The Federal Reserve officials yesterday said they might further adjust the supply of cash on hand at the end of the year to meet public expectations about the computer software problem known as Y2K.

Typically, the Fed keeps about $150 billion in its vaults. In its annual currency order last August the Fed asked the Treasury Department to print up an extra $50 billion to cover possible withdrawals by people who fret that banks' systems and automatic teller machines might be interrupted by software glitches after Jan. 1, 2000.

With the time for its next big currency order approaching next month, Fed officials now say they are studying whether to increase or decrease the $50 billion set-aside based on how seriously the public regards the threat of Y2K-related problems.

The decision will be delicate because just as with the Fed's decisions on interest rates public expectations might be influenced by how concerned the central bank appears. Since last year banks have made much progress fixing their software, Fed officials noted, suggesting customers might have more confidence that any problems at their banks will be minor.

On the other hand, in an interview last week Paul Connolly, the Boston Fed's chief operating officer, suggested the total amount of extra cash kept on hand might go as high as $70 billion to help provide ''a super-abundance'' of money at the time of the date change.

But other bank officials yesterday downplayed that figure. ''Nothing has changed in our overall assessment of the amount of cash that will be needed here,'' said Boston Fed spokesman Thomas L. Lavelle.

''In time we've become more optimistic about the other payment options remaining available and the general public becoming less concerned about the issue as a whole,'' Lavelle said. Rose Pianalto, spokeswoman for the Fed in Washington, said she doubted more extra cash would be ordered.

''So far there's no sign'' that banks have begun to seek extra cash to satisfy the needs of their customers, she said.

Y2K, short for year 2000, refers to a glitch in many older computer systems that use just two digits to represent the current year. When 99 becomes ''00'' some systems might be confused about what year is indicated and crash or shut down.

To combat the problem, banks, electric utilities, telephone companies, and public agencies across the country are spending about $100 billion to upgrade their computer systems, according to the consulting firm Gartner Group Inc.

The financial sector is considered relatively advanced in its Y2K-preparedness efforts, and bank examiners have vowed to punish or close down institutions that don't meet certain target dates in their work to upgrade their systems. So far only about 2 percent of the country's 10,400 federally insured institutions have made unsatisfactory progress, officials say, an improvement from 4 percent a year ago. Most of the laggards are expected to catch up in coming months, officials say.

The Fed has also pressed individual banks to familiarize customers with their own efforts. In that vein, major local banks, including Fleet Financial Group Inc. and BankBoston Corp., said they met a June 30 target date to complete reviews of their systems considered critical to stay in business.

BankBoston economist Wayne Ayers said he would be comfortable even if the Fed winds up increasing the money supply.

''They're in uncharted territory as far as what people will do, so it's better to be safe than sorry,'' Ayers said. Even if the cash isn't demanded by customers, Ayers said, the Treasury Department can put the extra funds into circulation later on.

This story ran on page D01 of the Boston Globe on 07/20/99. ) Copyright 1999 Globe Newspaper Company.

-- kevin (innxxs@yahoo.com), July 20, 1999

Answers

"BankBoston economist Wayne Ayers said he would be comfortable even if the Fed winds up increasing the money supply.

''They're in uncharted territory as far as what people will do, so it's better to be safe than sorry,'' Ayers said. Even if the cash isn't demanded by customers, Ayers said, the Treasury Department can put the extra funds into circulation later on."

Begin commentary:

OK, so this bank economist says that it's prudent for the government to have extra cash available just in case people go nuts and withdraw money from the banks even though there won't likely be many banking problems associated with Y2K.

Apply this same logic to individuals. It's prudent for individuals to have extra water and food (and whatever else they might need to sustain themselves) just in case Y2K is indeed a problem, and not just for the banks.

-- nothere nothere (notherethere@hotmail.com), July 20, 1999.

I have a couple of questions for our saavy economic folks...

How will an influx of $250 billion dollars affect our economy? Could it increase the rate of inflation, etc? (Let's pretend $250 billion is just enough to cover the demand : )

How will capital outflows from less prepared nations overseas into the US affect our economy? The world economy?

I don't have a clue just wondering what the affects of these two things happening at about the same time might have.

Thanks!

And thanks Kevin for the article.

Mike

===============================================================

-- Michael Taylor (mtdesign3@aol.com), July 20, 1999.

Mike,

Since Yardeni has stated that Y2K will be deflationary, I don't know. I think the fed is taking a risk in increasing the money supply, but a calculated risk. The greater risk is to not have enough currency for the demand. My own gut feeling is that there will be deflation and then after a couple of years, maybe, spiriling inflation. Just an uneducated--totally--stab in the dark. For this reason, I have invested in the 10 years inflation adjusted T-bills. I don't recommend these to anyone. Just my choice. Someone said the government can convert this to 30-year bonds. So...don't know. I will also get some two-year T-bills, I think. THe financial instrucments of choice are limited and not without risk.

-- Mara Wayne (MaraWAyne@aol.com), July 20, 1999.

Add this to China hints at devaluation.

Could this hurt us economically if China devaluates its currency?

-- Mark Mastrorilli (mastrorilli@hotmail.com), July 20, 1999.

''In time we've become more optimistic about the other payment options remaining available and the general public becoming less concerned about the issue as a whole,'' Lavelle said. Rose Pianalto, spokeswoman for the Fed in Washington, said she doubted more extra cash would be ordered.

So far there's no sign'' that banks have begun to seek extra cash to satisfy the needs of their customers, she said.

Every bank I've dealt with regarding Y2K contingency planning is expecting to increase the amount of vault cash they have on hand for the rollover. Some have already started accumulating this cash, and most plan to have about twice as much as usual by Nov.-Dec. There may not be any sign of this yet, but there will be soon.

-- Nabi Davidson (nabi7@yahoo.com), July 20, 1999.

Michael:

To answer your question, this does NOT represent an influx of even a penny. This extra currency would simply change an existing amount of money from one form to another. If you withdraw $1000 in cash, you become no wealthier as a result. Your account went down $1000, your pocket went up $1000, net change ZERO. I can't understand why people keep making this same basic error.

Now, if the government is just *giving* away this money, then it would make a tiny change in the supply of money, hardly noticeable to the economy at all. But noticeable to ME, of course -- where do I sign?

-- Flint (flintc@mindspring.com), July 20, 1999.

Nabi, and other astute banking friends I can't remember at the moment (sorry -- I'm just away from two screaming kids for a moment at keyboard and can't search old threads to remember your names)

could this:

http://www.bog.frb.fed.us/releases/H3/Current/

be an alert on the money supply situation?

Depository Institution Reserves have dropped to 41540m July 15 from 44895 July 1998. Although the required amount seems to have dropped, too. The excess reserves are at a low, too (around 1050m, down from about 1600m)

Drop in "excess" means they've lowered the reserve requirements? Overall money supply has *increase* about 8% in a year, NOT dropped 8%. What goes? I forgot my Econ 111 money supply s**t! (After all, "we're ALL Keynesians now," aren't we? LOL)

I'll go back when I get a chance and see if the vault cash is in there. (Not literally...In the FRB statistics, I mean.)

Would we expect them to change accounting standards for pumping ("lending") cash into the system in an emergency? Of course. But in what area, and how would it show in stats?

-- jor-el (jor-el@krypton.uni), July 20, 1999.

Mara, thanks. I have no clue as to whether or not there will be inflation or deflation but I know neither is great for the economy.

Flint, thanks, but forgive my being a little naive about this.

The Fed is "printing money". Therefore, the money doesn't exist at this time.

I think I understand that you are saying that what the Fed is doing is "covering" electronic money. That is, that the $250,000 billion never existed in reality but only in the form of electronic currency. Therefore, they are creating a tangible form of the currency for the increased demand.

Is that right?

Thanks!

Mike ===============================================================

-- Michael Taylor (mtdesign3@aol.com), July 20, 1999.

Nabi, by the way, I have to take the time to thank you for all your insight and the information you share. It's helped me tremendously and I want you to know that.

Thanks!

Mike ===================================================================

-- Michael Taylor (mtdesign3@aol.com), July 20, 1999.

>>How will an influx of $250 billion dollars affect our economy? Could it increase the rate of inflation, etc?<<

You need to understand that increasing the currency supply is not the same as increasing the money supply. Most money exists as entries on the balance sheets of banks, rather than as currency. When you write a check to make a purchase or pay a bill, no currency is involved, yet you have spent a certain amount of money. The money is transfered directly from your account to the account of the entity you wrote the check to.

By the same token, when you withdraw some money from your account in the form of currency, no new money is created, because the money in the account is decreased by the same amount as the currency you withdrew - so they cancel each other out. In terms of money supply, it's a wash.

When people hear that there will be a lot more currency available, most of them assume the effect will be inflationary. In fact, if more people choose to hold a larger percentage of their money as currency, it has the effect of somewhat decreasing the overall money supply, which is somewhat deflationary.

Howzat?

Well, money that is held as currency tends to reduce actual bank reserves. As the currency sits in your pocket, or in a safe deposit box, or in your mattress it is most emphatically *not* in a bank. As soon as you spend it, it tends to scoot back into the bank pretty quickly, but if you hold it, it stays out of the bank.

Bank lending is a large component of the money supply. Banks lend money, based on their reserves. The more money that flows into currency and stays out of the bank, the less a bank can lend. As bank lending slows, the money supply shrinks.

The Federal Reserve could choose to counteract that deflationary effect by creating some new money. (It does this every time it buys US Treasury bonds.) The problem is, if all that money held as currency flows back into the banks in January/February of 2000, then the money supply will jump back up as more funds become available to lend again. At that point the Fed would need to disgorge some Treasury bonds back into the market to shrink the money supply again.

All this yo-yoing around with the money supply could be a real headache for the Fed to manage, and for the markets to react to, even if Y2K turned out to be a bump in the road.

>> How will capital outflows from less prepared nations overseas into the US affect our economy? The world economy? <<

There is no requirement that overseas capital flight will be to the USA. If we are hurting, it could be into a commodity like gold.

Assuming somewhat normal conditions in the US markets, such capital flight to the US would exacerbate the collapse of those overseas economies, as the local currency was dumped in the market in favor of dollar-denominated instruments. It would drive weaker economies into inflation, as their currencies became more worthless and all imported goods became more expensive in the local currency.

If the dollar attracted the overseas money, it would strengthen the dollar worldwide. Debt issued by the affected countries would be more prone to default. Our exports would drop even further. Our imports would rise even further. Our trade deficit would increase still more. Commodity prices (in dollars) would tank even more steeply. The trends of the past two years would continue. More deflationary pressures would build up.

But at some point those trends could easily drive us over a cliff.

Already, sectors of our USA economy that rely on exports, like agriculture, are in serious recession. As we earn fewer dollars from overseas, and import prices drop steeply putting pressure on domestic producers, deflationary pressures could eventually work their way into wages as well as prices. This exerts huge pressure on everyone who borrowed dollars when they were worth less, and has to pay them back when they are worth more, while their wages are dropping.

Y2K aside, the deflationary pressures in the world today are enormous. The *best* we can hope for is steady decrease in the standard of living for everyone who is deeply in debt, but with the deflation wringer being applied very slowly. The worst we should fear is a growing wave of debt defaults, among corporations, countries and individuals, who cannot cope with deflation of their products fast enough to service their debts. This would cause a full-blown depression.

Your company may make great products at a great price, but if your customers are weak, or *their* customers are weak, the ripple effects may reach you, as bankruptcies increase and bills go unpaid. At long last, your own paycheck goes away, as the money dries up at a source that may be far from you. Bad debt affects us all eventually.

I think deflation is certainly coming. We can already see the whites of its eyes, so to speak. Keep your powder dry.

-- Brian McLaughlin (brianm@ims.com), July 20, 1999.

Mike,

You are certainly welcome. Glad I could be of assistance.

-- Nabi Davidson (nabi7@yahoo.com), July 20, 1999.

Cash (currency) is only a small percentage of the total money supply, which is mostly bookkeeping entries (electronic blips and magnetic domains). Demand deposits are only part of the money supply. And of demand deposits (e.g., checking accounts), there's only enough CASH to cover maybe 2% max of what's supposedly in the accounts. Adding $X billion in cash to circulation would be only very mildly inflating.

Deflation would occur as a result of the bookkeeping entries (electromagnetic money) decreasing, caused by debt implosion, COMPUTERS LOSING TRACK and "destroying" money in a flash (just like it's created).

The reason people likely will want cash is that they figure that maybe the computers WILL go south. So that currency will be the only money, or at least a more important part of the money supply than at present.

Bottom line, if your are number 1 or 2 in a line of 100 at the bank, you may be able to get all the cash you want (subject to your account balances and/or credit limit). If you are number 3+, you'll be S.O.L.

-- A (A@AisA.com), July 20, 1999.

Charmin or Bounty would serve the same purpose.

-- Gia (laureltree7@hotmail.com), July 20, 1999.

wow, cool!

Brian, AisA, thanks!!!

This is the first I really feel I grasp some understanding of the possibilities to come.

I love this forum!!!

Mike

==================================================================

-- Michael Taylor (mtdesign3@aol.com), July 20, 1999.

Gia,

I have been buying "Embossed Marathon" TP from Costco in bulk. Charmin and Bounty are a little rich for my blood.

The way I figure it all TP will be a luxury item and I can buy low and sell at a reasonable profit : )

If you have Charmin or Bounty you're in a great position and, well, you may really be sitting pretty!

roflmao

Mike

=================================================================

-- Michael Taylor (mtdesign3@aol.com), July 20, 1999.

And another thing -- make sure you convert some of that cash to real stuff -- like toilet paper (How come they don't have a "Sitting Pretty" brand -- Mike myabe you've got a trademark there :-) ).

You could have deflation (decrease in money supply) -- but costs, because of shortages, could still increase in "dollars" even though you might expect that the scarcer "dollars" should be able to buy more.

You can have deflation and an increase in costs, even though the common expectation is that costs would decrease along with the decreasing (deflating) money supply.

-- A (A@AisA.com), July 20, 1999.

As I read it, they're talking about adding an additional $20 billion in currency to the extra $50 billion they planned to have on hand for Y2K. Whoopie. That's less than $75 bucks more per American. And if businesses want to keep a little extra cash over rollover just in case, you can quickly see that the Fed is just blowing smoke here. It sounds like a ton of money, but it isn't.

-- Dog Gone (layinglow@rollover.now), July 20, 1999.

Brian, Nathan, A -- some of the names I was trying to think of earlier, along with Nabi. Thanks for CLEAR economic explanation in regular English.

"I have been buying "Embossed Marathon" TP from Costco in bulk. Charmin and Bounty are a little rich for my blood. "

Maybe you're on to something the Bureau of Engraving and Printing should consider, given the shortage of currency-eligible paper from Crane & Co.

We've all wondered how to hedge our bets between inflation/deflation -- while they're busy running off more scowling Franklins ($100 notes) they could print them on some fine absorbent high-fiber TP for us.

Deflation -- you got cash! Buys lots of plain-white brands and other replacement goodies.

Inflation -- you at least got TP! Very tradable. I'll bet the Germans ca. 1923 wish someone had thought of that. But ve Amerikaners are too ciffilized to zink of zomezing zo zimple, nein?

-- jor-el (jor-el@krypton.uni), July 20, 1999.

Brian's got it about right. Get out of debt and stay there. Pre- or post-Y2k, the chickens of debt will come home to roost.

-- Nathan (nospam@all.com), July 20, 1999.