Friday, July 12, 2013

Financial Sector Liabilities, 2006 thru 2007 vs Increase in Federal $NFA Injections over the same time period

Data on Financial Business Liabilities from the first of 2006 thru the end of 2007:

2006-01-01 13282.61
2006-04-01 13653.19
2006-07-01 13900.80
2006-10-01 14260.51
2007-01-01 14783.11
2007-04-01 15168.47
2007-07-01 15808.05
2007-10-01 16204.48

Data here.  Looks like a 24 month build of $3T at a time when the Fed had the policy rate above 5%.

That's a lot of nut. (And btw doesn't include non-financial business...)

Looking at Federal Net Spending for 2005 here, we can compute that Net Spending ended up at  $2.770T    for FY 2005, while Net Spending for FY 2007 ended up at $3.081T .

So that represents an increase in leading $NFA flows of $311B/year during a time when just the non-govt financial sector was issuing an additional $3T of liabilities in an environment with a policy rate north of 5%.

This doesn't look like the government increased the rate of $NFA injection in an amount sufficient to provision the non-government with enough additional $NFA for the net liability cohort in the non-government to be able to successfully service the additional $3T+ of interest bearing liabilities the non-government sector was allowed to issue during this same time; leading to many failures of the debt securities issued to establish the $3T+ of new liabilities... fraud or no fraud.


Anonymous said...

I read it a few times. What are you saying Matt?

mike norman said...

Matt Franko states the definitive reason as to why the market and economy tanked in '07-'08.

If government does not supply enough $NFA at a time when the non-government is rapidly increasing its liabilities, the whole system becomes unstable and crashes.

Matt Franko said...


Trying to drill into this from Warren which he has been asserting going back to when the GFC was happening in real time and he would go on Mike's show:

"Additionally, the risk of it all going into reverse is mounting as well. This happens when the deficit- the net financial equity of the economy- isn’t sufficient to support the credit structure that’s supporting growth. And the way the deficit gets higher is via the automatic fiscal stabilizers going into reverse- the slowing economy increases transfer payments and reduces revenues."

We need more than "Warren's intuition"... imo we can create an information system that tracks/monitors this phenom in near real time and in the future avoid the chaos that usually ensues...

We have to monitor what Warren calls here "the credit structure" and its details; and we have to monitor the rate of $NFA injection that is being supplied (ultimately) to Paul's 'Net Liability Cohort' in order to determine if this cohort has the capability to successfully service the new system liabilities as they are added....

The govt can outsource this function of 'fiscal agent' to the non-govt, but at the same time, the govt retains certain responsibilities for system $NFA provision required when the govt allows the non-govt fiscal agents to increase system liabilities...

the non-govt cant do this all by itself...


Anonymous said...

Matt, how do we measure how much net equity the private sector has to have in order for it to be able to service it's debt?

Matt Franko said...


I think ultimately it will be a flow(s) that has to be monitored... some component of Fed govt xfers... we could increase xfers in response to a systemic flow deficiency... like we could do "helicopter drops" for a while...

Not necessarily a stock like "net equity" here...


Anonymous said...

thanks Matt