The Economist Weighs In - Nothing to fear but fear itself : LUSENET : TimeBomb 2000 (Y2000) : One Thread

No surprise here. The Economist produces their polly piece. No problem with the system, blame fear, blame the doomers, blame the hoarders. But, please, don't blame the computers, the embedded chips, the interconnectedness of our systems.

The Economist September 25 - October 1

(Not sure if this link will work)

Nothing to fear but fear itself

The main impact of the millennium bug will come not from faulty computers, but from the measures that are being taken to avoid trouble

IT MAY be the biggest problem that the modern world has ever faced...At midnight on January 1st 2000 (a Saturday morning), most of the worlds mainframe computers will either shut down or begin spewing out bad data...This will create a nightmare for every area of life, in every region of the industrialised world. Thus Gary North, a professional doom-monger who has had a field day with the much-lamented tendency of early software programmers to record the year with two digits rather than four. In fact, it seems increasingly probable that the turn of the year will pass in most industrialised countries with few severe problems. Industrialising countries may suffer more. The main disruption, however, is likely to come not from computer-induced disaster but from the precautions and contingency plans of nervous companies and investors. Indeed, many millennium-bug watchers, including Alan Greenspan, chairman of Americas Federal Reserve, now worry most about the bugs effects on stockpiling and on financial markets. Edward Yardeni, chief economist at Deutsche Bank Securities, has long predicted that the year 2000 (Y2K) problem would disrupt the American economy enough to trigger a world recession. This week, a report by a Senate panel similarly gave a warning that Y2K could end Americas eight-year-old economic expansion. Yet Mr Yardeni has recently been wondering what might result if people stockpile money in anticipation of new year chaosand nothing happens. Might their relief cause a post-millennial spending spree?

Most information-technology executives in large companies have always claimed that the fuss about the millennium bug was exaggerated, and that they expected little serious disruption. It will be like Monica Lewinsky, said Eric Schmidt, chief executive of Novell, recently: Everyone will be very excited about it, but in the end it wont matter very much. Such views may reflect merely a desire to reassure customers and investors. But several more disinterested observers also support them.

For instance, in its next progress report, the federal Office of Management and Budget in America will show that the government has completed the overhaul of 96% of its mission-critical computer systems. Since the federal government has the highest concentration of elderly and bug-ridden computer systems on the planet, that alone is a reason for optimism. In addition, says John Koskinen, who has been monitoring Y2K issues for the White House for the past year, more than four-fifths of American states are in very good shape in terms of the systems needed to run such programmes as food stamps and Medicaid.

In Britain, too, the official tone has become cheerier. Donald Cruickshank, head of Action 2000, the governments main watchdog, says his concern now is to ginger up small businesses which, in Britain as everywhere else, have done little. The state of some other countries is less reassuring. A lesson Mr Cruickshank draws from Britains experience is that youre either ready or youre not ready: theres no middle ground. Its also not possible to collapse the timescale, no matter what resources you throw at it. Only the English-speaking and northern European countries have clearly begun to reach the happy point where they are reasonably sure that they have reached the end of the lengthy process of fixing the bug.

Many big companies now say they have almost finished remediating faulty systems. Remediation has been expensive, although nothing like as much as the $600 billion that the Gartner Group, a consultancy in Connecticut, originally set as the upper bound for the cost of millennium-bug squashing in the United States. But, for individual firms and government agencies, the numbers have often turned out to be larger than expected. Five of Americas 15 biggest banks raised their cost estimates as late as the second quarter of this year: Citigroup, for instance, said it expects to spend a total of $950m, or 5.6% more than it had previously thought. Overall, Americas 15 biggest banks expect to spend just over $3.5 billion preparing for Y2K: probably the biggest chunk of spending by any single industry.

Some of that spending has been non-productive: it merely aims to avoid catastrophe and to reassure customers. Simply running a helpline, for instance, costs money: as Bruce Calhoon of Answerthink Consulting, a firm in Atlanta, pointed out at a recent conference on Y2K issues, a 20% increase in calls between mid-November and mid-February to a firm already handling 15,000 calls in 24 hours, at a cost of around $3 each, represents an extra $800,000. Such spending is rather like cleaning up after an oil spill: it creates jobs and boosts incomes, but buys nothing for the future.

Some spending will have bought new information technology. But most such investment would have been made eventually in any case; Y2K has simply brought it forward. That may help to boost productivity (although the impact of IT spending on productivity is itself hotly debated) but not by much more than would have occurred anyway.

One other consequence of bringing forward investment in new technology is likely to be a pause in the launch of new services, and a reluctance to take on new IT commitments. Quite a lot of organisations are putting things off, says Steve Goodwin of Houndscroft Partnership, a British IT consultancy, partly because the IT department has spent such a lot that it cant afford to invest any more, and partly because theyve got their compliance statements and they dont want to touch anything. Jitterbug Many companies are now more worried about the readiness of their suppliers than about their own arrangements. That is likely to mean greater stockpiling. Abby Joseph Cohen of Goldman Sachs, one of Wall Streets most consistent bulls, has surveyed reports from Goldmans corporate clients and finds that some are already building up stocks. She expects an inventory bubble over the remaining months of this year. Given uncertainty about the readiness of foreign countries and worries about the reliability of air services (and, more vulnerable but less publicised, of shipping), companies that rely on imports are especially likely to stockpile. Mr Yardeni thinks that this is already showing up in Americas steady succession of record monthly current-account deficits, the latest of whichof $25.2 billion in Julywas revealed this week. Some services can also be stockpiledin the sense that airlines expect travellers to bring journeys forward into this year. Some companies have decided to curtail services over the millennium weekend: Singapore Airlines, for instance, this week became the latest airline to say it would cancel or reschedule some flights that would otherwise have been in the air at midnight.

Some exceptional stockbuilding would anyway take place in countries that celebrate Christmas energetically, because of the extra-long holiday. Trefor Hales, who is responsible for continuity planning at J. Sainsbury, a British supermarket chain, thinks the peak period for stocking food will come before Christmas, rather than after it, but he has been lining up extra storage and transport capacity for most of the past year.

Where companies operate across borders, especially in industrialising countries, stockpiling is even more likely. At British American Tobacco, says Jorge Redon, global manager of the millennium programme, there are special worries about the ability of customs officers to handle the flow of goods across borders. These are leading his firm to put extra supplies into some markets.

Companies with just-in-time systems have generally cut their stocks, so few have scope for more stockbuilding. However, in Japan, power companies such as Tepco have said they will buy January-delivery contracts of oil ahead of schedule. Manufacturers such as NEC, Sony and Toshiba say they may procure parts ahead of schedule. Asahi Breweries and Kirin, no doubt conscious of their key role in ushering in another 1,000 years of drinking, plan to procure malt and other ingredients ahead of schedule. Lets sit this one out Perhaps the biggest question is how the millennium will affect the global financial system. One of the main worries is that, if a computer-related problem occurs in one ill-prepared company or country, it will infect others. A breakdown in power supplies in, say, Russia could cause havoc in Germany, which imports much natural gas from there. But for all the interdependence of the global economy, few networks are truly global apart from those in telecommunications, airlines and the financial system. The financial systems dependence on IT and its importance to the rest of the economy make it especially sensitive. Here, two related issues have emerged: the avoidance of risk and the need for liquidity. Banks worry not just that payments systems might be hitand, with more than 200 of them around the world, there is plenty of scope for problems. They also fear that some borrowers might be unable to pay their debts, because they or their trading partners have been hit by millennial glitches.

Central banks have expected for some time that the millennium will bring pressure on liquidity, as individuals and companies stockpile cash. As with physical stockbuilding, it is hard to disentangle what is millennial from normal responses to the underlying economy. But in Japan, Asahi Chemical has issued special commercial paper for the period; and Mitsubishi Electric has ordered its overseas subsidiaries to hoard cash rather than return it to head office.

Several central banks have taken steps to respond to such behaviour. Thus the Federal Reserve has ordered an extra $70 billion of cashenough to allow each household to take an extra weeks wages out of their banks cash machines. The Fed insists there is absolutely no need for people to do so, and it frets about creating a muggers paradise. But it is doing all it can to assure the public that banks can meet any extra cash withdrawals. And, from October 1st, it will offer a special liquidity facility to banks. It will be made easier for them to gain access to the Feds discount window if they need emergency funds. This month the Fed also announced further measures to improve liquidity through the short-term repo (repurchase markets) at the heart of the banking system. It widened the range of securities that banks can use as collateral for repo loans from the Fed; and it lengthened the maximum maturity of repo operations from 60 to 90 days. Similarly, in Britain, the Bank of England this week said it would extend the maturity of its standard repo facility from two weeks to three months.

In the capital markets, the approach of the millennium, and the attendant fears of a liquidity crunch, are already having an impact. In many markets, traders are taking millennium butterfly bets. These involve selling short-term December 1999 interest-rate futures contracts and buying September 1999 and March 2000 ones, on the assumption that short-term rates will spike over the millennium because of extra demand for cash.

Millennium risks are already said to be partly responsible for the unusually high cost of credit. Take, for example, one indicator of the markets appetite for risk, the spread between swaps of fixed- and floating-rate interest payments (see chart). Its widening to record levels in August was partly a reflection of early millennium effectsand, since the Feds easing of rules in the repo market, spreads have duly narrowed again. But, here as elsewhere, it is hard to distinguish millennial nerves from the economic cycle. Both short- and long-term rates, recently at historic lows, are now rising, so companies are anxious to lock in cheap funding. In the swaps market, in particular, it seems more attractive to receive floating interest rates and to pay fixed rates. In fact many observers believe that, because people might panic unnecessarily, the Fed will wish to avoid raising interest rates in November or Decemberthough it might be ready to risk a rise in October. But while both Y2K fears and expected interest-rate movements are leading to increased demand from borrowers, lenders are drawing in their horns. Some investment banks and hedge funds are drastically reducing the amount of risk they are willing to take. They still bear the scars of last autumns seizing-up of the credit markets. Thenfor decidedly non-millennial reasonscredit spreads went through the roof. In addition, as J.P. Morgan recently pointed out, the approach of the year-end always produces a turn premium: a mini-spike in interest rates as market participants worry about liquidity. The current premium in dollars is higher than the average for September over the past decade, and the bank expects it to keep rising until December. The bug, the bubble and the boom What of the links between the bug and the boom? Will the millennium be the moment when the American bubble bursts, causing the real economy to falter, or when fragile recoveries elsewhere are reversed? Deutsches Mr Yardeni has changed emphasis recently, from talk of recession to an emphasis on ways in which the shock of the millennium might pop share prices. He thinks that Americas growing trade deficit may be being caused by purchasing managers hoarding inventories, especially of computers and telecoms equipment, to see them safely into the year 2000. It would not be surprising if the stockmarket suffered some turn-of-century misery. It would, in fact, be par for the course. The British and Dutch stockmarkets in 1699 and 1799 and the New York Stock Exchange in 1899 all saw sharp falls in prices, according to ING Barings, a Dutch bank. A century later, several big banks and stockbrokers have predicted that reduced trading volumes may dent their profits in the fourth quarter. But, despite fears that investors will pull out of the stockmarket, there has been little hard evidence of their doing so. Phil Orlando, of Value Line, a fund-management firm, says that investors in mutual funds are not cashing out yetand may not at all, preferring the uncertainty of millennial risk to the certainty of capital-gains taxes. Emerging markets, however, are especially vulnerable to millennial worries, both because they tend to be less liquid, and because there will be greater doubts about the readiness of local companies.

Stockmarket hiccups certainly look more likely than a lasting bug-induced recession. Americas Council of Economic Advisers last year trawled through a gloomy litany of meteorological catastrophes, industrial strikes and big technical failures to divine their impact on GDP. It found that such events rarely show up as more than a blip, even during the quarter when they occur. Once they pass, the economy catches up.

So it probably will this time aroundbarring some cataclysmic Y2K accident such as a rogue North Korean missile. Even without such a disaster, the first three months of next year could have an eerie, stagnant feel, because activity has been brought forward into 1999. Couple that with an overvalued American stockmarket, ripe for adjustment, and there could be a post-Y2K recession. But the bug would be the excuse, not the cause.

-- Randy Poon (, September 23, 1999


But then again, that is typical Gary North shite: Some truth interspersed with gross exageration

--- "MOST of the worlds mainframe computers will either shut down or begin spewing out bad data...This will create a nightmare for every area of life, in every region of the industrialised world" ---

MOST!! Absolute bullsh*t!!

The correct word is SOME or A FEW

And that is why many people won't even consider the problem; because of fanatics like North who spew out irresponsible statements.

-- Craig (, September 23, 1999.

No Craig, the real reason people won't take Y2K seriously is because the government keeps repeating the "3-day storm" mantra, effectively pacifying the masses and keeping them happy. Most people have never even heard of Gary North. So don't try to blame him for America's lack of concern over this very serious problem.

-- Get it Straight (, September 23, 1999.

Get It Straight,

THANK YOU for setting this ditwit straight.

Only the 1% ers know of Gary. Most of course, know Klinton and the Republicrats who will be remembered by their criminal silence in the facing of this looming disaster. I am just so sick of the blame the messenger BS.

-- PJC (, September 23, 1999.

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