Bill,
I greatly enjoy your analysis which I find concise and logical.
I also am convinced that there will be an international credit crunch but the question is still "when?".
There certainly seems to be more psychologically driven steps the Fed can take in lowering interest rates (which Ed Yardeni expects will be 3% by December, '99), to spur liquidity in money center banks to help them manage localized defaults as they did with LTCM.
However, the real credit crunch will come, IMO, as Y2K draws nearer. Whether real or perceived, Y2K will impact Asia and Latin America far worse as money center banks "pull in their horns" and avoid exposing themselves to more loan or political risk in emerging markets.
In 1999, IMO, Investor's will also become far more hesitant to take major stakes in emerging countries and capital already in those countries will relocate to safe havens like Europe and the US, who are relatively more advanced in their Y2K efforts. Thus the dollar should retrieve much of its strength.
But the end result of this will be that most debtor nations will either declare debt moratoriums or outright defaults, especially since when one country is permitted to default others demand the same right to have there loans forgiven. I think Y2K related financial pressure will ultimately create an atmosphere of rejection of western financial systems with the resulting political and social repercussons, to include regional wars.
But with Y2K, according to everyone I have asked, there is also the issue of individuals hoarding cash which the drastic impact of both limited hard curency reserves and seriously slowing the velocity of money exchange. I have every reason to believe that the $500 billion the Fed has on hand in hard cash will not be enough to meet the demand. I base this upon the following equation: 100 million people (US and abroad) each having at least $5,000 on hand for Y2K will equate to $500 Billion in hard currency taken out of the banking sector. This equation is an average based upon input from people I have discussed the topic with and from ranges varied from doing "nothing" to taking out everything. Many people were in the $10,000 to 20,000 range.
This will be very bullish for gold eventually, as it will find the Fed in a serious quandary of how to convince depositors to keep their money in the bank through higher interest rates, and maintaining liquidity in those very same banks through lowering the discount and funds rate. Interesting problem.
Again, my question is WHEN the system will be stressed beyond easy repair. That is one of my rationales for believing that the CB's will continue to manipulate the gold market through either leaseing gold to shortsellers, or outright sales of gold from banks to preserve the sanctity of Fiat money.
Again, I truly enjoy your analysis. I would welcome your views on the scenario I presented above.
Regards,
Ron |
