Banks/Bonds dependent upon debtors to pay : LUSENET : TimeBomb 2000 (Y2000) : One Thread

Let's assume that the banking system remains relatively intact. Let's also assume that shock markets are able to function. Does this mean that everything is OK? No.

Banks and markets depend upon those who they loan money to or who trade with them to be in business, to be credit worthy, to perform in a profitable way. If they don't or can't then it doesn't matter that the bank or market is functional because its 'customers' (read debtors) will be in default for months or years.

Unless money is flowing as well as it does now (sales, paychecks) there will be a tremendous failure of banking and markets. Chase Manhattan has $x amount in total banking reserves. It has 500% of this amount extended as credit cards to consumers alone. This does not take into consideration all the other loans and lines of credit that are out there. If 20% of their credit card holders could not pay their monthly payment then they would be technically insolvant.

I'd say we have a boat that is pretty low in the water. The next wave will capsize us.

Got Life-preservers?

-- David (C.D@I.N), May 15, 1999


David, let's assume that you are 100% correct. But then, as you also have to be 100% consistent, hereinafter your short & long term scenarios concerning Y2K have got to match the original default and bankruptcy realities you are foreseeing. And the consequences of what you are correctly predicting should be in the Gary North category, right? Is there any other valid conclusion? Do you agree, David? Please comment.

Accordingly, one of the very first subject matters of analysis that naturally follows to your line of thought should be what will or may become currency. Because currency(ies) will exist. Have no doubt. Barter will take place also, but at least one currency will also co- exist as a recognized payment means. The "store of value" or "reserve value" role of money is the second thing to discuss. The third would be the "unit of account" role.

So then, what about precious metals, namely gold? One school maintains that in your scenarios gold has to drop jointly with all the other commodities in the subsequent (for a while) deflationary economy. Later, after central banks of the world are physically able to print all the money they didn't have to cover their M1 - M2 - M3 base, then, and only then would the price of gold have the chance to go sky high in the hyper-inflationary economy that would follow.

What this school of thought does not take into account is the possibility of gold being taken as the only currency by a sufficiently large number of people as from minute one, in absence of any other substitute for "money".

Because, in that case, gold would not drop neither initially nor subsequently, as it would be the "de facto" currency of the world, as it used to be, and would continue being so for the foreseeable mid and long term future. So it's everybody else's reaction that counts, including not just Americans (as many Americans tend to think) but rather the rest of the world. In Asia, Europe and Latin America my gut feeling is that in your scenarios, people would massively go for gold, minted gold, which is something quite differently from the gold "certificates" that rule the gold market today. Barter will exist, of course, but minted gold will be "mone" just about everywhere in the world.

The reason for this is (a) collective memory and (b) no other practical substitute. This last point is forgotten many times by people that don't understand that a most radical paradigm shift would be taking place in any and all of the Gary North type scenarios which you are also predicting David.

-- Jorge (George) Vilches (, May 15, 1999.

Right ON! And concisely stated.

A chain is only as strong as its weakest link.

Whether that be Depositors (that pull their deposits out of the bank) or Lenders (that can't process accounts due to Y2K disruptions) or Debtors (Consumer, corporate or international that default on repayments), it has the same result: The velocity of money slows down (a recession); demand slows down more (a depression) or supply stops ( a collapse).


-- Bill P (, May 15, 1999.

George ... Forget gold , except for large transactions. If you want 5 lbs of sugar, oatmeal, rice, etc. your not going to whip out even a one tenth ounce of gold, and expect change !!! One ounce "rounds" of silver , sold by Sunshine Mining ( was out of Texas in '80s ) will be the "realistic" currency of choice for everyday transactions. I believe silver will go back to the 3000 year ratio to gold of 10-1 , like it was before the major producing silver countries of the world, made an artificial rate of exchange in the late 1800's. It's all in the history books, SOMEWHERE . Of course "silver" change , which has almost no silver content at all, will still be used for a while, but I would bet "my bottom dollar" that it won't be long before you would need ten dollars of 'uncles' silver to get one 99.9% silver round. Respectfully, Eagle

-- Hal Walker (, May 15, 1999.


So if I understand your post correctly you posit that gold will be the best store of value before, during and after Y2K?

IMHO, there is a good possibility that Supply and demand will be thrownout of balance prior to and during the rollover period. In that event, it will be difficult to maintain a market - an agreed upon value of gold or other precious commodity. But I beleive gold will prove itself after Y2K disruption subside.

So, in early stage of Y2K -basic essentials could be more valuable than gold or non-essential goods (How many cars do you think will be sold in February 2000?) That forstalling of satisfying non-essential needs could well be deflationary - paper money could be worth more in future that it is today as demand for currency increases. But once govt printing presses inject added liquidity into the economy than gold could soar.

One should not plan on acquiring gold to transact business in late 1999 or early 2000 but should be acquiring gold for post-Y2K capital.

-- Bill P (, May 15, 1999.

You have layed out a pretty good case there. All fiat currencies depend upon public confidence in the government which backs it. What does it back it WITH? The ability of the government to maintain the economy is such a state that people do NOT have to barter, but can use the fiat as currency. IF barter were to emerge as the currency of the common transactions of the day then basicly fiats become worthless. Y2K certainly poses this problem for all governments.

Thinking of gold/silver as currency in common use as currency would really take a lot of changes in people's attitudes. As you imply the 'unit of account' would need to change in the collective consciousness. I see the precious metals as being part of a barter system for sure. This would be just as it was for thousands of years before the modern nation state appeared.

I can garrantee you that I would consider a gold ring or silver bracelet of more value that a paper fiat dollar. But also would tend to barter for things like greenhouse plastic, etc if I really needed to produce food.

We are indeed headed into a time of great difficulty. I had posted a note about the work of Sen from India who won the Nobel for Economics in 1998. He explored the issues of famine. It typically is about people not having a means of paying for food rather than food availability. It seems to me that this issue of payment/currency/barter will be a very large and immediate problem for all of us. "Up close and personal" as they say.

Thanks for your write up. Please do more. You have a good head on your shoulders.

-- David (C.D@I.N), May 15, 1999.

This is a great, informative thread. A few more things to think about:

1) Initially at least, surely cash will be king. Joe Sixpack will certainly have confidence that the lights will be back on, the banks will be back in business shortly, etc., etc. So during this initial period, cash will be the preferred choice, not barter, and certainly not gold.

2) Later, after even poor Joe realizes that the "72 hour hurricane" is BS, and its going to be a long, long winter, then thats when things get dicey. To be sure, bartering will be prevalent. Micheal Hyatt, in his new book, THE Y2K PERSONAL SURVIVAL GUIDE, recommends that you have BOTH gold coins (1/10 oz) and silver (90%, so-called "junk silver" coins).

3) And here is something to consider: Since as we all know, fiat money is in such short supply (like $1.17 for every $100 on deposit), greenbacks and coinage may actually become considered "precious" and gain in value! (Or, rejected outright after a period of time. Who knows?)

-- King of Spain (, May 15, 1999.

David said:

"All fiat currencies depend upon public confidence in the government which backs it. What does it back it WITH?"

The U.S. backs it with executive order 12919.

-- Clyde (, May 15, 1999.



-- Clyde (, May 15, 1999.

Hal Walker, thank you for your comments on gold/silver.

(1) Silver is not recognized (worldwide) as much as gold is, and Y2K most probably won't change that. Reasons there are many, not all of them "logical". But economics is "ruled" by people's perceptions and actions. As talk is cheap, whatever people say doesn't matter that much. It's what they end up doing what makes a difference. That is, they have to put their money where their mouth is. The rest is background noise without signal. The "signal-to-noise" ratio will probably be very high before, during and after Y2K I'm afraid, which makes things harder to follow.

(2) Some isolated areas of the world (Texas maybe?) may make minted silver their currency of choice. But the rest of the world probably wouldn't care simply because of the fact that there isn't enough minted silver to go around and Y2K will probably make things worse, i.e., focus on gold would grow at the expense of any other substitute currency because of reasons stated before. Now don't get me wrong: silver will be far more valuable (eventually, maybe after June 2000), but that won't necessarily make it the new currency of the new world order. Also, as I've said before, initially cash will be king, until central banks are allowed to print all the paper currency they can get away with without inflation. As soon as the very purpose of fiat money is defeated by over-printing, hyperinflation will make paper money worthless, and a new currency will be born. I believe it may very well be gold (June 2000). Events could unfold faster if enough people around the world foresee this scenario before it actually takes place. It all depends of culture, past experience, local conditions, etc.

(3) Eventually a given central bank may actually decide to go back to the gold standard of yester-year, thus acknowledging what people will realize anyway, sooner or later. Then that given paper currency would have gold backing, thus solving the problem of buying one pound of sugar with a one ounce gold coin.

(4) Gold by itself would thus play the essential role, whatever happens. Large transactions wouldn't be a problem, of course. Smaller transactions could be worked around in many different ways. For example, where I live (Argentina) many vendor companies that supply local supermarkets are thinking that for the December 1999-March 2000 time frame they would want 50% of their payments in coupons that would allow their personnel to get goods (any type of goods) at the supermarket (client). This could also develop into March 2000 supermarkets at which Joe Sixpack shows up with a one ounce Kruger Rand and getting for it plenty of coupons with which to pay for, fractionally, any stuff he cares for at that store, today or next week or week after that. Creativity will be rampant in post Y2K. So gold can be good for large transactions and there could be many work arounds for small transactions.

Have a good day Jorge (George)

-- Jorge (George) Vilches (, May 16, 1999.

King of Spain, thank you for your comments.

(1) Initially, cash is king. Not barter. Not gold. (2) Then Joe Sixpack goes for barter. (3) Immediately after barter (commercial transactions) is established, currency develops. Barter is cumbersome, nor practical at all, and sometimes outright impossible. (4) The rest is history

Jorge (George)

-- Jorge (George) Vilches (, May 16, 1999.

Bill P. thanks for your input on post-Y2K currencies.

To answer your question, the answer is "NO". No, I never said that gold will be the best store of value before, during, and after Y2K.

What I did say is that, depending upon the rest-of-the-world reaction (literally) gold might probably become the post Y2K currency as "means of payment". Probably also as "unit of account", depending on habits and of new world order "local economies". The store of value role of gold remains to be seen. Alternatives are very speculative at this point.


-- George Vilches (, May 16, 1999.

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