Gary North's REALITY CHECK No. 37

March 17, 1999

THE CALM BEFORE THE STORM

In January and February, there was a run on gold coins, especially tenth ounce American eagles. The U.S. Mint began rationing gold coins to wholesalers. Then, without warning, the panic buying ceased.

It ceased about the time that the Senate's Special Committee on the Year 2000 Technology Problem released its report (March 2). The report is dated February 24. A preliminary draft was released to the press that week. Then Senators Dodd and Bennett made the rounds on the TV news forums on February 28. They presented the Party Line:

1. Prepare for a hurricane, not a collapse

2. Foreign nations will have big problems

3. U.S. electrical power is safe

4. The health care industry will have problems

5. Small businesses will have problems

In short, Y2K is going to be a problem, but not a catastrophe in the U.S.

The report is less optimistic than the statements of Bennett and Dodd. It summarizes the testimony that has been presented to the committee over the past ten months. What we learn is that there are big problems that must be solved, and there is not much independently verified evidence that these problems have been solved.

As for the argument that foreign nations -- Japan, China, Brazil, Saudi Arabia, Venezuela, Germany -- will have big problems, this is hardly comforting. These are our major trading partners. If they cease exporting goods to us, the U.S. economy will take a major hit in 2000 and beyond. The international division of labor is far more extensive today than it was in 1930. Yet a reduction of world trade in 1930 led to the Great Depression.

Because you are on top of Y2K, you already know this. The public does not. Your friends and neighbors cannot hear the message for the noise. The message they hear is colored by the spin that a frightened government is putting on it. They do not want to hear that the days of wine and roses are about to end. They do not want to believe that their futures are going to be hard, the way things were hard in the 1930's -- or worse.

When the great fear comes in 2000, the euphoria that is universal in the U.S. today will evaporate. A great fear will paralyze people. We are not familiar with this level of fear. We have read Franklin Roosevelt's rhetorical line, "We have nothing to fear but . . . fear itself." We forget that this was nonsense in 1933, that there was a great deal to fear: loss of a job, 6,000 bankrupt banks, lost homes, lost dreams, and an economy that would not recover. It was terrible. Year after year, it would not recover. The Roaring Twenties had not prepared people for this.

We have had over four decades of roaring. We have not lived in fear. There have been recessions and setbacks, but nothing like the despair of the 1930's.

How do we prepare ourselves psychologically for a decade of depression? How can we imagine it? It is beyond our experience.

That's what I have been trying to do personally: get prepared mentally. I moved out of a lovely home on a suburban street. I moved to the sticks. I have bought grains. I have sunk wells. I have restructured my life and my finances on the assumption that the banks will not make the deadline, that the welfare State will end.

Meanwhile, those around us are convinced that the stock market will make them rich. It is not easy to keep my mind focused on what I know to be true: Y2K is systemic.

THE ONLY RELEVANT COUNTER-ARGUMENT

I have heard them all: "they" will fix Y2K, American ingenuity never fails, the free market can be trusted, the stock market has not discounted it, this or that company is compliant, it will be fixed on failure.

There is only one counter-argument that impresses me, and I have not seen many critics use it: the y2k glitch is not substantial. The erroneous century computation is too limited to affect the vast majority of functions in computer systems. Thus, y2k will hit, but almost nothing will go wrong. Systems will not fail.

To persuade me, this argument would have to come from mainframe programmers and electrical engineers working with embedded chips. The rest of us are not skilled enough to know. The problem is, the programmers are divided on the question of the degree of disruption we can expect. Most of them live in cities. Most are still on the job. But a few have left town. They are scared.

Programmer Cory Hamasaki goes out on weekends to a friend's ranch and works in the fields. In return, he has been promised a corner of a cabin if y2k hits so hard that the Washington, D.C. area becomes unlivable. Here is a self-professed middle-aged man who is spending weekends doing hard labor because he thinks he needs a fall-back position.

He is not sure that y2k will shut down society. He is sure that it will shut down computers in the nation's government. He is not sure how big y2k will be. But he is sure that it cannot be fixed.

I submit this to you as the rational position: it will not be fixed. You must make your plans on this assumption. I have been saying this since late 1996. I have not changed my mind.

If the century date problem is not a major problem for accounting and time-sensitive operations, then we need programmers -- a lot of them -- to come before Congress and show why this is so. But no such programmer has testified so far.

Now, how bad will it be? I look at Citicorp's y2k budget of $800 million to $925 million, and I conclude: somebody in high places thinks y2k will be a big, big problem if not fixed. Senior managers do not spend this kind of money on small problems.

Most businessmen are not spending anything like this. That is why Y2K will be disruptive in so many places. But will it shut down entire industries? I look at the division of labor, tied to just-in-time production and just-in-time distribution, and I conclude: yes.

Yet almost every economist says it will be a bump in the road. They are masters of studying the division of labor and the price system, and they think things will be fine. But they are not Austrian School economists. They think in terms of a world that is self-regulating, a machine. They do not understand that entrepreneurs can make simultaneous mistakes, they way they did in the 1920's, investing in projects that could not be sustained in the 1930's.

I contend that Y2K is such an overlooked error, one that is not really believed even when it is known to exist. This is why we see a rising U.S. stock market and gold below $290.

The free market is not a self-correcting machine. It is a social institution. This social institution is subject to the mythologies of the era. If men believe that prosperity is forever, that the stock market will grow at 10% per annum, decade after decade, when economic growth is 2% to 3% per annum, then they will not act in terms of a threat to that compounding.

Y2K is a threat to compound growth because it is a threat to the information system. It is a knife aimed at the heart of an information society. It will foul the data. It will make data unreliable. It will make mandatory the independent verification of all digital data. That will be like the Luddite's shoe in the 18th century machine.

Y2K is the ultimate Luddite. This is how we had better view it. A Frenchman's shoe (sabat, as in saboteur) would shut down a production line temporarily. That will be Y2K's effect: a million shoes tossed into a million machines, shutting down a million supply lines.

These supply lines are our life-support systems. Cities cannot do without them. The economy's warehouses today are 18-wheelers. Shut them down for a month, and the economy of the cities will die.

This is unthinkable. That's why your neighbors refuse to think about it. There is no way for 100 million households to prepare for the shutting down of the production lines. The supply lines are stretched out today. They are full. That is why the system is so efficient. There is no slack. It is not possible for 100 million U.S. families to increase their purchases of anything by 50%. To attempt to shift from buying new cars to buying beans and rice would bankrupt the auto industry and create riots in Sam's Club and Costco stores.

This is the grim reality of every society: society cannot change except slowly. An individual can change radically only if he changes alone or nearly alone. If he is accompanied by millions of others, social institutions will break down.

If half the population decided to go to church next Sunday, they could not do it. There would be no room. Even in Boston in 1660 -- the Puritan era -- church buildings could accommodate less than a third of the city's population. If we had mass revival next Saturday, the churches would have to go to round-the-clock worship on Sunday. The streets would be jammed, the parking lots full. Most people could not get in.

Individuals can change their resource allocations radically overnight only if very few of them attempt this. This is the great Catch-22 of Y2K. The worse Y2K is, the more sure is the Catch-22. There will be chaos. This has been my message since late 1996. Don't be in the middle of it. It will be bad enough on the fringes.

People will not believe the threat of Y2K because they inherently recognize the truth of social stasis. A society cannot adjust smoothly to a shutdown of its supply lines. This is why the press last week dutifully cited John Koskinen and the Federal Reserve System's Edward Kelley, Jr., when they said not to stock up on medicines, food, and currency. To do so as a nation is impossible. The just- in-time supply lines would not tolerate it. To attempt it today would bring panic tomorrow and gridlock the day after tomorrow. People would discover that there is no way that all of them can stock up.

THE DILEMMA OF DEMOCRACY

The democratic mind set says that if bad things must happen to most people, good things are illegitimate for a minority. This is why we have graduated income taxes and heavy inheritance taxes.

In wartime, societies adopt rationing. The free market's principle of allocation -- high bid wins -- is not acceptable when it's a survival issue. In a lifeboat, the high bid does not win. Majority vote wins -- or two people with guns.

If Y2K is a life-and-death issue, then high bids will not be allowed to win. We will have rationing and martial law. People will demand this. The government is getting ready for this.

This is why Y2K threatens long-run supplies. The free market is what encourages increases in output and efficient production. Martial law does not, since it is a form of socialism.

The day that most people know that their lives are at risk, the free market will become the black market. Theft will begin, whether government-run or private. Social order will break down when the division of labor breaks down.

We no longer live in a society marked by self- government and patience. We are a nation of short-run people. That is why our savings rate is so low. In some communities, law and order will prevail, but these communities will be small. The more impersonal the community, the more at risk it will be.

That is why you must begin to create community. But people will think you are nuts. That is why I moved to the country. I live in a small community. Some of the neighbors think I'm crazy. I have been written up in two regional newspapers as a Y2K survivalist. A reporter from Houston knocked at my door last Saturday trying to get a "Y2K survivalist kook in the sticks" story. Neighbors had directed her to me. (My wife sent her away.)

Communities will be created in urban areas, but at the expense of larger neighborhoods. People will park cars in streets to block entrance into them, the same way the Yonkers experiment has done with street-blocking pillars. Crime will go down immediately. Community bonds will be formed. But traffic patterns will get disrupted. Of course, if gasoline is being rationed, that's nothing crucial.

Your problem will be that you own assets. Are you going to be a target for your neighbors? You must work to create the awareness that your assets are a benefit to them apart from their violence. For example, if you have a solar panel, buy a solar battery charger and spend $200 on rechargeable batteries. Hand them out in 2000, or offer to charge your neighbors' existing batteries for free. Your solar panel is now worth defending.

Re-charge car batteries that can be used to operate CB units. Your community will need communication. Hand-held walkie-talkies, such as the Motorola Talkabout, are important. Buy several of them.

By the way, buy your panels now. The supply lines are getting very tight, even for British Petroleum panels. I think they will be unavailable by early July. One company that sells simple solar systems is Solar Extreme (http://www.solarextreme.com).

DON'T GO BY YOUR STOMACH

People are not worried about Y2K today. This can change -- will change -- in late 1999. Then you will be facing the supply lines problem. You must have bought AND INSTALLED your equipment by then. Skilled labor is scarce now; it will be unavailable then.

When people get scared, supply lines will dry up. The fact that you have doubts today about the severity of Y2K is what gives you a short head start. You must act against your stomach if your brain says that there is no reasonable way out.

The less you feel like spending money to defend yourself against Y2K's effects, the more preparations you should make. Use your brain to overcome your emotions. If you feel calm, take steady, systematic action. You must allocate time and money each week. Steady as you go.

You will have to start sprinting in September.

-- a (a@a.a), March 17, 1999

Answers

Must disagree rather firmly here.

This should be Reality Check #1 not #37

--Greybear

- Got Priorities?

-- Greybear (greybear@home.com), March 17, 1999.

On his site today Scary Gary mentions some articles in the April issue of WIRED magazine. Has anyone seen them? I was just in the bookstore & didn't notice it.... D'ooh.

BTW, say whatever you want to about Gary, but... The guy can write.

-- thanks (for@the.nightmares), March 17, 1999.

a,

Thanks for the timely post.

Greybear, Right on again!

-- Watchful (seethesea@msn.com), March 17, 1999.

Wow. I've beenchecked and recalibrated. Thanks for that post.

-- Rick (doc_u_ment@hotmail.com), March 17, 1999.

I saw the Wired articles a few days ago; they are very hardhitting. Of particular interest is the embedded system failure that occurs at the Texaco plant in front of the reporter's eyes as Texaco is checking their embedded problems.

-- cody varian (cody@y2ksurvive.com), March 17, 1999.

The Wired issue (3 articles) is a definite good read... I'm thinking about buying 10 copies and distributing them throughout the neighborhood... The cashier and the woman behind me in line did a double take on the black cover...I read the title to them...they blinked ... definite DGI's, but I think the woman behind me will get the magazine. She had that 'this doesn't jive with what I've seen on TV' look.

-- Shelia (shelia@active-stream.com), March 18, 1999.

Be sure to check out the ABSOLUT ad on the back of the Wired issue, its very Y2K aware.

-- King of Spain (madrid@aol.com), March 18, 1999.

Good ol Gary, ya gotta love the guy!

As an amateur historian it puzzles me that GN doesn't bring up Plague and Famine.

Second puzzle is why he doesn't bring up that banking collapses happen, have regular since at least the 1500's. And other than inconviences for a minority, most people get along, shifting back to barter or just designating an item that most people will call money. This happens naturally apparently. Then when society become reorganized, banks happen.

Third item. From my reading over the years, historically, Transporation and Energy Sources are two of THE most important factors. Between those two, they have great power over Agriculture, and between those three they are the controlling factors in Famine, which in its turn controls in great degree, Plague.

Y2k Civil Disorder, if/when/where it happens is of less concern in my estimation than Plague and Famine. Civil Disorder is a very hot fire and will burn itself out in short order. Plague and Famine are slower burning, sometime cycling through decades.

An astute person, with a bit of luck, can be out of the way of Civil Disorder. Plague and Famine are a bit more hard to avoid.

-- Mitchell Barnes (spanda@inreach.com), March 18, 1999.

Mitch:

These things don't "happen naturaly" as you suggested. The histories you are reading compress MANY months into a quick 5 minute read. We then develop the belief that that is all it takes, while the many months would be more accurate. there is a LOT of privation that occurs as the "switch back and forth" takes place.

Chuck, who loves history but has to reset the time frame now and then

-- Chuck, a night driver (reinzoo@en.com), March 18, 1999.

is that posted on his site? i thought i saw it there the other day, but now i can't find it...

-- Drew Parkhill/CBN News (y2k@cbn.org), March 18, 1999.

Drew- North's "Reality Check" issues are generally sent by e-mail, but I have also seen them on mirror sites for www.garynorth.com. You can find previous issues of "Reality Check" at http://reformed- theology.org/realitycheck

-- Jack (jsprat@eld.net), March 18, 1999.

jack,

thanks.

-- Drew Parkhill/CBN News (y2k@cbn.org), March 18, 1999.

Chuck, I don't read quickie 5 minute histories. I was referring to the fact that mankind needs (naturally), beyond barter, apparently an abstract method by which the exchange of goods are effected, and that yes indeed, when one system collapses for whatever reason, a new one emerges quite rapidly. I never said it happens overnight. As a y2k 10 on a 10 scale my time frame is set out many years, but I would guess that barter and "money" will make its reappearance will before the knitting back together of large scale governing bodies.

Banking collapse is the least of our worries.

Actually you missed the weakest part of what I was saying, that only a minority are affected by banking collapse. Historically, that is correct, at least prior to the formation to the Bank of England and its numerous imitators. Nowadays, more people will be hurt by banking collapse just because of bank financed private home ownership and the distinct lack, in the USA, of the ability to barter. However, since a bank collapse in this case will probability be accompanied by collapse of Fed, State, and most local govts and their supporting institutions, the people who will be most hurt are those who depend upon those institutions, not only for means of utilizing tax and financial codes, but for means of substantiating social status.

Which has nothing to do with the primary part of my post. Banking is insignificant. Famine and Plague due to snafued Transportation and Energy Sources are THE thing we should be worried about, and we are NOT, because we have at least two generations now who haven't ever seen how bad it can actually get, and the educational system doesn't teach history at all unless one specializes in it, yet there are innumerable examples of declining energy resources or broken transportation systems which have brought about Famine and Plague, which have always, always, been the largest killer, historically, of mankind. Birthing in females ranks right up there too as a major killer, if you want to add that into the pot.

No one is addressing these historical facts about mankind, and the fact that if Y2k hits even medium hard the probabilities for Famine & Plague are quite high. Screw the effing banks, we can live without them. We cannot live without food, nor decent sanitation and water. We have to have a functioning transportation and energy resource system that is fairly coherent throughout wide geographical areas.

I've never noticed banking being in Maslow's Hierarchy of Needs.

-- Mitchell Barnes (spanda@inreach.com), March 18, 1999.

Mitch: yup. And as Infomagic says, you could be wrong--it could be worse.

-- a (a@a.a), March 18, 1999.