We are certainly entering the phase where the Don't Get Its will begin to join the herd. I believe it was Rick Cowles who said the heard is starting to sniff the y2k breeze. Stocks will decrease, more bad news will bring on more of the herd into motion. Then the bank runs begin. Many of us see it coming.

The question I have is whether we will see a deflationary or inflationary collapse. I present below an inflationary scenario. If this unfolds, and you prepare accordingly, you will be able to prepared better than 99% of the herd who will pay off all their debts and also go completely broke before the year 2000 arrives.

Despite what many believe the government can print all the money they want and print away they might. For example we could see the following scenario unfold for 1999:

1. No restrictions are placed on withdrawals (this would lead to a deflationary scenario). As the runs start, the FED is right there with $1000 bills for anyone who wants to drain their large accounts. They would use a temporary but "legal" tender and avoid printing sophisticated bills like we now have. Yes they can do it.

2. After about a month of this the banks would become insolvent. No problemo. Security trading in bank stocks and bonds would be halted. The banks would be nationalized which basically says to the herd that the government now backs up the "dollar". This form of insolvency has been done often on this planet and can buy lots of time for a troubled government. Don't let anyone kid you, printing money buys time. It is not a long term solution but the herd will be very happy to have their inflated dollars instead of a closed bank.

3. For all of 99 people would do everything they could to buy preparation type goods and get rid of their electronic and paper money. Prices would soar.

4. While this is going on money continues to stream into the US despite the inflated dollar. This will provide more help to the US treasury and forstall trouble will treasury notes payoffs.

4. This could continue right through December of this year. Anyone who wants their money gets it. This money might not buy much but the Fed and government partnership will back up the dollar and grandma can have her cash.

5. Then the year 2000 arrives.

OK there it is. What do you think? Lets have at it.

-- Tomcat (tomcat@tampabay.rr.com), January 21, 1999

Answers

Your scenario is as plausable as any, one can only hope that this is not a linear time line, and that the race doesn't get underway until july. :-] I need a little more time.

-- sam (we're@theend.com), January 21, 1999.

"... but the Fed and government partnership will back up the dollar..."

Back it up with what, Tom? We have fiat money now, and the situation will only be exacerbated by printing more "money." Such a monetary system won't last very long at all. If what you suggest comes to pass, we will be just a step from the abyss.

-- Vic (rdrunneris@compliant.com), January 21, 1999.

Yes at the end. So in order to keep their power, they will reconstruct the system to a credit (unit) based system. So that there is no more money. We all start from scratch. You get paid in units. You buy and sell in electronic units. No more money. Life goes on

-- Ralph (tired@itall.com), January 21, 1999.

Very interesting, Tom. I don't think it would work, because the collapse of world confidence in the dollar and the US markets would happen 24 hours after the $1,000 bills began being printed like toilet paper.

-- BigDog (BigDog@duffer.com), January 21, 1999.

Tom,

There could be price increases in essentials for 2000, but decreases for other non-essential items. Also, one problem with $1000 bills is that there wouldn't be enough smaller bills in circulation to make change for these 1K bills.

I still think they'll end up rationing cash and encouraging people to use checks and debit cards.

-- Kevin (mixesmusic@worldnet.att.net), January 21, 1999.

Good question, TC, and your scenario is as valid as any at this point. There are too many unknowns for very much certainty.

Inflation has been the Fed's favorite windmill to tilt at for decades now, and for the short term will most likely be held in check at least according to the "official" sources (the Fed, that is). In actual practice things are already getting squirrely- the Fed has boosted the money supply immensely, fueled an unprecedented credit bubble, lowered interest rates etc. Once the textbook definition of inflation was "more money chasing the same amount of goods" but the textbooks don't seem to apply in the New Economic Paradigm we currently live in. So far most of the 'easy money' has gone into the stock market. That's kept visible inflation at a minimum so far, unless you're buying something like bags of pre-1964 junk silver coins.

I think the Old Economic Paradigm (otherwise known as 'reality') will reassert itself dramatically before too much more time goes by. My guess FWIW: there will be an awesome credit crunch first (happening very soon now, I think- look for the last 'borrow 125% of the value of your home' advertisement any day now) followed by an equally awesome liquidity crisis, in company with the most incredible market crash ever (the higher it goes the further it has to fall). Somewhere in there the global flight to the dollar will reverse as other nations begin dumping dollar denominated debt once the smell of ruin is in the air, and as other alternative reserve currencies assert themselves (the Euro for example). Dumping of dollar denominated ASSETS will not be far behind.

There is deflation in the air right now, and it is very close to making an imact in the US. The effects on the farm community and the industrial sector will prove fatal to many who have managed to survive so far as continually falling prices choke off their economic livelihood. Commodity prices across the board are approaching or exceeding historic lows, and promise to go lower. This cannot go on forever- it may very well be followed by a howling bout of inflation, or it may degenerate into 70's style stagflation. It may do something without precedent. An enormously complex financial edifice based solely on DEBT has built up globally, and when the unwinding/collapse of this structure is felt in the US there is no telling what will happen. And make no mistake, it IS unwinding right now.

One major question in my mind is whether the mob who now participates with gleeful abandon in the stock market will be content to watch their gains evaporate, or whether they'll take profits out and attempt to apply them elsewhere. There are incredible tides of money moving around the world today, even though most of them are created out of nothing and will eventually revert to the nothing from whence they came. Where they wash ashore before evaporating will make the difference in what happens and in what order.

But whatever happens it will not be good. The bug _may_ be a problem, and the time it will manifest itself is definite. But the bear _will_ be a _huge_ problem, which will surface at an unknown time and in unpredictable ways. If you are well prepared for the bug you will be as prepared as possible for the bear. This is as good a win- win situation as you're likely to find in this decade. I hope you'll take advantage of it while you can- time is short.

Disclaimer: I am not an economist. I have never even played one on TV. It may be possible to fool all of the people all of the time after all, and Dow 15,000 may be right around the corner. We are in uncharted waters, people. Watch for icebergs.

-- nemo... (nemo@deepsix.com), January 21, 1999.

In response to Kevin and Big Dog about these feasibility of $1000 bills. Your response is exactly what would work for the Fed. Lets say you have just sold your stocks and you go to the bank and ask for $10,000 in currency.

The teller says "Yes, Mr.Big Dog, I have these new $1000 bills for you.

You, reply. "But I want smaller bills. What can I do with these?"

Teller says with warmth and sincerity. "Yes, I know how you feel. However, the hoarders beat you to the smaller bills. Terrible. Isn't it great however that the FDIC is meeting its obligation to you. Most people have decided to leave their money in the bank. What would you like to do?"

You reply. "Well, I guess I will too. At least I will be able to write out checks smaller than a thousand. Please hand me a deposit slip."

-- Tomcat (tomcat@tampabay.rr.com), January 21, 1999.

Vic, you make some interesting points. Let me respond.

Back it up with what, Tom? We have fiat money now, and the situation will only be exacerbated by printing more "money."

When banks fail, as in Japan the banks become nationalized. This means that the banks don't have the reserves to back provide everyone their money up but the goverment will back the system with new reserves created by new taxes created from all the helpful citizens wanting to contribute. This is what is happening in Japan now. Such a monetary system won't last very long at all.

It could last more than six months to a year which is way more than the government needs. All they want is to get us through 99 first.

If what you suggest comes to pass, we will be just a step from the abyss.

Precisely.

-- Tomcat (tomcat@tampabay.rr.com), January 21, 1999.

IN ref Credit Crunch:

My mother-out-law (if you knew Barb you'd understand, it's nothing derogatory!) was talking to us tonight and she is finding that mortgage money in FLA is just about unavailable. She has had a number of mortgages turned down on EXTREMELY minor technical grounds, mortgages she says would have flown with no problem as little as two or three months ago. She sees money as VERY tight now!

Chuck

PS She does trailer/home real estate in the Daytona/Deltona/Holly Hill area.

-- Chuck, night driver (rienzoo@en.com), January 21, 1999.