'Piggy and the Banks: A Fairy Tale for 1999
Gary North's Y2K Links and Forums
Summary and Comments
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Category:
Banking
Date:
1999-01-16 12:01:36
Subject:
Piggy and the Banks: A Fairy Tale for 1999
Comment:
This was forwarded to me. I think it's relevant. Exponential curves take a long time to turn upward, but when they do, things happen very fast.
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THE SEEMING SUDDENESS OF EXPONENTIAL GROWTH. A Y2K FAIRY TALE
Try this out on your friends:
" I am going to tell you a story and I will ask you one question, which you should answer within 2 seconds. The purpose here is to find out your power not to calculate but to estimate."
"Here we go. There was a large pond in the middle of the forest. In it there was a lillypad. This was a very special lillypad because it grew so fast that it doubled every day, at least until the day when it covered the entire pond. Each day, a young boy came down to the pond in the morning to count the lillypads, but in time, he found they were too numerous and by the time they covered about 10% of the pond, the patch of lilly pads had grown almost too large to see, unless the boy climbed up a tree where he could see the whole pond. On the first day of the month, there had been only 1 lilly pad. On the 31st day of the month, the lake was covered completely. Now here comes the question you have to answer in two seconds. On what day of the month was the lake 10% covered?
Most people will think linearly and say something like the third or fourth or fifth.
The answer is the 27th.
[We can see this by moving from day 31 backward. At the end of day 31, it's 100%. At the end of day 30, it was 50%. At the end of day 29, it was 25%. At the end of day 28, it was 12.5%. At the beginning of day 27, it was 6.25%. Sometime on day 27, it reached 10%. -- G.N.]
Now let's take an example which relates to Y2K.
By now "almost every" American has "heard" about the Y2K problem in a general way. Many of them have even got letters from their banks and insurance agencies saying they are working on it. But how many people are "preparing" now? There comes a time in everyone's relationship with Y2K when they actually decide to make some kind of physical preparation, even if it is a small one.
One of the things which can shake people into preparing in some way is the realization that something they usually need might not be there (at least for a few days or weeks). Money, in the form of cash and coin is something which everyone wants at least a little of because it is the most versatile form of payment. So after reading a few articles on Y2K, and the potential for banking problems, and the news that the Fed is printing up 50 billion of extra cash, many of us will decide it might be a good idea to dust off the piggy bank and save up the coins again for a rainy day. So every night, the pocket change gets saved. Those of us who are lazy and don't really go out and buy a piggy bank will use a jar. Usually it will be a quart jar or larger, because even if we don't fill it in the end, we will intend to be good savers and try to. The jar allows us to save bills too, generally ones because fives pay for our lunches. Some of us will contribute casually to our piggy - a little bit at a time. Others of us will think of our piggy and remember to "try" to come home each night and will feel a warm glow as our pocket clinks with the sound of coin in the evening. Some of us who are freaks for cleanliness or fear our piggy could be taken may decide it is easier just to go out and get some nice tidy roles of coin and some small bills and make a small stash. Each will do this in his/her own way.
For the sake of argument, let's say that we define a person who has saved $100 or more in a piggy bank as being "prepared". Now let's start our story in January 1999. By that time, after about 2 years of internet driven awareness, 1% of Americans have "prepared". This actually means that most of them had gradually been saving during the last few months of 1998. In the same way others who started a bit later or saved more slowly reached the $100 mark in February. For now, we will not consider that many will keep saving and go beyond $100. We are only concerned with the number of people who reach the $100 mark and are counted as "prepared". To keep the math easy, let's say that this number doubles every month. So by February 2% were "prepared". Still a very small number, even though it's twice as many.
By March 4% were "prepared" and there was a human interest story in the New York Times that the stores on 5th Avenue noticed an interesting increase in the demand for good old fashioned piggy banks, and since it seemed to be y2k related, it was considered that unless the piggy industry geared up fast, Piggies could become the cabbage patch dolls of the 1999 Christmas season. But the story got lost on the 14th page of the Weekend section which most people don't read. The editor didn't really understand the interest in Piggies as being a vote-of-no-confidence in one of New York's major industries.
By April, with 8% of the population now "prepared", it was no longer considered an odd ball thing to have a piggy and there were even church groups and neighborhood groups meeting to inform themselves about the best way to "prepare". There was also a high level of concern amongst the 8% who were "prepared" that not enough people were grasping the importance of the "personal Piggy" and some were even advocating some form of "Community Piggy". Banks of course could understand the need for personal Piggies but were opposed to any form of non-bank Community Piggy. By this time it was controversial enough that many of those who were "prepared" were considering that since some of their neighbors were not only not preparing but were telling them to shut up about that stupid Piggy issue, that they must save a little extra for their neighbors as well. So there emerged a category of "ultra-prepared" which can be defined in that they had formed coin collecting clubs and had saved over $1000 in coins and singles per person. Some even advocated moving towards silver and gold coins because they could fit more value in smaller jars. A rumor circulated that coin which was not stored in diatomaceous earth would not be useful, but that was considered scaremongering and profiteering.
This feverish level of discussion, along with the influx of available money from tax return checks, drove a sudden surge in interest and by May the expected 16% turned out to be 20%. By this time, Wall Street had noticed because a new company called Piggy.com did an IPO in late April. Their product was a pre-packaged Piggy with $100 already loaded into it. This company had actually been in business for over 2 years and has seen the doubling of monthly sales the whole time. Copycats of Piggy.com appeared and Piggy.com announced that they had negotiated an exclusive distribution arrangement with WalMart, because their sales over the internet could no longer manage the demand. That day, the shares of WallMart jumped up 20%.
By June, with the help of Piggy.com and thousands of grass roots community groups 50% of Americans were now "prepared". In late May, Alan Greenspan was concerned about "irrational exuberance" in the Piggy market and stated that if it were left unchecked it could cause a bank run - particularly if interest in larger bills emerged . It was also of particular concern that the numbers of the "ultra- prepared" were getting beyond the small circle of "rural right-wing terrorists" and beginning to grow at an alarming rate. There were also an ever increasing number of people who had begun to quit their jobs and move with their Piggies to the country. This initially upset hog farmers who misunderstood them as competition in a glut market, but when the hog farmers got the message, they quickly joined the ranks and many even became "ultra-prepared" in a show of defiance.
The moral of the story is to notice that what was still "fringe" in March (4%) was "mainstream" in July (50%).
THERE IS A SCARY REASON WHY THIS STORY IS MORE THAN PLAUSIBLE.
There are about 9 billion $1 bills in circulation and about 3 -5 $billion worth of coins. Because $1 bills are time consuming to count and coins are heavy to transport, most of the $1s and coins are in circulation and there are only small vault reserves. Any decrease in the circulation (caused by money landing in Piggy banks for the rainy Y2K day) must be balanced by an increase in the velocity (rate of changing hands) because there is a limited amount of reserves. Unofficially estimated, $1 bill reserves may be about 5% of $1 circulation and coin reserves about 2% of coin circulation. At some point, the lack of coin will be noticed. First by the Fed who gets data from all the Banks, then by Banks, who notice dwindling vault reserves, then by vendors (small businesses) who are told by the banks to "conserve" coin requirements, then by "customers" who are asked if they have the change. It is difficult to say at what point it would begin to be a problem. Most likely, if 50% of $1s and coins were in Piggy Banks this would be a serious problem.
With 250 million Americans, this translates to about $35 in $1 bills and about $20 in coins. This means that there is really only about $50 per person in the smallest form of currency. But without the ability to make change easily, the value of all the larger bills is put into question. At least a question of convenience. This also means that once 10% of the public had $100 in a Piggy the system of small change might be in trouble. The moral of this story is that coin saving (which is certainly going on all the time and is definitely increasing as people get ready for Y2K) will most likely lock up the small change system long before it gets to the "mainstream".
How hard is it for a simple person to get $100 in a Piggy? Not hard at all. Most people can afford it if they try. It doesn't take a big cash advance from a credit card to finance it. Right now it is possible to walk into your bank and get a box of quarters valued at $500 and get $500 in $1 bills at the same time. There are no reporting requirements on this type of transaction. Millions of small businesses do this in smaller scale each week. If only 1% of people did this, the system of small change would lock up. The day Alan Greenspan or President Clinton speak the word "coin shortage" is the day the small change system will lock up. The reason for this is because almost all $1 bills and coins are in the hands of the people. All of the people all of the time. There is little that banks can do to "ration" the supply. The impulse to hold back can spread as quickly as the common flu.
This problem could happen in any country. It happens commonly in smaller economies which have currency problems. People find their way. But if it were to happen in America it would be very big news and it would immediately raise the level of y2k awareness worldwide. Such an immediate awareness around a negative event which threatened the banking system could take a very heavy toll on the world markets.
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