Y2K scenario: Blind man's bluff, anyone?
This article, which first appeared on the author's Web site, is printed here by permission. Dr. North is publisher of Gary North's Remnant Review (a financial newsletter available from 1217 St. Paul St., Baltimore, Md. 21202) and founder of the Institute for Christian Economics, Tyler, Texas.
Some writers predict the Y2K phenomenon will amount to no more than a minor footnote on the history of the turn of the millennium. Dr. North, whose Web pages link to 2,500 other Y2K-related Web sites of businesses, individuals and government agencies, forecasts economic and social upheavals beginning in 1999.
This article's original title was "Blind Man's Bluff in the Year 2000."
By Gary North
FAYETTEVILLE, Ark.--When I wrote the earliest version of this article in late 1996, few people outside of the computer industry knew about the Year 2000 problem, sometimes called Y2K or the millennium bug. I had known about it since 1992, but the realization of what it meant did not hit me for over four years. When it finally hit, my life changed. But not as much as it will change in 2000. So will yours.
Word is getting out about the millennium bug's threat to all systems. For example, as 1998 began, the press picked up the story of the U.S. Federal Aviation Administration (FAA), which relies on aging IBM mainframe computers that are not 2000 compliant and which IBM says cannot be made 2000 compliant.
This was the first widely circulated admission that one of America's critical infrastructures is at risk. The story was confirmed when the British equivalent of the FAA admitted that its computers are equally vulnerable.
This means that a drastic cut in airline travel will take place in 2000. Yet this realization has not hit investors in airline stocks. They hear, but they do not connect the story with its inevitable implications. This is true in every area threatened by Y2K. Investors hear, but they do not connect. They will connect in 1999.
On Feb. 4 President Clinton signed an executive order on Y2K. It warned that government agencies are at risk. This executive order set up a commission to discover ways to pressure government agencies to get 2000 compliant. Not one cabinet-level federal agency is compliant today.
In the same week, the U.S. Department of Defense's acting secretary for command, control, communications and intelligence resigned. He was in charge of the department's Y2K repairs. Two other senior staff members also resigned.
We are still waiting for any money-center bank-or any other bank-anywhere in the world to announce that it is 100 percent Year 2000 compliant.
The same is true of every phone company, power-generation plant and major city water utility. Yet the public just sits there as if nothing were at risk. But everything is at risk.
Breakdown in division of labor
What are you going to be doing for a living in the year 2001? Unless you're a fix-it man living in a small town, you probably won't be doing what you do today. If you make your living in financial services, you will surely be doing something else. If you're a journalist, you will be in a new profession.
But what? What other useful service can you provide? You have little time to make the switch.
Let me show you why.
We live in a world that depends on a high division of labor. That world has less than two years to go. In one gigantic collapse, the division of labor will implode.
The implosion will begin in 1999. It will accelerate in 2000 and thereafter.
Those who work in highly specialized fields will find little or no demand for their skills in the face of an enormous supply of desperate, low-wage competition. Any job classification that did not exist in 1945 will probably not have a lot of demand in 2001, with one exception: computer-software programming.
The June 2, 1997, issue of Newsweek ran a front-cover story on the looming computer crisis of the Year 2000. In the week the article appeared (late May), the Dow Jones Industrial Average set a record new high. (It was beaten a week later.)
If investors had believed the information reported in the Newsweek article, the world's stock markets would have collapsed. But they have risen. Clearly people don't believe the story. That's why a small handful of people can get out now: out of the stock market, the bond market and any city over 25,000.
Not everyone can get out at the top of a bull market. This includes the bull market known as modern industrial society. Pull the plug on the local power utility for 30 days and every city on earth becomes unlivable. What if the plug gets pulled for five years?
How do you rebuild the shattered economy if the computers go down, taking public utilities with them? Without electricity, you can't run the computers.
Without computers, you can't fix computers. How can you assemble teams of programmers to fix the mess? More to the point, how do you pay them if the banks are empty?
Chase Manhattan Bank has 200 million lines of computer code to check and then repair. Citicorp has 400 million lines. All big banks are similarly afflicted. Even if this could be fixed, bank by bank, there is no universal repair standard.
Thus the computers, even if fixed (highly doubtful), will not work together after the individual repairs. A noncompliant bank's data will then make every compliant bank noncompliant. Thus the world banking system will crash in 2000. When the public figures this out in 1999, the bank runs will begin.
Then there are the gigantic Japanese banks, the European banks and Latin American banks. The managers of these banks are not nearly so far along in awareness as U.S. bankers, yet as of February 1998 there was not one 2000-compliant money-center bank in the United States.
Banking is international. It is a system. A breakdown of the computers in thousands of banks will affect all of them. Even if every U.S. bank could achieve 2000 compliance, what good would this do if the other nations' banks don't?
But almost nobody discusses this. The United States is dependent on what the computer programmers in all the other countries do.
Today they're doing almost nothing on Y2K.
Bank runs are inevitable. The public will eventually figure out what's going to happen. On that day, the runs will begin. The world economy will begin to shut down.
My conclusion: You probably will not have your present job in 2001.
Our electrical life-support system
Take a look at Business Week (March 2). The headline is mild; the facts in the story are terrifying. The central industry on earth is at risk: electrical power. The story reported:
"In particular, electric utilities are only now becoming aware that programmable controllers-which have replaced mechanical relays in virtually all electricity-generating plants and control rooms-may behave badly or even freeze up when 2000 arrives. Many utilities are just getting a handle on the problem. 'It's probably six months too soon for anyone to try to guess the complete extent of the problem,' says Charlie Siebenthal, manager of the Year 2000 program at the Electric Power Research Institute, the industry group that serves as an information clearinghouse. 'We don't know' if electricity flow will be affected, he said."
Got that? The agency that charges $75,000 to each of its members to be part of a Y2K-repair information forum tells us, "We don't know." The agency that represents the most important industry on the face of the earth says, "We don't know."
But your friends and relatives do. They say: "We know. No problem." They ignore the facts, such as:
"Nuclear power plants, of course, pose an especially worrisome problem. While their basic safety systems should continue to work, other important systems could malfunction because of the 2000 bug. In one Year 2000 test, notes Jared S. Wermeil, who is leading the millennium bug effort at the Nuclear Regulatory Commission, the security computer at a nuclear power plant failed by opening vital areas that are normally locked. For that reason, the NRC is in the process of issuing a letter requesting confirmation from utilities that their plants will operate safely come Jan. 1, 2000. Given the complexity and the need to test, 'it wouldn't surprise me if certain plants find that they are not Year 2000ready and have to shut down,' says Wermeil."
Given that of the 108 nuclear power plants in the United States not one is 2000 compliant, I think this is a safe prediction.
The experts in this field are supposed to know. Our lives depend on a continuous supply of electrical power to run all of the infrastructures. If this supply line breaks, the entire civilization breaks. If the whole grid goes down, local systems will not be able supply power to systems that are down.
Every regional system depends on the others to supply power to reboot it if it goes down. But an overload condition could hit them all. How can they reboot the components of the system if the system itself is down or if most of the components are down?
How do we recover from Y2K if there is no power? How long will this take? A decade? What happens to the division of labor that makes possible complex power-generation systems if they go down? If we can't recover power because the power is off, what happens to 250 million Americans, most of whom live in cities that will not survive if the power goes off?
"We don't know."
I t g e t s worse. Rick Cowles works a s a Y2K adviser for power-generating companies: big ones. Here is his assessment, as of Feb. 27: The industry will not make it. It won't even come close. He writes:
"Most electric utilities are still, for the most part, in the awareness/inventory stage of Y2K. Some are actually still fighting about 'how to conduct inventory.' There is very little upper management appreciation of the depth of the issue."
My comment: According to the California White Paper (the State of California's official guideline), awareness counts for 1 percent of a repair project; inventory is 1 percent. When you've completed the inventory, you have 98 percent of the project ahead of you. Mr. Cowles' sample of America's power companies indicates that most of them have not completed their inventory. He goes on:
"Not one electric company has started a serious remediation effort on its embedded controls. Not one. Yes, there's been some testing going on, and a few pilot projects here and there, but for the most part it is still business as usual, as if there were 97 months to go, not 97 weeks.
"Almost all electric utility projects are severely understaffed. I was at an independent generating company this week which is responsible for production of nearly 3,000 megawatts between just two large generating plants. This company still doesn't have a single full-time person dedicated to [Y2K], and this includes the project manager. This is a . . . $5 billion operation, and their management has committed only a few hundred thousand dollars of 'seed money' to the project. I sincerely feel sympathy for the project manager."
My conclusion is simple: It is time for you to begin taking the situation seriously, a lot more seriously than the general public does. The public's apathy is the only thing that allows you a little more time to get prepared.
'It just can't be true!'
You don't believe me, of course. Not yet. But I have published the evidence on my Web site. You can verify what I'm saying.
But you still won't believe it. Why not? Because it's too painful. In their book The Sovereign Individual, James Dale Davidson and William Rees-Mogg make an important observation:
"A recent psychological study disguised as a public opinion poll showed that members of individual occupational groups were almost uniformly unwilling to accept any conclusion that implied a loss of income for them, no matter how airtight the logic supporting it. Given increased specialization, most of the interpretive information about most specialized occupational groups is designed to cater to the interests of the groups themselves. They have little interest in views that might be impolite, unprofitable, or politically incorrect" (p. 339).
My views are all three: impolite, unprofitable and politically incorrect. Impolite, because I am saying this:
Because 2000 begins on a Saturday, millions of victims will not be aware of their dilemma until the following Monday or Tuesday. They will pay no attention to advance warnings, such as this one, that they are at risk.
As you read this report, I want you to think to yourself: How will this affect me? Is my business at risk? Is my income at risk? What should I do?
I also want you to visit my Web site, www.garynorth.com, and examine the accumulating evidence week by week.
The origin of the problem
Here is the problem. More than four decades ago, computer programmers wrote mainframe-computer software in a way that saved punch-card space-two digits out of 80-by designating year codes as two-digit entries: 67 instead of 1967, 78 instead of 1978, etc. Back then, saving this seemingly minuscule amount of space seemed like an economically wise decision. This may prove to be the most expensive forecasting error since Noah's flood.
What the programmers ignored is this: In the year 2000, the two digits will be 00. The computer will sit there looking for a year. At midnight, Jan. 1, 2000, every mainframe computer using unrevised software dies or else gets unreliable: very, very sick.
Programmers who recognized the implications of this change did not care or could not persuade their employers. They assumed that their software would be updated by the year 2000. That assumption threatens every piece of custom software sitting on every mainframe computer unless the owner of the computer has had the code rewritten.
In some cases, this involves coordinating two billion lines of code (example: General Motors). One error on one line can shut down the whole system, the way America Online was shut down for a day in 1996 because of a one-digit error.
The handful of reporters who have investigated this problem have met a wall of indifference:
"We're all using microcomputers now."
"This is a problem only for a few companies that are still using mainframes."
"Cheap solutions will appear as soon as there is demand."
"The software will be updated soon, and I'll buy it then."
Large organizations relyon bad legacy code
On Sept. 24, 1996, Congressman Stephen Horn, chairman of the subcommittee on government management, information and technology, submitted to the full committee a report on the Year 2000 problem.
The subcommittee had held hearings on April 16. He said that these hearings had revealed "a serious lack of awareness of the problem on the part of a great number of people in business and government. Even more alarming was the cost estimate reported to the subcommittee to remedy the problem, which was said to be $30 billion for the federal government alone." Then he announced:
"Without greater urgency, those agencies risk being unable to provide services or perform functions that they are charged by law with performing. Senior agency-management officials must take aggressive action if these problems are to be avoided."
Yet despite Congressman Horn's 1996 warning, nothing much has happened since then as he continues to remind us in public hearing after hearing. In late 1997 he gave near-failing grades to the Department of Defense and the Department of Transportation as well as to the Treasury Department, which is where investors have put seven trillion dollars, not counting Social Security.
These agencies must shift hundreds of millions of dollars from their existing budgets to hire outside programmers to rewrite the code that runs these agencies. This isn't being done.
More to the point, the longer they delay, the worse the problem gets. You can't just go out and hire programmers who are familiar with the code. As businesses find out what threatens them, the demand for these highly specialized services will soar upward. (If businessmen don't figure this out in time, payment will come due in January 2000.)
The subcommittee's 1996 report warned: "This issue may cause banks, securities firms and insurance companies to ascertain whether the companies they finance or insure are year 2000 compliant before making investment decisions."
It also said that companies will start demanding contractual warranties guaranteeing against Year 2000 breakdowns.
In 1999 there will be an international bank run when depositors demand cash. But there is little cash available. This will threaten banks with bankruptcy (bank plus rupture equals bankruptcy). Withdrawals will be prohibited by the government. Bureaucrats will ration your own money back to you.
If electricity goes off completely for as short a period as a month, cities will become uninhabitable.
The subcommittee's 1996 report warned:
"The clock is ticking and most federal agencies have not inventoried their major systems in order to detect where the problem lies within and among each federal department, field office and division. The date for completion of this project cannot slip."
By "cannot," the subcommittee's report writer meant "must not." The date can surely be allowed to slip. It almost certainly will be allowed to slip.
"Additionally, the task may be more difficult for the public sector, where systems have been in use for decades [that] may lack software documentation and therefore increase the time it takes from the inventory phase to solution."
Did you get that? The software code's records are gone! Remember also that we're not just talking about the United States government. We're talking about every government-national, state and local-anywhere on earth that has its data stored on an unrevised mainframe-computer system or which relies on any third-party computer service that uses uncorrected software.
Congressman Horn released a report on Dec. 11, 1997. He warned: "Another year has passed and the latest data show that the current work on the year 2000 problems in Federal computers is unacceptable and potentially disastrous."
That same day, he wrote a letter to the director of the Office of Management and Budget. He said: "Unfortunately, at the current rate of progress, most Federal systems will not be able to handle the date change by January 1, 2000."
Kiss Medicare good-bye
Some 38 million people will receive Medicare payments in 1997. In 2000 an estimated one billion claims will be filed, totaling over $288 billion, according to a May 16, 1997, report of the General Accounting Office (GAO): "Medicare Transaction System."
Problem: The Medicare system won't make it through 2000. The same GAO report shows why. Medicare claims are not actually administered by Medicare. They are administered by 70 private agencies. These agencies have been informed that their contracts will not be renewed in 2000.
The agency that officially supervises Medicare has plans for one huge computer system that will bring the program in house. It is the same dream that has motivated the Internal Revenue Service for the past 11 years. The IRS announced earlier this year that, after 11 years and $4 billion, the attempt had failed.
Medicare officials knows they have a problem with their computers. They are not Year 2000 compliant. So, to make sure they will be compliant, Medicare has issued an appeal to the 70 newly canned companies: Please fix the Year 2000 problem for us before you leave.
As the GAO report puts it, "contractors may not have a particularly high incentive to properly make these conversions . . ."
What if the system fails? (What if? Are they kidding? When!) The report says the Health Care Financing Administration (HCFA), which is responsible for running Medicare, has not made contingency plans.
"HCFA officials are relying on the contractors to identify and complete the necessary work in time to avoid problems. Yet the . . . contractors not only have not developed contingency plans, they have said that they do not intend to do so because they believe that this is HCFA's responsibility."
In the fall of 1997 President Clinton killed the entire Medicare Transition project. It had failed. But the millennium bug is still present, waiting patiently to shut down the entire Medicare system.
The public is not aware of any of this, even though it's in the public record. Psychological denial is universal.
Kiss the IRS good-bye
The Internal Revenue System has 100 million lines of code. (Well, other reports say 70 million, 60 million or whatever. The IRS doesn't really know.) Its code is not Year 2000 compliant. After the failure of the 11-year project to upgrade the system, chief information officer Arthur Gross announced that getting the IRS Year 2000 compliant is the "highest priority for the IRS." In April 1998 he left the IRS. But what he had revealed is startling.
The IRS has nearly 50,000 code applications to coordinate and correct. This task will require the IRS to move 300 full-time computer programmers to the new project.
For comparison purposes, consider that the Social Security Administration began working on its Year 2000 repair in 1991. Social Security has 30 million lines of code. By June 1996 the SSA's 400 programmers had fixed six million lines.
(A year later they claimed they had corrected 18 million lines. But then the word got out: They had discovered another 33 million lines administered by 50 states, all of which ties into the SSA system. The SSA now says that this new code-noncompliant-is not "mission-critical." The SSA is simply defining the problem out of bureaucratic existence. But it can't define the bug out of electronic existence.)
What if the IRS isn't technically equipped to pursue tax evaders after Dec. 31, 1999? What if the IRS computer system isn't fully integrated with its branch offices? What if the system's massive quantities of forms are not stored in a computer system that is Year 2000 compliant? More to the point, what if 20 percent of America's taxpayers believe the IRS can't get them if they fail to file a return?
In 1999 the IRS may find a drop in compliance from self-employed people. If the IRS can't prosecute these people after 1999, there will be a defection of compliance by the self-employed.
When word spreads to the general public, there will be a hue and cry: maybe at first against the evaders, but then against employers who are sending in employees' money when self-employed people are escaping. Meanwhile, cash-only, self-employed businesses will begin to lure business away from tax-compliant businesses by offering big discounts.
This will start happening all over the world. Once it begins, it will not easily be reversed. The tax system rests on this faith: (1) The government will pay us what it owes us; (2) the government can get us if we stop paying. Both aspects of this faith will be called into question in 2000 if the governments' computers are not in compliance.
Big Brother is no more powerful than his software. On Jan. 1, 2000, this strength may fall to zero. Actually, double zero.
If the IRS cannot collect taxes, and if all the other mainframe-computerdependent tax-collection agencies on earth do not fix this, what will happen to government debt markets worldwide? To interest rates? To the government-guaranteed mortgage market?
Kiss them all good-bye.
'No problem! Trust me!'
When I wrote the first version of this report in 1996, there were a handful of conservative financial-newsletter writers who had heard about Y2K. They all denied its economic relevance.
They all know about it today, but virtually none of them warns his subscribers. To do so would be a belated admission that "North was right," and there is no way to protect yourself except by survivalist techniques, which most of them except Don McAlvany and Larry Abraham have long since dismissed as silly. To admit that I'm right would involve eating gigantic quantities of crow in full public view. It isn't going to happen.
Besides, a shut-down of all mainframe computers would mean that newsletter writers will be out of business after 1999: a thought too terrifying for them. So they still brush Y2K aside with some version of this rebuttal: "Of course, the government may not get its computers fixed."
This is supposed to calm you. It should terrify you. Ask yourself:
Kiss your job good-bye. Especially if you're a journalist. I know. I am one. I figure I'll be out of work-forced retirement-Jan. 1, 2000. I'm making plans to be in small-scale agriculture. I'm out of debt.
What about you?
Those in authority prefer to defer thinking about this. They are playing Scarlett O'Hara: "I'll think about it tomorrow," followed by, "Well, fiddle dee-dee."
Deferral is a normal response to distant problems. The question is: What can we afford to defer? People defer making this assessment. That you have not read much about this looming problem doesn't mean that it isn't a problem. If your employer has not actively sought solutions to this problem, your firm had better not use mainframe computers or be dependent on suppliers who rely on mainframe computers.
Everyone assumes that someone else is doing something to solve these problems. "It's being taken care of." The problem here is the passive voice. Who, exactly, is taking care of it? What, exactly, is this person doing? Is he on schedule? How do you know for sure? Are you taking his word for it?
Anyone who takes the word of a computer programmer that he is on schedule is a person of great faith. If the programmer says, "Sorry, I didn't make it," on Dec. 31, 1999, you're dead in the water.
What you should do beginning today
First, you investigate whether what I'm saying is true.
Second, think through what happens to you if the local power company and the local water and sewage company shut down in your city for six months. Who ya gonna call, especially if your phone is dead? And, if you do get through, how ya gonna pay if your local bank is defunct?
Third, here is my personal strategy. I have adopted a question:
"Can I prove on paper that he owes it to me?"
I want hard-copy print-outs of everything I do with the government. If you are owed money from Social Security and you're dependent on this income, contact the Social Security Administration and get a letter telling you what you're owed. This is true of every government pension system.
Do you have a copy of your birth certificate? If not, write to your place of birth and get it. Even if that community has not computerized the records, do it now. Even if it keeps the records in a desk drawer, do it. If word starts to spread, they may be buried in requests in 1999. You want your paperwork completed before word gets out.
Do you have copies of your educational transcripts? If not, get them. The same goes for your work-record history. Assume that your records are in some company's mainframe computer. Assume also that the company has failed to update the software.
Do you have a print-out of all of your insurance records? Would they stand up in court? If not, get what you need now.
Have you spoken with your local insurance agent? Is he fully aware of the problem? Ask him straight out if he has scheduled an update of his software if he relies on vendor-supplied software. He deserves to know what is coming. So do you. (If you want to photocopy this article to send him, go ahead.)
Think through this problem in advance, before it gets out and creates a banking panic all over the world. This story will get out eventually. In 1999, when reporters are running around looking for sensational Year 2000 and third-millennium stories, this one will at last surface. At that point every government bureaucrat whose agency is at risk will start playing the "No problem" game. "It's being taken care of."
The bureaucrat's No. 1 rule is to evade responsibility. No one with any authority is going to admit that his malfeasance in office is going to create a disaster on Jan. 1, 2000. The basic response will be this: "There's no problem here, and, furthermore, I'm not responsible when everything collapses next year!"
A free subscription
I publish an E-mail newsletter, Gary North's Reality Check. It covers aspects of the Year 2000 Problem. There is no other Internet-based newsletter like it. It comes out at least once a month and sometimes more often, if there is something significant happening.
I cover what you need to do to get ready for a depression-or worse. But, if you don't visit my Web site regularly, you probably won't believe me. Address: www.garynorth.com.
Please do not sign up for Reality Check if you aren't really concerned about Y2K. In it I "preach to the converted." It will bother you only if you have not visited my Web site and read a few dozen of its posts.
The newsletter is not designed to persuade; it's designed to motivate people to take action while there's still time. There isn't much time remaining. You can receive it byE-mailing email@example.com. In the message box write: "subscribe remnant-list."
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