Y2K Best Case Scenario (fwd)

[Michael Gurstein <mgurst@ccen.uccb.ns.ca>]

This is in reply to Tom Abeles question...any thoughts...

M

---------- Forwarded message ----------
Date: Fri, 11 Dec 1998 11:30:48 -0700 (MST)
From: Thomas Greco <circ@azstarnet.com>
To: circ@azstarnet.com
Subject: Y2K Best Case Scenario

BEST CASE SCENARIO 
by Stefan Stackhouse

Posted by Stefan Stackhouse on November 19, 1998 at 21:15:18 
E-mail address is: stefans@mindspring.com 
The post is located at: http://206.67.59.5/wwwboard13/messages/2244.html  

Here is what I see as being the best possible case scenario. If you don't
plan for at least this, you  are being pretty foolish indeed!

First, there will be some system glitches in the first 2 quarters of  1999.
This will rattle some people, and we will see the stock markets drop a
little lower than they did a couple months ago. (That was the smart money
getting out of the market. This second wave will be most of the rest of the
governing elites getting out while the getting is good.) There will be the
predictable public announcements by various government and corporate big
shots that this is a serious matter, but that everyone is hard at work, and
that they are confident that everything will either be fixed or
"manageable." There will be a partial recovery in stock values as fools
rush in to buy "bargains" with their 401K money. "Survival" type supplies
and equipment will get increasingly scarce and expensive through the first
6 months of 1999 -- if you don't get them by then, it will be virtually
impossible to get anything after June '99.

The third quarter 1999 will be the moment of truth. That is when we will
start to get a pretty good idea which corporate and government systems will
and won't be ready for Y2K. A fairly substantial number will, some won't
including some pretty big names. This will be the time period when
investment managers will be making some serious decisions about portfolio
allocation and who they will and won't invest in. Companies will also be
making some serious decisions about who they will continue to rely on for
suppliers. Y2K will start to become more than just a "blip on the radar
screen" in the media, and stocks will start to drift downward.

Beginning of the 4th quarter, October 1999. The "Black October" to end all
"Black Octobers." There will be a new record one-day drop in the DJI. I
expect that by the end of 1999, the DJI will be trading at no more than « -
to - 2/3 of its peak. The media & corporations will be under enormous
pressure from the government to try to calm things down and avoid causing a
panic -- expect on not being told everything, and to be told deliberate
disinformation then. Nevertheless, expect store shelves to be pretty bare
of necessities throughout the 4th quarter. This may not be a good time to
drive long distances, as gasoline may be in short supply as well. As we
move toward December, there is a very high probability of bank runs,
especially on any smaller bank which is not able to give the public prompt
and credible assurances that they really are Y2K compliant. At first the
government might try to handle this by merging the smaller banks with
bigger ones. However, I would rate the probability as greater than 50% that
a "bank holiday" will be declared for at least the entire last week of
December (i.e., between Christmas & New Years.) There will be tremendous
political pressure brought to bear on the government to not impose a bank
holiday prior to Christmas. There will probably also be an announcement
that all airlines will be grounded for the first few days of Jan. 2000.
This might be by government action, or by insurers, or both.

People will be extremely tense going into the 12/31/99 - 1/1/2000
transition. In the U.S. -- on which our population & media will be almost
exclusively focused -- people will be relieved to discover that it is NOT
"TEOTWAWKI". The lights will not go off in Times square at one second after
midnight, nor in any but a handful of places. There is a small possibility
that a few local system glitches might cause one of the regional grids to
go down, but it should be brought back up within a few hours. There will be
a few other isolated problems in transportation, utility, and communication
systems, but they will be pretty isolated. Very quickly, there will be a
sense of relief, of joking -- "I told you so!", etc.

Meanwhile, things won't be going nearly so well in the rest of the world.
There will be far more widespread system failures in many other countries.
However, this will barely get reported in the U.S., and most people will
ignore it.

Then, on Monday, 1/3/2000, there will be a few system failures at some U.S.
production facilities. However, there will be thousands, if not tens of
thousands, overseas. Very little of this will be reported, partially due to
the usual U.S. inattention to foreign affairs, but also due to the fact
that many communications systems overseas will not be fully operational.

As the days and weeks progress, however, import supply chains for crude
oil, raw materials, parts, and finished goods will become increasingly
disrupted. Given the "just-in-time" inventory management system which is
the current management fad, this will start very quickly to result in
production lines shutting down, workers being laid off, and store shelves
emptying. This will initially be most noticeable in industries dominated by
imports, and the initial conventional wisdom is that this is just "a
temporary import problem." However, the interconnectedness of the modern
global economy will gradually become evident over the following months as
domestic manufacturers find that they can't operate without supplies based
on imported materials and parts. Exporters will find that their export
markets have dried up. And sellers of goods and services in the U.S. will
find that they have less stuff to sell, and fewer people who can afford to
buy.

In short, the U.S. (and global) economy will be sinking into a recession.
Think of it being at least as bad as 1973/74. There is a very good
possibility that it will be as bad as the 1930s. The reason is that we will
also see a profound credit crunch. The stock market will continue falling.
In 1973/74, it traded at a P/E ratio of 8, now it is at 24. A drop from 24
to 8 is 2/3, suggesting that by December 200 or 2001 the DJI could be
trading in the 2000 - 3000 range. This means that most people who were
still substantially invested in the stocks -- i.e., most people with 401Ks,
the elites will have mostly pulled their money out by 6/99 -- will have
suffered at least a 2/3 decline in net worth. Many of them -- at least 10%,
possibly 25-35% -- will also be unemployed. The banking system will have
suffered a major loss of confidence. FDIC insurance will be honored, even
if the fed has to hyperinflate to do so. But they will counter this by
raising interest rates way up and tightening credit substantially. This
means that almost no one will be able to get mortgages, and a lot of people
will be in default on their mortgages, and eventually a lot of mortgages
will be foreclosed, and there will be a glut of foreclosed houses on the
market, which few people can buy because there is no mortgage money.
Meanwhile, look for increasing populations of unemployed and homeless
people to set up shantytown "Clintonvilles". The credit crunch will also
result in a wave of business failures, further driving up unemployment and
causing various goods to be in scarce supply.

Those who will cope best are those who can hold on to their homes, can find
some way to earn at least a little money, can produce at least some food,
fuel, clothing, or other goods at home, and can resort to barter and avoid
the cash economy. Those who got out of stocks, preserved their cash, and
had minimal debt will be in relatively good shape financially. Eventually,
the elimination of competition from foreign and failed domestic businesses
will open up a lot of new entrepreneurial opportunities for the survivors.

The big question in this scenario, of course, is at what point civil unrest
starts among the urban underclass, how bad and widespread it will be, what
the suburbanites do in response, and what the government does in response.
Since this is supposed to be a "BEST CASE" scenario, let's just say that
there will be some riots in a few cities along the lines of LA or Miami,
but that it will not be all the cities, it will not be all at once, and
that it will not all start on 1/1/2000. Some suburbanites will head for the
hills, some will get together with their neighbors and guns, put up
barricades, and protect their own turf, and some cities will start to look
a little more like Beirut or Sarajevo for a while, but most won't. Expect
the government to be ready with mobilized regular and national guard troops
to quell any disturbance. However, since this is "Best Case", I am going to
assume that Clinton doesn't have the support of the military to proclaim a
general martial law as a power grab.

Another big question is whether or not Sadaam, the N. Koreans, the Chinese,
etc., will use Y2K as an opportunity to launch a land grab against coveted
neighboring territory. If there is any substantial unremediated Y2K problem
with our weaponry, communications, intelligence or logistics systems, then
the danger of this will become extremely high. There could also be
substantial hostility overseas directed against American targets, as
foreign populations may blame U.S. technology for their Y2K problems. If
there are one or more foreign conflicts, it is very possible that the U.S.
will lose, and may lose badly. That will not be the end of the world, but
may worsen general conditions here. It may also increase the possibility of
a military coup d'etat, especially if the military believes that they were
sent in to an ill-advised foreign conflict with inadequate support from the
government, and especially if a country in the throes of a severe economic
depression and civil unrest holds the military in high esteem and the
government in low esteem.

This is what I see as the best case scenario. Even in this best case, the
world five or ten years from now will not be much like the one we live in
today. It will be a functioning world. Most people who prepared wisely will
have homes, they will be raising food on their property, they will have a
source of heat, they will have some way of earning some money, and there
will be some basic level of law, order, and peace, at least in smaller and
rural communities. Cash and the basic necessities of life will be scarce
and valuable, stocks, real estate, and labor will be abundant and cheap.
There will be a lot of poor people many more than we have now. Our
government will be pretty much of a shambles, it may no longer be a
civilian government, and in any case will not be able to do much to help
people. There will be no "New Deal" or World War to lift the country out of
the economic depression this time. This time all of the speculative and
governmental excesses will have to be pruned out of the economy, and then
will follow the long, painful, and difficult effort to rebuild by honest
hard work.

I am basing my plans and preparations on this as a given, and then trying
to do what I can to deal with more pessimistic scenarios. Don't say you
were not forewarned! 
	#     #     #

This "best case scenario" for the immediate and mid-range future seems
quite plausible to me. I find it VERY SOBERING. If this is the best we can
expect how much worse might it be? What should we be doing to prepare, both
individually and collectively? As I see it, individual and household
preparedness efforts are well and good and prudent, but far from adequate.
We must do everything we can to promote social cohesion. The situation
requires a total mobilization of the population in an effort to begin
building resilient communities which will provide the strong foundation
needed to weather the storm and build a happy future.

Thomas H. Greco, Jr., Co-coordinator
Tucson Year 2000 Center
P.O. Box 42663
Tucson, Arizona 85733
(520) 792-6438