The Global Credit Crunch Is Not Receding, It Is Intensifying

Granted, you wouldn't know it if you followed the stock market melt up as the wild rush to eek out any and all P&L before tax loss selling season hits (assuming there even is one this year), but read on. If nothing else, SocGen's Albert Edwards, unlike many others, has stuck to his convictions.

The reasoning behind the acceleration of the credit crunch is simple and needs to be reemphasised. The unwinding of the grotesque debt excesses of the last decade have only just begun (see chart below)! Rapid expansion of government debt and QE will not and cannot prevent the revulsion that is now underway (the Fed publishes the Q2 update of the debt data today, Thursday.

In addition, banks are retrenching their loan books as policy makers force higher capital requirements. In all probability this process would occur irrespective of government involvement as banks inevitably act pro-cyclically, exacerbating both boom and bust. But as we repeatedly highlight, one of the lessons from Japan is not to mistakenly believe that banks are the problem. Similarly a healthy, recapitalised banking sector is not the solution. As Japan experienced before, it is de-leveraging that is the problem and retrenchment takes many years, rendering the economy extremely vulnerable to rapid relapses back into recession when any reverse or pause in extreme stimulus occurs. The Great Moderation relied on the debt super-cycle which is dead and buried.


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