Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Stock Market SEASONAL TREND and ELECTION CYCLE - 24th Nov 20
Amazon Black Friday - Karcher K7 FC Pressure Washer Assembly and 1st Use - Is it Any Good? - 24th Nov 20
I Dislike Shallow People And Shallow Market Pullbacks - 24th Nov 20
Small Traders vs. Large Traders vs. Commercials: Who Is Right Most Often? - 24th Nov 20
10 Reasons You Should Trade With a Regulated Broker In UK - 24th Nov 20
Stock Market Elliott Wave Analysis - 23rd Nov 20
Evolution of the Fed - 23rd Nov 20
Gold and Silver Now and Then - A Comparison - 23rd Nov 20
Nasdaq NQ Has Stalled Above a 1.382 Fibonacci Expansion Range Three Times - 23rd Nov 20
Learn How To Trade Forex Successfully - 23rd Nov 20
Market 2020 vs 2016 and 2012 - 22nd Nov 20
Gold & Silver - Adapting Dynamic Learning Shows Possible Upside Price Rally - 22nd Nov 20
Stock Market Short-term Correction - 22nd Nov 20
Stock Market SPY/SPX Island Setups Warn Of A Potential Reversal In This Uptrend - 21st Nov 20
Why Budgies Make Great Pets for Kids - 21st Nov 20
How To Find The Best Dry Dog Food For Your Furry Best Friend?  - 21st Nov 20
The Key to a Successful LGBT Relationship is Matching by Preferences - 21st Nov 20
Stock Market Dow Long-term Trend Analysis - 20th Nov 20
Margin: How Stock Market Investors Are "Reaching for the Stars" - 20th Nov 20
World’s Largest Free-Trade Pact Inspiration for Global Economic Recovery - 20th Nov 20
Dating Sites Break all the Stereotypes About Distance - 20th Nov 20
THE STOCK MARKET BIG PICTURE - Video - 19th Nov 20
Reasons why Bitcoin is Treading at it's Highest Level Since 2017 and a Warning - 19th Nov 20
Media Celebrates after Trump’s Pro-Gold Fed Nominee Gets Blocked - 19th Nov 20
DJIA Short-term Stock Market Technical Trend Analysis - 19th Nov 20
Demoncracy Ushers in the Flu World Order How to Survive and Profit From What Is Coming - 19th Nov 20
US Bond Market: "When Investors Should Worry" - 18th Nov 20
Gold Remains the Best Pandemic Insurance - 18th Nov 20
GPU Fan Not Spinning FIX - How to Easily Extend the Life of Your Gaming PC System - 18th Nov 20
Dow Jones E-Mini Futures Tag 30k Twice – Setting Up Stock Market Double Top - 18th Nov 20
Edge Computing Is Leading the Next Great Tech Revolution - 18th Nov 20
This Chart Signals When Gold Stocks Will Explode - 17th Nov 20
Gold Price Momentous ally From 2000 Compared To SPY Stock Market and Nasdaq - 17th Nov 20
Creating Marketing Campaigns Using the Freedom of Information Act - 17th Nov 20
ILLEGITIMATE PRESIDENT - 17th Nov 20
Stock Market Uptrend in Process - 17th Nov 20
How My Friend Made $128,000 Investing in Stocks Without Knowing It - 16th Nov 20
Free-spending Biden and/or continued Fed stimulus will hike Gold prices - 16th Nov 20
Top Cheap Budgie Toys - Every Budgie Owner Should Have These Safe Bird Toys! - 16th Nov 20
Line Up For Your Jab to get your Covaids Freedom Pass and a 5% Work From Home Tax - 16th Nov 20
You May Have Overlooked These “Sleeper” Precious Metals - 16th Nov 20
Demystifying interesting facts about online Casinos - 16th Nov 20
What's Ahead for the Gold Market? - 15th Nov 20
Gold’s Momentous Rally From 2000 Compared To Stock Market SPY & QQQ - 15th Nov 20
Overclockers UK Quality of Custom Gaming System Build - OEM Windows Sticker? - 15th Nov 20
UK GCSE Exams 2021 CANCELLED! Grades Based on Mock Exams and Teacher Assessments - 15th Nov 20
Global "Debt Mountain": Beware of This "New Peak" - 13th Nov 20
Overclocking Zen 3 Ryzen 5600x, 5800x, 5900x and 5950x to 4.7ghz All Cores Cinebench R20 Scores - 13th Nov 20
Is Silver Leading Bitcoin or is Bitcoin Leading Silver? - 13th Nov 20
How Elliott Waves Simplify Your Technical Analysis - 13th Nov 20
How to buy Bitcoins using debit/credit card? - 13th Nov 20
Will COVID Vaccine Kill Gold and Silver? - 12th Nov 20
Access to Critical Market Reports - 12th Nov 20
Stock Market Dow Futures Reach 30,000 on News of COVID-19 Vaccine Trials Success - 12th Nov 20
8 Terms & Conditions You Must Know Before Asking For Life Insurance Policy Quotes - 12th Nov 20
Gold Stocks Post 2020 US Election Outlook - 11th Nov 20
Champions’ League Group Stage Draw: All You Need To Know - 11th Nov 20
Stock Market Secular Trend - 11th Nov 20
Stock Market Correction Curtailed by US Election - 11th Nov 20
What Causes a Financial Bubble? - 11th Nov 20
Ryzen 9 5900X RTX 3080 - Scan.co.uk vs Overclockers.co.uk UK Custom PC System Builder Review - 10th Nov 20
Killing Driveway Weeds FAST with a Pressure Washer - Saving Block Paving from LOTS of WEEDs - 10th Nov 20
Trump Fired, Biden Hired, What Next?  - 10th Nov 20
Looking for a Personal Loan? Here Is What You Have To Know  - 10th Nov 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

The Real Indian Currency Crisis (Things You Don’t Hear In The News)

Currencies / India Jun 30, 2017 - 02:41 PM GMT

By: HAA

Currencies

Jayant Bhandari writes: On November 8, 2016, Indian Prime Minister Narendra Modi dropped a bombshell. In a televised address at 8:00 pm, he declared that after midnight—four hours later—banknotes with face values of INR500 (US$7.50) and INR1,000 (US$15) would no longer be legal tender.

These bills comprised 86% of the monetary value of currency in circulation, so to say that panic ensued would be an understatement. The market stayed open all night as people rushed to buy gold, Rolex watches, and anything else they could get their hands on to use up their cash.


During the next two weeks, gold traded for as much as US$3,000 per ounce, a premium of almost 100% to the international price. Foreign currencies traded at similar premiums.

Soon, Indian tax authorities descended on the gold market, confiscating security camera recordings to identify any transaction that might have bypassed taxation. They were raiding people’s houses with abandon.

Chaos, Death, And Tragedy

India is already well known as a society where it is virtually impossible to find a public servant who won’t ask for a bribe, but now the number of bribes skyrocketed. Fear gripped the population—but most still didn’t realize that they were witnessing the emergence of a police state.

The government provided a one-time option to convert $30 worth of cash into the still legal banknotes, which were in extremely short supply. People’s fingers were to be marked with indelible ink to ensure they couldn’t repeat conversion. Any excess cash would have to be deposited into a bank account, which for all intents and purposes had the same effect as freezing people’s assets.

You’d see massive lines outside all the bank branches. The date by which the cash had to be deposited kept changing. Regulations that materially affected the handling of currency often changed more than once per day, until the last day of the demonetization exercise. The chaos was unprecedented.

To fully comprehend the level of turmoil, you need to know that 95% of Indian consumer transactions happen in cash.

The net effect of all these events was to rapidly stall the economy and to send it into a state of shock. Scores of disabled, sick, and old people—who had no choice but to personally take care of the currency exchange—died while standing in line at a bank all day. Many soon found themselves cash-strapped and with no means to buy staple items, including food.

Street markets started looking like ghost towns as even those with cash avoided non-urgent purchases. Next, the sudden drop in demand caused small businesses to fail. Even export houses, like diamond polishers, had to lay off their employees because they had no cash to pay salaries. The economy spiraled downhill.

Even today, vegetables sell for half as much as they normally do. This would be considered a good thing had it happened as a result of excess supply, but the reason for the price drop is the destruction of demand—resulting from lack of funds among the poor people who lost their jobs. And don’t expect any reports on this in the Indian media, which must toe Modi’s party line.

The Pampered, Salaried Middle Class

India’s salaried middle-class employees, on the other hand, were very happy with the situation: taxes are automatically deducted from their paychecks, and they want businesses and employees from the informal sector to pay their “fair share.”

The informal sector, or informal economy, is the part of a country’s economy that is neither regulated nor monitored by government entities. In developed countries, it makes up about 10% of the overall economy. Not in India, though. Here, it accounts for 90% of the economy and at least half of total GDP. 75% of all Indian businesses belong to this shadow sector, which makes this country one of the largest informal economies on the globe.

In other words, the informal sector is India’s backbone—without it, the ivory towers the salaried middle class reside in would come crashing down. Their persistent demand to tax it into submission is partly envy and partly an utter lack of empathy. Also, consider that virtually all taxes collected by the government end up in the pockets of politicians and bureaucrats, with no benefit to the people.

A Cashless Society In Its Death Throes

In recent weeks, cash has been fully replaced, but the economy continues to stagnate, and businesses continue to fail. Money—even in fiat currency form—is the lifeblood of the system. Even if you got the blood to flow again, once it stopped, clots would have appeared and organs would have failed. That’s what’s happening in India today.

Job growth was already stagnant before, but the situation is much worse now, making India’s so-called “demographic asset” a massive liability. (Hint: The rosy picture Modi’s government has painted of India’s growth rate does not match the on-the-ground reality.)

As I write, the domino effect continues to work its way up the food chain. Formal and big businesses are showing signs of stagnation. The salaried middle class are losing their jobs but fail to connect the dots. The government enjoys massive and increasing support, with the ruling party continuing to win provincial and by-elections.

It would be dishonest to blame everything on the middle class, although they should reasonably be expected to be the moral spine of any society. Ironically, most small-business owners and poor people support Modi’s drastic measures, despite the incredible suffering and the lack of a positive outcome. Again, they fail to connect the dots, which is why India will continue to mess up—politically and economically.

No Critical Thinkers

For a Westerner, it might be hard to comprehend how entrenched poverty, lack of economic growth, and backwardness are in India.

This is a deeply superstitious society where critical thinking and rationality is actively discouraged. I can consider myself lucky because I went to one of the better schools. Still, I was beaten up for questioning (not challenging) my teachers.

Without the glue of reason, intellectual and capital accumulation can’t happen. The people suffer from tyranny and the encroaching police state, but at the same time, they enable those things through their beliefs, ideas, and actions. There are no moral instincts, hence the lack of empathy and the dominance of envy in public affairs.

In a society like this, capital has a tendency to get destroyed or frittered away. Despite the fact that India has seen no wars in the recent past, most of the country looks like a war zone with dilapidated buildings and crumbling infrastructure.

So What Does This Mean For India’s Future?

There’s a reason why 95% of consumer transactions happen in cash. Two months ago, I used my debit card to buy a plane ticket from Delhi to London. The money left my account, but I never got the ticket. I still have no idea where my money went, and in the existing, convoluted system, I also have no idea whom to blame.

Lacking logic and reason, without the British (who left 70 years back), Indian institutions are in an advanced stage of decay. Most people simply don’t trust the banking system, if they even understand how to use it in the first place. I know many wealthy people who have never used their bankcards.

Gold, The Money Of Last Resort

As the institutions left behind by the British disintegrate, India—which used to be a geographic area filled with hundreds of kingdoms and principalities—is reverting back to its natural form.

With the only other option being a serious economic crisis, cash is coming back with a vengeance… and so is gold.

Indians have historically invested their surplus wealth in gold—for the simple reason that a zero-yielding asset class like gold is much better than investing in the economy, which offers negative yields and capital depreciation.

While some economic growth did happen in India over the last three decades—as it did in many emerging countries—this was not because people became better educated or more liberal. It happened because of the Internet and the easy import of Western technology that followed. But now that the low-hanging fruit has been plucked, India is reverting back to its Hindu rate of growth and its focus on gold.

Wealthy Indians are rapidly internationalizing their assets and storing gold in vaults in Hong Kong and Singapore. They instinctively know that there will be more occasions when gold trades at $3,000 or more per ounce.

Get A Free E-book On Precious Metals Investing

It’s only prudent to add some physical gold to your portfolio as a “crisis hedge.” But before you buy, make sure to do your homework first. The informative e-book, Investing in Precious Metals 101, tells you which type of gold to buy and which to stay away from… how to spot common scams and mistakes inexperienced investors fall prey to… the best storage options… why pools aren’t safe places… and more. Click here to get your free copy now.

The views expressed in this article are the author’s and not necessarily those of the Hard Assets Alliance.

© 2017 Copyright Hard Assets Alliance - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable,


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules