A Socionomist Looks at Bankruptcies
This essay by Robert R. Prechter, Jr. originally appeared in The
Elliott Wave Theorist in March 1998.
A correspondent wants to know, If things are so great in the
U.S., why is the bankruptcy
rate so high? Indeed, for the year ended September 1997, there were 1.37 million
personal bankruptcies, another new all-time high. It seems logical that bankruptcies
would contract in booms and expand in recessions/depressions, doesnt it? Finance
is often not so simple. This chart of annual bankruptcy filings from 1930
to 1997 reveals that a rising trend in petitions for relief from creditors
is not reliable evidence of economic decline. To the contrary, despite a flurry
of debtor-friendly alterations to the bankruptcy code in the 1930s, filings
remained flat. Since 1942, bankruptcies have risen along roughly the same
path as the stock market, producing an Elliott five-wave advance. Not shown
is a similar quadrupling in the number of bankruptcies during the booming
1920s. The numbers continued to edge higher to a peak in 1932, when the stock
market bottomed, and finally receded in the late 1930s and early 1940s, when
conservatism returned to finance.
|
In the late 1920s, a presidential commission searched for ways to toughen the bankruptcy code. Similarly, today Congress is debating ways to reverse the 1978 law that further loosened creditors grip.
Why does the trend of bankruptcies go mostly counter to what seems logical? The answer is that bankruptcy rates are a function of lending quality, and lenders are more active when they are more confident, which is in uptrends. Todays record-high bankruptcies reflect lenders record-high willingness to lend more money to less qualified borrowers, which is a symptom of good times, not bad times. So to answer our subscribers question, the bankruptcy rate is high because things are great. They will stay high through the coming bear market and depression and then recede.