Thursday, June 05, 2003

The Federal Reserve released its quarterly Flow of Funds Accounts report today, and the reading is interesting. Since the General asked earlier how the US economy can continue to mop up its excess production, the Fed was kind enough to provide the answer: big increases in household debt.

In 2003:I, household debt rose a robust 10.0% annualized. The business press was quick to point out how this is a decline from the 2002:IV figure of +10.9%. Still, 2003:I matches the overall growth of household debt in all of 2002 and is the second-highest rate of growth in fifteen years.

When the General asks who can mop up all these excess goods and services, it's important to point to government consumption as well, which is also galloping forward on credit. State and local government debt grew 10.1% in 2003:I, which amazingly enough is down from the red-hot borrowing days of 2002 when state/local government increased debt levels 14%, 10.6% and 15% in consecutives quarters. The private sector has little enthusiasm for increasing its debt levels -- up just 3.7% in 2003:I -- and why would they when there's no use borrowing to produce when there aren't any new consumers!

The vast majority of household borrowing is -- surprise surprise -- in the form of home mortgages and home equity loans. Probably a good idea to read The Economist's excellent recent series on housing bubbles again.

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