Credit Crunch 2

A quote from an interview with Robert Pretcher:

The Daily Crux from the June Elliott Wave Theorist:
Crux: Can you give us a brief, easy-to-understand explanation of how deflation could happen in a paper-money, reserve currency system like ours, and why you think it’s likely?
Prechter: Sure. In the simplest terms, creditors will stop lending, which will keep the credit supply from inflating. And debtors will default, causing the supply of outstanding debt to deflate. This will overwhelm government and central-bank efforts to inflate, and will result in deflation. These trends have already begun.

A definition of a credit crunch from Dogs of the Dow:

A credit crunch happens when banks are reluctant to loan money to individuals and businesses. In a credit crunch situation, it becomes increasingly difficult for companies to obtain funding. When and if lenders do offer loans during a credit crunch, they do so at relatively higher interest rates, which can be prohibitively expensive. Several situations can lead to a credit crunch. When banks, in unison, are concerned about elevated counterparty risk (i.e. high rates of defaults, bankruptcy, etc.), a credit crunch can ensue. Also, if banks find themselves overexposed in an economic downturn (i.e. subprime mortgages crisis), many banks may have to reduce loan availability in order to not aggravate their collateral shortfall, resulting in a credit crunch. A credit crunch has significant consequences on the economy. A credit crunch can tighten the flow of capital causing businesses to lay off employees or shut down completely due to their inability to borrow capital. A credit crunch is also referred to as a credit squeeze.


Consider the situation unfolding in Euro.  Continuing banking and sovereign debt bailouts in an effort to "save the union".  We are now seeing firsthand the impact of bank runs on some Irish banks.

Ireland to Seek EU-Led Bailout to Avert Bank Collapse

Lenihan said Ireland’s banks need a “contingent capital” fund and he indicated that the state will not be able to borrow in bond markets next year at current interest rates.

The cost of saving Ireland’s banks threatens a rerun of the Greek debt crisis that destabilized the euro region earlier this year. Lenders are reeling from the collapse of the property market in 2008, which resulted in the biggest contraction of any EU nation. An unprecedented budget deficit -- equaling one-third of economic output this year -- sent bond yields to all-time highs.

The Irish bailout follows two years of budget cuts that failed to restore market confidence as the cost of shoring up the financial industry soared. The price tag may reach 50 billion euros, according to the central bank in Dublin.

Allied Irish Banks Plc, Ireland’s second-biggest bank, emphasized the fragility of the financial system on Nov. 19, reporting a 17 percent decline in deposits this year. Lenihan said the “first step” will be to stress test the banks to ensure they have enough capital.

If we continue on our current fiscal and monetary paths, I anticipate runs on some banks will come to America.  Phony voodoo accounting can only cover-up leverage and solvency problems for so long.  The large amount of dollars in "unlent reserves" is a good indicator that we have a serious bank insolvency problem.  
The nonsense talked about in this article about "stress testing" banks to ensure they have enough capital is political smoke and mirrors.
Of course Irish banks do not have enough capital!
They lent in a tremendous property boom and property values (and bank capital reserves) have now collapsed.
At best we are seeing a repeat of the Japanese banking crisis of 25 years ago where the Japanese authorities refused to let many of their banks die an insolvent death.  Instead they poured billions into the bottomless pit of insolvency and dragged their country into a very long deflationary period that is ongoing today.
In my view, we are very close to a second credit crunch.
The authorities are making the same errors as their predecessors.
Banks must be allowed to go bankrupt to rid the system of bad debt or the long term consequences can be even more negative, ie: the default of a sovereign state.


  1. PW, how close are we to a second credit crunch?

  2. It is my view that we could be as close to 4 months away from a second credit crunch. A March timeframe is a possibility. I qualify this since these events are nearly impossible to predict, and I base my view on the rate of deterioration in the banking sector in Europe.

  3. PW, I like your blog, and added to my blogroll,

    Please visit my blog and consider starting a blogroll of your own. Cooperation will increase traffic.

  4. See the bottom chart, the Fib Fan from Great Depression is amazingly back in play. And a 60 channel backtest rejection.

    There is going to be lots of 78 retrace and bull boils until the buy the dip bulls get whooped.

  5. Hi PW,

    Bulls are challenging the intermediate time frame momentum which doesn't look that bearish anymore but it's rather neutral at this point. Dollar on the other hand is almost giving a "buy" signal.


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