Karl Denninger notes the latest Z1 report:
We’re where we were in Q3 2007 on a ratio basis, which is hardly “healthy” by any stretch. And if you look closely you’ll see that the debt number is going up — and faster than the GDP one is. Where’s it going up? In Federal Government, that’s where. We’re simply shifting where the debt resides. Are we making any material progress? No. In fact, last quarter we added more debt than we did GDP. Therefore, we’re still going backward.
That’s not quite true when viewed from a larger perspective. By my calculations, the debt/GDP ratio has fallen from 3.75 to 3.48 since Q2-2008. The problem, however, is that the debt-shifting that Karl describes is even more significant than most people who know about it grasp. The federal government has not only increased its outstanding debt by 105.76 percent, but as I will show in my column tomorrow, it has provided 168 percent of the $3.3 trillion in post-crisis credit growth. This means that when people talk about the economy needing $3 in new debt to purchase $1 in GDP growth, they are failing to account for the decline in private credit. In other words, the federal government has needed to take on $5.21 in new debt in order to purchase $1 in new nominal GDP.
But that’s not what I found most interesting about the latest report. First, the amount of possible statistical shenanigans appears to be increasing. I keep track of the numbers according to the initial reports, and whereas the federal government number is always static from quarter to quarter, the other numbers tend to change dramatically. The biggest change I’ve seen was in State and Local Governments, which showed a mysterious $500 billion increase (+23.77 percent) in Q3-2011, but the one that caught my attention is the sudden growth in corporate debt during 2011. Corporate debt had been basically flat from 2008 through the first quarter of 2011, but for last three quarters it has suddenly averaged 3.62 percent quarterly debt growth. It was 4.46 percent in Q1-2012, which is between 2x and 3x normal. The last time we saw this sort of corporate debt growth, it ran 3.16 percent for a year, ending in the second quarter of 2007.
I don’t know if this could be some sort of indication that federal government is feeding loans to corporations or if it suggests that corporations go on debt binges prior to economic crises. I tend to doubt the former since the financial sector is still contracting and I’d have to do a lot more research before I could possibly conclude the latter. Either way, it doesn’t strike me as being an entirely innocuous development.