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-notesBanned 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.

 

golalotGold – 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-fixAnother 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.

 

 
 

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

   
 

One Response to “India’s Currency Debacle – An Interview with Jayant Bhandari”

  • No6:

    Australia is now looking at removing the $100- note!

    The usual suspects, banks and academics, have come out of the woodwork hailing this as the next great thing.

    The $100-note has been around for decades (1984) but suddenly has been found being used by criminals!

    (NB When released the $100 note was worth $300- in today’s fiat by the central banks own minimising calculation)

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Gold - Ready to Spring Another Surprise
      Sentiment Extremes Below is an update of a number of interesting data points related to the gold market. Whether “interesting” will become “meaningful” remains to be seen, as most of gold's fundamental drivers aren't yet bullishly aligned. One must keep in mind though that gold is very sensitive with respect to anticipating future developments in market liquidity and the reaction these will elicit from central banks. Often this involves very long lead times.   Blackbeard's...
  • Modi’s Great Leap Forward
      India’s Currency Ban – Part VIII India’s Prime Minister, Narendra Modi, announced on 8th November 2016 that Rs 500 (~$7.50) and Rs 1,000 (~$15) banknotes would no longer be legal tender. Linked are Part-I, Part-II, Part-III, Part-IV, Part-V, Part-VI and Part-VII, which provide updates on the demonetization saga and how Modi is acting as a catalyst to hasten the rapid degradation of India and what remains of its institutions.   India’s Pride and Joy   Indians are...
  • Global Recession and Other Visions for 2017
      Conjuring Up Visions Today’s a day for considering new hopes, new dreams, and new hallucinations.  The New Year is here, after all.  Now is the time to turn over a new leaf and start afresh. Naturally, 2017 will be the year you get exactly what’s coming to you. Both good and bad.  But what else will happen?   Image of a recently discarded vision... Image by Michael Del Mundo   Here we begin by closing our eyes and slowing our breath.  We let our mind...
  • The Great El Monte Public Pension Swindle
      Nowhere City California There are places in Southern California where, although the sun always shines, they haven’t seen a ray of light for over 50-years.  There’s a no man’s land of urban blight along Interstate 10, from East Los Angeles through the San Gabriel Valley, where cities you’ve never heard of and would never go to, are jumbled together like shipping containers on Terminal Island.  El Monte, California, is one of those places.   Advice dispensed on Interstate...
  • A Trade Deal Trump Cannot Improve
      Worst in Class BALTIMORE – People can believe whatever they want. But sooner or later, real life intervenes. We just like to see the looks on their faces when it does. By that measure, 2017 may be our best year ever. Rarely have so many people believed so many impossible things.   Alice laughed. "There's no use trying," she said: "one can't believe impossible things." "I daresay you haven't had much practice," said the Queen. "When I was your age, I always did it for...
  • Pope Francis Now International Monetary Guru
      Neo-Marxist Pope Francis Argues for Global Central Bank As the new year dawns, it seems the current occupant of St. Peter’s Chair will take on a new function which is outside the purview of the office that the Divine Founder of his institution had clearly mandated.   Neo-Papist transmogrification. We highly recommend the economic thought of one of Francis' storied predecessors, John Paul II, which we have written about on previous occasions. In “A Tale of Two Popes” and...
  • Trump’s Trade Catastrophe?
      “Trade Cheaters” It is worse than “voodoo economics,” says former Treasury Secretary Larry Summers. It is the “economic equivalent of creationism.” Wait a minute -  Larry Summers is wrong about almost everything. Could he be right about this?   Larry Summers, the man who is usually wrong about almost everything. As we have always argued, the economy is much safer when he sleeps, so his tendency to fall asleep on all sorts of occasions should definitely be welcomed....
  • Where’s the Outrage?
      Blind to Crony Socialism Whenever a failed CEO is fired with a cushy payoff, the outrage is swift and voluminous.  The liberal press usually misrepresents this as a hypocritical “jobs for the boys” program within the capitalist class.  In reality, the payoffs are almost always contractual obligations, often for deferred compensation, that the companies vigorously try to avoid.  Believe me.  I’ve been on both sides of this kind of dispute (except, of course, for the “failed”...
  • Money Creation and the Boom-Bust Cycle
      A Difference of Opinions In his various writings, Murray Rothbard argued that in a free market economy that operates on a gold standard, the creation of credit that is not fully backed up by gold (fractional-reserve banking) sets in motion the menace of the boom-bust cycle. In his The Case for 100 Percent Gold Dollar Rothbard wrote:   I therefore advocate as the soundest monetary system and the only one fully compatible with the free market and with the absence of force or fraud...
  • Silver’s Got Fundamentals - Precious Metals Supply-Demand Report
      Supply-Demand Fundamentals Improve Noticeably Last week was another short week, due to the New Year holiday. We look forward to getting back to our regularly scheduled market action.   Photo via thedailycoin.org   The prices of both metals moved up again this week. Something very noticeable is occurring in the supply and demand fundamentals. We will give an update on that, but first, here’s the graph of the metals’ prices.   Prices of gold and silver...
  • Trump’s Plan to Close the Trade Deficit with China
      Rags to Riches Jack Ma is an amiable fellow.  Back in 1994, while visiting the United States he decided to give that newfangled internet thing a whirl.  At a moment of peak inspiration, he executed his first search engine request by typing in the word beer.   Jack Ma, founder and CEO of Alibaba, China's largest e-commerce firm. Once he was a school teacher, but it turned out that he had enormous entrepreneurial talent and that the world of wheelers, dealers, movers and...
  • Side Notes, January 14 - Red Flags Over Goldman Sachs
      Red Flags Over Goldman Sachs Just to prove that I am an even-handed insulter, here is a rant about my former employer, Goldman Sachs. The scandal at 1MDB, the Malaysian sovereign wealth fund from which it appears that billions were stolen by politicians all the way up to the Prime Minister, continues to unfold.   The main players in the 1MDB scandal. Irony alert: apparently money siphoned off from 1MDB was used to inter alia finance Martin Scorcese's movie “The Wolf of...

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