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Government of India vide their Notification no. 2652 dated November 8, 2016 have withdrawn the Legal Tender status of ` 500 and ` 1,000 denominations of banknotes of the Mahatma Gandhi Series issued by the Reserve Bank of India till November 8,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

 

 

 

 

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The Brexit Breakfast saga

Yesterday saw quite an extraordinary missive from the offices of KPMG that combined economics and an insight into the apparent habits of staff at that organisation. It led to some debate and indeed some humour so let us take a look. From the Guardian.

Brexit breaks breakfast? Hard Brexit could mean hard luck for fry-up fans…….Shoppers would be forced to pay £3 more for a traditional British fry-up if the government fails to secure a trade deal with the EU, piling more pressure on already cash-strapped consumers.

That is a bit of a shock is it not as it implies such a breakfast would be £3 more each which seems rather extreme. Of course some products have risen in price already due to the lower value for the UK Pound £ as the UK imports quite a bit of the food it consumes.

Here is how Bloomberg released this.

The price attracted my attention so I enquired if they only ate in five-star hotels? It quickly turned out that I wasn’t the only one.

let’s just say I enjoyed a full English last week £7.50. Same price as a year ago at my same local coastal cafe. ( @mhewson_CMC )

 

Read this (and its comments) with your breakfast. £5 here at Totnes Waterside (  @RSR108 )

 

Tesco all you can eat £4,95 KPMG making a real dogs dinner of their analysis. No doubt you can get cheaper elsewhere ( @BarrattPeter )

The analysis stated that the ingredients came from the mid-range of a UK supermarket although some were not convinced.

“KPMG UK analysed the cost of mid-range ingredients of a fry-up from a leading UK supermarket” where…Fortnum and Mason??! ( @maximbroking )

I am not sure if the Guardian re wrote their article but anyway it now states that this was for a family breakfast, something missing from the original Bloomberg article. The debate then shifted to the choice of ingredients with the choice of olive oil to the fore.

Somewhere that cooks its breakfasts in a litre of olive oil? ( @dsquaredigest)

I have to confess I was beginning to feel a little queasy especially as it turned out that some might do this albeit if course we do not know what oil was used here.

I used to have a friend who did their fryups in about two inches depth of fat…utterly inedible! ( @MattBrookes3 )

There were some alternative suggestions for the use of olive oil.

You don’t cook in it, you barbarian. You wash down your meal with a couple of pints of it. ( @Birdyworld)

One Bloomberg journalist did appear willing to give it a go.

As I mulled the list I was curious about the addition of French butter to the list for two reasons as what I buy is mostly UK butter and of course French butter is usually unsalted giving a very different taste. I wasn’t the only one it would seem.

Welsh butter with mine please boyo ( @putt1ck )

 

I’m remain/internationalist but I always buy UK for my fry up, I don’t think these calcs will effect me? PS toss the oil, use butter! ( @LukeMcElligott )

Some took this a stage further.

I find Swiss organic grass-fed butter goes better with baked beans………but only ever fair-trade Himalayan Yak butter with my Japanese Kotoka Strawberry jam. Obviously, ( @WEAYL )

The issue of strawberry jam got a mention.

and who puts strawberry jam on their fry-up!? ( @ChrisB_IG )

Although hope springs eternal for one Bloomberg customer.

Bacon=NL,bread=local,Cherry vine tomato=Spain/NL/or Kent UK 😉 Strawberry jam= free with Bloomburg subscription (I would hope) ( @Svedenmacher )

We did discover someone keen on French butter albeit for a modern reason.

I often buy President butter, especially lately … to piss off the Brexiteers ;). ( @ClausVistensen )

Thus we found quite a bit of debate over the ingredients which then seemed to be reflected off Bloomberg Towers.

Also there’s no ketchup or hash browns. The moral of this story is don’t go for breakfast at KPMG ( @Lucy_meakin )

Considering the cost some were unhappy with the quality.

Funny looking sausage anyway. I think I’ll give it a miss. ( @PaulKingsley16 )

As ever some were hoping for a bright side to the issue.

Does anyone know if KPMG have vacancies for analysts economists researchers -will come out of retirement for their hourly Breakfast rates. ( @BarrattPeter)

Whereas the other side of the atlantic felt we needed to widen our perspective somewhat.

You Europeans are so dense. It’s the labor cost component of the typical Chinese household cook that’s driving up breakfast costs. ( @EquityTrader44 ).

Still it could all have been much worse. Imagine this for breakfast or anything really.

Another salvo in the war on cash

There is much to consider in the report on the gig economy by Matthew Taylor today but one bit in particular caught my eye.

The author of a government review into work practices would like to see an end to the “cash-in-hand economy”.

Matthew Taylor, whose report is out on Tuesday, said cash jobs such as window cleaning and decorating were worth up to £6bn a year, much of it untaxed.

Although he wants to present it as progress.

Mr Taylor also said he did not want to ban cash payments outright, but hoped, over time, the increasing popularity of transaction platforms such as PayPal and Worldpay would see a shift from cash-in-hand work.

“In a few years time as we move to a more cashless economy, self-employed people would be paid cashlessly – like your window cleaner. At the same time they can pay taxes and save for their pension,” he said.

This has many of the features of so-called blue sky thinking reports. In itself the cash in hand economy is hard to defend because tax is not paid and it is therefore unfair on those who pay taxes on income. However his effort to claim it would benefit the workers is risible “they can pay taxes and save for their pension.” From a magic money tree? Also it is hard not to think that the establishment wanted this review as part of an effort to raise more tax like the Chancellor’s attempt to increase National Insurance on the self-employed of a fee months ago. If they cannot make a relatively minor change without a fast U-Turn how exactly will they tax these workers?

But we have a theme of more tax being paid which will please the establishment and another feature these days which is of things being leaked before they are announced properly. Why not wait a few hours? It is all about expectations management which moves me to my  main point which is that the establishment seems ever more desperate to get rid of cash.

You would think that it is one of the barriers to them introducing negative interest-rates in the future……Oh hang on!

Comment

Economic life is often much more complicated than it first appears as for example we are on the road to more electronic payments. Over the past few years I have found myself paying for things with a card that would have been unthinkable before. Yet this is also true . From the Bank of England.

Despite speculation to the contrary, the number of banknotes in circulation is increasing. During 2016, growth in the value of Bank of England notes was 10%, double its average growth rate over the past decade.

Evidence of stockpiling?

As to the breakfast saga there are a few bits to consider. The first is the British obsession with a fry-up which goes in hot pursuit of our obsession with tea. Although apparently not the latter at KPMG who drink coffee. Next we have the click bait effort of claiming breakfast would cost £26.61 where even the family addition from the Guardian does not work unless you use all of the olive oil ( I am getting queasy again) and drink several gallons of coffee with slabs of butter.

Meanwhile there are issues one of which is a regular theme of mine which is that we import so much food in the UK and could do much better on that front. Some things we cannot grow (oranges) but some we can. Actually KPMG seems unaware of what we do produce as apparently we grow a lot of mushrooms. Of course we could end up paying higher tariffs for some products as we seem to have become rather dependent on Danish bacon. But for other products such as olive oil ( assuming you use it) Europe is not the only source and transport costs are often low.

Could the Bank of England step in with some Sledgehammer Breakfast QE?

 

What is happening in the war on cash?

One of the features of the credit crunch era is the way that the establishment so regularly pushes the idea that cash money is bad for us. If we stop for a moment there is quite an irony and contradiction here as of course the various establishments have created so much more money via the use of Quantitative Easing. The leader in this regard has been the Bank of Japan which announced this back in April 2013.

The Bank of Japan will conduct money market operations so that the monetary base will increase at an annual pace of about 60-70 trillion yen………In order to do so, it will enter a new phase of monetary easing both in terms of quantity and quality. It will double the monetary base….

Actually it decided in August 2014 that even such an extraordinary number was not enough as like Agent Smith in the Matrix series of films the cry went up for “More! More!”.

The Bank will conduct money market operations so that the monetary base will increase at an annual pace of about 80 trillion yen (an addition of about 10-20 trillion yen compared with the past).

Of course plenty of other central banks have been playing the same game as we see the Bank of England with its £435 billion of conventional QE and the ECB with around 1.8 trillion Euros of it and the US Federal Reserve with a balance sheet of US $4.47 trillion. The other side of this has been the money created which has sloshed around the financial world ever since exacerbating the problems that we are now told are the fault of cash!

The fanatic pursuing this argument Kenneth Rogoff will be familiar to regular readers and here from NPR is his argument.

Well, I think that a lot of the money – these big bills – is used to facilitate tax evasion and crime. We all use cash in our everyday life, but we don’t use hundred-dollar bills. We’re not using 500-euro notes. And yet these account for mountains of cash out there. I think they’re being used in tax evasion and by criminals of all types.

This is very awkward for our Ken and sadly he is rarely challenged on the two main problems. Firstly as I have described above the world has been flooded with base money with policies he supported which has facilitated all sorts of problems some of which he is now blaming on cash. Next if we apply the principle of banning things which are used by criminals and terrorists then we need immediately to get rid of mobile phones and as they seem to be increasingly using cars,vans and lorries they need to go as well. They also use houses and so on……

The UK seems to be demanding ever more cash

I referred to this a few days ago but here is some more detail from the Bank of England on the subject.

Despite speculation to the contrary, the number of banknotes in circulation is increasing. During 2016, growth in the value of Bank of England notes was 10%, double its average growth rate over the past decade.

The speculation referred to links to an article in the Guardian discussing the cashless society. Then the Bank of England points out that we are far from alone with this trend.

Banknote growth has been continuous, despite cash’s popularity as a payment method declining. In 2015, cash accounted for less than half of consumer payments (volume) for the first time. This paradox of falling transactional use of, but rising demand for, notes is faced by many other countries.

So it would appear that our road to a cashless society is er paved with cash, how contradictory! As to the cause well the author choses her words neutrally because it is rather close to home.

One factor driving this is low-interest rates incentivising increased hoarding, so notes remain in wallets and the retail sector for longer.

Let me spell this out the low interest-rates applied by the Bank of England have slashed the cost of holding cash. Also some will be afraid that the ideas of Kenneth Rogoff will be acted on so that further interest-rate cuts can be made and negative interest-rates can be enforced.

We are referred to some Bank of England research which is rather damning for Kenneth Rogoff.

However, given the untraceable nature of cash, it is not possible to determine precisely how much is held in each market.

Ken can apparently…..

The housing market

One feature of the modern era is high and indeed unaffordable house prices which of course have been driven by policies which Kenneth Rogoff has been a cheerleader for. Well there is a massive irony in this being reported by the Financial Times today.

Cash is pouring into UK residential property as never before, with buyers less reliant on mortgage finance in 2016 than at any time since comparable records began.

The scale of this issue is described below.

Using official figures on the number of property transactions and average prices, plus Bank of England data on mortgage financing for house purchases, the IMLA ( Intermediary Mortgage Lenders Association) estimated that £418 of every £1,000 used to buy property in 2016 was in cash. In 2013, when the BoE first collected comprehensive mortgage data, the cash contribution was £377, although the proportion of cash used for house purchases has been growing for a much longer period, the IMLA said.

I have to confess that this is a larger proportion than I was expecting. Also the FT’s economics editor has a really odd view on the creation of money.

Much of the cash is created by rising property values.

If true no wonder central bankers are so keen on ever higher house prices. Also as I have pointed out so many times, what could go wrong here?

Mr Williams said the Bank of England should relax the rules to make it easier for people without access to a large cash deposit to get a mortgage.

The issue here is that property prices have been driven higher by all the monetary easing and the ordinary person has been priced out more and more often. That is the fault of the central banks and has also been associated with more money laundering where the money is called cash but is more often the electronic money the central banks are so keen on. Giving people ever more debt is part of the problem not the solution here and of course debt has led to rather a lot of financial crime.

Bitcoin

The war on cash makes alternative currencies look more attractive because they are outside the grasp of both governments and central banks. So it is hard to avoid such thoughts as we note that the price of Bitcoin has now passed US $1700. There are of course other factors such as money flowing out of India and China but it particularly intriguing to see Japan make it a legal means of payment. It is so often Japan isn’t it? Perhaps they increasingly fear even that interest-rates could go even more negative.

Comment

There is much to consider here but there is a huge irony and indeed hypocrisy in those who have flooded the world with electronic money blaming cash money for ills it contributed too. Many scandals such as “liar loans”, PPI miss selling, Li(e)bor and foreign exchange rigging had nothing to do with cash. Indeed in the news today is another example of a whole wave of financial crime that was nothing to do with cash.

Noel Edmonds, the television celebrity, has written to the boss of Lloyds Banking Group to demand compensation that his lawyers claim could run to more than £50m in connection with the fraud scandal at HBOS. In correspondence seen by the Financial Times, Mr Edmonds says HBOS and its disgraced former employee, Mark Dobson, destroyed Unique Group, his former business, a decade ago.  ( Financial Times).

I do not know the individual circumstances and there will no doubt be plenty of ” Mr Blobby” and “Deal or No Deal” jokes but I do know that there have been many problems in this area that seem to take forever to come to justice. They are nothing to do with cash.