A reckless war on cash – the real goal of #DeMonetisation

Going cashless or recapitalizing banks

It isn’t just in India, that people are being forced to put money into banks. Banks worldwide are in trouble. Banks worldwide are needing bailouts. Demonetisation of notes is being considered as well as put into action in country after country – Europe (plan to not make 500 Euros post 2018), Venezuela (got reversed after protests from people) and now Pakistan (plan to demonetise Rs.5000 notes) and Australia (may abolish $100 note), though none of them have been as extreme as the abrupt discontinuation of 86% of the cash in the country, as India did. Governments are in difficult positions. If banks collapse, chaos will result. If they bail out banks, it is not sustainable. And worldwide, government and banks seem to have hit on the bright idea of using the people to get money into banks. Or rather, use the money of customers to continue with their mismanaged methods that have got them to this point. It wouldn’t work, normally. One whiff of banks using the customer’s money would have people withdrawing their money from banks. Unless – they couldn’t withdraw, because there was no real way to do it.

The idea is simple. Go cashless – or as close to cashless as possible. With people unable to withdraw money, their money will remain in the banking system, even while they transact and it moves from account to account. Banks would have most of the money of the whole country to tap into. And no matter what happened, no matter how mismanaged, no matter how close to collapse, there would be no way for people in the country to prevent banks from looting them. Eventually you progress to what is called negative interest rates, where you pay banks for keeping money in them.

What could possibly go wrong?

Please note, I am not an economist. But it doesn’t take rocket science to figure out that mishandled anything can only be fixed by handling it right. If banks are in a crisis, demonetisation may fill them flush with cash, but it cannot fix the problem. It will only give banks the freedom to make even bigger, catastrophic mistakes with money that isn’t even theirs. Of course the government gets the side effect of unprecedented surveillance and control over lives of citizens. Soon, being harrassed by tax officials or being framed in cases would be the least of worries for dissenters. With very little effort, the government would have the power to cut off your access to all life essentials – or at least make access very difficult as yourself – your own money in your banks, access to cooking gas, your phone numbers… and it goes downhill from there. Whatever you have attached to this monolith.

Here are some very possible scenarios the current debate on demonetisation does not cover adequately:

Shrinking of the economy

Economic migrants are returning to their places of origin by the hordes. Jobs are being lost in entire sectors. Tourism has as good as crashed without money to spend freely. Most tourism in India happens away from the city in small towns and remote places where internet connectivity can be iffy. No matter the propaganda on TV, very few will (or indeed are) risking travel without actual hard cash to back up any cashless plans. A friend in the adventure tourism industry reports of hotels running empty with Christmas coming up, even when they are giving rooms at off season rates. They actually made a tidy profit, because a large chunk of a trip’s expense is hotel rooms, which they got for way less than what they budgeted for. So he should be thrilled, right? um… Nope. That one trip is the only business he has in sight at the moment. Usually, they don’t have time to breathe in this season. Automobile manufacturers have stopped or cut down production drastically. Local markets everywhere are shrinking. Reduced number of sellers seeing some sales in essential goods creates an illusion of normalcy, but it is an illusion, because the number of sellers have reduced to the point where the few left can try to survive on half of what they used to earn.

Agriculture has been hit unevenly. Those who got their produce sold and new crops planted before demonetisation are relatively unaffected, but most farmers are facing severe crisis with an entire year’s worth of profits wrecked. The season that was just over was good. Good rain leading to good harvests. Except demonetisation resulted in their crops selling at the rates of the dirt they grew in. Devastated farmers have dumped tomatoes on roads because the prices they get wouldn’t even cover taking them anywhere to sell. As reports of farmers unable to buy seed created outrage, an oblivious government did the one thing it was doing rapidly – poked a few more holes in their grand demonetisation to temporarily allow farmers to buy seeds from government outlets using the old demonetised notes. The government still appears to be oblivious, because the biggest cost of sowing crops is not the seed, but the labour and related expenses that go into it. To add insult to injury, in several places (notably in Uttar Pradesh), the government shops didn’t accept the old notes anyway, because the banks wouldn’t accept the notes from them – under the directions of the government.

Small industries – garment manufacturers, beedi manufacturers, etc – are rapidly shutting down or drastically cutting down workers, leaving thousands out of work. The pundits of the “market” appear to think that once cash is back (and note, they aren’t even talking cashless at this point), things will get to normal. I admit I don’t have their knowledge of economics. But I have the experience of living in countless small towns, villages and remote places on shoestring budgets (or credit) and I can assure you, there is no such thing as a jobs bonanza. The jobs being lost as a tsunami had trickled into existence over decades. Banks may be ready and willing, indeed eager to give cheap loans, but other than big companies and their audacious attitudes, I cannot imagine people coming out of a money crisis even thinking of risking loans before their depleted savings are shored again and loans taken to survive are repaid. Because for these people, the consequences of not repaying loans are not write-offs.

To be blunt, even before demonetisation, we weren’t really adding much jobs. If the loss of jobs can be reversed, it still isn’t an impressive pace. And I don’t think it will reverse with the ease it was broken. It will have to recover from this trauma. Less jobs and less incomes mean less taxes after this one time bonanza and more NPAs. So the government and banks may end up losing income while they gain access to use a lot more money of depositors. That way lies bad news, in my view.

Security risks

The overall situation of desperation puts India at risk of unrest and lawlessness. We already see increased violence at banks. That is the most obvious. People want money, banks don’t have money, anger happens, bankers are overtired, something blows on occasion, more frequently as time passes and the pressure does not relent. The government appears to be oblivious to this, as the usual propaganda channels are recklessly blaming banks for black market trading of cash, telling people via television that there is plenty of money and so on. Bankers have died of stress at work. There has been a suicide as well. This is bad news waiting to happen unless the government wakes up fast. Which it does not seem inclined to do, given that it is still trying to prevent a “cut” of demonetised money from being deposited at all and their absurd rules and roll backs and new rules to try and make it happen are further stressing banks and depositors. But still, this is the most obvious.

Situations of mass desperation are ripe for creating hostility and generating violence with rumors and incitement. With elections coming up in several states, this is a very real risk. Given that the ruling party seems to consistently profit from elections held after riots, I don’t know whether they see this as a bug or a feature.

Another kind of security risk that would be very high right now is internet banking crimes. With most of the country’s money in banks, bankers overworked, and a lot of new people beginning to use cashless transactions, India right now is ripe for internet banking crimes. Furthermore, the government’s reckless promotion of services like Paytm, with no liability to protect users from fraud and unknown security measures and unaccountable management, the risk is magnified drastically. Several serious issues leading to loss of money crop up daily on social media, including organized fraud and tax evasion. Our own Godavar found that Paytm has an absurd process for responding to the loss of a phone with a Paytm app on it. The Cyber Appellate Tribunal being non-functional for the last five years is the icing on this cake.

The banks are also vulnerable to threats from terrorists or other enemies of the country. Attacks on the banking system at this point have the potential of bringing the entire country to a complete standstill. And they don’t even have to involve theft of funds. Even simple DoS attacks preventing cashless transactions from succeeding would create considerable disruption. It is unclear whether the government has even prepared for such an eventuality.

Money being funnelled out of citizens and into banks and foreign services

When you spend Rs.100 as cash, and the next person spends Rs. 100 as cash and so on, the Rs. 100 remains Rs. 100. If you swipe a card and incur a 2% charge, With every transaction, the Rs.100 bleeds money to service providers and there is a continuous loss of value that can be recovered from it. Rs. 100 becomes Rs. 98, which becomes Rs. 96 and so on (yes, I know I should be getting into decimals and more accurate percentages. Too lazy). This is a tremendous bonanza for banks and other service providers. It doesn’t get any more free money than this. For them, not you. Keep servers running, completely automated transactions keep dumping money at you. Is it any surprise that there is a rash of providers applying to become payment banks? It is likely that rates would be lowered. And why not, if they are able to get a cut on literally every single time anyone transacts for any reason – doesn’t even have to be business – say someone giving their child pocket money? But the money with people will keep shrinking like this.

Worse, we will be bleeding money out of the country with every use of payment systems owned fully or partially by foreign companies. The government may well promote fully Indian solutions (not in a hurry, Paytm is 40% Chinese and the government is promoting it the most right now). But even with Indian solutions promoted, there will be considerable use of companies like Visa and Mastercard by those who need compatibility outside India – online purchases, travel… I am no economic expert, but I cannot imagine this to be a good thing – for foreign companies to profit from massive amounts of routine transactions in India. Would probably have serious implications for the trade deficit or something.

Collapse of banks

Here I say with even more stress that I am not an economist. But I don’t see how this would not happen. Even with withdrawal of cash prevented, the flow of funds from one bank to another cannot be prevented without completely ending all pretense at an economy. Sooner or later, banks with accounts of mostly spenders and small businesses will start collapsing, because money from those accounts will be used to pay those with accounts in bigger banks. Smaller businesses would be more vulnerable for collapse and NPAs given to them will disrupt matters further. Now here is the irony in this. The banking crisis is largely of banks lending to big corporations. They are the ones most likely to cannibalize smaller banks with far less NPAs. Saraswat Bank for example apparently has a pretty healthy 2.6% of NPAs. If this happens (and I hope it doesn’t – as a result of failure to go cashless), it would be like punishing banks for not serving problem customers.

Where does this end?

What this whole circus achieves is cosmetic covering up of the problem. Preventing the money of citizens from being withdrawn to prevent collapse of banks cannot be a functional solution to anything. It is a violation of citizen rights. It is an exploitation of their money. It does nothing to prevent banks from taking their mismanagement further into a loss making zone, confident that the customers money cannot escape. What would a point be where anyone says “enough”? What comes next? Any other asset citizens can use to escape the banks? Gold? Silver? Diamonds? Real Estate? How many of our rightful and honestly earned possessions will be regimented for this forced rescue of banks? What point is enough? And why is it not “enough” right now instead of pulling this horrendous attack by a government on the country at the behest of businesses?

It is alarming that when some global opportunistic plan says “jump”, our government doesn’t even ask how high, it throws the country off the cliff.

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25 thoughts on “A reckless war on cash – the real goal of #DeMonetisation”

  1. Go global, Vidyut!
    cashless live is a global NWO trend before inevitable chipisation.
    try to find another nwo opposers to make a team. print articles from other countries, where nwo is advanced jet such as Suede or Norwege. Ukraine and Russia opposites this and other nwo trends as juvenile justice, vaccination, GSM car chips etc. dont forget, being a loner in this movement, you are exposed a lot. before acting, must hide yourself.
    you cannot stopped just on aadhaar.

    anyway, salut for your efforts!

  2. now its also important to note that in many countries deposits are insured (for example in the US, the federal reserve (their rbi) insures peoples deposits upto $250,000) so even if a bank fails and is not able to give people their money back, the gov’t is dutybound to. so the fear of a bank run is lower and the impacts not as horrendous as they would be in India.

  3. Demonetization is the myth on corruption, We are talking about CASHLESS what does mean that are we heading to Barter system.Demonetization was absolutely nonsense and without home work and planning if you shucked out 500,1000 note then why issued again 500 and 2000 was absolutely rubbished and link to corruption is making laymen fool.

  4. Nicely written for common ppl to understand abt the full circle of money in the system & real meaning of Demonetization.
    Majority of media is a circus just to keep you busy and distracted from real issues.

  5. What the author has enumerated is the bare practical effects of demonetization to common man, common farmer, common small scale business man and a shop keeper by the roadside visa vis advantage to the banks and foreign companies with all the strings in the hands of the government, read FM/PM (in that order). Whoever is the parent of this brainchild has deliberated and debated with top economists (or have they?). In spite of hallowed futuristic sunshine of the whole process tat is churning the nation today I have one major doubt on this economic circus, who is the great economist behind the stage because even with the street smart PM and all knowing smug smiled FM one thing is clear, they are as much economist as a politician and a lawyer should be. That is woefully inadequate to manage this economic giant that has been let loose. So what is the bottom line of the future, question to the author please ??

  6. I don’t know How much time will it take for these people to learn the fundamentals of economy . When will they stop doing any thing and every thing to benefit their own people and to fulfil their own agenda. In the process government keep on doing blunders and the general public and experts are giving free service of teaching them the basics. They don’t feel obliged and rather attack them back with some knowledge gained from someone else. Don’t they know that they are answerable for their wrong doings. How long will this arrogant and ‘we don’t care approach’ continue. ‘Might is right’ approach succeeding were seen on waysides where Gundas used to operate. Now we can see it in the government. What a tragedy.

  7. Could you please compile possible best solutions that would address all ills in holistic manner?
    How could crony capitalism be prevented? How could NPAs be reduced,say through use of better checklists and technological solutions,and through prevention of donations,beyond a limit to political parties?
    Use Wensdesbury’s Principle for detection and PIL for unreasonable of decision making at any level and for that make use of tools like DATT(Direct Attention Thinking Tools)- 10 principles of creative thinking enunciated by De Bono. Its way beyond traditional cost-benefit analysis and more modern SWOT analysis.
    How could the money go only to to the State and not private players.so that its chance of figuring in welfare measures is better?
    How could money laundered by innumerable methods be detected and confiscated, and how could deterrent punishment be meted out to all the guilty,in public and private domain?
    How could MSMEs be promoted and made competetive, locally/nationally/globally?
    How could productivity in agriculture be increased and how could technology help the farmers in doing so?
    how could the chief factor of all ills; of population explosion with poorer families,specially in BIMARU States, be addressed with a sense of great urgency and purpose with whole heared involvement of all stakeholders?
    it is only DEMOGRAPHIC DISASTER and not the least DEMOGRAPHIC DIVIDEDN,as made out bu ignorant western economists.
    Brainstorming will bring out innumerable facets.
    it is better to light a candle than curse the darkness.
    LETS ALL BE A PART OF THE SOLUTION AND PART OF THE PROBLEM-which is so much more easier.
    Pl conduct serious research to figure out ways and means of doing good to the society/humanity.
    Cribbing any one can.
    Lets see not a rejoinder but a follow-up article as requested with slew of measures that address sticky issues.

    1. I will try. It is not easy. At this point, there are no good solutions in sight beyond cornering the government and forcing it to either reverse the catastrophic demonetisation or provide currency notes fast. This is an emergency situation and the government is not inclined to bend on the matter. It has become an ego issue. Short of that, if the Supreme Court can reverse. At this point over 90% of the currency has been deposited back into banks, so merely allowing use of old notes will not be sufficient to return liquidity to the country. Trust in the currency has been lost and exceptions aren’t working anyway, because of that. That is the only nationwide solution that I can think of. Failing this, we will suffer a longer cash crunch resulting in greater damage. Never mind the government propaganda, the RBI facts on the notes printed and our known capacity of printing guarantee that even with presses working around the clock, it will be difficult to get enough liquidity for another few months at least and will be April – at the earliest – before the whole money withdrawn is replaced – even if the government intends to replace. In my view, it is not a wise move (for safety reasons, even if potentially convenient) to introduce new users to cashless transactions at this point.

      On an individual level, the only thing I can think of is counterintuitive, actually – do more and more cash transactions. That keeps money circulating in the market (as opposed to sitting in your wallet), helps businesses recover faster.

      On a personal level, for these days, and frankly to future proof your savings, I would recommend keeping one bank account for your income and another for your savings. Keep the account you get income in connected to your cards and netbanking and what not. This account should have a balance you reasonably expect to use over the month (and perhaps some for emergencies, though between cheques and credit cards, not really crucial). Transfer all funds you don’t expect to use to the other account to be withdrawn strictly by cheque. Don’t apply for any kind of cashless access to that account. May still not prevent hackers, but if money is removed from that account, the bank will have to produce a cheque for the withdrawal or replace your funds, as a hacker should not be able to access your account at all if you haven’t enabled digital services and if they do, the liability would belong to the bank, since you haven’t accepted any digital access and thus can’t be liable for it.

      1. These are good solutions to demonetisation problem. I already do have one account for digital transactions in which I maintain only as much money as I need, as I’ve already suffered from a hacker attack.
        But coming to the original comment, I don’t know what the poster expects.
        He’s basically asking you to solve all the problems. Talking about current problems is not cribbing. That’s how problems get solved. First people point them out, then put pressure on the government to solve it. It’s not your job to solve problems. It’s the government’s job. You are doing well to point out these problems that mainstream media is hardly talking about.

  8. Dear Sir, It depends on how one looks at anything. If you look positively and optimisticyour actions also will become positive and the whole scenario will become positive.
    Pl. listen to what industrial CEOs say in CNBC TV. Leaders meet. Everybody was cautiously optimistic.
    None of them had any negative opinion.
    You call yourself Intellectual.
    Pl. observe your mind , the way it thinks. Then you will become intellectual.

    1. The blog’s title is “Intellectual ANARCHY” What makes that sound like I’m a nice, conforming intellectual?

      TV news is completely paid for. It is one of the most unreliable for anything other than direct quotes with enough space before and after to ensure they aren’t cut to taste.

    1. Under 5k. Varies. Extremely rare to exceed 10k – last time that happened, I was moving homes. 2k of it is the salary of someone who helps me for an hour or so with my son. She doesn’t have a bank account.

  9. Maj Gen Ashok Coomar

    A very interesting concept which is quite convincing. I was just wondering whether there is a way out because the apparent promise of ridding the nation of black money even in another few steps as discernible to most laypersons seems practical. But we are being taken for a ride.
    Can we help ourselves?

  10. Which countries,other than India? Which other Governments? None.(para1). When did we last ever mention that banks were that badly off. Something after 2014 .

    1. I have my own observation.There was no need of Demonetisation as being done by Narendra  Modi, to reduce the dependancy on money in circulation.He feel that by doing this he will control the  corruption.I had tried to remove  corruption from the Department of CBEC.I started with Licensing Control and  Exemption under the said Act.I proposed certain simplifications,which were accepted,however people at lower level did not like it.They do not work without corruption.It is everywhere. Employee at level IV class will not work,unless not assured of some cash.How to eradicate it.Patwari (Talati) will not transfer the name on Document unless not paid in Cash.Any order passed by any lower Court is not available without paying CASH.We go far eating food, we are forced to pay Tipp.We park our Motor Vehicle at any place in the Court, market, we are forced to pay Tipp in addition to charges.  

  11. Yes economics us complex as it involves the psychology of people reacting to situation. De.Monetization is slowly leading us in bigger whole and may progessivley become difficult to come out of it. The cycle of lower income, lower spending may cause further problem, Uncertianity in earnings make people to Save more, Spend less and postpone spending. All these may not help. Also banks may not see loan take off as expected but will have to pay interest .
    Many other problems can not be anticipated at this stage as every problem may lead to some new problem.
    Above all we will come out if this great difficulty only when power is transfered to right person.
    We people if India have lead the problem to escalate as we did not raise our voice at the right time. The more we delay, the more problems we land up.

  12. Do you know Forum of Free Enterprises? It was started by late Nani Palkhiwala and many others like late .M R.Pai.It was located at 235 D.N.Road, Mumbai.400001.It was shifted to Dadar for sometime.  

  13. Pain of this problem have started radiating . In the rush to transect with banks at present which somehow became #1 priority . Repercussions are forgotten by people at large.

  14. Reading this article makes me feel like we are all fucked. Economics has been made so complex, I can’t be sure of anything. The media is PR management and it works. Talking to some of my friends and relatives, I’ve gotten the feeling that most people aren’t as pissed as they should be.
    Some say that at least modi is doing something. For them just the fact that he’s done something which previously no govt did is merit in itself. They don’t want to see deeper into what he’s actually done. People are emotionally invested in politics, there’s no mass source of trustworthy facts, and economics is hard. All this means that the banks and the rich can do whatever they want. They can go from one experiment to the next, one scam to the next. Until people actually start starving in the streets, they won’t do anything.

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