Demonetisation Links (25-Nov-2016)

November 25, 2016

The anti-cash movement rising across world and its unrealised wide implications..

November 25, 2016

Joseph Salerno of Mises Institute has been warning us against the rising anti cash movement across the world.

In an earlier talk Salerno tells us how these are just attempts by the State to ensure you are always under their radar.

Governments, at least modern western governments, have always hated cash transactions. Cash is private, and cash is hard to tax. So politicians trump up phony reasons like drug trafficking and money laundering to win support for bad laws like the Bank Secrecy Act of 1970, which makes even small cash transactions potentially reportable to the Feds.

Today cash is under attack like never before. Ultra low interest rates are the norm for commercial bank accounts. In Europe, as the ECB ventures into negative nominal interest rates, certain banks threaten to charge customers for depositing cash. Meanwhile, certain European bonds now pay negative yields, effectively turning them into insurance products rather than financial assets. And some economists now call for the outright abolition of cash, which shows just how far some will go in their crazed belief that economic prosperity can be commanded by forcing us to spend rather than save.

The War on Cash is real, and it will intensify. Here to explain is Dr. Joe Salerno, who spoke on the subject at our recent Mises Circle event in Stamford, Connecticut.

In this piece, Ryan McMaken sums up the talk:

As Joseph Salerno has observed, the elimination of physical cash makes it easier for the state to keep track of private persons, and it assists central banks in efforts to punish saving and expand the money supply by implementing negative interest rate schemes. 

A third advantage of the elimination of physical cash would be to more easily control people and potential dissidents through the freezing of their bank accounts.

Joseph Salerno further points that post-India, there is a similar movement in Australia as well:

The global war on cash is remarkably well coordinated. Less than a week after the Indian government announced it was withdrawing its two highest denomination currency notes (equivalent to about $15.00 and $7.50, respectively) from circulation, the Anti-Cash Axis, which comprises a witch’s brew of national governments, establishment media outlets, international bureaucracies and, especially, gigantic multinational banks, has launched a concerted attack on Australia. Two days ago, Citibank announced that it was going cashless at some of its Australian bank branches.

Yesterday, Swiss giant UBS called for the elimination of the Australian $100 and $50 bills because it would be “good for the economy and good for the banks.” The Australian government in cahoots with the media prepared the way for these brazenly self-serving antics by two of the largest banks to have failed and been bailed our during the financial crisis. Back in February a leading Sydney newspaper published a series of articles, some authored by officials from Australia’s Treasury Department, suggesting that abolishing cash would “save billions” and that  “a cashless society is the next step for the Australian dollar.” 

I have a better proposal for our brothers and sisters Down Under: don’t acquiesce in the elimination of your cash; eliminate the banks by immediately reclaiming all your cash that is “on deposit” at these institutions that cannot exist without government guarantees and bailouts.  

What is interesting to see across are huge double standards across the globe. We are hardly seeing a natural evolution towards e-payments.

There is this supposed crony capitalism where these large banks/payment providers are using Governments to push people towards their products. Then these very large corporate/financial players along with these e-payment providers build a story that how these things are about development of markets and making them efficient!

Part of the blame is on economics education as well. Earlier history of money was known to most students. Now we hardly discuss about historic evolution of money and State’s deep interest and manipulation in the matters of money. The way we have moved from commodity money to fiat money and all fiat money declared as legal tender with very little State accountability is a fascinating tale untold. And now this jump towards plastic money which gives State powers to monitor you as well. What better?

It is shocking that earlier most economists would have raised questions on this State involvement in monetary matters. Now most are backing it!

Digging India’s Demonetisation History Part -2: Case of Pakistan demonetising Indian Rupee notes post Partition….

November 24, 2016

The history of demonetisation continues to be fascinating. After posting about two episodes of Demonetisation in India in 1946 and 1978, one came across another one reading RBI history during Partition.

There are various economic history issues in Indo-Pak partition. The currency usage was one such issue. Before Partition, the Indian Rupee was used across the sub-continent. Post-partition, how did Pakistan move onto a new currency? How was Indian currency removed  or in other words demonetised from Pakistan monetary system?What was the process?

In RBI’s first history volume (1935-51), there is some interesting discussion on these issues. (Let me warn upfront. This one is both a long and confusing post):

Read the rest of this entry »

The secret of Dubai’s success..

November 24, 2016

Yasser Al-Saleh, a faculty member at the MBRSG (formerly the Dubai School of Government) has a piece on Dubai model.

He calls it the ABS model:

As governments across the Middle East try to wean themselves off natural resources and build diversified, resilient economies, they should take some lessons from Dubai. It’s a remarkable story. In less than a generation, Dubai has transformed itself into a major center for investment, commerce, and high-end culture. Although the 2008 global financial crisis hit the city-state hard (owing to its exposure to inflated real-estate assets), it recovered quickly, as evidenced by its bids for events such as the World Expo 2020.

How Dubai managed not only to survive, but to thrive, in the wake of the crisis warrants closer scrutiny. So, this past summer, I began investigating the so-called Dubai model of resilient growth, and the challenges that may lie ahead for it. As part of my research, I conducted more than 40 in-depth interviews with government officials and business elites, and fleshed out my findings with secondary data sources.

Dubai’s growth and resilience is attributable to its “ABS model” of attraction, branding, and state-led development. Just as a car’s anti-lock braking system prevents it from skidding out of control in dangerous situations, Dubai’s three-prong strategy keeps its development agenda on track, even during economic crises.

With respect to state-led development, Dubai’s approach is typical of Gulf states. Its society adheres to tribal traditions that afford its ruling elite, headed by the royal family, a paternal and omnipotent role in determining the direction and form of economic development. This means that “Dubai, Inc.” can quickly and seamlessly adapt to changing economic circumstances.

Dubai is sometimes called the Singapore of the Desert, because, like Singapore, it has experienced enormous state-directed economic growth, and benefits from proactive, visionary leadership that has turned a small city-state with limited natural resources into an important international entrepôt.

Moreover, Dubai has done a good job of branding itself to attract the foreign investment and labor needed to achieve its growth ambitions. Like New York, Shanghai, and Las Vegas, which have all enhanced their images through architecture, Dubai conveys its innovation-oriented identity through its cityscape and skyline, which has around 150 skyscrapers, more than any other city except New York and Hong Kong.

Dubai also has the first 3D-printed office building, stunning manmade islands, the world’s only (self-proclaimed) “seven-star hotel,” shopping malls combined with aquariums, indoor skiing, and skydiving facilities, and an array of iconic buildings and amusement parks. It also hosts the world’s most expensive horseraces and other lavish sporting events.

Dubai’s brand is further strengthened by its political stability, safety, tolerance, cultural diversity, and high standard of living, which are a draw for skilled expatriates from around the world. Moreover, the emirate appeals to foreign investors with special economic zones that few other states can match.

What are the worries?

The ABS model explains Dubai’s economic resilience and its quick recovery after the global financial crisis. But it also helps the emirate adjust its strategy to account for new challenges. Just as a car’s ABS makes it easier for a driver to slow down or change course to avoid dangerous obstacles, Dubai’s state-led development apparatus can realign its attraction and branding activities in accordance with its growth goals and changing circumstances in the Middle East and beyond.

On the other hand, if the government fails to fix its structural problem – under-developed indigenous human capital – it will essentially be driving a more dangerous car, one in which it will become difficult or impossible to avoid obstacles without the wheels locking up.

The success of all models eventually becomes its biggest weakness as well..

The ocean transportation revolution in the North Atlantic during 1826 to 1914

November 24, 2016

Brandon Dupont and Thomas Weiss have an interesting paper telling you about history of many things:

 They basically build the data from advertised fares of passenger liners published in newspapers during those times:

We have therefore also made use of advertisements in a number of newspapers and magazines to construct a consistent long-term series on first cabin passenger fares from 1826 to 1914. This has proved to be an efficient method of collecting enough evidence on fares to be representative of the industry as a whole. The newspapers – a number of which are readily available online – reported ship movements, departure schedules, and contained shipping line advertisements of fares, often on a daily or nearly daily basis across the period. Compiling fares from standardised newspaper advertisements is more feasible than excavating heterogeneous data from the archives of multiple firms, and it also represents the price signals which passengers were likely to have considered when deciding to travel, even though it does not always measure how much was actually paid.

One limitation to the advertised fares is that they stopped appearing after 1896 for reasons that seem to be associated with the contemporaneous advancement of market-sharing and rate-setting by North Atlantic passenger shipping cartels or conferences. We were, however, able to extend the series up to 1914 using minimum fares established by the cartels. Although these cartel fares were not advertised in newspapers, they were public information, and were reported in news stories and in some shipping line brochures. These fares are those that would have been advertised, if the shipping lines had continued to include fare information in the ads they did run.

The evidence shows that fares declined over a period and then rose:

Since passenger volumes varied across shipping companies, we also constructed a weighted fares series using estimates of passenger volumes from a variety of sources including the New York Commissioner of Emigration, the New York Times and other newspapers, and, in later years, records of the Transatlantic Passenger Conferences. Both the weighted and unweighted fares are illustrated in Figure 1.

By 1870, the major UK lines were all providing at least weekly departures from New York, and the quality of travel was improving as well, with electric lighting and the first forms of refrigeration soon becoming standard. But as illustrated in Figure 1, first class travellers paid fares that were about 40% lower in 1890 than in 1870 even while there were considerable improvements in frequency of service, safety, and on-board amenities. The declining fares before 1890 contrasts noticeably with what took place in first class travel on the New York–UK corridor for the two and half decades after1890, during which first cabin fares increased while first cabin passenger traffic stagnated. This might reflect increased efforts to substantially improve travel amenities as suggested by Johnson and Huebner (1920), and made evident with Cunard’s launching of the Lusitania and Mauritania in 1907. Or it might have been more a matter of passenger lines using stronger cartel price support to collect some offsetting revenue – through fare increases – for the mild cost inflation incurred since the 1890s and for enhancements provided to passengers. What is consistent for both the decades before and the decades after the 1890s is the negative correlation of first cabin fares and passenger volumes, which was stronger than might be expected given that most pre-WWI first class transatlantic passengers were wealthy tourists not especially sensitive to the prices of tickets for the oceanic transit.

Many things are here. How people traveled, time taken, various passenger classes in ships and so on..

Currency Notes across the world in 2016..

November 23, 2016

Currency notes have become a new obsession with this blog. After seeing some surprising interest by viewers on the blogpost on new notes in Norway, one decided to see what is happening across the world.

Here are some links of new notes issued across the world in 2016:

If visitors know of other new launches, please add to the list. Thanks.

The Rebel Economist Who Blew Up Macroeconomics..Paul Romer

November 23, 2016

A nice profile of Paul Romer and his recent mission to blow up macroeconomics:

Paul Romer says he really hadn’t planned to trash macroeconomics as a math-obsessed pseudoscience. Or infuriate countless colleagues. It just sort of happened.

His intention actually had been to write a paper that would celebrate advances in the understanding of what drives economic growth. But when he sat down to write it in the months before taking over as the World Bank’s chief economist, Romer quickly found his heart wasn’t in it. The world economy wasn’t growing much anyway; and the math that many colleagues were using to model it seemed unrealistic. He watched a documentary about the Church of Scientology, and was struck by how groupthink can operate.

So, Romer said in an interview at the Bank’s Washington headquarters, “I just thought, OK, I’m going to say what I think. I don’t know if I’m the right person, but no one else is going to say it. So I said it.”

The upshot was “The Trouble With Macroeconomics,” a scathing critique that landed among Romer’s peers like a grenade. In a time of febrile politics, with anti-establishment revolts breaking out everywhere, faith in economists was already ebbing: They got blamed for failing to see the Great Recession coming and, later, to suggest effective remedies. Then, along came one of the leading practitioners of his generation, to say that the skeptics were onto something.

Demonetisation Links (23-11-2016): Supreme Court advocate on the move, RBI’s Mt Everest Challenge, Marriage cash woes and many more

November 23, 2016

Meanwhile meet Norway’s new bank notes…

November 22, 2016

Norway has announced launch of new notes as well. But hardly as disruptive as we have done. These notes will come into circulation in Summer of 2017.

Read the rest of this entry »

Demonetisation 2016: The notification on withdrawing cash for marriages…(recovering lost art)

November 22, 2016

One was assuming whether Indian government has lost the art of writing detailed notifications which they wrote so often before the 1991 era.

In those days, everything for you was planned by the government and written painstakingly in the notices. The language and details stunned one and all as it was so meticulously written. One  often asked how is it that Government knows so much about me which I also don’t know. But then such were the times.

With all this liberalisation and markets, one would have thought this art too would have been lost somewhere. More so in the twitter and whatsapp generation where brevity is of utmost importance, who has time to think and write in such details.

But one is wrong. If the recent RBI notification is to be believed, the skills are intact.

 

 

 

Demonetisation Links (22 Nov 2016): 8 myths, Shimla hotels, Chickpet shops and many more

November 22, 2016

Usual disclaimer applies (request visitors to add to the list as and when in comments):

Economists are partly responsible for US President-elect Trump’s victory

November 22, 2016

Dani Rodrik who has been warning on the uneven outcomes of trade liberalisation for a while just blasts economists in this piece. Years of hubris and imperialism is finally getting to the den of American economics. First the global financial crisis and now the recent US elections.

He says we always think those who speak for trade are angels and those against are these barbarians at the gate:

Are economists partly responsible for Donald Trump’s shocking victory in the US presidential election? Even if they may not have stopped Trump, economists would have had a greater impact on the public debate had they stuck closer to their discipline’s teaching, instead of siding with globalization’s cheerleaders.

As my book Has Globalization Gone Too Far? went to press nearly two decades ago, I approached a well-known economist to ask him if he would provide an endorsement for the back cover. I claimed in the book that, in the absence of a more concerted government response, too much globalization would deepen societal cleavages, exacerbate distributional problems, and undermine domestic social bargains – arguments that have become conventional wisdom since.

The economist demurred. He said he didn’t really disagree with any of the analysis, but worried that my book would provide “ammunition for the barbarians.” Protectionists would latch on to the book’s arguments about the downsides of globalization to provide cover for their narrow, selfish agenda.

It’s a reaction I still get from my fellow economists. One of them will hesitantly raise his hand following a talk and ask: Don’t you worry that your arguments will be abused and serve the demagogues and populists you are decrying?

There is always a risk that our arguments will be hijacked in the public debate by those with whom we disagree. But I have never understood why many economists believe this implies we should skew our argument about trade in one particular direction. The implicit premise seems to be that there are barbarians on only one side of the trade debate. Apparently, those who complain about World Trade Organization rules or trade agreements are awful protectionists, while those who support them are always on the side of the angels.

In truth, many trade enthusiasts are no less motivated by their own narrow, selfish agendas. The pharmaceutical firms pursuing tougher patent rules, the banks pushing for unfettered access to foreign markets, or the multinationals seeking special arbitration tribunals have no greater regard for the public interest than the protectionists do. So when economists shade their arguments, they effectively favor one set of barbarians over another.

Well, the problem with economics is removal of history and political thought. Trade supporters often quote Adam Smith to support their ideas but forget how Smith was mindful of politics around the ideas.

The seeds of elitism were sown long ago and now is the time to reap the fruits…

Econometrics and its consequences for human beings..

November 22, 2016

Marco Fioramanti and Robert Waldmann have a timely post cautioning on the huge usage of econometrics in policy. If one is not careful, then chances of being conned and taking bad policy decisions could be huge.

The post is technical and authors could have simplified the post for a better reading:

The basic idea is how different econometric models produce different results. They show analysis for Italy:

The difference in the structural balance calculated by the European Commission and the Italian authority can easily be produced by tweaking the second or third decimal point of variance bounds imposed on the stochastic processes driving the NAWRU. Do we really want these technical aspects of an estimation procedure – the uncertainty of which is huge and cannot be removed given the unobservability of the underlying phenomenon – to be the key element on which we base our decision on Italy’s fiscal strategy in a time when a still high unemployment rate and humanitarian emergencies require the support of government’s actions?

One should be very careful with usage of econometrics and even more while giving policy reccomendations based on the models. The assumptions and limitations should be clearly specified.

Bank of England should resist appointing yet another “pale, male and stale” economist…

November 21, 2016

Mark Gilbert of Bloomberg View advises Bank of England to not look at  another male elite economist from London as its DEputy GOvernor. Instead it should appoint  a Female, Northern Brexiteer..

The Bank of England is advertising for a new deputy governor to start next year. As you’d expect, the job posting lists several desired features aspiring candidates should have. But let’s hope the winning applicant possesses some attributes not listed in the official job description; ones that would make the central bank’s monetary policy committee more representative of the community it serves. That might also help restore public faith in a valuable and somewhat beleaguered institution.

Research suggests managers typically prefer to hire people who remind them of themselves. So there’s a risk that the recruiters for the 270,000 pound-per-year ($335,000) role will opt for yet another white, male economist. That would be a mistake, and a missed opportunity. Given the recent assaults on central bank independence and criticism that monetary policy has disadvantaged huge swathes of the electorate, it’s more important than ever that policy makers reflect the diversity of society as a whole.

Here, then, are some of the attributes the government should be looking for as it trawls through the applications for this prestigious post.

  • Shatter the Glass Ceiling (select a woman)
  • Location, Location, Location (No more Londoners please)
  • Brexit Means Brexit (someone who believes in Brexit)
  • Hire an Entrepreneur, Not an Economist (well well well)

The last bit is an egg on the face on econs:

The advert says the successful candidate “will have an advanced understanding of economics.” I’d argue that professional economists are increasingly having to admit that even they don’t really understand what makes economies tick. Given the amount of time the new deputy governor will be forced to spend in the company of other officials — “He or she will be a member of the Monetary Policy Committee, the Financial Policy Committee, the Prudential Regulation Committee, the Court of the Bank of England and will also represent the Bank on several international bodies,” the job description states — it might actually be more helpful if they are not a professional economist so they can resist groupthink and bring a different experience and viewpoint to the discussion.

I’ve argued before that the lack of businesspeople on monetary policy boards is a serious shortcoming. No-one understands the labor market and the economy quite like someone who’s built a business from scratch. Nothing focuses the mind quite like having to make payroll on a Friday. Conservative lawmaker Andrew Tyrie, who heads the Treasury Select Committee, said earlier this week in a discussion about central bankers that “their capacity to create a theology is virtually boundless.” He’s absolutely right. Given the newfound enthusiasm among central bankers for all things blockchain, perhaps a bitcoin entrepreneur is the ideal candidate.

As well as having well-rounded and diverse personalities, monetary policy makers should empathize with the interests, desires and ambitions of their constituency. (Governor Mark Carney revealed under interrogation by a gang of schoolchildren in September that the culinary television program The Great British Bake Off is his guilty pleasure.) The next deputy governor doesn’t need to be a fan of fondant fancies and three-dimensional gingerbread structures, but being aware of cultural context doesn’t hurt.

At this point, it would be nice if I could at least come up with a shortlist of candidates for consideration. Unfortunately, the world of business and finance remains a white male bastion; only seven of the U.K.’s 100 biggest businesses, for example, are run by women (see what I mean about the glass ceiling still being firmly in place?). I’m at a bit of a loss. But if you know anyone who fits the bill, the Cabinet Office is taking applications until midday Nov. 21.

Amazing times..

Understanding RBI Board’s role in Demonetisation 2016…

November 21, 2016

This is a great time to learn about role of law in monetary affairs. It is so crucial as we will see.

One question that is central to the demonetisation strike is “What gives government the powers to declare legal tender illegal?”

These powers come from RBI Act. Not surprisingly, the act was made by the British government and we have just followed! They ensured that amidst all this legal language which shows an independent central bank, the power to make a currency legitimate or illegitimate remains with the government.

Section 26 (2) of RBI Act gives these powers:

(2) On recommendation of the Central Board the [Central Government] may, by notification in the Gazette of India, declare that, with effect from such date as may be specified in the notification, any series of bank notes of any denomination shall cease to be legal tender 2[save at such office or agency of the Bank and to such extent as may be specified in the notification]. 

It says on recommendation of the Central Board government may declare a currency as illegal tender by issuing a notification in the Gazette of India.Why Gazette? Well it contains all the notices of the government. One can see the Gazette notification on 8 Nov 2016 here and here.

If you notice it says “On recommendation of the Central Board….” this can be done. What is the Central Board? It is the main body of RBI which governs the central bank and has 21 members . These directors are divided into official and non-official:

Read the rest of this entry »

Indore Patna Express Accident: Indian Railways thinking of changing default option for passenger insurance..

November 21, 2016

What a tragedy on early Sunday morning (20 Nov 2016). It was just shocking to see the pictures.

One just realises the importance of insurance when such accidents happen. The Government had started this really laudable insurance scheme which costs just 0.92 paisa to safeguard passengers. However, due to ignorance and discounting of the accident only 126 of the 429 passengers had availed of the insurance. Those who did will get additional Rs 10 lakhs in case of permanent injuries and so on (detailed conditions here).

The question is why is it that so few opted for the insurance in this train? I am sure same would be the case across most journeys. The problem is default choice. The question railways asks is whether you want insurance or not. The railways is thinking of changing this default question.

 

Indian express explains:

The accident Indore-Patna Express met on Sunday will be the first real test of the recently-launched optional travel insurance scheme for train passengers. Thanks to the scheme, the family of the insured deceased will now get Rs 10 lakh over and above other compensation announced. Railways is now mulling a proposal to make the travel insurance default for each e-ticket booked unless a passenger opts out, sources said.

By Sunday evening, representatives of three insurance companies, ICICI Lombard, Royal Sundaram and Shriram, were on their way to the mishap spot, sources in the Indian Railway Catering and Tourism corporation (IRCTC), which anchors the scheme for Railways, said. They will assess the total payout in claims, which will be in crores.

This is where defaults in choice selection matters and is straight from behavioral economics toolkit.

So far default is “Do you want to buy insurance?” If yes then you tick the box and  0.92 paisa is added to the fare per passenger.

Now the railways is thinking of changing the default to ” You are being charged for 0.92 paisa for insurance? Do you want to opt out of the scheme?” If yes, then you cancel the tick and the amount is deducted from the fare.

If possible, the railways should not wait and add a choice on booked tickets as well. People who book should be asked to keep the really small change and pay the Ticket examiner. This is a time when change is in shortage but people will produce it to safeguard  against this rare but huge risk. (This suggestion is coming as the blogger is guilty of not availing the insurance as well…)

Questions over Indian central bank role in demonetisation rising…

November 21, 2016

I had worried about this aspect very early on. It is strange that not a word has come from Indian central bank on the decision except for confusing notifications. This is such a matter that no talk only creates more suspicion around the problem. If the Governor is reticent and fighting behind the scenes, why not appoint someone else to do the talk? I mean someone has to say atleast something.

 

Now, we have questions like: RBI’s silence on demonetisation raises questions on its independence. Even worse, the Bank Officers’ Union demands resignation of RBI chief given the chaos.

I am really surprised no banker/policy expert etc has made this request. Tons of paeans were sung by one and all on the appointment and more funnily connecting all kinds of powers to the central bank. Even post demonetisation, similar experts hailed it as one of the best moves ever. None have asked now why is the central bank not speaking on the matter? If RBI is not saying things as it has been kept off the loop and so on, then it is even a more serious matter.

The favorite topic of RBI independence has suddenly disappeared when it matters quite a bit. For all you know, one of the most reputed newspapers is reporting that PM indicating a rate cut post the strike yesterday. We would imagine such news coming from central bank and atmost from FM who can at best say – one wishes RBI does cut rates.

I mean reports saying that post demonetisation case for rate cuts has increased is like a joke.  The entire effort and noise around so called central bank reforms and making our policy like a developed one has become almost a joke. It looks more a case of monetary policy being run from Delhi now…

Demonetization links (21 Nov 2016): Impact on Northeast states, UP Small business, Bovine feeding and many more..

November 21, 2016

We are in such times, that one has to add a disclaimer: Assuming atleast some of these news is true!

RBI said no to demonetization during UPA-II..

November 18, 2016

As this blog wrote, one just hopes that RBI had cautioned the government against the demonetisation move. I mean with such small scale of demonetisation, RBI warned against monetary stability in both the previous instances. This time with such large scale demonetisation, no central bank independent or dependent should have let the government do it this easily. The mess should have been foreseen by someone who is not even an expert on these matters.

Though, having said all this things look murkier as days pass by. KC Chakrabarty, former DG of RBI spills the beans further. In this interview, he says RBI was asked earlier as well. The proposal did not even move to the Board level !

You were the deputy governor of RBI when the UPA-II government was at the centre. Was there any such proposal from the government during your tenure?

Yes, it had come from the UPA government. After examining the proposal, we had said that this should not be done. The proposal never went to the board level.

Was it a formal proposal? What was the reason for declining it?

Whether it came officially or over telephone, is not the issue. But I definitely remember it had come. We said ‘no’ because it does not serve any purpose… the cost is high and the benefit is less.

It has already impacted the banking system. For the next couple of months, banks will only concentrate on exchange of notes, no business can happen.

This is huge and comes at a very bad time for RBI. Why? RBI Act 1934 says:

26. Legal tender character of notes.
(1) Subject to the provisions of sub-section (2), every bank note shall be legal tender at any place in 4[India] in payment or on account for the amount expressed therein, and shall be guaranteed by the Central Government].

(2) On recommendation of the Central Board the 1[Central Government] may, by notification in the Gazette of India, declare that, with effect from such date as may be specified in the notification, any series of bank notes of any denomination shall cease to be legal tender save at such office or agency of the Bank and to such extent as may be specified in the notification].

One imagines the amount of demonetisation would be small as suggested by previous Government. This time the operation was very secretive and obviously RBI board was not informed. But there was no ordinance either. Even in previous demon in 1978, RBI board was hardly kept in the loop but there was an ordinance as per the Act.

All this is getting too murkier.

Further Dr Chakrabarty says this move was rejected as it did not help in anything:

What is your view on the ongoing demonetisation exercise?

It has no economic rationale. It does not serve any purpose.

Why do you say so? The government claims that the move is aimed at curbing black money…

What is black money? No notes are black. All notes are white. It is the process that creates the black money. When a person does not pay tax, it becomes black money. Here you are killing the notes and not the fellow who is not paying tax.

The government also argues it will address the issue of counterfeiting…

If you buy a kilo of rice, there will be some small stones (interspersed). What you do is remove those particles and not the entire rice. The law enforcement authorities should identify those notes and take action. Here people are standing in the queues to get their own money because there are inefficiencies with the income tax (process), police machinery etc.

I am not aware of the thinking of the current government… I don’t know what information they have. I don’t know if they have the information that 90 per cent notes are counterfeit. I do not have this information. If they have the information then they should tell the people. They must disclose, per million pieces of Rs.1,000, how many counterfeit notes there are.

Much of these ideas from a former central banker have been echoed in this blog too…

Demonetisation 2016 links: Occupy RBI, Temples learning banking, Children’s bank helping parents etc..

November 18, 2016