from y2k AlertSend (y2k Supply), latest "Alert":

THE CASH BACKLASH PROBLEM

We already know many people are taking cash out of the banks due to Y2K concerns. Recent polls indicate that more and more people are going to follow this strategy, although the overall numbers are still showing less than 1/3 of the country plans to do this. But remember, it only takes $250 billion in cash withdrawals to deplete the system, and that's only a fraction of total deposits owed to customers. In this case, no doubt, the minority rules.

But what happens *after* Y2K rolls over, and we suppose the banking system doesn't collapse? After all, we must consider all the likely possibilities, and for certain, a total collapse of the bank system is only one of the many possible outcomes here. It may not even be the most likely outcome.

The day after Y2K, if the banks are still up, people are going to breathe a sigh of relief. They'll still wait, of course, to see what happens, but if things seem to be calming down in the following weeks, people are going to start putting their money back in the banks.

THE CASH TIDAL WAVE This action would result in a cash tidal wave and a huge increase in the money supply. All of a sudden, we would be facing the possibility of a cash glut. When we interviewed a senior Fed official a few months ago, he indicated that in this situation, the Federal Reserve would crank of the money shredders are start pulling money out of circulation again. We would have the whole pre-Y2K cash run in reverse.

But there's a risk here, and this is what you should be aware of: if the Fed fails to pull enough cash out of circulation -- for any reason -- we could be looking at excess supply and dramatically reduced demand for cash. Traditionally, this causes a reduction in the "value" of money: inflation.

Hopefully, the Fed will act responsibly in this regard. However, this potential cash backlash provides yet another justification for diversification: precious metal coins, supplies, land, and so on.

-- Blue Himalayan (bh@k2.y), February 01, 1999

Answers

Does the inflation scenario created by a "demand for cash" still apply in today's electronic commerce of credit cards, IBM cards (and checks)? I plan to be plenty stocked up, bills paid ahead, so forth, that I see very little need for cash in early 2000. Therefore, my reason to withdraw money would be to protect it. I'm not protecting it post-Y2K if I rush to spend it all. I just won't have as much reason to use cards or checks. OTOH, I expect prices to go up (or for goods to be unobtainable) as a result of supply chain problems, so I'm trying to buy what I need now.

-- Brooks (brooksbie@hotmail.com), February 01, 1999.

Blue, I don't think there is any risk of a backlash. You need to differentiate between the terms "money supply" as it's used in economics and "cash supply." Increasing the supply of cash will have negligible effect on the overall money supply because very little of the nation's wealth is in actual bills or coins. If the banking system remains intact, the Fed. can simply reclaim the newly printed bills from bank vaults and there will be no effect.

None of my response deals with bank runs, multipliers, deposit to loan ratios or any secondary effects of unusually large withdrawals of deposit account funds.

-- Puddintame (dit@dot.com), February 01, 1999.

Blue, I looked at this weeks Barron's listing of money supply figures. The approximate seasonally adjusted figures are:

M1- $1.1 trillion M2- $4.4 trillion M3- $6.0 trillion

M1 consists of checking account deposits, traveler's checks and currency. M2 consists of all the M1 components plus money invested in savings accounts at commercial banks, savings banks and savings and loan associations. I don't have all the components of M3, but it consists of M2 plus some other accounts, credit union accounts for instance (I think.

So an additional 50 billion in currency, if withdrawn, would merely replace 50 billion in deposits and the money supply would not change.

Again, this is not to argue that the banks don't face a problem on y2k. I'm just saying that if it's just a bump in the road, then the excess cash printed at the request of the Fed should have no deleterious backlash effects.

The check-up on the money supply figures is sobering. I had been looking at a figure of $2.1 trillion in deposit accounts which I think I have seen on this forum. Everything, at least up to the M2 measure, is readily convertible into cash, if not on demand, then within a reasonably quick time frame. It looks like most of M3 is theoretically convertible into cash within a short period even if it does include "time deposits" in addition to "demand deposits." So does this mean that a float of $150 billion in currency has been supporting from $4 to $6 trillion in deposits? That sounds more fragile than the $2.1 trillion figure I had been thinking about. Calling Adam Smith. Someone with some formal knowledge please step in here.

-- Puddintame (dit@dot.com), February 01, 1999.

Puddintame, can't answer your question directly. But I don't think there will be much of a problem taking bills out of circulation. They are in that mode right now with the new non counterfeit bills, that is, putting them into circulation while taking the older bill out.

Getting back to the original question. I've thought about this but for a different industry, food. If we prepare for two months of shortages and there's no more than a bump in the Y2K road, what happens the food supplies that have been stockpiled (both at the personal level and any additional supplies at the supermarket warehouses)? Now there's an increase supply of food. On the personal level, you simply eat up what you have in your pantry. But that means you (and many others) won't be going to the store to purchase food. The market puts these supplies on sale but will they sell? Maybe, maybe not. Will the local grocery store fold?

You could place this analogy on other industries as well. If Y2K is a bump in the road, businesses may go under and the economy may slow down until we use up the stockpiles. Just a thought.

Troll Maria

-- Maria (anon@ymous.com), February 01, 1999.

Troll Maria:

I suspect your concerns will be obviated by a number of factors. First, not that many people will do very extensive preparations. Second, useful stuff (TP, beer) will be consumed quickly enough not to cause perturbations. Third, less useful stuff (hard wheat, tons of rice, dried healthfood) will sit around until discarded. Fourth, a lot of charity organizations will welcome leftover stockpiles.

But the market for new generators might be kind of slack for a while...

I'm also curious to see whether economy-wide preparations, in and of themselves, cause any noticeable macroeconomic blips.

-- Flint (flintc@mindspring.com), February 01, 1999.

If Y2K is just a bump, do you think that you'll be able to go back to your pre-Y2K life style? I don't think that I'd feel comfortable without a reserve of food and supplies. Most of the money will go back into the bank, obviously, but I can't imagine living life like I did before. How do the rest of you feel?

-- d (d@dgi.com), February 01, 1999.

Keep in mind that Y2k effects may show up significantly later than 2000-1-1, and remind others. This can have the additional benefit of smoothing out post-Y2k money sloshings.

-- No Spam Please (anon@ymous.com), February 01, 1999.