Chaos in the Wake of the Ban

Here is a link to Part 1, about what happened in the first two days after India’s government made Rs 500 (~$7.50) and Rs 1,000 (~$15) banknotes illegal. They can now only be converted to Rs 100 (~$1.50) or lower denomination notes, at bank branches or post offices. Banks were closed the first day after the decision. What follows is the crux of what has happened over the subsequent four days.

 

modi  India’s prime minister Nahendra Modi, author of the recent overnight currency ban

Photo credit: indiatimes.com

 

Today India is on the verge of a major social-political crisis, unless either the government backs off from the decision of banning the currency or some real magic happens. There is chaos in the streets and daily life is slowly but surely coming to a full halt.

What Modi did was not only heavy-handed, hugely arrogant, and of no value, it has been very badly implemented to boot — as everything in India always is — and carries the real potential of escalating and snowballing into something horrific. They could have seen that this was not going to end well by simply using primary school math.

 

Modi, Nationalism, and the Public School-Indoctrinated Middle Class

India today is like a cult under the influence of Narendra Modi — in which unlike in the past, not the poorest or uneducated citizens, but mostly members of the so-called educated middle class participate. Over the last two decades, people have been exposed to mass education, TV and nationalistic propaganda without being taught an iota of critical thinking skills.

In a society in which the concept of reason does not exist, this has made these people receptive to any kind of propaganda with a nationalistic or Hindutva bent. (Hindutva = fanatical Hinduism, which is rapidly metastasizing).

To aggrandize his position, Modi ordered a lot of military-hardware that India cannot afford, escalated tensions with Pakistan, and conducted what was very likely a fake surgical strike inside Pakistan. This united Indians under the flag.

Now, the demonetization of the Rs 500 and Rs 1000 banknotes was tagged with nationalism, anti-corruption, and anti-terrorism. Simple-minded, slogan-susceptible persons were hardwired to accept an erroneous causality. Those who did not go along were made to be afraid of being called pro-terrorist elements.

Those in the middle class have taken what they deem to be the higher moral ground, for they have mostly avoided suffering from the demonetization. Lacking moral instincts — which is unfortunately the case with much of Indian society, given its deep-rooted irrationality and superstitions — they cannot see or feel the pain of those who are suffering, even if that suffering stares into their faces.

But events are in motion that will likely very soon lead to these salaried members of the middle class starting to feel the pain as well. Their instinctive trust in Modi is likely within weeks of coming crashing down, not because of reasoned argument, but because they will be facing similar problems as the ones the common man is now facing.

 

Conversion to the New Currency

I went to convert my banned banknotes into new ones. The largest amount one can have converted is Rs 4,000 ($60), until further notice. There was a huge rush of people at the bank. Arguments were erupting, as people refused to stand in queues and the banks gave no explanation of what needed to be done. Fights were breaking out.

Amid the chaos I finally learned that there were three queues I had to go through in a sequence. I had to get a form from one counter, which I had  to fill in with my name and address, my ID card details, the serial numbers of all the bills I wanted to exchange, and my cell-phone number.

At the second counter, I then had to present the completed form along with a photocopy of my ID card. I had to sign on the photocopy which an official then stamped. With my banknotes, the form and the photocopy of my ID card, I then went to the next queue to get my currency converted at a third counter. The whole process took about two hours. For most people in the busier parts of the cities, it took much longer.

 

Day 1 of the banks opening. Poor, desperate people, whom the government treats like slaves or perhaps insects. Somehow these people have been brainwashed into thinking they live in a free country. My granddad kept photographs of British royalty on the walls of his office until his final days, for he had realized that the British had treated him much better.

 

Anyone who thinks that a country which wastes two hours of every citizen’s life to convert his own $60 can ever hope to be an economic power is drinking too much Kool-Aid and cannot do primary level math. Forget any possibility of removing unaccounted for money or reducing corruption, what Modi is doing is a recipe for the destruction of whatever legitimate economy there is.

That same afternoon, I went to the post office with a friend who wanted to get his money converted. After waiting a long time there, we found out that the post office had run out of cash. Since then most ATMs have had limited amounts of cash available and banks keep running out of cash as well.

The queues have continued to grow. People start lining up late into the night waiting for banks to open and still have to go back home with no cash. What started with two hours of queuing is becoming an endless slog now.

 

An endless queue to convert Rs 4,000 (USD 60). Will they actually go home with their new cash?

 

The Problems Go Much Deeper

Half of India’s citizens do not have a bank account and around 25% do not even have an ID card. These are the country’s poorest people, who have no way of converting their money – even if they learn how to do it, which is already a nigh insurmountable hurdle. Also, those who are old, disabled or sick have no choice but to suffer, for without personally visiting a bank branch office, one cannot convert one’s banknotes.

 

old-womanAn old disabled woman struggling to get her money converted. One has to be utterly heartless not to feel angry about the situation.

 

97% of the Indian economy is cash-based. With 88% of all outstanding currency no longer usable, the economy is coming to a standstill. The daily-wage laborer, who leads a hand-to-mouth existence in a country with GDP per capita of a mere $1,600, no longer has work, as his employer has no cash to pay his wages. His life is in utter chaos. He is not as smart as Modi —  despite the fact that Modi has no real life experience except as a bully and perhaps in his early days as a tea-seller at a train-station. He has no clue where his life is headed from here.

These people are going hungry, and some have begun to raid food shops. People are dying for lack of treatment at hospitals. Old people are dying in the endless queues. Some are killing themselves, as they are unable to comprehend the situation and simply don’t know what to do. There are now hundreds of such stories in the media.

Small businesses are in shambles, and many will probably never recover. The Hindu wedding season has just started and people are left with unusable banknotes. Their personal and family lives are now an utter disaster.

 

Desperate people raiding a supermarket

 

Lacking moral and rational anchors, and hence compassion, members of the salaried middle class are unperturbed. Their salaries get taxed and most of the bribes they are getting end up in gold or property investments. In their minds, poor people and small businesses don’t matter. In the hypocritical culture of India, as long as the middle class is not suffering — for the time being — they prefer to take what they believe to be the higher moral ground.

 

Why This Problem Will Get Much Worse

Let us do a few simple numbers… What has been made illegal comprises 88% of the monetary value of all currency notes in circulation. In an economy based primarily on cash, the liquidity of cash is the lifeline of the economy. This requires that 88% of the new currency be rapidly dispersed into the market.

The Indian government has absolutely no history of being able to entertain a project of this type or magnitude ever and after the British left, India’s institutions have continued to deteriorate, so hope is not an option. If they fail to issue enough new bills, the very limited supply of Rs 100 notes will disappear within a few days.

As any rational person has a tendency to store good money while using bad money in transactions, people will hide all newly released currency as well as Rs 100 banknotes until full liquidity is restored. The rich and the well-connected have already done what was needed.

A reminder of Gresham’s law for Modi:  “Bad money drives out good money.

Those who have no need to convert their money as all their cash is already in the banking system (as is the case with the salaried middle class), which they think is making them look like a heroes in the eyes of Modi and is giving them a sense of moral superiority –  they are nothing but turkeys being groomed.

Banks are giving out a mere Rs 20,000 ($300) a week at best. Their lives will suffer and for all intents and purposes, their accounts are frozen. This is Cyprus ten times over –  they just haven’t realized it yet.

Whichever way one looks at the above numbers, India’s economy is going to start suffocating, within weeks, if not within days. And a serious political and social crisis will take place, which will eventually acquire a life of its own. That is when the as of yet unperturbed salaried middle class wakes up with pain.

As in any irrational system, it is not reason and morality that will have convinced them to scuttle their hypocrisy and limited vision, but the violence and pain that they themselves will suffer.

 

Corruption

Politicians and bureaucrats of course cannot be seen queuing at the banks. Many bank branches apparently had their cash secretly replaced by the now-illegal bills before the first day of reopening. While no more than two bills of Rs 2000 each should have been collected, those better connected apparently haven’t had a problem with this and have been shown showing off packets of the new currency they have. All this cash will do nothing but end up under mattresses, as it has in the past.

 

wads-of-cashPoliticians with too much corrupt money (now unusable currency notes), who could not convert it beforehand, are distributing it to villagers as loans. Villagers will take the risk with the tax department, including having to hand over a large portion of it as bribes.

 

As I walk around, corruption is everywhere and has grown exponentially, not only in financial terms but worst of all, in terms of the humiliation and degradation Indians are suffering. And I don’t know how a humiliated, soulless person can be anything but corrupt.

In village after village people have stopped working, even if they had work, as they can now join the queues at the banks to convert other people’s banknotes for a commission. For many young people, this is a wise entrepreneurial decision, as they are making many times the money they would have otherwise made for now.

But they are being trained to make money from non-productive activities — not from wealth-creation, but from unnecessary problems created by the government. Are they being groomed for a corruption-free society? One has to be naive to respond affirmatively.

 

currency-saleSell your now illegal currency for a 20% discount, which young kids can then convert into legal money at the bank

 

Fear of the tax authorities means that the level of bribes being offered has gone up. Random people can now impersonate tax officers and collect bribes. People are in the grip of a fear psychosis. Many are emptying their bank deposit boxes, which means that crime will inevitably increase in coming days.

People are constantly worrying about what Modi’s next knee-jerk act might be and how to protect themselves against it.  A police state is knocking at the doors.

A receptive environment has been created in which all kinds of rumors are taking wing. Today, salt is selling for Rs 400 ($6) per kilogram, as rumors have been  making the rounds that it is about to disappear. This of course creates a situation in which it will actually disappear. The same is happening with sugar. The largely irrational masses are eagerly devouring a great many random rumors.

Lesson for Modi: Never, ever destabilize a society that works through conventions rather than reason, for it has no way to return to a normal state of affairs without a huge amount of pain and violence. Simply look at neighboring countries in order to understand this.

Chronic fear is slowly overtaking the mood of Indians, particularly those who run businesses. They have not only completely lost their trust in the government, but the tax department has been raiding people’s premises to scare those who are trying to salvage what they have.

They have stopped worrying about creating value. Everyone is talking about what to do with the banned banknotes, for even if they are fully accounted for, people  fear that the increasingly rapacious tax authorities will make trouble anyway.

 

Uncertainty has gripped the populace. Not everyone is capable of grasping the situation and dealing with it.

 

People are now converting whatever they can into gold, silver, and mostly for the first time into the US dollar and other foreign currencies as well, all of which are trading at huge premiums. Money is also moving out of the country. Gold has shot up to as much as $2,800 per ounce, if you can find it.

Lesson for Modi: The reason people trust Switzerland is because it has hundreds of years of history of protecting private property. Singapore has done an equally good job, but it still lags behind Switzerland, because trust requires a very, very long history of institutional honesty and integrity. India is back to level zero for now. When future generations look back, they will see the current demonetization as the worst event in the history of post-colonial India.

Finally, the new bills have actually worsened the counterfeiting problem they were supposed to solve. People do not have any experience with what the new banknotes look like. Within a mere three days, counterfeits are already in circulation. Contrary to the government’s claims, the new bills are not any more sophisticated than the old ones and are made of simple paper.

 

fakes

A mere three days after the first release of the new banknotes, fake currency is already in circulation

 

Why Has the Government Miscalculated?

The most productive job Modi ever had was running a tea-shop at a railway station, which he then gave up to become a bully. He is a complete stranger to complex thought. He is simplistic in his thinking and does not understand the second-order consequences of his actions.

First he increased Hindu fanaticism, then he participated in collectivizing people using nationalism, then he created problems with Kashmir through his heavy-handedness.

He completely failed to liberalize the economy or remove corruption from public life, which is an almost impossible job. Quite ironically, Modi is making it possible for public servants to escape scrutiny, the very people who are the fountainhead of all corruption.

A simplistic mind is also arrogant. Such a mind — unable to conceive the possibility of unintended consequences — thinks all that has to be done is to issue orders and everything will fall in place. Alas, this may work when shooting innocent people in Kashmir and in other destructive ventures, but when it comes to institutionalizing social progress, a more complex and intelligent approach is needed.

All of India’s institutions have continued to deteriorate since the British have left. They are rotting away and are in shambles. India had some breathing space over the past three decades because of the free gifts of the internet and cheap telephony which it got from the West.

This has merely made Indian governments more rapacious and so-called educated Indians more arrogant. They collectively lack the capacity to improve India’s institutions after having destroyed them. Demonetization may well be the straw that will break the camel’s back by accelerating the deterioration of India’s institutions toward the point of breakdown, perhaps in weeks if not already in coming days.

 

Conclusion – What Can One Do?

As Indian, be a speculator – even if the government does not like it and will blame you for all ills. Try to keep as much of your money in cash, in Rs 100 notes. Rs 2,000 notes have no value when you go shopping for groceries. Keep a supply of water and dried food sufficient for a few months’ needs.

Cash is disappearing and even before that the economy was stumbling. It might take just one more small domino — more strain on liquidity — to bring about systemic problems in the economy that could bring crucial transactions, businesses and supply lines to a halt.

If systemic violence spreads, everything will be complicated further. Think of Zimbabwe. It pays to be prepared, particularly when we are ruled by zombies.

 

Photos and videos by courtesy of Jayant Bhandari.

 

Jayant Bhandari grew up in India. He advises institutional investors on investing in the junior mining industry. He writes  on political, economic and cultural issues for several publications. He is a contributing editor of the Liberty magazine. He runs a yearly seminar in Vancouver titled Capitalism & Morality.

 

 
 

Emigrate While You Can... Learn More

 
 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

3 Responses to “Gold Price Skyrockets in India after Currency Ban – Part II”

  • RagnarD:

    Wow, great post Jayant!
    I this is the best piece I’ve ever read explaining the Indian psychology / economy.

    I am American, and I was in India for a month in 1995, just backpacking around.

    I have one tidbit to relate with respect to Indian currency. Back then, and probably still now, knowing India, they used to staple all the new bills together. Thus all the brand new bills had a hole in them. And, of course, these holes, this government provided degradation of the currency, led to the money falling apart – especially at the points where the hole was created by the large steel staple.

    As tourist saps it seems we were magnets for off loading worn out currency. We were given plenty of it, but no one wanted to take it. It was infuriating.

    Why would you punch a hole in brand new money when you could easily wrap it in paper, twine, etal.???

    Also, as you say, the people don’t see the pain and distress of their countrymen. I remember seeing lepers with no hands or feet and people with broken elbows twisting their for arm to demonstrate the otherwise impossible twists and motions. Horrorific stuff. A circus side show of pain and horror in New Delhi square.

    Thanks again for the post. Please keep us updated!!

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Strange Moves in Gold, Federal Reserve Policy and Fundamentals
      Counterintuitive Moves Something odd happened late in the day in Wednesday's trading session, which prompted a number of people to mail in comments or ask a question or two. Since we have discussed this issue previously, we decided this was a good opportunity to briefly elaborate on the topic again in these pages. A strong ADP jobs report for March was released on Wednesday, and the gold price dutifully declined ahead of it already, while the stock market surged concurrently. Later in...
  • Gold – An Overview of Macroeconomic Price Drivers
      Fundamental Analysis of Gold As we often point out in these pages, even though gold is currently not the generally used medium of exchange, its monetary characteristics continue to be the main basis for its valuation. Thus, analysis of the gold market requires a different approach from that employed in the analysis of industrial commodities (or more generally, goods that are primarily bought and sold for their use value). Gold's extremely high stock-to-flow ratio and the main source of...
  • Doomsday Device
      Disappearing Credit All across the banking world – from commercial loans to leases and real estate – credit is collapsing. Ambrose Evans-Pritchard writing for British newspaper The Telegraph:   Credit strategists are increasingly disturbed by a sudden and rare contraction of U.S. bank lending, fearing a synchronized slowdown in the U.S. and China this year that could catch euphoric markets badly off guard. Data from the U.S. Federal Reserve shows that the $2 trillion market...
  • The Balance of Gold and Silver – Precious Metals Supply and Demand
      Orders of Preference Last week, we discussed the growing stress in the credit markets. We noted this is a reason to buy gold, and likely the reason why gold buying has ticked up since just before Christmas. Many people live in countries where another paper scrip is declared to be money — to picture the absurdity, just imagine a king declaring that the tide must roll back and not get his feet wet when his throne is placed on the beach — not real money like the US...
  • The American Empire and Economic Collapse
      Dashed Hopes Despite widespread optimism among libertarians, classical liberals, non-interventionists, progressive peaceniks and everybody else opposed to the US Empire that some of its murderous reins may finally be pulled in with the election of Donald Trump, it appears that these hopes have now been dashed.   Liberty... some of it is still above water, but definitely not as much as there could or should be.*   While the hope for a less meddlesome US foreign policy...
  • Pulling Levers to Steer the Machine
      Ticks on a Dog A brief comment on Fed chief Janet Yellen’s revealing speech at the University of Michigan. Bloomberg:   “Before, we had to press down on the gas pedal trying to give the economy all of the oomph that we possibly could,” Yellen said Monday in Ann Arbor, Michigan. The Fed is now trying to “give it some gas, but not so much that we’re pushing down hard on the accelerator.” […] “The appropriate stance of policy now is closer to, let me call it...
  • Credit Contraction Episodes
      Approaching a Tipping Point Taking the path of least resistance doesn’t always lead to places worth going.  In fact, it often leads to places that are better to avoid.  Repeatedly skipping work to sleep in and living off credit cards will eventually lead to the poorhouse.   Sometimes the path of least resistance turns out to be problematic   The same holds true for monetary policy.  In particular, cheap credit policies that favor short-term expediency have the...
  • The Empire Needs an Emperor
      Unknown (sort of) Head of State BUENOS AIRES – Type Swiss President “Doris Leuthard” into Google. You will get about 450,000 results. Do the same with Donald Trump, and the number is closer to 396 million. That’s 87,900% more references. The world’s press is as fascinated by President Trump as it is indifferent to President Leuthard.   Doris Leuthard, President and energy minister of Switzerland. She has won her second presidential term this year. It basically...
  • Mea Culpa – Precious Metals Supply and Demand
      Input Data Errors Dear Readers, I owe you an apology. I made a mistake. I am writing this letter in the first person, because I made the mistake. Let me explain what happened.   The wrong stuff went into the funnel in the upper left-hand corner...   I wrote software to calculate the gold basis and co-basis (and of course silver too). The app does not just calculate the near contract. It calculates the basis for many contracts out in the distance, so I can see the...
  • The Cost of a Trump Presidency
      Opportunity Cost Rears its Head Last Thursday’s wanton attack on a Syrian air field by the US and its bellicose actions toward North Korea have brought the real cost of candidate Trump’s landslide victory last November to the forefront.   It didn't take long for Donald Trump to drop his non-interventionist mask. The decision was likely driven by Machiavellian considerations with respect to domestic conditions, but that doesn't make it any better.   Unlike...
  • India – Is Kashmir Gone?
      Everything Gets Worse  (Part XII) -  Pakistan vs. India After 70 years of so-called independence, one has to be a professional victim not to look within oneself for the reasons for starvation, unnatural deaths, utter backwardness, drudgery, disease, and misery in India. Intellectual capital accumulated in the West over the last 2,500 years — available for free in real-time via the internet — can be downloaded by a passionate learner. In the age of modern technology, another mostly...
  • French Election – Bad Dream Intrusion
      The “Nightmare Option” The French presidential election was temporarily relegated to the back-pages following the US strike on Syria, but a few days ago, the Economist Magazine returned to the topic, noting that a potential “nightmare option” has suddenly come into view. In recent months certainty had increased that once the election moved into its second round, it would be plain sailing for whichever establishment candidate Ms. Le Pen was going to face. That certainty has been...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com