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BEST CASE SCENARIO by Stefan Stackhouse

Here is what I see as being the best possible case scenario. If you don't plan for at least this, you are being pretty foolish indeed!

First, there will be some system glitches in the first 2 quarters of 1999. This will rattle some people, and we will see the stock markets drop a little lower than they did a couple months ago. (That was the smart money getting out of the market. This second wave will be most of the rest of the governing elites getting out while the getting is good.) There will be the predictable public announcements by various government and corporate big shots that this is a serious matter, but that everyone is hard at work, and that they are confident that everything will either be fixed or "manageable." There will be a partial recovery in stock values as fools rush in to buy "bargains" with their 401K money. "Survival" type supplies and equipment will get increasingly scarce and expensive through the first 6 months of 1999 - if you don't get them by then, it will be virtually impossible to get anything after June '99.

The third quarter 1999 will be the moment of truth. That is when we will start to get a pretty good idea which corporate and government systems will and won't be ready for Y2K. A fairly substantial number will, some won't including some pretty big names. This will be the time period when investment managers will be making some serious decisions about portfolio allocation and who they will and won't invest in. Companies will also be making some serious decisions about who they will continue to rely on for suppliers. Y2K will start to become more than just a "blip on the radar screen" in the media, and stocks will start to drift downward.

Beginning of the 4th quarter, October 1999. The "Black October" to end all "Black Octobers." There will be a new record one-day drop in the DJI. I expect that by the end of 1999, the DJI will be trading at no more than ´ -to - 2/3 of its peak. The media & corporations will be under enormous pressure from the government to try to calm things down and avoid causing a panic - expect on not being told everything, and to be told deliberate disinformation then. Nevertheless, expect store shelves to be pretty bare of necessities throughout the 4th quarter. This may not be a good time to drive long distances, as gasoline may be in short supply as well. As we move toward December, there is a very high probability of bank runs, especially on any smaller bank which is not able to give the public prompt and credible assurances that they really are Y2K compliant. At first the government might try to handle this by merging the smaller banks with bigger ones. However, I would rate the probability as greater than 50% that a "bank holiday" will be declared for at least the entire last week of December (i.e., between Christmas & New Years.) There will be tremendous political pressure brought to bear on the government to not impose a bank holiday prior to Christmas. There will probably also be an announcement that all airlines will be grounded for the first few days of Jan. 2000. This might be by government action, or by insurers, or both.

People will be extremely tense going into the 12/31/99 - 1/1/2000 transition. In the U.S. - on which our population & media will be almost exclusively focused - people will be relieved to discover that it is NOT "TEOTWAWKI". The lights will not go off in Times square at one second after midnight, nor in any but a handful of places. There is a small possibility that a few local system glitches might cause one of the regional grids to go down, but it should be brought back up within a few hours. There will be a few other isolated problems in transportation, utility, and communication systems, but they will be pretty isolated. Very quickly, there will be a sense of relief, of joking - "I told you so!", etc.

Meanwhile, things won't be going nearly so well in the rest of the world. There will be far more widespread system failures in many other countries. However, this will barely get reported in the U.S., and most people will ignore it.

Then, on Monday, 1/3/2000, there will be a few system failures at some U.S. production facilities. However, there will be thousands, if not tens of thousands, overseas. Very little of this will be reported, partially due to the usual U.S. inattention to foreign affairs, but also due to the fact that many communications systems overseas will not be fully operational.

As the days and weeks progress, however, import supply chains for crude oil, raw materials, parts, and finished goods will become increasingly disrupted. Given the "just-in-time" inventory management system which is the current management fad, this will start very quickly to result in production lines shutting down, workers being laid off, and store shelves emptying. This will initially be most noticeable in industries dominated by imports, and the initial conventional wisdom is that this is just "a temporary import problem." However, the interconnectedness of the modern global economy will gradually become evident over the following months as domestic manufacturers find that they can't operate without supplies based on imported materials and parts. Exporters will find that their export markets have dried up. And sellers of goods and services in the U.S. will find that they have less stuff to sell, and fewer people who can afford to buy.

In short, the U.S. (and global) economy will be sinking into a recession. Think of it being at least as bad as 1973/74. There is a very good possibility that it will be as bad as the 1930s. The reason is that we will also see a profound credit crunch. The stock market will continue falling. In 1973/74, it traded at a P/E ratio of 8, now it is at 24. A drop from 24 to 8 is 2/3, suggesting that by December 200 or 2001 the DJI could be trading in the 2000 - 3000 range. This means that most people who were still substantially invested in the stocks - i.e., most people with 401Ks, the elites will have mostly pulled their money out by 6/99 - will have suffered at least a 2/3 decline in net worth. Many of them - at least 10%, possibly 25-35% - will also be unemployed. The banking system will have suffered a major loss of confidence. FDIC insurance will be honored, even if the fed has to hyperinflate to do so. But they will counter this by raising interest rates way up and tightening credit substantially. This means that almost no one will be able to get mortgages, and a lot of people will be in default on their mortgages, and eventually a lot of mortgages will be foreclosed, and there will be a glut of foreclosed houses on the market, which few people can buy because there is no mortgage money. Meanwhile, look for increasing populations of unemployed and homeless people to set up shantytown "Clintonvilles". The credit crunch will also result in a wave of business failures, further driving up unemployment and causing various goods to be in scarce supply.

Those who will cope best are those who can hold on to their homes, can find some way to earn at least a little money, can produce at least some food, fuel, clothing, or other goods at home, and can resort to barter and avoid the cash economy. Those who got out of stocks, preserved their cash, and had minimal debt will be in relatively good shape financially. Eventually, the elimination of competition from foreign and failed domestic businesses will open up a lot of new entrepreneurial opportunities for the survivors.

The big question in this scenario, of course, is at what point civil unrest starts among the urban underclass, how bad and widespread it will be, what the suburbanites do in response, and what the government does in response. Since this is supposed to be a "BEST CASE" scenario, let's just say that there will be some riots in a few cities along the lines of LA or Miami, but that it will not be all the cities, it will not be all at once, and that it will not all start on 1/1/2000. Some suburbanites will head for the hills, some will get together with their neighbors and guns, put up barricades, and protect their own turf, and some cities will start to look a little more like Beirut or Sarajevo for a while, but most won't. Expect the government to be ready with mobilized regular and national guard troops to quell any disturbance. However, since this is "Best Case", I am going to assume that Clinton doesn't have the support of the military to proclaim a general martial law as a power grab.

Another big question is whether or not Sadaam, the N. Koreans, the Chinese, etc., will use Y2K as an opportunity to launch a land grab against coveted neighboring territory. If there is any substantial unremediated Y2K problem with our weaponry, communications, intelligence or logistics systems, then the danger of this will become extremely high. There could also be substantial hostility overseas directed against American targets, as foreign populations may blame U.S. technology for their Y2K problems. If there are one or more foreign conflicts, it is very possible that the U.S. will lose, and may lose badly. That will not be the end of the world, but may worsen general conditions here. It may also increase the possibility of a military coup d'etat, especially if the military believes that they were sent in to an ill-advised foreign conflict with inadequate support from the government, and especially if a country in the throes of a severe economic depression and civil unrest holds the military in high esteem and the government in low esteem.

This is what I see as the best case scenario. Even in this best case, the world five or ten years from now will not be much like the one we live in today. It will be a functioning world. Most people who prepared wisely will have homes, they will be raising food on their property, they will have a source of heat, they will have some way of earning some money, and there will be some basic level of law, order, and peace, at least in smaller and rural communities. Cash and the basic necessities of life will be scarce and valuable, stocks, real estate, and labor will be abundant and cheap. There will be a lot of poor people many more than we have now. Our government will be pretty much of a shambles, it may no longer be a civilian government, and in any case will not be able to do much to help people. There will be no "New Deal" or World War to lift the country out of the economic depression this time. This time all of the speculative and governmental excesses will have to be pruned out of the economy, and then will follow the long, painful, and difficult effort to rebuild by honest hard work.

I am basing my plans and preparations on this as a given, and then trying to do what I can to deal with more pessimistic scenarios. Don't say you were not forewarned!

Comment by Tom Greco

This "best case scenario" for the immediate and mid-range future seems quite plausible to me. I find it VERY SOBERING. If this is the best we can expect how much worse might it be? What should we be doing to prepare, both individually and collectively? As I see it, individual and household preparedness efforts are well and good and prudent, but far from adequate. We must do everything we can to promote social cohesion. The situation requires a total mobilization of the population in an effort to begin building resilient communities which will provide the strong foundation needed to weather the storm and build a happy future.

Thomas H. Greco, Jr., Co-coordinator Tucson Year 2000 Center P.O. Box 42663 Tucson, Arizona 85733 (520) 792-6438