Should We Expect the "Financially Rare Event"?

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Should We Expect the "Financially Rare Event"?
Elliott Waves Tell a Multi-Generational Story

By Bob Stokes
Thu, 30 Jun 2011 16:15:00 ET

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Several weeks ago I took a bridge in Memphis across the Mighty Mississippi. The river had crested near a record high a few days earlier, yet it still looked extraordinarily wide.

Extreme flooding around Memphis had been a national story; as I drove I saw the swollen river first-hand.

The scale of the event was rare, as was the amount of damage to homes and businesses. The city was not prepared for a flood of that size.

That trip came to mind the other night as I watched a TV interview with a scientist -- the topic was what he called the "100-year wildfire" in New Mexico, which had come perilously close to the Los Alamos National Laboratory (a top U.S. nuclear research facility).

In brief, this scientist said the government was not prepared for a wildfire of that size.

Rare events also happen in other spheres of life: like finance. The subprime mortgage meltdown is one example among many.

Another is the build-up of credit in our financial system. In fact this buildup is beyond rare; it's unprecedented in at least the past 100 years of U.S. history (see below):

Remember, the chart above represents total credit, not merely the $14.5 trillion federal debt. In turn this led to yet another financial rarity, namely Standard & Poor's downgrade of the United States' credit rating outlook some weeks ago.

And now, Standard & Poor's is getting more specific. Here's the latest from Reuters (6/29):

"The United States would immediately have its top-notch credit rating slashed to 'selective default' if it misses a debt payment on August 4, Standard & Poor's managing director John Chambers [said]

"Chambers[said]...that U.S. Treasury bills maturing on Aug. 4 would be rated 'D' if the government fails to honor them."

How will the country's debt problems ultimately be resolved?

Well, please look again at the chart above -- you'll see that the gigantic credit bubble is already starting to deflate (far upper right side of the chart).

Before credit began to contract in 2007, EWI's Robert Prechter wrote this in the November 2005 Elliott Wave Theorist:

"When credit expands beyond an economy's ability to pay the interest and principal, the trend toward expansion reverses, and the amount of outstanding credit contracts as debtors pay off their loans or default."

As for what it means when "credit contracts" on a mass scale, that too is depicted on the chart. It was the rare financial event known as the Great Depression. Today's credit build-up is much bigger.

Will the current trend toward credit contraction lead to another financially rare or even unprecedented event?

The Elliott Wave Theorist provides big picture economic and financial analysis in every issue. The current Theorist includes Robert Prechter's latest research on keeping financially safe, and you can read it risk-free within minutes.

Learn more about what else you'll find in the current Elliott Wave Theorist>>

Tags: consumer credit, credit crisis, credit rating, deflation, Elliott Wave Theorist, great depression, gross domestic product (GDP), history, monetary policy, Robert Prechter, safe haven

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