When cash = liberty.
I don’t know if you caught up with what’s happening over in India. It’s amazing stuff.
Basically, Prime Minister Modi has outlawed the old 500 and 1,000rps notes. They’re being replaced with new ones.
On the same day the America went to the polls, Modi announced that the old notes – worth something like $10 and $20 bucks each, were no longer legal currency. Indians had until the end of the year to deposit them with a bank and start using the new ones.
Doesn’t sound like such a big deal right? It wouldn’t be such a drama if you couldn’t use your 10s and 20s…
But that’s the thing about India. In India, the black market is huge. Only 2% of Indians pay income tax!
And so most Indians – well most of the wealthy – have mattresses and mattresses stuffed with cash.
And that’s exactly the point of the call-back. Modi is trying to bring all of the hidden black-market money back into the light.
And since Indians can only deposit 250,000 rps (about $4000) without proof that they’ve paid taxes, rich Indians are in a panic.
There’s stories of people trying to buy a year’s worth of fruit, or maid services, or yoga lessons – up front!
Other people are ploughing it into designer shoes and dresses or gold jewellery.
Some people are simply burning it or dumping it in the river. There’s several stories of people fishing pillow cases stuffed with cash out of the Ganges river.
And so many industries that rely on cash – from cosmetic surgery to wedding planners – are taking a hit. The real estate industry is in a flap too. Apparently it’s common for 60% of a property’s purchase price to be paid in cash, under the table!
How do you get finance for something like that??
The NY Times is running a story about a guy who had just sold a property and had received 3.5 million rupees, or about $60,000 in cash. He was now hiring 14 low-income people to deposit 250,000 rupees in old notes and launder the money back to him – less a small commission for their trouble.
Wild. And in proof that the “Incompetent Government” league table is extremely competitive, this major change has come with major blunders.
The government failed to make sure it printed enough notes, so even people seeking to exchange legitimate cash had to wait in long queues, if they could get it at all. Worse still, the new money doesn’t fit in the existing ATM machines and they’ve all had to be reworked.
And without money to help the gears go round, India’s previously booming economy has ground to a halt. It’s on track to post a fall of 1-2% this year.
But these SNAFUs are not enough to deter Prime Minister Modi from taking it further. He’s been talking about making India a “cashless society” – even though cash currently accounts for 90% of transactions, and 85% of worker pay.
You don’t make it to the top of the incompetent government leader board by letting facts like that get in your way.
But perhaps this isn’t incompetency at all..?
A few weeks ago, global investment bank UBS called on Australia to eliminate $100 notes. From the AFR:
“Removing large denomination notes in Australia would be good for the economy and good for the banks… Benefits would include reduced crime and welfare fraud, increased tax revenue and a “spike” in bank deposits.
In Australia, 92 percent of all currency by value is in A$50 and A$100 notes, the larger of which is “rarely seen,” according to the UBS report. Removing bigger denominations would boost digital payments in a country where the use of cash payments is continuing to fall, the analysts wrote…
The program would also be positive for banks. If all the A$100 notes were deposited into accounts at the lenders, household deposits would rise by about 4 percent, the UBS analysts said. That would likely be enough to fill the big banks’ regulatory-mandated net stable funding ratios and reduce reliance on offshore funding, they said.”
I was surprised to find that 92% of our cash is in 50s and 100s. It is true that you don’t see a 100 all that often.
So maybe it is true that most 100s are tied up in the black market and organised crime. We do probably want to do something about that.
But I get very nervous when I hear about plans to phase out notes, or cash altogether. Kenneth Rogoff’s been going on about going cashless for years.
For me, cash gives you a way to opt out of the banking system. If there’s no cash, then you’re forced to use an intermediary institution. You’re forced into the system.
I could think of many good reasons why you’d want to keep the banks at arms length – maybe you think they’re all about to collapse, or maybe you’re a dissident worried about the state ‘flipping the switch’ on you.
And what happens as we push further and further towards negative interest rates. What happens when we have to pay banks to hold our money? We could take our cash out and just sit on it, but if cash doesn’t exist, then you’re just forced to pay for the convenience of wealth.
This feels like a slippery slope to me.
You might say that $100 notes wouldn’t be missed, and that maybe true now, but it wasn’t that long ago that the $20 note was serious money.
Inflation keeps on keeping on, and soon we’ll spend 100s the way we currently spend 50s.
If we give it up now, there’s no guarantee we’ll get it back, particularly if it’s not politically convenient to give people the option at the time.
And you might say that this is targeted at criminals, so if you’re not a criminal you’ve got nothing to hide.
This is deeply flawed logic. I’m not a criminal now, but I reserve the right to become one if the state goes rouge. If the government decides it wants to persecute millionaire trouble-makers, I’d like to have as many options open to me as I can have, thanks.
I feel conflicted about this every time I revel in the convenience of pay-wave. But as they say, the price of liberty is vigilance.
And when it comes to the concentration of power in the financial sector, we have to be particularly vigilant.
So watch out for this one. They can have my 100s when they prise them from my cold dead hands.
What do you reckon? Is India on the right path? Would you go cashless?