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To: Mohan Marette who wrote (107550)	3/5/1999 12:31:00 PM
From: Boplicity	Read Replies (1) \| Respond to of 176387

Mohan, as if we did know this already... Y2K Is More a Boon Than a Threat to Economy: Lawrence Kudlow New York, March 5 (Bloomberg) -- U.S. Senator Robert Bennett's recently released special committee report on Y2K asserts that ''in this country we will have a bump in the road, but it will not be crippling.'' Good. I have long believed that doomsday forecasts of the so-called Year 2000 millennium bug reflect flat-earth thinking and a medieval fear of the future. Actually, I'm now starting to think that the ultimate effects of Y2K will be beneficial to the U.S. economy. Experts in the innovative information technology sector have accurately diagnosed the problems and are well-versed in the solutions. Both business and government have the necessary resources to make the right fixes. Bennett's report gave high readiness marks to financial services, utilities, telecommunications and transportation. Hospitals and health care still have more work to do, as is the case for some government agencies. (Wouldn't it be tragic if a third of the government shut down and hardly anyone noticed, or cared?) Numerous foreign countries have a lot more work to do. 70 Percent Positive Alan Greenspan testified last week that the banking sector is in good shape. Stock exchange tests have also gone well in the U.S., the U.K. and Europe. The Gartner consulting group estimates that only 10 percent of any computer failures are expected to last more than three days. Numerous technology experts believe that roughly 70 of American businesses will be glitch-proof. Actually, that's pretty darn good. Nothing in life ever works better than 70 percent. In rural Redding, Connecticut, where my wife, Judy, and I live, every medium-hard rainstorm temporarily brings down the cable television and telephone systems. So be it. Reading by candlelight, with no phone or fax interruptions, puts us in touch with the Founding Fathers and the Declaration of Independence. It's a healthy spiritual-historical experience. Almost transcendental. Let freedom ring. What most people seem to be missing, however, is the economic growth impact of Y2K. It's positive, not negative. This thought came to me while reading a recent report by Hudson Institute economist Alan Reynolds, who calculated that in 1998 ''information technology accounted for 41.7 percent of all spending on plant and equipment.'' Is this related to Y2K? Some of it has to be. Reynolds also calculated that without information technology investments, real GDP growth last year would have been a subpar 2.6 percent instead of the above trend actual growth of 4.3 percent. Remember, Commerce Department GDP figures still do not include software, so technology stimulus is underreported. Tech Investment In this important sense the Y2K threat is benefiting the economy by forcing business to modernize information systems ahead of schedule. The net result will be a technology update that could position the cutting-edge U.S. well ahead of the global pack for the next five or ten years. The doomsday scenarios have concentrated the collective mind of business; procrastination is no longer an option. Early numbers for 1999 suggest that technology investment continues to accelerate. For instance, while total industrial production was flat in January, the computer and office equipment component rose by 3 percent. Over the past 12 months, tech production increased 49.4 percent, compared with only 1.7 percent overall. The Y2K influence? It's a reasonable assumption. California economist Victor Canto believes that the increase of investment, production, and consumption related to Y2K upgrades will significantly bolster growth in 1999, perhaps to 3.5 percent or even 4 percent. I agree. Canto also believes that this year's Y2K add-on to growth comes at the expense of Year 2000 growth, which will be much lower. Markets Agree What's more, the Y2K growth speed-up this year may be responsible for the bond market sell-off that has driven long- term Treasury yields from 5 percent to nearly 5.7 percent. However, rather than inflation-driven, the bond drop reflects a temporary upward move in real interest rates. Not just from heavy investment in technology that improves the productivity of capital and labor, but also because the time shift of spending from the future into the present raises real rates as a means of rationing credit in a self-regulating economy. In this sense Wall Street fears of inflation from an ''overheating'' economy are completely misplaced, as are stock market concerns that the Fed will raise the official fed funds rate. There is no inflation. But real interest rates are temporarily bumping up in response to the Y2K shock. Look at the King Dollar exchange rate. If rising Treasury yields truly signified heightened inflation fears, then the dollar would be depreciating. Think of Brazil, where more rapid inflation and much higher interest rates are responses to the sinking currency. Strong Dollar But the U.S. dollar has strengthened, not weakened. Since the turn of the year it has appreciated nearly 10 percent relative to the yen and the Euro. Along with depressed gold and commodity prices, the rising real dollar exchange rate and the jump in real bond yields is actually another technologically induced deflationary event. This implies a general tightening of U.S. financial conditions that will slow the economy as the Y2K spoon-fed investment bulge gradually runs down in the next few quarters. Then bond rates will descend, and the bull market in stocks will resume. The deflationary boom will continue, though next year's growth will probably come in below the historical 3 percent trend rate. In sum, Y2K is OK. The Y2K process will prove to be a healthy influence on the economy, yet another example of Schumpeterian gales of creative destruction. Both industries and interest rates will churn during this new round of technologically induced restructuring, but the net effect will be an inflation-less U.S. economy even better positioned for value- added wealth creation. Whacko flat-earth doomsday prognostications will be proven wrong once again. After all, our Creator wouldn't have blessed us with a new millennium if He didn't think we could handle it. Keep the faith. Faith is always the spirit.