Karl Denninger doesn’t see much more good news in the current Z1 release than I do. It’s not overtly bad, at first glance, but even if the pattern of corporate debt expansion combined with household contraction isn’t immediately problematic, it is clear that the continued expansion of government sector debt is only keeping the economy in a state of disinflation.
Consumer debt has gone exactly nowhere. The so-called “recovery” has been carried by business debt that has grown at a rate roughly double that of economic expansion, and the government is growing debt at a rate more than triple that rate…. Note that the absolute level of debt to GDP, however, refuses to go under 350%; it has now started rising again but is entirely coming from two sectors — business credit and the Federal Government. The problem with this paradigm is that we’re doing the same thing that led to the 2008 blowup — we’ve learned exactly nothing. In real terms our GDP is in fact contracting by about $500 billion a quarter, after adjusting for debt expansion — that’s $2 trillion a year, more or less.
I prefer to look at what I call Zn, which is Z1 estimated as if it had continued to grow at the sixty-year historical rate of 2.36 percent that was required to fuel the post-WWII economic growth. Regardless of when one begins, Zn tracked Z1 very, very closely until 2008, and the gap is still widening. Although Z1 grew 1.28 percent, (47 percent of which was federal government debt), that didn’t prevent the disinflationary gap from growing another $1.1 trillion in Q1.
The credit demand gap is now approaching $25 trillion, which is not only more than the entire annual GDP, but amounts to 43 percent of total outstanding credit market debt. And federal sector debt, which in 2005 was less than half the household sector debt, now virtually equals it in size.