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Y2K-41 Days: Fear and Loathing in Y2K Land


November 20, 1999: http://www.yourdon.com/books/y2k2020/24.fear.html

If we assume, for the moment, that everyone does carry through on their plans, then we're faced with some interesting statistics.  It turns out that the average household income is approximately $33,000 per year; that's $2,750 per month, some of which disappears in witholding taxes, Social Security deducations, etc.  Let's assume that the average take-home pay is about $2,000 per month; and as the Zogby poll indicates, roughly 13 million households (20% of 65 million) might be serious enough about Y2K to withdraw $2,000 to cope with emergencies.  As for the other 52 million, let's assume that they decide to withdraw a week's income, or $500.  If you do the arithmetic, that works out to roughly $52 billion in little pieces of green paper with dead Presidents on them.  The Federal Reserve has already indicated that it has ordered the printing of $50 billion in extra currency, in addition to $150 billion that it already has available.  So, assuming that the Fed can actually distribute all of that paper to the banks, and assuming that the banks have sufficient collateral to borrow that paper from the Fed, there should be more than enough to cope with the public demand.  (By comparison, a recent article entitled Swiss banks gather cash for Y2K demand  indicates that the Swiss National Bank has shipped $39 billion to its banks, which works out to $5,800 for every individual in Switzerland).

But regardless of how much cash the average individual decides to withdraw, there is a more fundamental question to ask: how much cash do they have available in their accounts?  I haven't been able to get any precise data on this, but I've seen anecdotal comments that the combined balance of savings and checking accounts for the average American family is only a few hundred dollars; indeed, quite a few families live from paycheck to paycheck, with very little extra money in their bank accounts.  And if they do have any extra money, why would they keep it in a savings account that pays 2% interest?  For a long time, the most valuable asset of the average citizen was not his savings account, but rather the equity in his home.  But today, it's more likely to be the stock market: with a seven-year bull market that has seen increases of as much as 10% in a single month, it's incredibly tempting for the average person to take out a home-equity loan of 125% of the equity in his house, and invest that in the high-flying ".com" companies.

Which means two things: if people do decide to withdraw more than a couple hundred dollars for Y2K, there's a good chance that they'll do so by cashing in some of their stocks, transferring the funds to their bank account, and then withdrawing the proceeds in cash.  And second, it suggests that the first consequence of such a withdrawal -- potentially as much as $52 billion, if my arithmetic above is correct -- will consist of stock market sales and/or mutual fund redemptions.  Whether this will be enough to trigger a stock-market decline or crash is beyond my ability to predict.  But if such an event occurred, it would have an interesting psychological effect: just as a booming stock market creates a "wealth effect" by making people think that their stock certificates represent real wealth, so a declining stock market may create a "poorhouse effect" by making people think that they've lost money that they never really had in a tangible sense.

Independent of Y2K, I have no idea why the market is as high as it is, or why it seems to keep going upwards, based on high-tech ".com" companies that have no profits, miniscule revenues, and little of substance.  When you add Y2K into the equation, I thought that investors would be heading for the sidelines as we began the fourth quarter of 1999.  But they didn't, and they still haven't -- at least, not yet.  Maybe they'll continue to be so enthused about the ever-upward nature of the Dow Jones average and the Nasdaq index that they'll hang in, right to the bitter end.  And maybe if they want some extra cash for Y2K, they'll do it by taking a cash advance on their credit cards.  None of this makes any sense to me, but that's probably why I'm a software engineer rather than a stock broker or a banker.

-- anon (anon@anon.com), July 24, 2000

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