For the week, the S&P500 was little changed (up 22.5% y-t-d), while the Dow added 0.8% (up 19.3% y-t-d). The S&P 400 Mid-Caps increased 0.5% (up 31.1%), while the small cap Russell 2000 declined 0.4% (up 20.2%). The Morgan Stanley Cyclicals added 0.5% (up 69.6%), while the Transports dipped 0.2% (up 15.7%). The Morgan Stanley Consumer index declined 0.3% (up 22.7%), and the Utilities jumped 4.0% (up 7.1%). The Banks dropped 1.5% (down 1.6%), and the Broker/Dealers fell 2.5% (up 45.2%). The Nasdaq100 was unchanged up 47.9%), while the Morgan Stanley High Tech index gave back 0.6% (up 62.4%). The Semiconductors were little changed (up 58.0%). The InteractiveWeek Internet index slipped 0.3% (up 70.0%). The Biotechs added 0.1% (up 40.7%). With bullion ending the week down $47, the HUI gold index was hit for 5.8% (up 46.7%).

One-month Treasury bill rates ended the week at zero bps, and three-month bills closed at 2 bps. Two-year government yields declined 2 bps to 0.73%. Five-year T-note yields were unchanged at 2.16%. Ten-year yields gained 8 bps to 3.55%. Long bond yields jumped 11 bps to 4.51%. Benchmark Fannie MBS yields added one basis point to 4.26%. The spread between 10-year Treasury and benchmark MBS yields narrowed 7 to 71 bps. Agency 10-yr debt spreads narrowed 2 bps to 41 bps. The implied yield on December 2010 eurodollar futures declined 12.5 bps to 1.25%. The 10-year dollar swap spread declined 2.25 to 12.25 bps, and the 30-year swap spread declined 3.25 to negative 16.75 bps. Corporate bond spreads were mixed. An index of investment grade bond spreads widened 4 bps to 141, while an index of junk spreads narrowed 17bps to 560 bps.

Another big week of debt issuance. Investment grade issuers included Blackrock $2.5bn, Time Warner Cable $2.0bn, Boston Scientific $2.0bn, TCM $885 million, Hess $750 million, CVS $740 million, National Money Mart $600 million, Dupont Fabros $550 million, US Bancorp $500 million, Total Capital $500 million, Georgia Power $500 million, American Transmission $400 million, New York Life $350 million, Goodrich $300 million, Lincoln National $300 million, Wisconsin Electric Power $250 million, ITC $200 million, and Public Service New Hampshire $150 million.

Junk bond funds reported inflows of $135 million. Junk issuers included Ford Motor Credit $750 million, Goodman Global $590 million, NII Capital $500 million, Sandridge Energy $450 million, American Axle $425 million, Pinnacle Foods $300 million, JDA Software $275 million, Cascades Inc $250 million, Bumble Bee Foods $220 million, Primus Telecom $130 million, Intcomex $120 million, and Calfrac $100 million.

I saw no convert issues this week.

International dollar-denominated debt issuers included Westpac Banking $3.0bn, Wind Acquisition $625 million, Desarrolladora Homex $250 million, and Sigma Alimentos $250 million.

U.K. 10-year gilt yields surged 25 bps to 3.86%, while German bund yields declined 3 bps to 3.21%. Bond yields in Greece jumped 29 bps to 5.29%. The German DAX equities index declined 1.1% (up 19.7% y-t-d). Japanese 10-year "JGB" yields were little changed at 1.28%. The Nikkei 225 added 0.9% (up 14.1%). Emerging markets were mixed. For the week, Brazil's Bovespa equities index jumped 2.5% (up 84.5%), while Mexico's Bolsa slipped 0.6% (up 42.5%). Russia's RTS equities index was down 1.8% (up 116%). India's Sensex equities index was little changed (up 77.4%). China's Shanghai Exchange dropped 2.1%, lowering 2009 gains to 78.3%. Brazil's benchmark dollar bond yields added 3 bps to 4.82%, and Mexico's benchmark bond yields jumped 15 bps to 5.10%.

Freddie Mac 30-year fixed mortgage rates jumped 10 bps to 4.81% (down 66bps y-o-y). Fifteen-year fixed rates increased 5 bps to 4.32% (down 88bps y-o-y). One-year ARMs dipped one basis point to 4.24% (down 85bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates sinking 17 bps to 5.82% (down 122bps y-o-y).

Federal Reserve Credit declined $19.3bn last week to $2.168 TN. Fed Credit has declined $78.7bn y-t-d and $73.7bn over the past 52 weeks. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 12/9) increased $12.1bn to a record $2.944 TN. "Custody holdings" have expanded at a 18.0% rate y-t-d, and were up $450bn over the past year, or 18.0%.

M2 (narrow) "money" supply jumped $22.6bn to a record $8.414 TN (week of 11/30). Narrow "money" has expanded at a 2.9% rate y-t-d and 4.5% over the past year. For the week, Currency slipped $0.5bn, while Demand & Checkable Deposits increased $7.2bn. Savings Deposits jumped $26.5bn, while Small Denominated Deposits declined $6.0bn. Retail Money Funds fell $4.7bn.

Total Money Market Fund assets (from Invest Co Inst) added $1.1bn to $3.320 TN. Money fund assets have declined $510bn y-t-d, or 14.1% annualized. Money funds fell $457bn, or 12.1%, over the past year.

Total Commercial Paper outstanding dropped $26.3bn (17-wk gain of $135bn) to $1.210 TN. CP has declined $472bn y-t-d (29.8% annualized) and $491bn over the past year (28.9%). Asset-backed CP declined $2.0bn last week to $493bn, with a 52-wk drop of $246bn (33.3%).

International reserve assets (excluding gold) - as accumulated by Bloomberg's Alex Tanzi - were up $875bn y-o-y to a record $7.624 TN. Reserves have increased $859bn year-to-date.

Global Credit Market Watch:

December 9 - Bloomberg (Svenja O'Donnell and Elliott Gotkine): "Former Bank of England policy maker Willem Buiter said Greece may be the first major country in the European Union to default on its debts since the aftermath of World War II. 'It's five minutes to midnight for Greece,' Buiter... said... 'We could see our first EU 15 sovereign default since Germany had it in 1948.'"

December 11 - Bloomberg (Caroline Hyde): "High-yield bond issuance in Europe more than doubled this week as companies take advantage of the lowest yields in more than a year... That puts Europe on course for the busiest quarter since 2007, with companies raising 12.2 billion euros."

December 9 - Bloomberg (V. Ramakrishnan): "India's proposal to spend more than planned this year to cap food prices is spooking fixed-income investors and yields on benchmark 10-year bonds may reach 8% in two months, Canara Robeco Asset Management Ltd. said."

December 8 - Bloomberg (Aaron Eglitis): "Fitch Ratings said Latvia and Lithuania's sovereign ratings remain under "downward pressure" as the Baltic states' economic plight sends their deficit and debt levels higher."

December 8 - Bloomberg (John Glover and Bryan Keogh): "Wind Acquisition Holdings Finance SA, controlled by Egyptian billionaire Naguib Sawiris, is raising 500 million euros ($740 million) by issuing Europe's first payment-in-kind notes since the credit crisis started in 2007... 'High-yielding credits are en vogue,' Tim Brunne, a credit strategist at UniCredit SpA in Munich, wrote... 'They're the investment vehicle of choice for players that are required to invest in credit only.'"

Global Government Finance Bubble Watch:

December 8 - Bloomberg: "China's economic policy for the next year will make domestic consumption top priority, the nation's three biggest state-owned financial newspapers wrote... The emphasis of the government's annual economic-work meeting, concluded yesterday, was adjusting the nation's growth model..."

December 8 - Bloomberg (Keiko Ujikane and Toru Fujioka): "The Japanese government unveiled a 7.2 trillion yen ($81 billion) economic stimulus package amid signs the recovery and Prime Minister Yukio Hatoyama's popularity are waning."

December 8 - Bloomberg (Kartik Goyal and Bibhudatta Pradhan): "India's finance ministry sought parliament's approval to spend an extra 309.4 billion rupees ($6.6bn) to cap prices of food and fertilizers... Finance Minister Pranab Mukherjee already plans to raise a record 4.51 trillion rupees during the period after announcing stimulus packages equivalent to 12% of gross domestic product."

December 7 - Bloomberg (Alexandre Deslongchamps and Greg Quinn): "Bank of Canada Governor Mark Carney's pledge to freeze record-low borrowing costs through June may be raising the chances of a bubble in home prices even as it helps the economy recover from its first recession in 17 years. Sales of existing houses rose 74% in October from the January low, with prices up 21% from a year ago to a record C$341,079 ($323,203), partly because of Carney's promise..."

December 7 - Bloomberg (Gonzalo Vina): "Chancellor of the Exchequer Alistair Darling said China and other emerging economies realize that current account imbalances need to be addressed even as many are putting it off to cope with domestic political reasons. 'A growing number of countries realize the problems with imbalances need to be addressed, but not yet,' he said..."

Currency Watch:

The dollar index ended the week up 0.8% to 76.53. For the week on the upside, the Japanese yen increased 1.7% and the New Zealand dollar rose 1.2%. On the downside, the Swedish krona increased 1.9%, the Swiss franc 1.7%, the Norwegian krone 1.6%, the Danish krone 1.6%, the Mexican peso 1.6%, the Euro 1.6%, the Brazilian real 1.5%, the British pound 1.4%, and the South Korean won 1.0%.

Commodities Watch:

December 11 - Bloomberg: "China, the world's biggest producer and consumer of steel, said output rose to a record last month as export demand rebounded.

December 9 - Bloomberg (Luzi Ann Javier): "Hedge funds and speculators are making the most bets in 19 months that rice prices will rise, echoing conditions when grain shortages forced governments in India, the Philippines and Egypt to boost food subsidies."

The CRB index declined 1.1% this week (up 18.0% y-t-d). The Goldman Sachs Commodities Index (GSCI) dropped 2.8% (up 40.2%). Gold sank 4.0% to close at $1,115 (up 26.4%). Silver sank 7.1% to $17.205 (up 52%). January Crude dropped $5.73 to $69.74 (up 56%). January Gasoline sank 6.7% (up 74%), while January Natural Gas surged 12.3% (down 8%). March Copper fell 2.9% (up 123%). March Wheat declined 3.7% (down 12%), while March Corn jumped 4.1% (down 1% y-t-d).

China Bubble Watch:

December 7 - Bloomberg (Toru Fujioka and Aki Ito): "China's top leaders pledged to maintain a 'moderately' loose monetary policy stance and 'proactive' fiscal policies next year to bolster growth in the world's third-largest economy. The government will ensure policy continuity, boost consumer spending and adjust growth models, the official Xinhua news agency reported..."

December 12 - Bloomberg: "China's industrial production jumped, exports fell the least in 13 months and imports surged in November as rebounding trade with Asian nations underscored the region's role in leading the world recovery. Factory output climbed 19.2% from a year earlier... Exports slid 1.2%...and imports surged 26.7%..."

December 7 - Bloomberg: "Bank of China Ltd. will continue lending to key government projects, smaller-and-medium-sized companies and for low-cost housing, the lender said... The bank will cut lending to projects that don't comply with government industrial and environmental policy."

December 7 - Bloomberg (Kelvin Wong): "About 70% of affluent Chinese investors say they became wealthier during the last six months, helped by the global stock market rally, according to a survey conducted by Nielsen."

December 8 - Bloomberg: "China's passenger-car sales surged 98% last month, the most in at least five years, as government incentives spurred demand in an auto market poised to surpass the U.S. as the world's biggest this year. Sales of cars, sport-utility vehicles and minivans rose to 1.04 million last mont..."

December 7 - Bloomberg (Joost Akkermans and Christopher Anstey): "China's lending boom may erode the quality of bank balance sheets as a jump in lending was 'unavoidably' linked to an easing of credit standards, the Bank for International Settlements said. 'While strong loan growth in China has fuelled the current economic recovery, it is not without risks,' the...BIS..."

December 9 - Bloomberg: "China's banking regulator plans to slow new lending to between 7 trillion yuan ($1 trillion) and 8 trillion yuan next year... The China Banking Regulatory Commission's recommended range compares with 8.9 trillion yuan of new local-currency loans in the first 10 months of this year."

December 9 - Bloomberg: "China issued policies to curb speculation in the nation's property market after home prices rose at the fastest pace in more than a year. The government will impose a sales tax on homes sold within five years of their purchase, increasing the time period covered by the charge from two years, according to a statement posted on the Web site of the State Council, the nation's cabinet. A record $1.3 trillion of bank lending that helped revive Chinese economic growth to 8.9% in the third quarter has also fueled concerns of a bubble in the nation's property market... 'The Chinese central government wants to gradually control the bubble in the real estate market,' said Andy Xie, former Morgan Stanley chief Asian economist."

Japan Watch:

December 8 - Bloomberg (Toru Fujioka and Aki Ito): "Japan's current-account surplus widened in October... The surplus rose 42.7% to 1.4 trillion yen ($15.7bn) from a year earlier..."

India Watch:

December 11 - Bloomberg (Kartik Goyal): "India's industrial production grew less than forecast, suggesting the central bank may wait for more signs of economic recovery before raising interest rates. Output at factories, utilities and mines rose 10.3% in October from a year earlier..."

December 8 - Bloomberg (Tushar Dhara and Vipin V. Nair): "India's passenger car sales rose the most in more than five years in November as cheaper loan rates and economic expansion lifted demand... Sales totaled 133,687 units in November, 61% more than the 83,121 sold a year earlier..."

December 10 - Bloomberg (Christian Schmollinger): "The Reserve Bank of India may ban over-the-counter oil swaps and options trading in an attempt to prevent losses that could bankrupt companies."

Latin America Bubble Watch:

December 9 - Bloomberg (Helder Marinho): "Brazilian President Luiz Inacio Lula da Silva will sign a decree next week increasing the country's minimum wage by 8.7% next year, Folha de Sao Paulo reported, without saying where it obtained the information."

December 8 - Bloomberg (Diana Kinch and Peter Millard): "Petroleo Brasileiro SA, Brazil's state-controlled oil producer, expects to raise more than $10 billion from minority investors in a share sale next year, Chief Financial Officer Almir Barbassa said."

Dubai Watch:

December 9 - Bloomberg (Laura Cochrane and Lester Pimentel): "The tumble in bonds of Dubai's state- controlled companies to record lows signals growing concern more borrowers will fall behind on debt payments as Dubai World seeks to restructure $26 billion of obligations. 'We are concerned that it's just not Dubai World that has issues,' said Oliver Bell, the head of Middle East and Africa investment at Pictet Asset Management... 'The health of other government- related entities is in question.'"

December 8 - Bloomberg (Lester Pimentel): "Debt restructuring by Dubai state-run companies may almost double to $46.7 billion as more of the emirate's businesses could need help making payments, Morgan Stanley said. Dubai Holding LLC, Dubai Holding Commercial Operations Group LLC, Borse Dubai Ltd. and Dubai Sukuk Center Ltd. may join Dubai World in restructuring debt..."

December 7 - Bloomberg (Arif Sharif and Zahraa Alkhalisi): "Dubai World...may sell assets in the United Arab Emirates and abroad to repay its borrowings, a government official said. Asset sales are normal to shore up finances in such circumstances, Abdulrahman Al Saleh, director general of Dubai's Department of Finance and head of the government fund that's leading the restructuring of Dubai World, said yesterday..."

Unbalanced Global Economy Watch:

December 9 - Bloomberg (Scott Reyburn): "Record sale prices for a Raphael drawing and a Rembrandt portrait helped Christie's International in London raise the highest total for an auction of Old Masters last night, even as other works struggled to attract bids."

December 8 - Bloomberg (Theophilos Argitis): "Canadian housing starts increased to the highest level this year in November as builders began work on more single-family homes, Canada Mortgage and Housing Corp. said."

December 7 - Bloomberg (Jennifer Ryan): "The U.K.'s biggest earners face a 9% squeeze on their discretionary spending over the next two years as tax bills and mortgage costs increase, PricewaterhouseCoopers LLC said. A single person with no children earning 150,000 pounds ($245,500) a year must cut spending by 4,725 pounds, PwC said..."

December 10 - Bloomberg (Jacob Greber): "Australian employment soared for a third straight month... The number of people employed gained 31,200 in November from October and the jobless rate fell to 5.7% from 5.8%..."

U.S. Bubble Economy Watch:

December 11 - Bloomberg (Simon Kennedy and Michael Doermer): "Former Federal Reserve Chairman Paul Volcker said imbalances in the structure of the U.S. economy pose a bigger challenge than the financial crisis and will impede economic growth for some time. 'We have another economic problem which is mixed up in this of too much consumption, too much spending relative to our capacity to invest and to export,' Volcker... said... 'It's involved with the financial crisis but in a way it's more difficult than the financial crisis because it reflects the basic structure of the economy... It's likely that economic growth is going to be pretty sluggish for a while," Volcker said..."

Central Banker Watch:

December 11 - Bloomberg (Steve Matthews): "The Federal Reserve, which has more than doubled its balance sheet during the past 15 months to $2.19 trillion, should consider buying another $2 trillion in assets to reduce unemployment, Nobel Prize-winning economist Paul Krugman said. 'Such a program could do a lot to promote faster growth, while having hardly any downside.' Krugman wrote... He cited research by Joseph Gagnon, a former Fed staffer now at the Peterson Institute for International Economics... as 'the most specific, persuasive case I've seen for more Fed action.'"

GSE Watch:

December 7 - Wall Street Journal (Aparajita Saha-Bubna): "As home loans sour at a rapid clip, mortgage-finance giants Fannie Mae and Freddie Mac are aggressively bouncing back defectively underwritten loans to lenders. The result: higher loan-loss reserves for the lenders and new headwinds for banks trying to escape the housing downturn. For lenders such as Wells Fargo & Co., Bank of America Corp., J.P. Morgan Chase & Co. and Citigroup Inc., which are among the largest sellers of mortgages to Fannie and Freddie, this could mean buying back souring loans at a loss... Through Sept. 30, Freddie Mac put back about $2.7 billion of single-family mortgages to lenders, more than double the $1.2 billion of a year earlier."

Fiscal Watch:

December 11 - Bloomberg (Brian Faler): "House Majority Leader Steny Hoyer said the chamber will vote next week on increasing the U.S. debt limit by $1.8 trillion or $1.9 trillion... This year's deficit is projected to total $1.4 trillion, the same as last year, which was the largest since 1945. Deficits over the next 10 years will total $9 trillion, according to the nonpartisan Congressional Budget Office."

Real Estate Watch:

December 10 - Bloomberg (Dan Levy): "Foreclosure filings in the U.S. will reach a record for the second consecutive year with 3.9 million notices sent to homeowners in default, RealtyTrac Inc. said. This year's filings will surpass 2008's total of 3.2 million..."

December 11 - Bloomberg (Brian Louis and Carol Massar): "James B. Lockhart III, vice chairman of WL Ross & Co. and the former director of the Federal Housing Finance Agency, said the U.S. housing decline may not be over. Lockhart said... that he's concerned there may be 'another leg down' because of the pace of foreclosures."

December 7 - Bloomberg (John Gittelsohn): "Delinquencies on commercial mortgage- backed securities rose to a record in the third quarter... The percentage of CMBS loans at least 30 days past due rose to 4.06% from 1.17% a year earlier, the Mortgage Bankers Association said..."

Muni Watch:

December 9 - Bloomberg (Dunstan McNichol): "New budget gaps totaling $28 billion have opened in 36 U.S. states since July 1 as recession-battered tax collections declined and health-care spending increased, the National Conference of State Legislatures said. The chasm marks the second consecutive year states will be forced to change course in mid-stream, and will drive spending to decade-low levels, the conference said... 'Even if the recession is over, state budgets are in appalling conditions and are going to be that way for quite a while,' Corina Eckl, the conference's fiscal director, said..."

December 9 - Bloomberg (Michael McDonald): "U.S. state government collections fell 16% to almost $1.7 trillion in fiscal 2008 from a year earlier, while spending increased 6.2%, according to the U.S. Census Bureau. The biggest drop came in so-called insurance trust revenue, which slid $377.7 billion, or 73%..."

Speculation Watch:

December 11 - Bloomberg (Michael Tsang and Jim Polson): "Carlyle Group and Goldman Sachs Group Inc. are asking investors to pay more than $1 billion for a deepwater-oil explorer with no revenue or profits in the industry's biggest U.S. initial public offering this decade."

Q3 2009 Flow of Funds

The Fed's third quarter Z.1 "flow of funds" report offers little positive news. At a 2.8% seasonally-adjusted and annualized rate (SAAR), Total Non-financial Credit growth actually slowed from Q2's 4.5%. Non-Financial Credit was up $1.493 TN, or 4.5%, over the past four quarters. Total (non-financial and financial) system Credit actually declined $113bn during the quarter to $52.617 TN, the second straight decline (Q1 down $169bn). Total system Credit increased only $547bn over the past year, or 1.1%, with financial sector market Credit down 5.2% y-o-y to $16.1 TN. The ratio of total system debt to GDP was at a near-record 369%.

By major sector, Household Credit declined at a 2.6% rate during Q3, with Mortgage Credit contracting 3.6% SAAR and Consumer debt contracting 3.2% SAAR. Corporate borrowings expanded 1.3% SAAR (up from Q2's 0.8%), although total Business debt contracted 2.6% SAAR (lower than Q2's negative 2.2%). State & Local debt expanded 5.1% SAAR, up from Q2's 3.6% to the strongest rate of growth since Q4 2007.

Once again, system Credit expansion was almost completely dominated by federal borrowings. For the quarter, federal government debt expanded at 20.6% annualized, down from Q2's 28.2%, Q1's 22.6%, and Q4 2008's 37.0% SAAR. Domestic financial sector Credit contracted 9.3% SAAR, an improvement from Q2's 12.5% contraction. Foreign sector U.S. borrowings expanded at a 14.9% rate, the strongest since Q1 2008.

In nominal SAAR dollars, non-financial debt expanded $966bn, down from Q2's $1.514 TN. Household sector borrowings contracted $351bn SAAR, and Non-farm Noncorporate Business declined $368bn SAAR. Non-financial Corporate Business expanded borrowings $94bn, while Farm Business contracted $10bn SAAR. Government debt carried a heavy load. State & Local Government borrowings expanded $116bn SAAR, and the Federal Government increased its debt $1.485 TN SAAR during the quarter.

Over the past year, Treasury debt expanded $1.743 TN, or 30.2%, to $7.521 TN. Treasury borrowings were up $2.270 TN, or 43%, in just five quarters. And despite the contraction of overall mortgage borrowings, outstanding GSE MBS expanded $408bn, or 8.3%, over the past year to $5.30 TN. In the past eight quarters, GSE MBS expanded $1.057 TN, or 25%. For the quarter, GSE MBS expanded $481bn SAAR. In just five quarters, combined Treasury and GSE MBS expanded an unprecedented $2.810 TN. "Flow of funds" data confirm the Government Finance Bubble thesis.

Outside of GSE MBS, the financial sector was notably moribund. In nominal dollars, Asset-backed securities (ABS) declined $152bn, or 15.9%, to $3.650 TN. ABS was down $588bn, or 13.9%, over the past year. GSE balance sheets (as opposed to guaranteed MBS) continue to contract. GSE assets dropped another $140.7bn during the quarter to $3.126 TN, with a one-year decline of $288bn, or 8.4%.

Commercial Bank assets declined a nominal $48bn (1.4% annualized) during the quarter to $14.167 TN. At least this was an improvement from Q2's $252bn (7.0% annualized) contraction. Less encouraging, Bank Credit dropped a nominal $223bn. Bank holdings of Mortgages contracted a nominal $102bn to $3.796 TN, and bank loans dropped $165bn to $1.864 TN. Holdings of government debt rose $20bn to $1.365 TN and holdings of corporate bonds increased $8bn to $947bn. On the Bank Liability side, total deposits expanded nominal $99bn, or 5.4% annualized, to $7.383 TN. Bank Credit market borrowings declined $36bn, or 8.3%, to $2.466 TN.

Securities Broker/Dealer assets expanded for the second straight quarter. Asset grew a nominal $44.9bn to $2.062 TN. Holdings of Credit Market Instruments declined $58bn (to $543bn), while Miscellaneous Assets jumped $69bn (to $1.155TN). Broker/Dealer assets are down $940bn, or 31.3%, from a year earlier (although a slug of this - including Bear Stearns and Merrill Lynch - was transferred to Bank assets).

Money Market Fund assets declined a nominal $211bn during Q3 to $3.363 TN. Money Fund assets were little changed over the past year. Life Insurance assets expanded at a 17.3% pace during the quarter to $4.749 TN (up 0.7% y-o-y). Savings Institutions contracted at a 9.0% pace to $1.229 TN (down 11.1% y-o-y). Finance Company assets declined at a 9.7% pace during the quarter to $1.734 TN (down 9.2% y-o-y). Real Estate Investment Trust (REIT) Assets expanded at a 9.4% pace during Q3 to $266bn (down 9.2% y-o-y). Credit Union assets expanded at a 2.2% rate during the quarter and were up 9.2% from a year earlier.

No encouraging news on the fiscal front. Third quarter Federal government Receipts were down 11.2% from a year ago to $2.212 TN SAAR. Federal Expenditures jumped 12.7% to $3.555 TN SAAR. Compared to three years ago, Receipts were down 12% while spending was up 29%. State & Local Receipts were up 0.7% from Q3 2008 to $2.002 TN. State & Local Expenditures were down 1.3% y-o-y to $2.019 TN.

Rest of World (ROW) holdings of U.S. assets increased a small $21bn for the quarter to $15.052 TN. There appears little increased appetite for our risk assets. Treasury holdings were up $101bn during Q3 to $3.584 TN, with a one-year gain of $794bn, or 28.4%. "Official" Treasury holdings surged $126bn during the quarter to $2.693 TN (up 32.3% y-o-y). Total holdings of Agencies declined $42.6bn during Q3 to $1.319 TN (down 14.1% y-o-y). Holdings of U.S. corporate bonds declined $34bn.

Not surprisingly, the massive inflation of government debt has worked to stabilize system incomes. National Income increased $133bn during the quarter to $12.352 TN SAAR, the strongest expansion in six quarters. National Income was down 3.4% year-over-year. Total Compensation expanded $22bn during the quarter to $7.838 TN SAAR. Total Compensation was down a modest 2.9% from a year earlier.

Massive government borrowings have also helped reflate the Household balance sheet. For the quarter, Household Assets jumped $3.104 TN, or 19.3% annualized, to $67.485 TN. And with Liabilities little changed at $14.061 TN, Household Net Worth rose a notable $3.116 TN to $53.424 TN (one-year high). Real Estate holdings were up $295bn during the quarter (to $18.25TN), the first gain in almost three years. Holding of Financial Assets surged $2.36 TN (22.4% annualized) for the quarter to $44.415 TN. For the past year, Household Net Worth declined - a not disastrous - $3.388 TN, or 6.0%. Over the year Real Estate assets declined $2.140 TN, or 10.5%, and Financial Assets dropped $1.740 TN, or 3.8%.

There were no big surprises in this quarter's "flow of funds" data. I was somewhat surprised by non-financial debt growth below 3%. Watching weekly corporate and municipal debt issuance, I expected stronger debt expansion from these sectors. I view the continued contraction in mortgage and consumer debt as supporting the thesis of a very atypical reflation and recovery. Considering the degree of monetary and fiscal stimulus, the general financial and economic response continues to be disconcerting. There is as yet no indication that massive government pump-priming is fostering a self-reinforcing private-sector Credit recovery.