Observations from India’s Ban on Cash

On November 8, 2016,  India’s Prime Minister Narendra Modi announced that nation’s 500 and 1,000 rupee currency notes would become worthless overnight. Those notes were the largest notes used in circulation in the Indian economy.  This edict is absurd. As an American, it would be like hearing that your $20′s, $50′s and $100′s will become worthless at midnight tonight.

The lack of logistical planning is unconscionable, especially when you consider there are 1.25 billion people living in India! Literally every one of these people has been forced to run to the bank and deposit their currency before it becomes invalid. If you do a quick search on the internet, you’ll see videos where lines stretch thousands of people long.  There are lines where people wait days just to deposit their money at the bank! It’s madness!

On July 10, 2016 I wrote my prediction on negative interest rates. One of the keys to the colossal shift, is the banning of physical currency. I predicted physical cash would be banned in 5 or 10 years. I certainly did NOT expect it to be banned within 5 months! Nor did I expect a nation with 1.25 billion people, to be the pilot program for the war on cash!

So my observations….

1. People often use the term “systemic” risk to refer widespread risk to attributed to a few colossal banks, but I’ve never seen the term applied to a currency. As I watch India fall into chaos, I think there is clearly a systemic risk in the use of the rupee. Over a billion people had their lives wrecked overnight, simply because they all depended on the rupee. Had these billion people diversified their assets into other currencies (ie US dollar, Chinese Renminbi, or bullion), the consequences of Modi’s edict would of been benign. This event has caused incredible suffering to the entire nation. I therefore expect people will bear these scars for years. Confidence in the rupee will be weak for at least the next decade. Anyone in India who has the means to diversify their assets, will do so. There will be a renaissance of bartering too.

2. As of about an hour ago, it appears India is really shifting into a panic. There are nationwide protests. I think this whole debacle is going to send a shockwave of pain through the Indian economy for over a year. Smooth currencies are like oil for an engine. Without oil, things go bad really quickly. When you burn out the engine it takes a long time to fix it.

3. I also find it quite odd that most Americans are completely aloof to this disaster in India. Normally we hear about stuff in India, like when a train goes off the tracks. It’s a terrible event, but we hear about it in America. Yet the American media is mute over the entire Indian currency devaluation. This is a story impacting over a billion people! yet the American media doesn’t mention it? Even The Economist magazine glossed over the issue, which makes me question their judgement. Why is the American media ignoring such a massive news story?  Perhaps the American currency ban is closer than we think? Don’t be surprised, if you’re told that in 24 hours all paper money in America will become invalid. It just happened to 1.25 billion Indians, so it could surely happen to a mere 300 million Americans.

We shall see…