. In the cities reported, Boston, Chicago, and Atlanta scored the highest in owners having equity in their own home.
And, with one out of every four or five working age people being under-employed, it is highly unlikely that there will be a stronger recovery in the housing market in the near future.
Ethan Harris of Bank of America Merrill Lynch is quoted as saying “We’re not going to see a real recovery in the housing market until the foreclosure process gets worked out. That’s…a 2012 event.” (http://online.wsj.com/article/SB10001424052748704009804575309692681916212.html?mod=WSJ_WSJ_US_News_5)
Delinquencies on mortgages seem to have leveled out but they still remain at a high level. Also, foreclosures remain at a high level.
The performance of loans that have been restructured remain dismal: see my post “Eventually Debt Must Be Repaid, http://seekingalpha.com/article/210365-eventually-debt-must-be-repaid. Sixty-five to seventy-five percent of the loans restructured in the Treasury’s loan restructuring plan “re-default.”
And, banks continue to stay on the sidelines in terms of making new loans, especially mortgage loans. With one out of every eight commercial banks on the FDIC list of problem banks and many more on the edge, housing is just not going to show much bounce in upcoming months.
Households, according to the Federal Reserve data, are reducing the amount of debt outstanding, but at a relatively slow pace. This is where, I think, it is important to think about how the country is dividing along two lines, between those that are doing quite well, thank you, and those that are really struggling.
As I mentioned, the value of the financial assets of U. S. Households rose by about $5.5 billion last year, most of the increase coming in the market value of equity shares. However, those benefitting from the rise in the value of equities are generally not the ones that own a home with no equity in it. They are generally the people that are still employed and have a sufficient income. Also, they are not the ones that are in debt in a major way.
In my post on debt repayment, I quoted a report by Fitch Ratings Ltd. indicating that the individuals that were in the mortgage re-structuring program were also heavily in debt on credit cards, car loans, and other obligations. People in this second group are the ones that are excessively in debt and have neither the accumulated wealth nor the current income to pay down their debt.
It is this debt that still must be worked off before the recovery can have any bounce to it. Resolving this debt burden will also go a long way to helping the banking system regain its legs.
Consumer spending may increase modestly, housing starts may gain some, but the Americans that are in this second group will not be the ones contributing to these increases until they get their finances back in order and that may take a long time. To see this in another way, check out what is actually being purchased by consumers. Much of it is up-scale, not ordinary “stuff.”
Thursday, March 12, 2009
Households and the Debt Problem
The Federal Reserve released new data on the financial condition of the household sector of the United States. Like other sectors of the economy, the financial condition of this sector has deteriorated over the past year.
The value of household assets dropped about 15% falling from $77.3 trillion to around $65.7 trillion. Most of the decline came from the fall in housing values and in their stock market portfolios.
In terms of household holdings of stocks, the value of the stocks households owned, mutual funds that were held and funds in retirement plans, the loss was $8.5 trillion. That is, the value of stock holdings fell from $20.6 trillion to $12.1 trillion.
Although mortgage credit fell during the year, total household liabilities stayed roughly the same at about $14.2 trillion. This means that debt as a percentage of assets rose from around 18% to 22% during the year (or net worth as a percentage of assets dropped from 82% to 78%).
Mortgage credit at the end of 2008 was $10.5 trillion so that other household liabilities totaled around $3.7 trillion, with consumer credit making up $2.6 trillion of this latter number. Mortgage credit fell during the year, but not because the household sector was trying to get out of mortgage debt. The primary reason for the decline was foreclosures and the reduction in the willingness of financial institutions to lend.
What this means is that households took on increased leverage during the year, not because they wanted to in order to grow their balance sheets, but because of the decrease in the value of their assets and because of the need to borrow due to lower incomes. The increased leverage was a result of the collapse of the mortgage market, in particular, and the economy, in general. The increased leverage just happened—it was not planned.
In order to protect themselves in the face of these changes, households moved assets into cash and cash equivalent accounts. Banks deposits held by households were at about $7.7 trillion at year end.
This is important information for understanding the state of the economy and the contribution the household sector might make toward turning the economy around. The household sector was in free fall in 2008 and was reacting to events, not leading them.
Households took three major shocks last year: first was the decline in housing prices; the second was the rise in unemployment; and the third was the fall in the stock market. Not only was their cash flow significantly hurt, but the value of their assets fell precipitously. They borrowed in an effort to hold on and they became more liquid so as to be prepared for that “rainy day.”
The year 2009 does not look any better than 2008. Housing prices continue to plummet. The stock market has dropped since the first of the year. And, unemployment has ratcheted up. That is, one can assume that the direction observed in the balance sheets of American household in 2008 will continue to be followed this year. Even if the stock market were to stabilize or rise through the rest of the year consumer spending, I believe, will continue to be weak. Even if housing prices stabilize. Even with the implementation of the Obama stimulus plan.
According to the best information we have there are three further shocks looming on the horizon. The first two have to do with the mortgage market: over the next 18 a large amount of Alt-A and Options mortgages are supposed to re-price. Given the weakness in employment that is expected to continue and the lower household incomes, this event could be devastating. And, on top of that credit card delinquencies are rising and these are expected to grow given the financial condition of the household sector.
Consumers will continue to withdraw from the marketplace as they add debt where they can in order to maintain at least a part of their former living standards. Also, consumers will continue to try and become more liquid so that they can be prepared should they need to need cash to tide them over a rough time. Any improvement in the stock market will be met with households selling more stock so as to move the funds into more liquid assets, the rise in the market making it easier for them to get rid of stocks—even at a loss.
And where are the funds going to go that come to households from the Obama recovery plan? My guess is that a good portion of them will go into liquid assets, or into paying down debt. Households are scared right now. They are going to use whatever they have as conservatively as possible. This even goes for those that have some security in their employment condition.
The data that are coming out confirm the strength of the problem that the policy makers face. The United States has a tremendous debt overhang. This debt problem is going to have to be worked off. Economists talk about “the paradox of thrift”, the problem that consumers are not spending at this time and probably will not spend much in the near future, even though if everyone opened up their pocketbooks and spent, everyone would be better off.
This situation is like a “Prisoner’s Dilemma” game. If everyone else increases their spending reducing their savings and, willingly, increasing their debt and I don’t follow their lead, then I will be a lot better off that all these other people. But, if everyone else believes as I do and doesn’t reduce their savings and doesn’t increase their debt, then I end up losing big to everyone else. So, as in the “Prisoner’s Dilemma” everyone defaults to the decision to save more where they can and to pay off their debt. The consequence of this will be that consumer spending will remain weak and much effort will be extended, where possible, to work themselves out of debt.
The overall problem is that there is too much debt outstanding. The policy makers are focusing upon stimulating the economy by increasing spending. If the debt overhang is truly too great, then the stimulus package will only have a small multiplier effect on the economy as households try and get their balance sheets back in some kind of order.
Such behavior will not have much affect on the economy, and it will also not have much affect on the stock market. Government policy makers must direct more attention to resolving this debt problem. It seems to me that this is what the financial markets are trying to tell them. As Citigroup and Bank of America claim they are showing some signs of profitability. As General Electric survives a reduction in its credit rating, meaning that GE Capital has more of a chance to re-structure itself. As General Motors indicates that it has reduced costs sufficiently to rescind the request for another $2 billion from the government in March. And, as other financial institutions seek to repay to TARP money they had received last fall, the stock market rebounds.
It is the debt problem that is the big concern of the financial markets. In my opinion, as long as the government policy makers put their primary focus on stimulating spending, the financial markets—and the economy—will continue to flounder. When they refocus on the more crucial problem they will find that the financial markets will be more supportive of what they are doing.
The value of household assets dropped about 15% falling from $77.3 trillion to around $65.7 trillion. Most of the decline came from the fall in housing values and in their stock market portfolios.
In terms of household holdings of stocks, the value of the stocks households owned, mutual funds that were held and funds in retirement plans, the loss was $8.5 trillion. That is, the value of stock holdings fell from $20.6 trillion to $12.1 trillion.
Although mortgage credit fell during the year, total household liabilities stayed roughly the same at about $14.2 trillion. This means that debt as a percentage of assets rose from around 18% to 22% during the year (or net worth as a percentage of assets dropped from 82% to 78%).
Mortgage credit at the end of 2008 was $10.5 trillion so that other household liabilities totaled around $3.7 trillion, with consumer credit making up $2.6 trillion of this latter number. Mortgage credit fell during the year, but not because the household sector was trying to get out of mortgage debt. The primary reason for the decline was foreclosures and the reduction in the willingness of financial institutions to lend.
What this means is that households took on increased leverage during the year, not because they wanted to in order to grow their balance sheets, but because of the decrease in the value of their assets and because of the need to borrow due to lower incomes. The increased leverage was a result of the collapse of the mortgage market, in particular, and the economy, in general. The increased leverage just happened—it was not planned.
In order to protect themselves in the face of these changes, households moved assets into cash and cash equivalent accounts. Banks deposits held by households were at about $7.7 trillion at year end.
This is important information for understanding the state of the economy and the contribution the household sector might make toward turning the economy around. The household sector was in free fall in 2008 and was reacting to events, not leading them.
Households took three major shocks last year: first was the decline in housing prices; the second was the rise in unemployment; and the third was the fall in the stock market. Not only was their cash flow significantly hurt, but the value of their assets fell precipitously. They borrowed in an effort to hold on and they became more liquid so as to be prepared for that “rainy day.”
The year 2009 does not look any better than 2008. Housing prices continue to plummet. The stock market has dropped since the first of the year. And, unemployment has ratcheted up. That is, one can assume that the direction observed in the balance sheets of American household in 2008 will continue to be followed this year. Even if the stock market were to stabilize or rise through the rest of the year consumer spending, I believe, will continue to be weak. Even if housing prices stabilize. Even with the implementation of the Obama stimulus plan.
According to the best information we have there are three further shocks looming on the horizon. The first two have to do with the mortgage market: over the next 18 a large amount of Alt-A and Options mortgages are supposed to re-price. Given the weakness in employment that is expected to continue and the lower household incomes, this event could be devastating. And, on top of that credit card delinquencies are rising and these are expected to grow given the financial condition of the household sector.
Consumers will continue to withdraw from the marketplace as they add debt where they can in order to maintain at least a part of their former living standards. Also, consumers will continue to try and become more liquid so that they can be prepared should they need to need cash to tide them over a rough time. Any improvement in the stock market will be met with households selling more stock so as to move the funds into more liquid assets, the rise in the market making it easier for them to get rid of stocks—even at a loss.
And where are the funds going to go that come to households from the Obama recovery plan? My guess is that a good portion of them will go into liquid assets, or into paying down debt. Households are scared right now. They are going to use whatever they have as conservatively as possible. This even goes for those that have some security in their employment condition.
The data that are coming out confirm the strength of the problem that the policy makers face. The United States has a tremendous debt overhang. This debt problem is going to have to be worked off. Economists talk about “the paradox of thrift”, the problem that consumers are not spending at this time and probably will not spend much in the near future, even though if everyone opened up their pocketbooks and spent, everyone would be better off.
This situation is like a “Prisoner’s Dilemma” game. If everyone else increases their spending reducing their savings and, willingly, increasing their debt and I don’t follow their lead, then I will be a lot better off that all these other people. But, if everyone else believes as I do and doesn’t reduce their savings and doesn’t increase their debt, then I end up losing big to everyone else. So, as in the “Prisoner’s Dilemma” everyone defaults to the decision to save more where they can and to pay off their debt. The consequence of this will be that consumer spending will remain weak and much effort will be extended, where possible, to work themselves out of debt.
The overall problem is that there is too much debt outstanding. The policy makers are focusing upon stimulating the economy by increasing spending. If the debt overhang is truly too great, then the stimulus package will only have a small multiplier effect on the economy as households try and get their balance sheets back in some kind of order.
Such behavior will not have much affect on the economy, and it will also not have much affect on the stock market. Government policy makers must direct more attention to resolving this debt problem. It seems to me that this is what the financial markets are trying to tell them. As Citigroup and Bank of America claim they are showing some signs of profitability. As General Electric survives a reduction in its credit rating, meaning that GE Capital has more of a chance to re-structure itself. As General Motors indicates that it has reduced costs sufficiently to rescind the request for another $2 billion from the government in March. And, as other financial institutions seek to repay to TARP money they had received last fall, the stock market rebounds.
It is the debt problem that is the big concern of the financial markets. In my opinion, as long as the government policy makers put their primary focus on stimulating spending, the financial markets—and the economy—will continue to flounder. When they refocus on the more crucial problem they will find that the financial markets will be more supportive of what they are doing.
Subscribe to:
Posts (Atom)
