Jump to content
  • The above Banner is a Sponsored Banner.

    Upgrade to Premium Membership to remove this Banner & All Google Ads. For full list of Premium Member benefits Click HERE.

  • Join The Silver Forum

    The Silver Forum is one of the largest and best loved silver and gold precious metals forums in the world, established since 2014. Join today for FREE! Browse the sponsor's topics (hidden to guests) for special deals and offers, check out the bargains in the members trade section and join in with our community reacting and commenting on topic posts. If you have any questions whatsoever about precious metals collecting and investing please join and start a topic and we will be here to help with our knowledge :) happy stacking/collecting. 21,000+ forum members and 1 million+ forum posts. For the latest up to date stats please see the stats in the right sidebar when browsing from desktop. Sign up for FREE to view the forum with reduced ads. 

What is wrong with India removing 10000 + 5000 Notes


Pampfan

Recommended Posts

Just saw some articles about the price of gold skyrocketing in India as a result of the removal of the 10000 and 5000 note as legal tender.

Doesn't make any sense to me why the government would do such a thing.  

Apparently the notes are valued at like $14 and $7 dollars and this was done to stop corruption and black market activity????

What kind of black market could such small bills support - (The illegal egg trade????)

 

 

 

Link to comment
Share on other sites

6 hours ago, Pampfan said:

What kind of black market could such small bills support - (The illegal egg trade????)

When you consider that their wages etc are a fraction of the west, that 1000 Rupee note which is peanuts for us in the west is a much larger value for them.

 

Link to comment
Share on other sites

I have worked in India on four occasions. Very class based. Rising middle class are getting better wages. It's not Uk level, but it's not the fraction it once was. There are shopping centres now and nice shops. Guards on the door though and I saw people turned away like you might get at a nightclub here if not smart enough! 

Rural and working class is of course extremely poor still. 

Just some random commentary from me. Not sure on reasons for note removal. I remember getting £100 out of a cash machine and it was a large denomination of rupees!!!! Lol

Link to comment
Share on other sites

I work in the banknote industry and we have been told the removal of notes is due to vast levels of counterfeits , which funds terrorism and also to stop the people who are hoarding cash for the black market. They will be replaced with a new purple 2000 note and a new green 500 shortly.

Link to comment
Share on other sites

I read this article too but i also read a different one that said these counterfeit notes are apparently printed in Pakistan and are often used to buy gold. There is a gold buying frenzy for people trying to use up these notes at the moment but in the long term when the notes are out of circulation it would actually impact negatively on gold. It would also have long term positive effects for the banks and currency which are also factors in bringing gold price down. Or at least until they counterfeit the new notes.. So i wouldn't put money into gold purely based on the fact you think this could increase the price of gold. The long term outlook for gold is good for many other reasons however.

 

Link to comment
Share on other sites

On 20/11/2016 at 01:58, Pampfan said:

Just saw some articles about the price of gold skyrocketing in India as a result of the removal of the 10000 and 5000 note as legal tender.

Doesn't make any sense to me why the government would do such a thing.  

Apparently the notes are valued at like $14 and $7 dollars and this was done to stop corruption and black market activity????

What kind of black market could such small bills support - (The illegal egg trade????)

 

 

 

 

There's nothing "wrong" with it if you play by the rules of the institution issuing the currency.... but it is another stark reminder than those who control the currency can and do change the definition of what that currency is at a whim.

Link to comment
Share on other sites

15 minutes ago, vand said:

 

There's nothing "wrong" with it if you play by the rules of the institution issuing the currency.... but it is another stark reminder than those who control the currency can and do change the definition of what that currency is at a whim.

Even if you hold it, you don't own it ;)

Link to comment
Share on other sites

Very true.

Your comments made me pull out some silver and gold pamp bars and just hold them in my hands, feel their weight and stare at them.

A sense of calm and relaxation.

I own these babies no matter what the powers that be do to their fiat currencies,

:)

 

 

 

Link to comment
Share on other sites

The above comments all give a great example of not having all your eggs in one basket, spread your risk around so you are never over exposed to one thing going tits up

Dont keep all your cash at home, dont have it all in silver, dont have it all in gold, dont have it all in one bank, dont have it all in the stock market, dont have everything in a safety deposit box

Spread it around and spread your risk

Link to comment
Share on other sites

Courtesy of GoldMoneys ALASDAIR MACLEOD : The economic consequences of Mr Modi  

Two weeks ago, India’s Prime Minister Narendra Modi demonetised an estimated 86% of rupees in circulation, offering conversion into a bank account or into smaller currency notes until 31 December, after which these notes will have no redemption value.

Together with forgeries in circulation, it could be over 90% of all circulating money. The terms of redemption are so inconvenient for anyone other than black-marketeers, that for all purposes $50bn equivalent of rupees have been eliminated from the economy at a stroke, pending the introduction of new currency notes.

The sadness in all this is that Modi should have foreseen the extent of the disruption to the poor and rural communities, but has obviously forgotten the hard lessons of life learned in his youth as a lowly chai wallah. It could be that the Reserve Bank went along with it as a government puppet, consoling itself with the thought it would be a good way to write off obligations, believing a significant quantity of notes is likely never to be redeemed by black-marketeers and tax evaders. It effectively reduces the central bank’s obligations to the private sector at the expense of those the state likes least. However, the $10-20bn equivalent the state will make from it is less important than the disruptive economic effect and the likely impact on the rupee’s future purchasing power.

The purpose of this article is to look at the economic consequences of Modi’s action. Initial estimates by western macro economists of the effect on GDP seems to be benigni. It could be because their contacts in India are typically the more highly-paid city bourgeoisie, who rarely spend cash except for tips, using bank and credit cards more normally for everyday purchases. These people would almost certainly welcome moves to bring illegal trading under control and extend the income tax base, playing down the negatives. However, the cash immediately removed amounts to about 2.5% of GDP, eventually to be replaced at an unspecified time in the future by the new notes bearing a portrait of the Mahatma. But while these notes are shortly to become available, it could take months to convert ATMs and ensure their widespread availability.

If the long-term consequences will be to bring unrecorded transactions into the GDP statistic, some western macro economists postulate recorded GDP could end up rising faster than anyone expected before Modi’s action. This misses the point. Banning high denomination notes worth as little as $7.50 equivalent to be replaced by the new Ghandi notes has been a major disruption in most Indians’ lives, particularly for the rural population. Removing everyday money is like trying to run an engine without any oil in it. It seizes up, which is what the Indian economy is certain to do. India’s economy is therefore likely to face a short-term slump, which government economists will counter by reflating, in other words by increasing the quantity of money. It will do the economy no good, but nominal GDP, which is not the same thing, will eventually rise, to the satisfaction of the central planners.

Behind the confusion in government economists’ minds is a false conviction that GDP records the performance of an economy. This is wrong. GDP is just a money-total at a previous point in time, and no more than that. It is not a measure of economic progress or regress. A change in GDP reflects only a change in the quantity of money in the economy, so it is perfectly possible for an economy to contract, or even collapse, while nominal GDP rises. Not only is this fatally misunderstood by today’s economists, but this outcome has become far more likely for India, and will simply end up generating more monetary inflation from the banking system. Behind the Indian authorities’ poor grasp of the economic consequences of their actions are misconceptions common with establishment economists everywhere. However, it is likely that central bankers in India and elsewhere are at least vaguely aware of the long-term danger of increasing price inflation. But the consensus in banking circles is that more money and credit may be required to stave off recession, and even systemic risk. And in the case of systemic risk, cash is a danger because it allows the public to expose a bank’s insolvency. If only cash was somehow replaced, there could perhaps be greater control over economic and systemic outcomes.

All the signs of this loose thinking are there. We keep on hearing of central banks planning to do away with cash, and Modi’s action is consistent with this standpoint. His government is not only trying to eliminate black markets, but it is also brutally trying to eliminate economic dependence on physical cash. It rhymes with the direction of travel for central bank policy in the advanced economies as well as in the emerging.

Doubtless, for this reason, central banks everywhere will be watching the Indian experiment closely. But we can easily guess what their analysis will conclude. If the experiment succeeds, it will encourage them to proceed with their own plans to digitise money and dispense with the folding sort. If it doesn’t, failure will be deemed to be due to the peculiarities of the Indian economy and the failure of the Reserve Bank to implement policy effectively, so they will proceed with their plans anyway.

However, hopes that the elimination of cash will give central banks greater control over inflationary outcomes appear to be badly misplaced. Not only does history tell us the exact opposite is the case, and that the reality is central banks have no control over price outcomes, but subjective price theory also confirms. The pricing power of money is not and never has been in the control of central banks; it is a matter only for the users of money in their day-to-day transactions. Money’s use as money is wholly down to its public acceptance as money, as experience proves, and central banks’ abuse of this trust is ultimately dangerous, as so often demonstrated. For example, despite government diktats and heavy-handed enforcement, Zimbabwe’s currency has become at best, to put it politely, a replacement for another form of paper whose vital supply has been disrupted. The digital version has even less value, because it has no alternative use.

India and Gold

We must return to the specific subject of India, and the likely outcome of Modi’s clumsy attempt to eliminate means of payment using cash. It is almost certainly going to backfire. Indians have little respect for government as it is, and this action will only convince them with renewed purpose to have as little to do with the government and its money as possible. When the new Gandhi notes come into circulation, they will likely be rejected as the preferred money by growing numbers of a rightly suspicious public. This means that the rupee’s purchasing power will diminish more rapidly than if Modi had not disrupted what had become a relatively stable monetary situation.

Ordinary people in their actions are well ahead of western financial analysts, having quickly anticipated this outcome for themselves. Despite longstanding government attempts to persuade them otherwise, they are rushing to convert worthless rupees into the one form of money they have trusted for millennia and over which government has no control, gold. They know that priced in rupees, gold will be more expensive in the months to come, so anything that can be encashed will be encashed for gold, not rupees.

This is the reason why gold in India is now trading at a substantial premium to international prices. The Indian government restricts its supply because it has always seen gold, correctly, as a challenge to its own fiat money. Accordingly, the central planners condemn gold as being more appropriate to history than today’s economic environment. And having dismissed its relevance as money and as a superior store of value to the rupee, they see gold imports as unproductive hoarding. The government and central bank also appear to make the mistake of believing that if gold imports were eliminated, the balance of trade would improve accordingly. The result is various acts and regulations since the Gandhi era have only encouraged gold smuggling. The importation of gold has never halted, and responding to every twist and turn of monetary policy has increased over the long-term, and will continue to do so following Modi’s clumsy action.

The impact of government ineptness on the gold market is likely to be considerable. After a period of relative currency stability, gold demand, at the officially recorded level, had in fact declined earlier this year. The premium on gold was less than the new sales tax, putting many jewellers out of business, because they could not compete with smuggled gold, which bore no tax and attracted a lower premium than the sales tax. More jewellers will probably be put out of business by this latest action. Smuggling will consequently rise and rise, particularly if the rupee’s purchasing power declines because of escalating public distrust of it as money.

The central banking community, headed by the Bank for International Settlements, was concerned at Indian gold demand increasing at a time when Chinese citizens were absorbing most of the world’s free supply of newly-mined and scrap gold. It is almost certain that the appointment of Raghuram Rajan in September 2013 as Governor of the Reserve Bank of India had much to do with the urgency to bring Indian demand for gold under control, because he was and still is the BIS’s establishment man. He has generally failed in this mission, and his tenure was not renewed for reasons unknown, other than he preferred to return to the calmer pastures of academe and his Vice-Chairmanship of the Bank for International Settlements.

This is not characteristic of a career central banker at the height of his powers and influence. Perhaps Rajan realised his attempt to manage gold demand would never work, and Modi was proving too dangerous for his own legacy at the Reserve Bank to survive unblemished. He was recently quoted as saying that the RBI’s ability to say no to the government must be protected, some months after he declined the opportunity to serve a second term. Was this a reflection of something that happened?

In conclusion, the surprise money-grab by the Indian authorities intensifies the public’s perception of a corrupt, overly-bureaucratic, and ineffective government. The public’s suspicion that government paper money is ultimately worthless will have, in its collective mind at least, gained immeasurable credence. An accelerating decline in the purchasing power of the rupee is the most likely economic consequence of Mr Modi, ultimately destabilising for both the country and his government.

Link to comment
Share on other sites

Archived

This topic is now archived and is closed to further replies.

×
×
  • Create New...

Cookies & terms of service

We have placed cookies on your device to help make this website better. By continuing to use this site you consent to the use of cookies and to our Privacy Policy & Terms of Use