For months now, I have been warning you about the coming war on cash, as governments look for ways to force savers into the banking system to support the banks and increase control of the financial system. (See my posts of February 19 and February 22).
Without warning, on November 8, 2016, India’s government made the Rs (Rupee) 500 note (worth about $7.50) and the Rs 1,000 note illegal tender, effective at midnight. These notes must now be converted to Rs 100 or lower denominations at bank branches or post offices. Banks were closed the first day after the decision. The last date for exchanging the banned currency notes with banks has been fixed as December 30.
Why are they doing this? The official reason is to prevent crime, corruption and the funding of terrorism. The real reason appears to be to drive hidden wealth out into the open where it can be taxed.
Unfortunately, the banking system was not ready for this policy change. There are not enough new notes available to meet demand. Consequently, the largest amount that can be exchanged at this time has been limited to Rs 4,000, about $60. Nonetheless, most banks have run out of the new cash and most bank machines are shut down.
The result of this sudden move is nothing less than catastrophic. Fully 97% of the Indian economy is cash-based. The newly illegal bills account for 88% of all outstanding currency so the economy is coming to a standstill. The daily-wage laborer, who leads a hand-to-mouth existence in a country with GDP per capita of a mere $1,600, no longer has work because his employer has no cash to pay his wages. His life is in utter chaos. Small businesses are also in shambles and many will probably never recover.
Here is a first-hand account of the chaos:
“I went to convert my banned banknotes into new ones. The largest amount one can have converted is Rs 4,000 ($60), until further notice. There was a huge rush of people at the bank. Arguments were erupting, as people refused to stand in queues and the banks gave no explanation of what needed to be done. Fights were breaking out.
Amid the chaos I finally learned that there were three queues I had to go through in a sequence. I had to get a form from one counter, which I had to fill in with my name and address, my ID card details, the serial numbers of all the bills I wanted to exchange, and my cell-phone number.
At the second counter, I then had to present the completed form along with a photocopy of my ID card. I had to sign on the photocopy which an official then stamped. With my banknotes, the form and the photocopy of my ID card, I then went to the next queue to get my currency converted at a third counter. The whole process took about two hours. For most people in the busier parts of the cities, it took much longer.”
Half of India’s citizens do not have a bank account and around 25% do not even have an ID card. These are the country’s poorest people, who have no way of converting their money. Those who are old, disabled or sick have no choice but to suffer, for without personally visiting a bank branch office, you cannot convert your banknotes.
A day after Prime Minister Narendra Modi announced that Rs 500 and Rs 1,000 currency notes would cease to be legal tender, wealthy Indians rushed en masse to jewellers to buy gold. These people were willing to pay huge premiums…up to 80% over the world price…to jewellers who accepted old currency notes. The transactions took place on past-dated bills. As a result of this rush, there was a sudden spurt in demand for gold. According to market estimates, as much as $1 billion worth of gold, or around 30 tonnes, has been imported since November 9 to meet demand.
Of course, dear reader, you think this sort of thing would only happen in India. But imagine how much easier it would be to do this in America, where everyone has a bank card and cash is used for fewer than 10% of all transactions.
Meanwhile, look what’s happening in Australia. Two days ago, Citibank (yes, the American-owned Citibank) announced that it was going cashless at some of its Australian branches. Yesterday, banking giant UBS proposed that eliminating Australia’s $100 and $50 bills would be “good for the economy and good for the banks.”
In February of this year, the Sydney Morning Herald released a series of articles, some of which were written by officials from Australia’s Department of the Treasury, suggesting that eliminating cash will “save billions”, and that “moving to a cashless society is the next step for the Australian dollar”.
I recommend that you keep some cash outside the system in case there is a day when the ATMs don’t work. But even more, I recommend you own physical gold which you should keep outside your bank where you can get it when you need it most.