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Technology Stocks : 2000 - 1 Money under matress or in the computer systems?
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To: Caroline who wrote (4)10/26/1998 2:41:00 PM
From: Fred Ragan  Read Replies (1) of 6
 
Caroline,
My best guess is that the immediate result of a calamitous bank run would
be a short period of steep deflation. Cash would indeed be in short supply
but people are creatures of habit. They are familiar with values in dollar terms
and have virtually no experience with barter. The first preference will be to
trade in dollars as they are readily exchanged for the next commodity in
demand. The shortage of "cash" dollars will make there relative value in
goods rise dramatically. What about the money still in the bank? The under-
standing of its value and the value that people will be willing to give it will
be affected by the same concerns that caused the bank runs in the first place.
If people do not know or believe that they can physically possess their money
then the value of that money to them is diminished and will show as a gaping
disparity between the buying power of money in the bank (cheques or wire
transfers) and cash. A parallel barter economy will quickly develop but at first
it will be a secondary economy. The transfer of value by barter is an awkward
and clumsy process at best, that will take time to learn especially by people who
have no tradition or experience with it, but as we shall see, it will over time become
the primary economy. I expect the deflation phase to be brief, maybe two to three
months, followed by a long period of rapidly rising inflation as the government
tries to head off the barter economy and pay its employees by printing larger
and larger amounts of currency. We have as guides the experience of both the
Weimar Republic in Germany and the Bolshevik Government in Russia. In each
instance over a period of about three years the mark and the ruble devalued to
less than one one millionth of their previous buying power. As there is a physical
restraint on the printing capacity of even "secure" paper money the quality of the
issue will depreciate and the government will quickly have competitors in the
printing process. Every functioning photocopier will become a "money machine".
If this comes to pass, monetary security will only be available in incorruptible
precious metals and barter will be the rule of the day.

This is a vary unpleasant and unpromising picture I paint, but if the governments
of the world don't begin in earnest to create real credibility in their ability to deal
with the issues presented by the Year 2000 problem, people will do as they
have always done, that is to look after their own perceived needs first and
as best they can.
I leave you with this thought; Government can only function so long as the people
believe it can solve their problems. The moment that belief dies, the authority
of government dies with it.
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