India faces hard economic times with Gold and Liquor

Early this morning we got news on a topic we have been pursuing for several years now and as has become familiar it showed quite an economic slow down.

At 27.4 in April, the seasonally adjusted IHS Markit India
Manufacturing PMI® fell from 51.8 in March. The latest reading pointed to the sharpest deterioration in business conditions across the sector since data collection began over 15 years ago.

It caught my eye also because it was the lowest of the manufacturing PMI series this morning. Although some care is needed as the decimal point is laughable and the 7 is likely to be unreliable as well. But the theme is clear I think. Of course much of this is deliberate policy.

The decline in operating conditions was partially driven by
an unprecedented contraction in output. Panellists often
attributed lower production to temporary factory closures that were triggered by restrictive measures to limit the spread of COVID-19.

So that deals with supply and here is demand.

Amid widespread business closures, demand conditions were severely hampered in April. New orders fell for the first time in two-and-a-half years and at the sharpest rate in the survey’s history, far outpacing that seen during the global financial crisis.

So there was something of a race between the two and of course external demand was heading south as well.

Total new business received little support from international markets in April, as new export orders tumbled. Following the first reduction since October 2017 during March, foreign sales fell at a quicker rate in the latest survey period. In fact, the rate of decline accelerated to the fastest since the series began over 15 years ago.

The plunges above sadly have had an inevitable impact on the labour market as well.

Deteriorating demand conditions saw manufacturers drastically cut back staff numbers in April. The reduction in employment was the quickest in the survey’s history. There was a similar trend in purchasing activity, with firms cutting input buying at a record pace.

Background and Context

We learn from noting what had already been happening in India.

Real GDP or Gross Domestic Product (GDP) at Constant (2011-12) Prices in the year 2019-20 is estimated to attain a level of ₹ 146.84 lakh crore, as against the First Revised Estimate of GDP for the year 2018-19 of ₹ 139.81 lakh crore, released on 31st January 2020. The growth in GDP during 2019-20 is estimated at 5.0 percent as compared to 6.1 percent in 2018-19. ( MOSPI )

Things had been slip-sliding away since the recent peak of 7.7% back around the opening of 2018. So without the Covid-19 pandemic we would have seen falls below 5%. In response to that the Reserve Bank of India had been cutting interest-rates. I would have in the past have typed slashed but for these times four cuts of 0.25% and one of 0.35% in 2019 do not qualify for such a description.

Before that was the Demonetisation episode of 2016 where the Indian government created a cash crunch but withdrawing 500 and 1000 Rupee notes. This was ostensibly to reduce financial crime but also created quite a bit of hardship. Later as so much of the money returned to the system it transpired that the gains were much smaller than the hardship created.

For newer readers you can find more details on these issues in my back catalogue on here.

Looking Ahead

On April 17th the Governor of the RBI tried his best to be upbeat.

 India is among the handful of countries that is projected to cling on tenuously to positive growth (at 1.9 per cent). In fact, this is the highest growth rate among the G 20 economies………For 2021, the IMF projects sizable V-shaped recoveries: close to 9 percentage points for global GDP. India is expected to post a sharp turnaround and resume its pre-COVID pre-slowdown trajectory by growing at 7.4 per cent in 2021-22.

He was of course running a risk by listening to the IMF and ignoring what the trade date was already signalling.

In the external sector, the contraction in exports in March 2020 at (-) 34.6 per cent has turned out to be much more severe than during the global financial crisis. Barring iron ore, all exporting sectors showed a decline in outbound shipments. Merchandise imports also fell by 28.7 per cent in March across the board, barring transport equipment.

On Friday the Business Standard was reporting on expectations much more in line with the trade data.

While acknowledging some downside risks from a lockdown extension in urban areas beyond 6 June, we maintain our GDP projection of 0% GDP growth for CY2020, and 0.8% for FY21,” wrote Rahul Bajoria of Barclaysin a report.

If we stay with that source then we get another hint from what caused the drop in share prices for car manufacturers today.

Shares of automobile companies declined on Monday as many firms reported nil sales in the month of April after a nationwide lockdown kept factories and showrooms shut.

At 10:11 AM, the Nifty Auto index was down 7.33 per cent as compared to 5.1 per cent decline in the Nifty50 index.

Monetary Policy

You will not be surprised to learn that the RBI acted again as the policy Repo Rate is now 4.4% and the Governor gave a summary of other actions in the speech referred to above.

 In my statement of March 27, I had indicated that together with the measures announced on March 27, the RBI’s liquidity injection was about 3.2 per cent of GDP since the February 2020 MPC meeting.

Those who follow the ECB will note he announced something rather familiar.

 it has been decided to conduct Targeted Long-Term Repo Operations (TLTRO) 2.0 at the policy repo rate for tenors up to three years for a total amount of up to ₹ 50,000 crores, to begin with, in tranches of appropriate sizes.

Oh and as we are looking at India by ECB I am referring to the central bank and not cricket.

If we switch to the money supply data we see that in the fortnight to April 10th the heat was on as M3 grew by 1.2% raising the annual rate of growth to 10.8%. But there was a counterpoint to this as there were heavy withdrawals of demand deposits with fell by 7.8% in a fortnight. We have looked before at the problems of the Indian banking sector and maybe minds were focused on this as the pandemic hit.

Gold

I am switching to this due to its importance in India and gold bugs there may be having a party as they read the Business Standard.

The sharp rise in the prices of gold —which almost doubled over the past one year —has been the only good for investors at a time when both equities and debt returns have been under pressure.

That price may be a driving factor in this.

India’s demand declined by a staggering 36 per cent during the January-March quarter, to hit the lowest quarterly figure in 11 years due to nationwide that has forced the closure of wholesale and retail showrooms.

Comment

The situation is made worse by the fact that India starts this phase as a poor country. Things are difficult to organise in such a large country as the opening of the Liquor Shops today has shown.

Long queues witnessed outside #LiquorShops in several parts of Chhattisgarh, people defy social distancing norms at many places: Officials ( Press Trust of India)

Also a problem was around before we reached the pandemic phase.

Armies of locusts swarming across continents pose a “severe risk” to India’s agriculture this year, the UN has warned, prompting the authorities to step up vigil, deploy drones to detect their movement and hold talks with Pakistan, the most likely gateway for an invasion by the insects, on ways to minimise the damage. ( Hindustan Times from March)

Now let me give you another Indian spin. The gold issue has several other impacts. No doubt the RBI is calculating the wealth effects from the price gain. However I think of it is another form of money supply as to some extent it has that function there. Also part of the gain is due to another decline in the Rupee which is at 75.6 to the US Dollar. Regular readers will recall it was a symbolic issue when it went through 70. This creates a backwash as it will make people turn to gold even more.

Let me finish with some good news which is that the much lower oil price will be welcome in energy dependent India.

Podcast

 

 

 

 

India gives us an update on the war on cash

A feature of these times is what has been called the “war on cash” It’s proponents argue for it on two main grounds. The first is that cash and in particular large denomination banks notes are used by criminals (especially by organised crime) and terrorists and so eliminating such notes would be part of the various wars against them. Others make the case that we may need to cut interest-rates even further when the next recession arrives which means that even more countries will experience negative interest-rates and that they will go even more negative for those that already have them. Cash is a barrier to this because it provides 0%. Who would have thought that 0% would be attractive? It is of course as Prince would say A Sign O’ The Times.

Of course interest-rates were supposed to go up in a recovery but Michael Saunders of the Bank of England has opened more than one can of worms with this in his speech this morning.

It is fully 10 years since the MPC last tightened monetary policy

India

If we go back to early November last year this happened.

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.

What was called Demonetisation was publicised as an effort to cut corruption. crime and also terrorism and there was a day to consider it as November 9th was a bank holiday. Also as I pointed out on November 11th it was suggested that it would provide an economic boost.

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 were official claims that around 3 lakh crore or 20% of the currency would not come back and therefore a significant cost would be imposed on the criminal and terrorist worlds.Actually I note that the Financial Times is reporting that there were even more inflated claims.

 

At the time, government officials had suggested that as much as one-third of India’s outstanding currency would be purged from the economy — as the wealthy abandoned or destroyed it, rather than admit to their hoardings — reducing central bank liabilities and creating a government windfall.

 

Not everyone was convinced that it would be that easy including The Times of India.

Firstly, gone are the days when people hoarded wealth in gunny bags full of banknotes. In today’s world, there are refined ways of laundering money or stashing it away in benami properties, offshore bank accounts and foreign currency. Only the small fish keep their ill-gotten wealth in currency and the impact on black money will therefore be very limited in this exercise.

What happened next?

As I pointed out on the 26th of November the initial economic effects were negative and some of them were quite strong.

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%.

If we move to overall economic output we see that it in fact slowed. The annual rate of economic growth fell to 6.1% in the first quarter of this year so we can say that it showed no signs of the economic boost promised. As to how much demonetisation contributed to the fall we can say that there were downward effects but as ever it is hard to be precise.

What happened to the cash?

Yesterday the Reserve Bank of India gave its annual report and here is The Times of India on the subject.

The Reserve Bank of India (RBI) on Wednesday said that Rs 15.28 lakh crore –or 99% of the Rs 15.44 lakh crore demonetised by withdrawal of Rs 500 and Rs 1000 notes on November 8, 2016 –has been deposited with banks.

So the promises and suggestions of a large windfall gain for the government via the central bank have turned out not to be true. Seignorage is usually a theoretical number but in this instance it became reality except as we looked at above it was expected to be much more than this. Also according to the RBI there were costs in doing this.

Expenditure on Security Printing and Distribution
VIII.12 The total expenditure incurred on security printing stood at `79.65 billion for the current year (July 2016 – June 2017) as against `34.2 billion
during 2015-16.

More fake notes were uncovered than usual ( 345% up on the previous year) but considering what was taking place the number remained low especially if the rumours about how many fake bank notes there are in India have any basis in fact. As some of the returned bank notes have not been counted yet could we see the number of notes climb to say 101%?

According to The Times of India the official response is as follows.

The finance ministry said the five main objects of demonetisation were: -Flushing out black money -Eliminating fake currency – Ending financing of terrorism and left-wing extremism – Converting the non-formal economy into a formal economy to expand the tax base and employment — Giving a big boost to digitisation of payments to make India a less cash economy

Well I suppose the last bit is probably true but this bit is pretty woeful if we note the government’s previous rhetoric.

The finance ministry said in a statement that the government had in fact expected the bulk of the cash to be returned to become effectively usable currency.

Although no doubt you can define “bulk” in a variety of ways.

Comment

Let me completely support efforts to reduce organised crime and terrorism with the only caveat being that care is needed how you define that. After all an area pretty much ignored by Demonetisation is that a clear example of what many would consider organised crime in recent times has involved the banks. For obvious reasons it is hard to get accurate estimates but it seems likely that “banking crime” exceeds “cash crime”.

Returning to the Indian experience there were clear stoppages in the economy and I speculated on the 11th of November last year on who it would hit the most.

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.

Also let us remind ourselves that India now has more 2000 Rupee notes which surely will only make the stated objectives harder to achieve. The timeline we now know also perhaps provides insight into the resignation of the previous RBI Governor Raghuram Rajan..

On the other side of the balance sheet then if this claim from the Finance Ministry is true maybe there will be a gain going forwards.

Advance collections of personal income tax showed a growth of 41.79% on August 5 over the corresponding year-earlier period. Personal income tax under self-assessment grew 34.25%.

Having mentioned the Indian railways it reminds me of the impact the Monsoon season has on the ( Monsoon Railway if you have not seen it) and that it has been severe this year. My sympathies to those affected.

Me on Core Finance TV

http://www.corelondon.tv/unsecured-credit-boom-j-curve-effect-uk-not-yes-man-economics/

 

 

 

 

The Demonetisation saga in India rolls on and on

As we emerge ( at least in England & Wales) blinking into 2017 then the main economic action is in the East. For example new currency controls for retail investors in China. Such factors are in my opinion what has been behind the subject of my last post of 2017 which was Bitcoin. This broke the 1k barrier in US Dollar terms and is now US $1020.68 according to Coindesk. A factor in this rise must be what is ongoing in India which is what has become called Demonetisation which I first pointed out on the 11th of November last year.

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.

Something that was immediately troubling was that the official view was along the lines of “please move along, there is nothing to see here”.

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.

The initial communique mentioned the 24th of November implying that it would pretty much be over by then and that the Indian economy would boom afterwards.

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 it going?

Manufacturing

The Markit/Nikkei PMI or business survey had a worrying headline yesterday,

Manufacturing sector dips into contraction amid money crisis

Indeed it went further in the detail.

Panel members widely blamed the withdrawal of high-value rupee notes for the downturn, as cash shortages in the economy reportedly resulted in fewer levels of new orders received. Concurrently, manufacturers lowered output accordingly.

Actually pretty much everything seemed to be going wrong here as input inflation rose and employment fell.

Meanwhile, input costs increased at a quicker rate……Cash shortages and lower workplace activity resulted in job shedding and falling buying levels during December.

So whilst small changes in a PMI tell us little a drop from above 54 in October to 49.6 in December poses a question. This is reinforced by the other PMIs for manufacturing we are seeing that have overall improved (China for example).

Actually the industrial production numbers were weak even before Demonetisation according to dnaindia.

For the April-October period, industrial output declined by 0.3% as against a growth of 4.8% a year ago, as per the data released by Central Statistics Office (CSO) today……..The manufacturing sector, which constitutes over 75% of the IIP index, recorded a contraction 2.4% in October.

All this adds to the problems recorded in the services sector back in early December.

Services activity declines as cash shortages hit the sector

So according to these surveys there was a clear deflationary impact from Demonetisation leading to this.

Nikkei India Composite PMI Output Index dipped from October’s 45-month high of 55.4 to 49.1 in November, thereby pointing to a slight contraction in private sector activity overall.

There were hopes for this to be short-lived back then but for now those seem more to be of the Hopium variety.

A response?

Well if Prime Minister Modi was watching the cricket he may have thought of mimicking England and the UK as he has announced a pumping up of the housing market. From dnaindia.

In a bid to boost rural and urban housing post demonetization, Prime Minister Narendra Modi on Saturday announced interest subsidy of up to 4% on loans taken in the new year under the Pradhan Mantri Awaas Yojana.

Bank of England Governor Mark Carney hasn’t been to India has he? Anyway I do hope that the next bit actually happens unlike in the UK where we seem to announce the Ebbsfleet development every year like it is in a Star Trek style time warp.

Announcing a slew of measures, Modi in his national address on New Year’s eve also said 33% more homes will be built for the poor under this scheme in rural areas.

I wish India better luck than the UK where schemes under the official label of “Help” have in fact contributed to house prices becoming ever more unaffordable for those wishing to get on what is called the housing ladder.

What about other credit?

According to Gadfly of Bloomberg the banks are now awash with cash.

Almost all the 15.44 trillion rupees ($227 billion) of currency outlawed by Prime Minister Narendra Modi has entered banks as deposits, with the biggest, State Bank of India, receiving $24 billion. This “unprecedented” surge in liquidity led SBI to cut lending rates by 90 basis points on Sunday. Other government-run banks followed suit.

But in a familiar trend for the credit crunch era businesses do not seem to be that keen on borrowing more.

The average daily value of new investment proposals announced since the cash ban has slumped by three-fifths, according to the Centre for Monitoring Indian Economy.

In fact a consequence of the economic weakness following Demonetisation is that both companies and individuals in India are less able to borrow.

Supply chains greased by cash payments are broken. From diamond-polishing to shoemaking and construction, layoffs are increasing. As borrowers, both the average Indian worker and his employer are much more subprime today than they were just two months ago. Using this group to pull up credit growth, which has plunged to a 25-year low of 5.8 percent, is both impractical and risky.

Whilst in terms of deposits the Indian banks are in the opposite situation to Monte Paschi of Italy they too have capital issues. This may explain the problem with business lending which invariably ties up more bank capital than other forms of bank lending.

The Real Economy

If we move to actual experiences we see signs of trouble, trouble,trouble as India Spend reports.

Now, the government’s decision to withdraw Rs 14 lakh crore–86% in value of India’s currency in circulation–has dealt a hard blow to 80,000 workers, whose economy was defined by cash. Before notebandi, despite a growing downturn, the town soldiered on.

This is the town of Malegaon which has an economy based on the power-loom industry which has gone on a 3 day week.

In the weeks following demonetisation, power looms, known to work 16-18 hours in a day for six days a week, were working only three days a week–Saturday, Sunday and Monday–halving the wages of thousands of workers.

 

Why? Well here it is.

Most of the transactions in the power-loom sector are in cash–power loom owners buy raw material in cash, disburse wages in cash, and  sell in cash.

Thus we see how the problem feeds through the economic chain in what is a clear government driven credit crunch which hits weak industries like this one the hardest. Even more sadly the same is true of people. From @bexsaldanha.

“Business is down so we work on the farm more,” Megha Patil, Hivali village, Bhiwandi Taluka

Goods supplier Santosh Jadhav: From Wada to Vikramgad, supply chain to 203 Kiranas has broken down. Nobody has money.

Comment

There are obvious issues with the unofficial economy in India and attempts to reduce it are welcome. Except in any move you need to look at the likely side-effects and these were always going to be large from removing over 80% of the cash money in circulation. I warned about the problems back on November 11th.

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.

Actually the gold trade has not been boosted and as The Times of India points out there is more than a little irony in the reason why.

“The business was down by more than 70% in December, primarily because of the cash crunch and weakened purchasing power of consumers and investors. Many don’t still invest in gold except for by cash transactions. Besides, the liquidity crunch is also impacting trade,” said Shanti Patel, president, Gems and Jewellery Trade Council.

So whilst very little is easy in a country where changes are even harder than turning an oil supertanker but so far the message is not good.

Number Crunching

We learn from the table below that Helicopter Money would be much easier for the Swiss Air Force than the Indian one.

https://twitter.com/BTabrum/status/816208447846907904

 

 

 

 

The impact of Bitcoin and negative bond yields

As we approach the end of 2016 the natural tendency is to look ahead to 2017. We will soon find ourselves afflicted by a litany of forecasts for the year ahead. I say afflicted because this has been an “annus horribilis” for establishment forecasters but those that I am in touch with seem to have learned little if anything at all. Accordingly the theme “same as it ever was” seems set to turn into a “road to nowhere” for them. However we will take a different tack as the holiday break has thrown up a couple of disturbing signals in the world monetary system.

Bitcoin surges

When I signed off before Christmas I ended with this.

The average price of Bitcoin across all exchanges is 910.16 USD

As you can take the boy out of the city but it is much harder to take the city out of the boy I had noted that it had been further on the move this week and now I note this.

Bid: $972.27 Ask: $972.28

So there has been a push higher and of course we are reminded of two things. The first is simply a factor of the way that we count in base ten meaning that the threshold of US $1000 is on the near horizon and the second is the Bitcoin surge of a bit more than a couple of years ago.

Actually for some I note that threshold city has already arrived. From BTC Manager.

Bitcoin has surpassed its all-time high in two major currencies, the Euro and the British Pound……With the largest weekly volume in almost 12 months, bitcoin looks to continue to soar against the Euro. With a break of the all-time high at €872.90, there are no previous fractal levels to gauge where the market will take us next. However, the best bet is through the use of simple psychology. Buyers will look to cash out once the price has hit a psychological resistance, a big, round number where profits will be locked in and buying interest starts to fade.

So it is interesting to note first that standard analysis ” it might go up or it might go down” applies as much to newer markets as it does to older ones! As ever the possibility it might stay the same is ignored though. But those of you who use the Euro as a currency have seen a considerable devaluation against Bitcoin in recent times which means those of us who use the UK Pound £ have had a particularly poor 2016 against it.

On the Coinfloor exchange, BTC-GBP was at £479.00 week ending June 26, 2016, following our open letter to Britons. Fast forward to the close of 2016, BTC-GBP is looking to break above the £800 mark and is taking aim at the psychological £1000 level. With a break above the all-time high, there is no precedent and £1000 could be a conservative estimate for the long-term, but we will see some exhaustion from bulls at this level.

Looking at the chart a past colleague of mine would be very upset if I did not point out that it looks very much like what he called a “bowl” formation. This means that it needs to continue to accelerate or otherwise it will then be like one of those cartoon characters which run over a cliff edge by mistake. Or to bring things up to date like the Toshiba share price this week as it has now eroded nearly all the gains of 2016.

There is another perspective we can find and StockTwits helps us out with this.

 Some care is needed with the word never as Botcoin was invented on the 31st of October 2008 and is thus a child of the credit crunch era. But the current situation does give us food for thought as the immediate knee-jerk response that it is replacing gold in some fashion does have issues. Let me point out the one which occurs to me which is that discoveries on other planets and moons apart the supply of gold is fixed whereas Bitcoin and especially cryptocurrencies in general is not. ( Just to add that the latter remains true but @BambouClub has pointed out that Bitcoin is limited to 21 million units).

Also those of you who like me watched the BBC 4 documentary on Fleetwood Mac last night which of course featured the “Gold Dust Woman” Stevie Nicks will wonder about any impact on music and this is before the backing vocals she did for John Stewart?

There’s people out there turning music into gold

Somehow I don’t see “Bitcoin Dust Woman” quite cutting it do you?

Why is this happening?

If you follow the advice of go west young (wo)man then you have a long journey as the real pressure is to be found in the East. Let us first take a stop over in India where the Demonetisation debacle continues.  From LiveMint.

Mumbai: Demonetisation has boosted the digital platforms for payment, which has helped the National Payments Corporation’s (NPC) RuPay card usage at merchant terminals soar seven times since 8 November, taking the daily volumes to over 2.1 million.

As we look at the ongoing issue it is not hard to see the motivation for people wanting to escape the Indian monetary system entirely and thus moving towards currencies like Bitcoin. As I pointed out on November 11th.

We can expect the traditional Indian love of gold to be boosted by this and maybe also non-government electronic money like Bitcoin.

Although of course many were left 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.

Here is a link to the details of Demonetisation.

https://notayesmanseconomics.wordpress.com/2016/11/11/the-war-on-cash-continues/

China

There have been signs of creaking from the Chinese monetary system as estimates of the actual outflow of funds from China seem to be around double the official one. Oops! If we move to this morning there are other signals to be found. From the Wall Street Journal.

The yuan dropped 7% against the dollar this year…….

Unlike other emerging markets that have mostly free-floating currencies such as Russia and Brazil, China hasn’t had a chance to find its bottom. Chinese investors, therefore, act as if more depreciation is coming, sending money overseas.

The People’s Bank of China is increasingly replacing deposits and indeed finance in the banking system in a move that has not gone so well for us western capitalist imperialists. But the fundamental point here is that with such a large flow of funds ongoing we see two clear effects. The first is the rise in the Bitcoin price as it would take only a minor proportion of the move to put it in a boom and the second is that the world financial system looks unstable one more time.

Negative Interest-Rates in the UK

One of the forecasts for 2017 will no doubt be for higher bond yields. After all it has to be right one year! But more seriously if we just look at the UK something else is in play and it covers a few areas. It started with this before Christmas. From Bloomberg on December 16th.

The U.K. Treasury sold one-month bills at an average negative yield for the first time ever on Friday, with investors bidding for more than seven times the amount on offer,

That got worse just before Christmas and today a former respondent on here Shireblogger who now contacts me on Twitter pointed out this.

UK gilts just hit a record low 2 year yield at 3.3 bps. ( @bondvigilantes )

What we find ourselves observing is a safe haven problem of sorts as @NelderMead points out.

a year end desperation for collateral. QE creates the priv deposits & takes away the collateral to back ’em

Another “side effect” of the “Sledgehammer” of Andy Haldane and Mark Carney. Are they available for comment and I do not mean a diversion onto green issues?

Comment

So there you have it. After all the central planning and “reform” what we see are yet more signs of stress in the financial system. So much for certainty about 2017 as we expect inflation yet again in the use of the words “unexpected” and “surprise”.

Share Radio

I will be on after the 1 o’clock news today with quite a bit to discuss I think.

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.