How is the demonetisation of India going?

A feature of these times is what I have labelled as the war on cash . In essence this war involves the establishment blaming it for financial crime and tax evasion. The High Priest of such thoughts Kenneth Rogoff is giving a talk this evening on this very subject at the London School of Economics.

Tomorrow at LSE: Leading economist on why we should get rid of most paper money

I did reply to enquire if they meant leading as in leading everyone off a cliff? Unfortunately I cannot be there as I will be on Share Radio but I do hope that someone will ask why if all the interest-rate cuts have not worked going further into negative territory will?

India and Demonetisation

This is an area where it is hard not to think of our Ken and his pet theories. Back on the 11th of this month I explained what had taken place.

Government of India vide their Notification no. 2652 dated November 8, 2016 have withdrawn the Legal Tender status of ` 500 and ` 1,000 denominations of banknotes of the Mahatma Gandhi Series issued by the Reserve Bank of India till November 8, 2016.

They were taking advantage of a public holiday to facilitate the move.

All ATMs and other cash machines will remain shut on November 9, 2016 to facilitate recalibration

After that there were going to be limits on what cash could be withdrawn.

cash withdrawal from a bank account over the counter shall be restricted to ₹ 10,000/- per day subject to an overall limit of ₹ 20,000/- a week from the date of the notification until the end of business hours on 24th November, 2016, after which these limits shall be reviewed.

So we are pretty much there especially if we allow for the time difference so how has it gone? The Hindustan Times gives us some insights.

“Consumers have not had the cash to complete purchases, and there have been reports of supply chains being disrupted…The time spent queuing in banks is also likely to have affected general productivity… ,” said Fitch, one of the world’s three big rating agencies alongside Moody’s and Standard & Poor’s.

It gave specific examples of industries which have been affected.

The automobile industry, which accounts for 7.1% of the GDP, is witnessing a fall in stock prices of up to 12% since the demonetisation. Himanshu Sharma, auto analyst at Centrum Broking, said two-wheeler sales can get affected by 40- 45%. The impact on cars is less, since most of them are bought on loan, but it could still be 10-12%……..Things aren’t any better with pharmaceutical companies, as sales of medicines have plunged almost 15%.

Why has the pharmaceutical industry been affected? Well something of a shambles seems to have been at play here.

Even though chemists are allowed to take old currency notes, distributors are not.

It goes onto point out that in the words of Taylor Swift there was always going to be “trouble,trouble,trouble” if you withdrew 86% by value of bank notes in the country described below.

This was only to be expected in a country which has 20% of its $1.8 trillion GDP and 80% of employment in the unorganised sector. Nearly half the population still does not have a bank account. Less than 300 million use the internet, and therefore the overwhelming majority cannot make electronic payments.

Ch-ch-changes

The initial statement implied that ATMs would be up and rolling after the bank holiday yet if we look at the Reserve Bank of India today we are told this.

17. Can I withdraw from ATM?

The ATMs are progressively getting recalibrated. As and when they are recalibrated, the cash limit of such ATMs will stand enhanced to ₹ 2500/- per withdrawal.

There has been a specific change today which tries to cover the Indian habit of paying for weddings in cash.

With a view to enable members of the public to perform and celebrate weddings of their wards it has been decided to allow a cash withdrawal of maximum ₹ 250000/- from their bank deposit accounts till December 30, 2016 to meet wedding related expenses.

A fundamental point through all this is the assumption implied below.

7. ₹2000 cash is insufficient for my need. What to do?

You can use balances in bank accounts to pay for other requirements by cheque or through electronic means of payments such as Internet banking, mobile wallets, IMPS, credit/debit cards etc.

This is all very well for those applying the move who no doubt have these but India’s many poor? They do not.

What about the economic effect?

Back on the 11th I reported on the official view.

I hope that they have success in that and also that the official claims of a 1.5% increase in GDP as a result turn out to be true.

How is that going? From Bloomberg.

The most pessimistic of these estimates comes from Ambit Capital which says GDP (gross domestic product) growth could crash to 3.5 percent. Others like HDFC Bank and HSBC are paring down GDP growth estimates by 0.5 – 1 percentage point.

Down seems to be the new up yet again. There are also concerns about rising prices due to shortages as industries wonder why weddings get relief but they do not?

What does Kenneth Rogoff think?

You might think he would be cheering and high-kicking but no.

The short run costs are unfolding, but the long-run effects on India may well prove more than worth them, but it is very hard to know for sure at this stage.

Indeed for a man whose plans for ever more negative interest-rates require an elimination of cash this is not far-off breathtaking.

First, I argue for a very gradual phase-out, in which citizens would have up to seven years to exchange their currency, but with the exchange made less convenient over time.

Mind you what is “less convenient”?! Our Ken is trying to have his cake and eat it here. Also I have a few £10 notes and a £20 note in my jacket pocket and will give them a serious telling off later.

the vast bulk of physical currency is held in the underground economy, fueling tax evasion and crime of all sorts.

Sweden

This comes to mind as it is a type of polar opposite to India in that so much of its money is already electronic. So I noted this from Cecilia Skingsley of the Riksbank on the 16th.

Will we have e-krona in an e-wallet in the future, as naturally as we now have a wallet with cash in it? The less those of us living in Sweden use banknotes and coins, the clearer it becomes that the Riksbank needs to investigate whether we should issue electronic money as a complement to the money we have today.

Is complement the new euphemism for replace? Convenient should you ever find yourself looking to take the official interest-rate lower than -0.5%. Indeed one of the accompanying slides poses this question.

Should we accept that the use of cash comes to an end?

Comment

This was always going to be a very difficult thing to do in India. The stated reasons are on their own good ones as India plainly has severe problems with corruption and the underground economy. The issue can be expressed Bob the Builder style ” Can you fix it?” I note some pointing out that in India corruption is regularly to be found at the top of the system. Also according to Live Mint Credit Suisse has reported this.

In the last two years, the share of the top 1% has increased at a cracking pace, from 49% in 2014 to 58.4% in 2016.

if you were looking for corruption where would you start after seeing that? it makes our 1% in the UK seem lightweights doesn’t it? It reminds us also of the point that a lot of crime takes place in electronic finance as the recent issues at Tesco bank illustrated in the UK. The ordinary Indian can still be affected by this although of course it is indirect for many. Maybe someone tonight will ask our Ken about online financial crime?

There are differences to the western war in cash in that India for example has interest-rates of around 6% as opposed to the -0.5% of Sweden. But there are also similarities.

As to language let me translate a speech given today by Kristin Forbes of the Bank of England. Here is the entry in my financial lexicon for these times.

Uncertainty: This means we were wrong, “This is well above the consensus expectation by economic forecasters, as well as the MPC forecast. ” But as we are so intelligent and nobody else we meet at dinner parties thought anything else that’s fine…

Sad really as she is perhaps the brightest member of the Bank of England

Share Radio

I will be on the Simon Rose show after the 7 pm news tonight and already there is much to discuss.

The war on cash continues

A feature of recent times has been the way that those in authority are becoming more authoritarian. This has come as a by-product of the fact that there has been more central planning often by central banks. The catch has come that in spite of an enormous amount of what was called extraordinary monetary action which now feels normal we are still struggling with the consequences of the credit crunch and seem unable to reach the “escape velocity” promised by the Governor of the Bank of England Mark Carney. Economic growth does not seem to be what it used to be does it?

On that road the central bankers promised success first from interest-rate cuts and then from bond buying or QE (Quantitative Easing) and more recently for even lower and negative interest-rates. That posed its own problems as of course the “innovation” of Forward Guidance had left them promising interest-rate rises but in the case of Governor Carney then delivering a Bank Rate cut whilst promising later cuts. This moved ever more central banks on the edge of or actually in the world of negative interest-rates or what has become known as NIRP (P=Policy). This then led to fear from the central planners as bank notes or cash offer 0% ( if you ignore storage costs and the like) and as official interest-rates go ever lower central banks are afraid that they will lose what power they have if people switch to cash on a large-scale. It would also be quite an own goal by the central planners as the use of electronic methods of payment has made like simpler and more efficient. In other words another possible side-effect for them to look at “another time” when they write self-congratulatory working papers.

More interest-rate cuts remain the recipe

You might think that after so many interest-rate cuts there would be the realisation that the medicine is not working yet instead we see this. From the IMF about Switzerland.

Calibrating the negative interest rate differential so as to discourage persistent inflows that can cause prolonged deflation and weaken activity is appropriate.

Translating that into English means that the next time the Swiss Franc comes under upwards pressure interest-rates should be cut below the present -0.75%. Also the Riksbank in Sweden seems to have come to that conclusion itself as we note this from it.

The Executive Board were unanimous that the repo rate should be held unchanged at –0.50 per cent and assessed that it needed to remain at this level for six months longer than was forecast in September. The probability of the repo rate being cut further has also increased.

That would be intriguing as you see Sweden is perhaps the country which has advanced the most in terms of electronic payments and so a “dash for cash” would be especially destabilising.

Back on the 5th of May I pointed out that the ECB was planning to scrap the 500 Euro note and that the Financial Times was rushing to support the establishment line.

The use of high-denomination notes, in particular the €500 note, is a problem reported by law enforcement authorities,” according to a draft of the plans seen by the Financial Times. “These notes are in high demand among criminal elements . . . due to their high value and low volume.”

It then went on about “gangsters” and “Greek savers” but seemed unaware that the German Bundesbank was not a fan.

There is scant concrete information on the extent to which cash is being used to facilitate illicit activity

Back in February Larry Summers was on the case in the Washington Post.

It’s time to kill the $100 bill

As a side-effect Larry seems to be keen on some weight-training.

a million dollars weighs 2.2 pounds as with the 500 euro note rather than more than 50 pounds as would be the case if the $20 bill was the high denomination note.

US $20 bill as the highest denomination Larry? I have also just been contacted on Twitter by @PeterWarne29 who apparently was watching a chess show yesterday and saw the high priest of this movement Kenneth Rogoff come on and say that high-value notes were used by criminals and tax-evaders. How very Orwellian or perhaps just a bad dream or of course both!

The disappearing 500 and 1000 Rupee Note

From the Reserve Bank of India on Tuesday.

Government of India vide their Notification no. 2652 dated November 8, 2016 have withdrawn the Legal Tender status of ` 500 and ` 1,000 denominations of banknotes of the Mahatma Gandhi Series issued by the Reserve Bank of India till November 8, 2016.

So in terms of South Park “It’s Gone”  and this does matter because most Indian cash money was in these two notes. It came with something also a bit chilling.

All ATMs and other cash machines will remain shut on November 9, 2016 to facilitate recalibration

Although it was a public holiday even so it makes you think. Even now there are limits.

cash withdrawal from a bank account over the counter shall be restricted to ₹ 10,000/- per day subject to an overall limit of ₹ 20,000/- a week from the date of the notification until the end of business hours on 24th November, 2016, after which these limits shall be reviewed.

Today’s press release tells us everything is fine.

There is enough cash available with banks and all arrangements have been made to reach the currency notes all over the country. Bank branches have already started exchanging notes since November 10, 2016.

Although we may need a financial lexicon for these times version of the concept of fine.

As mentioned in RBI communications, it may take a while for the banks to recalibrate their ATMs; once the ATMs are functional, members of public will be able to withdraw from ATMs upto a maximum of ₹ 2,000 per card per day up to November 18, 2016;

How is it going?

Just for clarity those are not pictures of the queue to get into the England versus India Test Match to watch Virat Kohli bat. The banks have been told to open over the weekend.

Also there is this from the same source.

Maharashtra: Temples sealing donation boxes in Marathwada region so that people don’t try to donate their black money after

Comment

There is much to consider in India’s move and let me open with a difference from elsewhere. It has just offered a fixed-rate repo at an interest-rate of 6.25% so we are a long way from NIRP or even ZIRP. With the problems of corruption and tax-evasion in India I am sure there is a fair bit of truth in this from the RBI.

This is necessitated to tackle counterfeiting Indian banknotes, to effectively nullify black money hoarded in cash and curb funding of terrorism with fake notes.

I hope that they have success in that and also that the official claims of a 1.5% increase in GDP as a result turn out to be true. There is an immediate catch in that if the black economy is the size we are told it is then the gain is minor but perhaps I should not be too churlish. However there are clear side-effects as the picture above shows and the Financial Times has pointed out.

It has made it harder to buy vegetables and rice, and hire rickshaws. And, for hundreds of millions of Indians who work in the informal economy, it has brought commerce to a halt. If there is a well-laid plan to mitigate the impact of this surprise crackdown on “black money”, it has yet to reach rural parts, where few Indians have bank accounts or credit cards.

Not much sign of a boost to GDP there! Also are some of those who should be caught able to slip and slide away?

The poor are hit far harder than the rich, who have credit cards and live in places where shops accept them.

I remember watching the excellent BBC 4 documentaries on the Indian railway system and the ( often poor) black market sellers on the trains saw arrest as simply a cost of business. Will this be the same? Also there is the issue of whether it will all just start up again with the new 2000 Rupee notes.

We can expect the traditional Indian love of gold to be boosted by this and maybe also non-government electronic money like Bitcoin. Meanwhile here is a light-hearted suggestion for UK bank notes in the future, it is a joke right?

How many more times will we be told a ban on cash is good for us?

A regular theme of these times is the argument that cash as in paper note and metal coins is bad for us. There are regular efforts to get such theories into the media mostly by establishment figures who somehow present a non-cash world as something of a nirvana for our economic prospects. The latest move on this front has come from the former International Monetary Fund Chief Economist Ken Rogoff who has written a book on the subject and has recently been on the BBC World Service proclaiming such a view. The program called The Inquiry though did not live up to its name as the presenter Linda Yueh only presented the views of Kenneth Rogoff and supported him. He was even allowed to claim unchallenged that arguing for a ban on large denomination bank notes was like “arguing for gun control” or “banning semi-automatic weapons” which was really rather poor unless of course such notes are killing loads of people each year in the United States.

One intriguing statistic presented was that the amount of cash is equivalent to each American or European carrying around US $4000 or 4000 Euros but did not specify the numbers.

Helicopter Money

One misfire here is that the number of establishment views in favour of Helicopter Money would be shot down by such a plan! Perhaps our Ken did not think that through. The transport section of the US Air Force would find that lifting one million dollars in US $100 bills weighs 22 pounds but doing so in the US $10 bills that our Ken would have as a maximum denomination would weigh 220 pounds. With all the Zeroes required (sorry) in Japan its air force would have a job for life!

What are the arguments for banning large denomination notes?

The one pressed hard by Ken Rogoff is shown below.

My argument centers around the fact that all the advanced countries have collectively pumped out trillions of dollars in paper currency, the vast bulk in large denomination notes that are increasingly unimportant for ordinary retail transactions, but are highly valued by those engaged in tax evasion and crime.

In an essay entitled The Sinister Side to Cash in the Wall Street Journal he really piled in.

There is little debate among law-enforcement agencies that paper currency, especially large notes such as the U.S. $100 bill, facilitates crime: racketeering, extortion, money laundering, drug and human trafficking, the corruption of public officials, not to mention terrorism………Cash is also deeply implicated in tax evasion, which costs the federal government some $500 billion a year in revenue. According to the Internal Revenue Service, a lot of the action is concentrated in small cash-intensive businesses, where it is difficult to verify sales and the self-reporting of income.

This poses more than a few questions. No-one would doubt that organised crime uses large denomination notes and that they are used in tax evasion. But one of the largest amounts of organised crime in recent years has come from the banking sector which has not used cash for this. The proposed US $14 billion fine by the US authorities on Deutsche Bank is an example of this and it joins a list which is both long and large. When the German Bundesbank did some research into the issue it found that it was in fact very hard to find any proof that cash did in fact help crime.

There is scant concrete information on the extent to which cash is being used to facilitate illicit activity……… the volume of notes devoted to such transactions is unknown and would be extremely difficult, if not impossible, to estimate.

Mind you perhaps in Ken Rogoff’s world Sam Allardyce would still be England’s football manager!

Negative Interest-Rates

This is of course the main course to the publicity friendly aperitif and starter discussed above. Ken sings along to

Secondarily, the book also talks about how phasing out large bills would be a major step towards more effective negative interest rate policy, although a number of fairly straightforward tax, legal and institutional changes would also have to be made. Negative interest rate policy is not for everyday use, but for dealing with very deep recessions and financial crises; the book argues that if negative rate policy were done right, it would be rare and short-lived, and vastly preferable to a decade of near zero interest rates.

Actually negative interest-rates have not been “short-lived”. It was only yesterday I was looking at Denmark which tried to escape them and then found itself sucked back into them as if the gravity of a black hole was at play, meaning that over 4 years later no escape is in sight. Also the IMF that Ken used to be Chief Economist of has just suggested that Switzerland should plunged deeper and deeper into negative interest-rate territory. Also should the ECB want to help its QE problem with German bonds one way of doing so would be to reduce its deposit rate below -0.4%.

There is another problem for our Ken if we look at this from him in the Wall Street Journal.

In principle, cutting interest rates below zero ought to stimulate consumption and investment in the same way as normal monetary policy, by encouraging borrowing.

You see if normal monetary policy had worked in the way he is trying to imply we would simply not even be discussing negative interest-rates now because the economic situation would be much better than it is. Indeed Ken seems rather like a snake-oil salesperson at this point.

Take cash away, however, or make the cost of hoarding high enough, and central banks would be free to drive rates as deep into negative territory as they needed in a severe recession.

How many times would you keep taking the same medicine when it is not working? Ken would have both more and larger bottles.

If we look at the experience of negative interest-rates so far then this below is a combination of wishful-thinking and ignorance.

But if a strong dose of negative rates can power an economy out of a downturn, it could bring inflation and interest rates back to positive levels relatively quickly, arguably reducing vulnerability to bubbles rather than increasing it.

If you look at house prices in the countries which have negative interest-rates you would see that with West Ham fans currently being mostly silent that it is the central bankers who are taking up the chorus of “I’m forever blowing bubbles”.

Comment

We find ourselves in a world where negative interest-rates and bond yields are on the march. The tantrum which pushed bond yields higher for a while has faded as indicated by reports that the 10 year yield in Finland went negative yesterday and this morning investors have paid Germany 0.7% per annum to buy a two-year bond.

Meanwhile up in his Ivory Tower Ken Rogoff has plans to take control freakery to its maximum. He ignores the fact that his plans so far have not worked and wants to push the pedal even beyond the metal. Along the way such concepts as privacy and legitimate use of currency are ignored. Also if we banned everything used by terrorists and organised crime we would end up at food,shelter,water and oxygen. Back in February I was disappointed to see Gillian Tett offer support for such plans which were supported by this gentleman.

John Cryan, co-head of Deutsche Bank, is not a man given to hyperbole. A couple of weeks ago, however, he made a comment about money that might make ordinary mortals blink.

Speaking on a financial technology panel at Davos, he cheerfully predicted that in a decade’s time cash probably won’t exist.

Er organised crime anyone?

Meanwhile here is a song for our Ken to help pass the time in his Ivory Tower. From David Bowie

This is Major Tom to Ground Control
I’m stepping through the door
And I’m floating
in a most peculiar way
And the stars look very different today

For here
Am I sitting in a tin can
Far above the world
Planet Earth is blue
And there’s nothing I can do