Flow of funds tell a different story than bank loans

We have commented on the Fed H8 report which shows that bank lending has increased over the last year, bu the Fed flow of funds data tells a different story. In this case, there has been a significant retrenchment of both consumers and non-financial businesses. We usually expect to see a decline in business debt as they retrench but this has usually not been the case for consumers. The fall is unprecedented. The only way to reconcile some of these numbers is through the fact that credit is not available through non-bank forms. It is the shadow banking system that has contracted. We agree that there has been significant changes in the credit markets but it is not clear how the credit transmissions have changed. This transmission story has to be more closely analyzed.

The second chart shows the amount of debt outstanding which is finally declining. It is interesting to note that the debt outstanding was stable for most of the 1970's when economic growth was slow and equity prices were flat. The charts are provided by the Levy institute of Bard College.