India's Currency Debacle: "Consider It A Warning"

Tyler Durden's picture

Submitted by Pater Tenebrarum via Acting-Man.com,

A Major Crisis

Last week Jayant Bhandari related the story of the overnight ban of certain banknotes in India under cover of “stamping out corruption” (see Gold Price Skyrockets In India after Currency Ban Part 1 and Part 2 for the details).

 

banned-notes

Banned 500 rupee banknotes

The problem is inter alia that the sudden ban of these banknotes has hit the Indian economy quite hard, given that 97% of all transactions in the country are cash-based. Not only that, it has certainly created fresh avenues for corruption – which should have been expected (whether it will succeed in its aim of stamping out other types of corruption remains to be seen – we doubt it).

Moreover, the poorest of the poor are suffering the most on account of the ban, not least because the promised replacement of the banned banknotes is apparently hitting major logistical snags and may take much longer than thought.

Readers interested in this story may want to listen to an interview Jayant has recently given to Maurice Jackson of “Proven and Probable”, which we have embedded below.  A quick note on errata: at 1:45 and 1:57, Jayant says “2,000 dollars” – he obviously meant to say “2,000 rupees”.

 

Maurice Jackson interviews Jayant Bhandari

 

Further updates on the still developing situation can be expected soon.

 

Consider it a Warning

We would note on this occasion that although what India’s citizens are facing these days may seem a remote danger to most Westerners, it does demonstrate an important point: state-issued paper currency exists only at the sufferance of the State. It can be made worthless by decree.

As we pointed out in “Why Does Fiat Money Seemingly Work?”, the main reason why irredeemable paper money is accepted at all are not only legal tender laws which enforce its use as a means of payment, but primarily the fact that the State insists that its fiat currency be used for the payment of taxes. This is what creates a secondary market demand for fiat money, without which it could probably not exist.

Surprisingly, the concept is not really a modern one – it was tested in Great Britain for a considerable stretch of time with the tally sticks system. Although that particular system ultimately failed (just as every currently extant paper currency eventually will), it did show the way to governments. It was indeed possible to do more than merely usurp the production of gold and silver coins.

So obviously, governments do have considerable influence on what is used as the means of final payment in the economy. What governments have been unable to do though is to effectively “demonetize” the money previously chosen by the market – namely gold. Governments may well be able to make the possession of gold illegal, but they cannot possibly destroy the metal’s monetary qualities by decree.

 

golalot

Gold – the market-chosen money. No agreements, convocations or force were needed – people adopted gold voluntarily as a money commodity all over the world, after a long period of trial and error with a variety of monies.

 

When Nixon was persuaded to abandon the gold exchange standard in favor of a pure fiat dollar, many monetarists (one of whom was advising him on the move) and other mainstream economists were convinced that gold prices would decline from the $35 fixed exchange rate to something like $6 per ounce, reflecting its  value as an industrial commodity.

In other words, they reckoned that the act of officially “demonetizing” gold would erase all monetary demand for it. As is often the case with predictions agreed on by a majority of economists, this turned out to be rather wildly mistaken.

 

gold-pm-fix

Another prediction by mainstream economists gone rather spectacularly wrong. Monetary demand for gold not only failed to disappear, it actually grew rather significantly – click to enlarge.

 

What has just happened in India clearly demonstrates that the nature of state-issued fiat money must be taken into account when considering what to do about the rapaciousness of increasingly desperate and technically insolvent governments.

If one wants to safeguard one’s cash holdings against the potential failure of the fractionally reserved banking system or against arbitrary wealth confiscation  – such as has inter alia been advocated by the IMF (see “Is a Large wealth Grab in its Way” for the sordid details on this) –  one has to keep this important detail in mind.

Withdrawing deposit money in the form of cash currency is only an effective strategy as long as governments don’t do what India’s government has just done. And one should definitely never make the mistake of underestimating the lengths to which governments are prepared to go under the cover of “emergency”.

 

Conclusion

In the course of the 20th century alone, we have seen such a wide range of government depredations with respect to money, that one has to be extraordinarily naïve to believe repeat performances are no longer possible.

What has happened in India should be seen as a clear warning. State-issued cash currency may not be affected by bank insolvencies and “bail-ins”, but it is by no means safe. By contrast, gold simply cannot be devalued by government decree.

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carlinhos1988's picture

WHAT? F 'EM WE HAVE FREE MONEY!!!

El Oregonian's picture

But, it does not mean these criminals (governments) will not stop trying to steal your wealth.

AtATrESICI's picture

Have you guys ever read the paper Silent Weapons for Quiet War at the link below? If you have the time check it out and let me know what you think.

https://www.scribd.com/document/332002438/Silent-Weapons-for-Quiet-War

sun tzu's picture

Another arrogant dothead that thinks he knows it all

The central planners's picture

Cash ban to support corruption called fraccional reserve banking.

DaNuts's picture

My friend in India says that the population was encouraged to open bank accounts and get ID cards at the start of Modi’s term. So far there has been stiff resistance but it will not be long until most of the population will be fully invested into the fiat ponzi scheme.

We can see that the war on cash is very real and governments want the population to carry the mark of the beast enabling them to be taxed at will.

The whole black-market counterfeit meme is an excuse for the Indian government to behave as its population does, irrationally and amorally.

Socialism in India has taken hold and the free shit army along with Hindu nationalism marches blindly into its inevitable course towards slavery. If only they knew what awaits them.

1777's picture

Digital sheep to the digital slaughter..

Joe Sixpack's picture

Indians prefer gold...

stacking12321's picture

indians:

you can't eat gold, but you can wear it!

The central planners's picture

Only western retards prefers debt.

WillyGroper's picture

they can starve you to death devaluing fiat.

they'll come for pm's with the barrel of a gun...the kind for killing, not for fun.

AtATrESICI's picture

Gold is that stuff the juice's storm-troopers take off your dead ass right before you are rolled into the mass-grave.

1777's picture

First of all, the storm troopers are gonna have to get past hundreds of thousands if not millions of PM holders who are armed to the teeth. And the mass grave may be their own...

City_Of_Champyinz's picture

The more often that governments attempt to devalue gold by various decrees, the more valuable the shiny relic will become to the people. 

Able Ape's picture

On the inherent worth of paper currency - TRY buying toilet paper with Civil War Confederate bills...

HRH of Aquitaine's picture

Actually you can although it would require that you sell those notes for FRNs. APMEX (and other places) sell historical items like old currency notes for real money. It depends on the condition of the Confederate bills you have for sale. I am guessing that some of them are extremely valuable and worth quite a lot when converted to FRNs which means that you could buy a helluva lot of fucking toilet paper with those old Civil War Confederate bills. Just sayin'.

tarabel's picture

 

 

But their value is no longer as money, but as a rarity.

Mustafa Kemal's picture

Try doin that at Walmart. Just sayin

Agstacker's picture

Yea but gold is more durable...

Food Loaf Junkie's picture

Actually, Confederate currency is worth well above the face value these days.

hoagy goldmikel's picture

i bought a large amount of physical gold at 1490 oz . I'm not happy now but it's a long term thing.

 

Fuck the Boozoo's

ronron's picture

i bought a lot of gold at 1200 CAD and am extreamly happy.

UnschooledAustrianEconomist's picture

I bought my gold for a stack of printed toilet paper. I'm very unhappy because I can't wipe my ass with the gold.

DanDaley's picture

Expensive gold beats no gold every time.

Agstacker's picture

I bought a bunch of silver in the 30's and had to sell some in the 16's due to a job loss.  It sucks but it's always worth something.

Quinvarius's picture

I talked to some Indians to figure out what this was about.  They said it was really mostly about counterfeiting.  It is a sucky thing to deal with.  But they needed new currency.  They also said that the crime in Cashmere, which apparently is a really bad place for crime, dropped off hugely when this started.  I have no way of verifying that.  But it is an interesting effect.

HRH of Aquitaine's picture

Did you ask them how many pounds of gold bullion they own?

NoDebt's picture

I did a little digging into this after getting called on the carpet by another ZH member.  I think he was right about my commentary at least partially.

The notes (500 and 1000 R) are going away and being supplanted with 2000 R notes (which were announced earlier this month) as well as redesigns of the 100 and 1000 R notes coming later.  It's not just lopping the top off the end of the denomination scale.  It's more like when the military changes their 'scrip' notes from red to blue and back again to discourage hoarding and profiteering.

Mostly what I think this is designed to do is force people back into the tax system.  Tax cheating is a HUGE issue for any government in any cash-based society and India has this in spades.

Ultimately it's a "one shot deal" that will work with less effect each time it's done.  The cash-based economy and tax cheating will continue unabated with the introduction of the new notes.  However, fewer will choose to hoard cash in the future.  They buy gold and other tangible assets (even more so than they already do).

 

Mustafa Kemal's picture

Yes, this is less about the outlawing of cash than poor planning. But it does sound a bit like the limits for exchange are a war on the script holders.

founthead's picture

There are 3 stated reasons for this demonetization/remonetization :

(1) Flushing out the "Black Money" - Hoarded, non-taxed income/wealth

(2) Anti-Counterfieting - To counter some of Pakistan's funding of cross-border terror

(3) Choke funding to other terrorists/maoists

...but these are mostly for "Public consumption"!

 

The real motive is as follows:

- Bank NPAs (or NPLs as referred to in US/Europe) are about $130 Bln (acknowledged)

- Currency Demonetized (86% of outstanding total cash) is about $220 Bln

- Expected non-return of Cash is approx. $60 Bln, which reverts to GoI at the end of the year as windfall gains - most probably to be used to recapitalize the Banks.

Yep, as usual, the GoI is playing a Reverse Robinhood ......

TeaClipper's picture

(Kashmir)

Disputed territory between Pakistan and India. they have been at war for years over this region. You can bet the Paki's have a large hand in he counterfeiting

That region use to in the 60s  70s, produce some of the best blow on the planet, but like anywhere else, between religion and politics they can screw the best of paradises up.

 

East Indian's picture

The government spokesman claimed that about 10% of all the Rs 1000, Rs 500 notes were counterfeit. Those have been demonetized; of an estimated Rs 13.5 trillion, Rs 5.5 t have already returned to the banks. But the counterfeits are very less in number. 

This demonetization is about

1. Recapitalizing the banks

2. Forcing a cashless economy

3. starving other political parties to death

4. writing off bad loans (given to 'friends') earlier

5. creating new fiat to the tune of trillions at one go, and lending them to 'friends'

6. incidentally, killing some black money. 

Deflation, depression, economic stimulus, friends flourishing...

Crony Capitalism at work. 

Deflationist's picture

I will also add that India's crony Capitalists are well connected with International Financial Terrorists like GS, JPM, DB etc. I will not rule out the possibility of role of these crooks in advising Neo Colonial Govt. of India to go cashless. Already Bill Gates, Jack Maa and others are welcoming cashless move in India. 

RayKu's picture

I've been in the kashmir area more than once. I find it extremely difficult to believe crime dropped off because of this. Jammu and Kashmir doesn't go a day without some trouble or another. Most recently there was some Indian soldiers killed by some Pakistani soldiers. Where there is war and fighting, crime isn't far behind.

alexcojones's picture

If God didnt want us to have Gold, he wouldn't have showered us with it in asteroids aeons ago.

Same thing goes for beer. 

Huge Asteroids Brought Gold to Infant Earth, Study Says
NoDebt's picture

"Human beings exist because mother nature decided it needed plastic."

- George Carlin

tarabel's picture

 

 

I've never heard of a Beer Asteroid before.

But I suppose it wouldn't be a bad way to go.

Dubaibanker's picture

Aside from 100 odd employees laid off by eBay post demonetization in Bengaluru (India's Silicon Valley), the first top corporate company involved in infrastructure building has fired 14,000 employees (11.2% of it's entire workforce!

They have done the right thing because entire economy, every single Indian has come to a standstill, so why pay any employee when work is stalled, banking is stalled, payments are stalled and all new and existing contracts are stalled.

Entire country except the 1% who have credit cards is standing in bank lines!

75 are dead in 14 days due to stress, heart attacks and suicides related to banking queues! :(

In one of India's biggest-ever layoffs, L&T sheds 14,000 employees from its workforce 

 

 

_ArC_'s picture

Gold and Silver are always inter twine. Im all Physical
Silver. I consider it on sale when it drops ratio is 1/8 from above ground. Can't go wrong. Gold or Silver if you don't hold it. You don't own it!

groundedkiwi's picture

Train them young for a cashless society.

https://youtu.be/BwoQAaIXfYk

Dubaibanker's picture

Jewellery sector in India has been in major turmoil since the Govt started a 10% odd duty on importing gold which has been changed all the time, so I am not even sure what's the duty as on date.

Due to that act alone, jewelers had fired millions in 2013 and 2014.

Sales have been very weak due to to all the tax raids related to black money and money laundering etc and asking for PAN and Aadhar cards for purchase of gold and diamond from all customers.

Now, with demonetization, work has almost halted because all jewellery stores have been shut for the last 14 days - except for first day of demonetization - so expect millions of further lay offs in this sector at a time when job creation in India is at a 7 year low, according to the President of India.

Job cuts loom in jewellery industry

Snaffew's picture

Modi is a western elitist lapdog and it is no surprise at all that the ban on the large denomination rupees coincided exactly with the huge paper gold dump that exceeded the entire stable of physical gold in the comex.  This created a roughly $30 drop in the price of gold and was pure manipulation of the paper price without selling any of the physical.  the fact that Britain hasn't sold any notable amounts of gold during this recent slump is a hint and a half that gold prices were wildly manipulated and this selloff will prove to be very short lived.  GL

Herodotus's picture

Perhaps they could ask for the British to return?

Miss Informed's picture

Unfortunately they are not what they once were either.

GRDguy's picture

Just another live test-study done by banksters:

From 'Cash Coolies' To 'Rent-An-Account', The Dodging Of Notes Ban

http://www.ndtv.com/india-news/from-cash-coolies-to-rent-an-account-the-...

"Customers lined up outside jewellery stores in Delhi and Mumbai with bags of cash with one report saying they paid as much as Rs. 52,000 ($762) per 10 grams of gold, almost double the going rate."

Let's see: 28 grams/ounce,  2.8 times $762 gives $2133.60 per ounce.

Impressive spread from $1213 tonight. Paper conversions allowed until 12/30/2016.