Tag Archives: gold jewellery

Bitcoin isn’t Digital Gold, it’s Digital Uselesstainium

This blog post is a guest post on BullionStar's Blog by the renowned blogger JP Koning who will be writing about monetary economics, central banking and gold. BullionStar does not endorse or oppose the opinions presented but encourage a healthy debate. 

People often like to describe bitcoin as digital gold, but that analogy isn't a very good one. Bitcoin is categorically different from the yellow metal. If we had to choose a metal as an analogy for bitcoin, that metal would be boring grey in colour (and thus lacking ornamental purpose), useless for industrial purposes, but scarce. As far as I know no such material exists, so let's come up with a name for this imaginary metal: uselesstainium. Bitcoin is digital uselesstainium.

Before bitcoin fans get angry with me, I should confess that I got the idea for uselesstainium from a 2010 discussion board post by Satoshi Nakamoto, the creator of bitcoin. Below are his thoughts on a scarce metal that is "boring grey" and "not useful for any practical or ornamental purpose":

Let's dig more into the difference between gold and this stuff we call uselesstainium. There are two reasons to value something: 1) because you want to use it, or 2) because you expect to pass it off in the future. Pass-it-off demand may be for short-term purposes, like money—you only expect to have a dollar bill in your wallet for a day or two before spending it on. Or it may be for the long-term, like a speculative asset that you intend to keep for a few years before selling to someone else. Either way, pass-it-off demand means that the item's value to you depends on what *the next person* is willing to provide, not on its use-value.

The demand for gold is made up of both types of demand. A portion of those active in the gold market value it as jewellery or a collectors item, or because it can be used to make circuitry or in satellites. The other portion likes the metal for its pass-it-off purposes, say they expect that someone else will pay twice the price next year.

Because it is an ugly grey colour and thus unsuitable for collectors or jewellery wearers, and it can't be used in teeth nor for industrial purposes, uselesstainium has no use-value. If it is going to be valued at all, then pass-it-off demand will have to be wholly responsible for generating that value.

Gold and a fat-finger trade

Thanks to this difference, the prices of gold and uselesstainium will act very differently. Let's say the two metals are each trading at $1000/oz. Each of them suddenly suffers from a freak $100 drop in price. No event has occurred to cause it, nor have people's tastes change, nor has the technological backdrop been altered. It's a fat finger event.

In this context there is *no* fundamental reason for uselesstainium to return to $1000. With gold, however, strong market forces will emerge to help fix the mistake and push the price up towards $1000.

Gold is a good conductor of electricity. And unlike copper and other metals it doesn't corrode, which means that gold electrical connections are superior to most. However, an ounce of gold is much more expensive than an ounce of copper or any other metal. When gold was at $1000, manufacturers of printed circuit boards (PCB) will have made a tradeoff between gold and other materials subject to the preferences of their customers, choosing the optimal amount of gold for the parts of the board that are too delicate to suffer from corrosion while directing copper, silver, and other materials to the rest.

But with gold now at $900, the yellow metal has become marginally more competitive than other metals. At these prices, PCB customers can afford to ask for a bit more gold on their boards. This demand will help drive gold back up to $1000. The PCB market won't be the only market to demand more gold. Collectors, jewellers, dentists, and many others will all find gold a little more advantageous than before relative to alternative materials and will step up their buying. Their combined purchases will help counterbalance the mistaken fat finger trade.

Speculators who are attracted to gold solely for its pass-it-off value will contribute to this rebound. Because they are constantly trying to anticipate the needs of future buyers, including those in the PCB market, speculators will purchase as much gold as they can from the fat finger trader based on their informed opinion that they can resell it to board manufacturers at a higher price.

Uselesstainium and a fat-finger trade

When uselesstainium falls to $900, no equivalent forces exist to drive the metal's price back to $1000. Remember, because uselesstainium has no industrial value the only basis for valuing it is by trying to guess what price it can be passed off to others. Whereas a gold speculator can try to anticipate the needs of participants in the PCB market, a uselesstainium speculator can only sell to other speculators. This means that she must try to anticipate what other speculators are likely to pay, while at the same time these potential buyers are in turn trying to anticipate what she will pay.

This sort of expectations game was beautifully described by the economist John Maynard Keynes back in 1936 as a beauty contest. Presented with a row of faces, a competitor has to choose the prettiest face as estimated by all other participants in the contest:

"...each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which, to the best of one’s judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practise the fourth, fifth and higher degrees."

Confronted with a sudden $100 crash, there is no inherent reason for a uselesstainium trader to anticipate that average opinion anticipates average opinion to move the price back up to $1000. A move up to $1100, or down to $700, or a collapse to $0, are all just as likely. In a beauty contest, there is no right or wrong price for uselesstainium.

Bitcoin is digital uselesstainium

Since there is no use-value to anchor uselesstainium's price, we'd expect it to be far more volatile than gold. Likewise with bitcoin, which is both rare and demanded solely for pass-it-off purposes. Let's take a look at a chart of the relative volatility of bitcoin and gold to see what it shows.

What you see in the above chart is the median daily change for each asset plotted over a moving 200-day period. By using the median rather than the average I am stripping out some of the large gut-wrenching changes that assets experience, in an effort to give a sense of what happens on a day-to-day basis.

Gold's median change since 2011 (the black dashed line) is around 0.5%. This means that on a majority of days you should expect a gain or loss of around 0.5% if you hold the yellow metal. Over the same time range, bitcoin's median change (the dashed red line) is about 1.7%, which means that an owner of bitcoin must generally deal with moves of +/-1.7% each day, more than three times what a gold owner must bear.

Bitcoin's rolling 200-day median return (the solid red line) is much less stable than gold's. It almost fell to the same level as gold in late 2016, hitting a low of around 0.75%, but has quickly moved back above 3%, a level last seen in 2011 and again in 2013-14. The volatility gap between gold and bitcoin—the distance between the two solid lines—is currently at its widest since 2012.

Bitcoin will always be an incredibly volatile asset because it exists entirely on pass-through demand. Like uselesstainium, it is a pure Keynesian beauty contest. If all contestants in the bitcoin price-setting game come to believe that the average contestant believes that the average contestant believes bitcoin is worth $0, then that belief will self-realize itself and bitcoin will fall to $0. If they all become 100% sure that it should be worth $100,000, then it will jump to $100,000. These sorts of price implosions and explosions can't happen with gold because its usefulness inspires economic behaviour that counterbalances beauty contest dynamics.

Now it is possible that bitcoin inherits some useful properties and therefore shifts from being a form of digital uselesstainium to a form of digital gold. Bitcoin advocates will often mention time-stamping as a service. People can take a digital representation, or hash, of a document and put it on the bitcoin blockchain by spending a small amount of bitcoin. Once accomplished the owner of the document will be able to publicly prove that they were the owner of that document on that date. Bitcoin time-stamping would in theory compete with other alternatives, like real-life notaries or the post office. In the event of a bitcoin price crash, anyone who wants to get cheap time stamping services may step in as buyers of bitcoin, in the same way that PCB makers support the gold market.

However, time stamping is still in its infancy. Certainly other uses for bitcoin apart from time stamping may eventually be found, but until then bitcoin remains digital uselesstainium, not digital gold. Plenty of money can be made betting on uselesstainium, and much can be lost. But no one should be buying uselesstainum—whether it be the digital type or physical—unless they are comfortable playing in a pure Keynesian beauty contest.

This blog post is the second in a series of guest posts on BullionStar's Blog  by the renowned blogger JP Koning who will be writing about monetary economics, central banking and gold .

Guest Post – Jayant Bhandari: Gold Price Skyrockets in India after Currency Ban

The following guest post was written by Jayant Bhandari in two parts. Part 1 was first published by Jayant on November 9. Part 2 was first published by Jayant on November 16. Parts 1 and 2 were originally published on the 'Acting-Man.com' website as "Gold Price Skyrockets in India after Currency Ban" and "Gold Price Skyrockets in India after Currency Ban - Part II", and are also linked on Jayant Bhandari's website http://jayantbhandari.com.

India’s Government Makes Banknotes Worthless by Decree Overnight

As I write this in the morning of 9th November 2016, there are huge lines forming outside gold shops in India — and gold traded heavily until late into the night yesterday. Depending on who you ask, the retail price of gold has gone up between 15% and 20% within the last 10 hours.

gold-quote
Gold quotes in India – gold traded for as much as Rs 49,000 per 10 grams or US$ 2,294 per ounce

At some places, it was sold for as much as US$ 2,294 per ounce. That is, if you can actually find physical gold — gold inventories at stores are rapidly depleting. All of this happened well before the international price started to move up because of the election results coming out of the US.

Last night (8th November 2016), India’s government banned the use of Rs 500 (~$7.50) and Rs 1,000 ($15) banknotes. This pretty much made most currency-in-use illegal. Banks and ATMs are closed today. The government believes that doing this will help eradicate corruption and push counterfeit money out of circulation. According to the Indian government, the counterfeit money tends to come from Pakistan and helps finance terrorism.

My first instinct when I heard the news was that people would be on the streets this morning. There would be riots and the Indian Prime Minister, Narendra Modi, would be unceremoniously thrown out. Despite being a huge critic of him, I thought he at least had the spine to take bold action, however erroneous it might have been.

I am sometimes too optimistic about India and expect too much goodness from Indians. And I was wrong.

In the morning no opposition against the government was in sight. But there was some animosity detectable between people. Forgetful that they had lined up until late into the night yesterday trying to get cash out of ATMs before midnight, had fought at gas-stations to get their gas tanks filled, and had suddenly been trapped with unusable currency, people exchanged congratulations on what Modi had done.

Indian prime minister Narendra Modi - Photo via news18.com
Indian prime minister Narendra Modi - Photo via news18.com

What Modi had done — contrary to what I initially thought — wasn’t a bold move. It was a populist move, designed to please the 98% who do not save. While they are really driven by envy, these 98% are putting on a brave face, celebrating the alleged defeat of corruption. To them the fights of yesterday — at gas stations and elsewhere — and the loss of trust in their fellow citizens is merely collateral damage.

Fresh Avenues for Corruption Immediately Open Up

Those who find themselves stuck with high denomination bills today, must accept  as little as Rs 700 in usable currency for every Rs 1000 of banned currency.

At least theoretically, people can still use the otherwise banned bills at hospitals, gas stations, pharmaceutical shops, and train stations. As one would expect in India, these places have been converted into corrupt currency-exchange shops as of today. Some well-connected people are prepaying for their medical treatment.

But for most legitimate uses, none of these organizations are accepting the otherwise banned instruments. Why should they, when they can force customers to pay in the still-legal currency and then buy the banned instruments for Rs 700 for every Rs 1000 in face value, making a neat 43% extra profit without doing anything?

In India, a country not driven by morals or reason, almost everyone will exploit an opportunity to make an extra buck, however unethical it might be. Those who look deeper, understand that corruption in public life comes from ingrained corruption in India’s society and culture. If one had to make an effort to remove corruption this is where one should start.

1,000 rupee banknotes – worth 700 rupees each today, available from the newest entrants into the money-changer business. Unfortunately, their business model is fraudulent; it sure seems a strange way to “fight corruption”.

1,000 rupee banknotes – worth 700 rupees each today, available from the newest entrants into the money-changer business. Unfortunately, their business model is fraudulent; it sure seems a strange way to “fight corruption”. Photo credit: Reuters

Today, there is utter chaos in the market, with only the spontaneously erupted black market available to bypass the ban — most people simply don’t have anything else but the banned currency bills. Some are booking train tickets for  future rides and are subsequently canceling them  — they can use the banned currency to buy the tickets and can then get legal currency back after ticket-cancellation charges. This is costing people a lot of time, but it is the only way they can stay afloat and buy food. Others are taking different measures, equally desperate.

By any sane person’s reckoning, corruption has skyrocketed for the moment. So has gold. Those who run businesses have lost whatever remnant of trust in the government they still had. In recent months several businessmen have confessed to me that they are closing down, because the state has become increasingly heavy-handed and bureaucratic. Contrary to what the World Bank and IMF are saying, India is suffering economically. Its institutions are crumbling. And India is on the path to becoming another banana republic.

Within a few days, assuming this issue is handled appropriately — which it won’t be — most people with a certain amount of banned currency will be able to deposit it at banks, although tied to withdrawal limits. The banking system will stay partly frozen. After the banks open tomorrow, I expect to see riot-like scenes outside bank branch offices for a few weeks.

Huge chaos in the Indian economy should be expected to continue — as India’s government is simply incapable of bringing liquidity back any time soon. Businessmen will waste their time dealing with this nonsensical event, instead of investing and creating wealth. India simply continues to do more and more of what makes it an uneconomical and wasteful place to invest in.

Civil servants are already finding ways around the cash shortage problem… Cartoon by Ross
Civil servants are already finding ways around the cash shortage problem…Cartoon by Ross

Will the Plan Succeed in Reducing Corruption?

But will this eventually lead to a reduction in corruption?  Let us use the gold market as an example to understand how the Indian economy operates.  Any import of gold is subject to a cumulative tax of about 11%. The retail price of gold should be around 111% of the international price. Ironically, it mostly sells for 105% of the international price. Putting it simply, any law-abiding businessman must lose this 6% differential, ensuring his bankruptcy.

In reality most of the gold entering India is brought in by smugglers. These smugglers are happy to pass on almost half of their profit to consumers, while at the same time paying bribes to the Indian army, customs officials, other bureaucrats and politicians. If one wants to run a gold business, one must use smuggled gold if one wants to be competitive.

A shop selling gold jewelry in India - Photo via thehindubusinessline
A shop selling gold jewelry in India - Photo via the Hindu Businessline

Virtually all businesses in India have to be run this way. Without paying bribes, no business has a hope of succeeding in India. Corruption is in the blood of India and is not easy to get rid of, even if by sheer luck India finds good political leaders one day.

Corruption is so omnipresent in India that you don’t really have to look for it. It is always there. What Modi is doing is merely political theater to fool the gullible. His decision to ban cash currency is actually proof that he has utterly failed to achieve any meaningful change in India.

I have yet to meet a public servant in India who does not ask for a bribe. During Modi’s reign, not only corruption has gone up, the state has become extremely heavy-handed. As what is happening today shows that the government’s anti-corruption measures themselves are ironically leading to a huge increase in corruption.

PUnsuccessful Google search in India… - Cartoon by Thommy

Unsuccessful Google search in India… - Cartoon by Thommy

Conclusion - Part 1

Unfortunately, India’s degradation will not stop. Indians have become extremely nationalistic over the last two decades. They are now very easy to herd around. Under the color of nationalism they can be made to accept anything –  of course, only as long as the victim is someone else. The currency issue of today affects maybe 2% of the entrepreneurial population of India, so the remaining 98% can claim higher moral ground for themselves. The reality is that without these 2%, India could rapidly become a carbon copy of Idi Amin’s Uganda.

What India needs is not a focus on the removal of corruption, but the removal of regulations and restrictions on wealth-creation. For now the state is doing exactly the opposite, as it has in the past. Most importantly, this poison of totalitarianism comes from the extremely irrational society of India - in which corruption is entrenched.

There is no escape for the Indian economy. And in the negative-yielding economy, those who save have no choice but to buy gold, even at $2,294 per ounce.

 

PART 2

Chaos in the Wake of the Ban

Part 1 above covered what happened in the first two days after India’s government made Rs 500 (~$7.50) and Rs 1,000 (~$15) banknotes illegal. They can now only be converted to Rs 100 (~$1.50) or lower denomination notes, at bank branches or post offices. Banks were closed the first day after the decision.

What follows is the crux of what has happened over the subsequent four days.

India’s prime minister Nahendra Modi, author of the recent overnight currency ban Photo credit: Indiatimes.com
India’s prime minister Nahendra Modi, author of the recent overnight currency ban
Photo credit: Indiatimes.com

Today India is on the verge of a major social-political crisis, unless either the government backs off from the decision of banning the currency or some real magic happens. There is chaos in the streets and daily life is slowly but surely coming to a full halt.

What Modi did was not only heavy-handed, hugely arrogant, and of no value, it has been very badly implemented to boot — as everything in India always is — and carries the real potential of escalating and snowballing into something horrific. They could have seen that this was not going to end well by simply using primary school math.

Modi, Nationalism, and the Public School-Indoctrinated Middle Class

India today is like a cult under the influence of Narendra Modi — in which unlike in the past, not the poorest or uneducated citizens, but mostly members of the so-called educated middle class participate. Over the last two decades, people have been exposed to mass education, TV and nationalistic propaganda without being taught an iota of critical thinking skills.

In a society in which the concept of reason does not exist, this has made these people receptive to any kind of propaganda with a nationalistic or Hindutva bent. (Hindutva = fanatical Hinduism, which is rapidly metastasizing).

To aggrandize his position, Modi ordered a lot of military-hardware that India cannot afford, escalated tensions with Pakistan, and conducted what was very likely a fake surgical strike inside Pakistan. This united Indians under the flag.

Now, the demonetization of the Rs 500 and Rs 1000 banknotes was tagged with nationalism, anti-corruption, and anti-terrorism. Simple-minded, slogan-susceptible persons were hardwired to accept an erroneous causality. Those who did not go along were made to be afraid of being called pro-terrorist elements.

Those in the middle class have taken what they deem to be the higher moral ground, for they have mostly avoided suffering from the demonetization. Lacking moral instincts — which is unfortunately the case with much of Indian society, given its deep-rooted irrationality and superstitions — they cannot see or feel the pain of those who are suffering, even if that suffering stares into their faces.

But events are in motion that will likely very soon lead to these salaried members of the middle class starting to feel the pain as well. Their instinctive trust in Modi is likely within weeks of coming crashing down, not because of reasoned argument, but because they will be facing similar problems as the ones the common man is now facing.

Conversion to the New Currency

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.

Day 1 of the banks opening. Poor, desperate people, whom the government treats like slaves or perhaps insects. Somehow these people have been brainwashed into thinking they live in a free country. My granddad kept photographs of British royalty on the walls of his office until his final days, for he had realized that the British had treated him much better.

Anyone who thinks that a country which wastes two hours of every citizen’s life to convert his own $60 can ever hope to be an economic power is drinking too much Kool-Aid and cannot do primary level math. Forget any possibility of removing unaccounted for money or reducing corruption, what Modi is doing is a recipe for the destruction of whatever legitimate economy there is.

That same afternoon, I went to the post office with a friend who wanted to get his money converted. After waiting a long time there, we found out that the post office had run out of cash. Since then most ATMs have had limited amounts of cash available and banks keep running out of cash as well.

The queues have continued to grow. People start lining up late into the night waiting for banks to open and still have to go back home with no cash. What started with two hours of queuing is becoming an endless slog now.

An endless queue to convert Rs 4,000 (USD 60). Will they actually go home with their new cash?

The Problems Go Much Deeper

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 – even if they learn how to do it, which is already a nigh insurmountable hurdle. Also, those who are old, disabled or sick have no choice but to suffer, for without personally visiting a bank branch office, one cannot convert one’s banknotes.

An old disabled woman struggling to get her money converted. One has to be utterly heartless not to feel angry about the situation.
An old disabled woman struggling to get her money converted. One has to be utterly heartless not to feel angry about the situation.

97% of the Indian economy is cash-based. With 88% of all outstanding currency no longer usable, 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, as his employer has no cash to pay his wages. His life is in utter chaos. He is not as smart as Modi -  despite the fact that Modi has no real life experience except as a bully and perhaps in his early days as a tea-seller at a train-station. He has no clue where his life is headed from here.

These people are going hungry, and some have begun to raid food shops. People are dying for lack of treatment at hospitals. Old people are dying in the endless queues. Some are killing themselves, as they are unable to comprehend the situation and simply don’t know what to do. There are now hundreds of such stories in the media.

Small businesses are in shambles, and many will probably never recover. The Hindu wedding season has just started and people are left with unusable banknotes. Their personal and family lives are now an utter disaster.

Desperate people raiding a supermarket

Lacking moral and rational anchors, and hence compassion, members of the salaried middle class are unperturbed. Their salaries get taxed and most of the bribes they are getting end up in gold or property investments. In their minds, poor people and small businesses don’t matter. In the hypocritical culture of India, as long as the middle class is not suffering - for the time being — they prefer to take what they believe to be the higher moral ground.

Why This Problem Will Get Much Worse

Let us do a few simple numbers… What has been made illegal comprises 88% of the monetary value of all currency notes in circulation. In an economy based primarily on cash, the liquidity of cash is the lifeline of the economy. This requires that 88% of the new currency be rapidly dispersed into the market.

The Indian government has absolutely no history of being able to entertain a project of this type or magnitude ever and after the British left, India’s institutions have continued to deteriorate, so hope is not an option. If they fail to issue enough new bills, the very limited supply of Rs 100 notes will disappear within a few days.

As any rational person has a tendency to store good money while using bad money in transactions, people will hide all newly released currency as well as Rs 100 banknotes until full liquidity is restored. The rich and the well-connected have already done what was needed.

A reminder of Gresham’s law for Modi:  “Bad money drives out good money.”

Those who have no need to convert their money as all their cash is already in the banking system (as is the case with the salaried middle class), which they think is making them look like a heroes in the eyes of Modi and is giving them a sense of moral superiority –  they are nothing but turkeys being groomed.

Banks are giving out a mere Rs 20,000 ($300) a week at best. Their lives will suffer and for all intents and purposes, their accounts are frozen. This is Cyprus ten times over –  they just haven’t realized it yet.

Whichever way one looks at the above numbers, India’s economy is going to start suffocating, within weeks, if not within days. And a serious political and social crisis will take place, which will eventually acquire a life of its own. That is when the as of yet unperturbed salaried middle class wakes up with pain.

As in any irrational system, it is not reason and morality that will have convinced them to scuttle their hypocrisy and limited vision, but the violence and pain that they themselves will suffer.

Corruption

Politicians and bureaucrats of course cannot be seen queuing at the banks. Many bank branches apparently had their cash secretly replaced by the now-illegal bills before the first day of reopening. While no more than two bills of Rs 2000 each should have been collected, those better connected apparently haven’t had a problem with this and have been shown showing off packets of the new currency they have. All this cash will do nothing but end up under mattresses, as it has in the past.

Politicians with too much corrupt money (now unusable currency notes), who could not convert it beforehand, are distributing it to villagers as loans. Villagers will take the risk with the tax department, including having to hand over a large portion of it as bribes.
Politicians with too much corrupt money (now unusable currency notes), who could not convert it beforehand, are distributing it to villagers as loans. Villagers will take the risk with the tax department, including having to hand over a large portion of it as bribes.

As I walk around, corruption is everywhere and has grown exponentially, not only in financial terms but worst of all, in terms of the humiliation and degradation Indians are suffering. And I don’t know how a humiliated, soulless person can be anything but corrupt.

In village after village people have stopped working, even if they had work, as they can now join the queues at the banks to convert other people’s banknotes for a commission. For many young people, this is a wise entrepreneurial decision, as they are making many times the money they would have otherwise made for now.

But they are being trained to make money from non-productive activities — not from wealth-creation, but from unnecessary problems created by the government. Are they being groomed for a corruption-free society? One has to be naive to respond affirmatively.

Sell your now illegal currency for a 20% discount, which young kids can then convert into legal money at the bank
Sell your now illegal currency for a 20% discount, which young kids can then convert into legal money at the bank

Fear of the tax authorities means that the level of bribes being offered has gone up. Random people can now impersonate tax officers and collect bribes. People are in the grip of a fear psychosis. Many are emptying their bank deposit boxes, which means that crime will inevitably increase in coming days.

People are constantly worrying about what Modi’s next knee-jerk act might be and how to protect themselves against it.  A police state is knocking at the doors.

A receptive environment has been created in which all kinds of rumors are taking wing. Today, salt is selling for Rs 400 ($6) per kilogram, as rumors have been  making the rounds that it is about to disappear. This of course creates a situation in which it will actually disappear. The same is happening with sugar. The largely irrational masses are eagerly devouring a great many random rumors.

Lesson for Modi: Never, ever destabilize a society that works through conventions rather than reason, for it has no way to return to a normal state of affairs without a huge amount of pain and violence. Simply look at neighboring countries in order to understand this.

Chronic fear is slowly overtaking the mood of Indians, particularly those who run businesses. They have not only completely lost their trust in the government, but the tax department has been raiding people’s premises to scare those who are trying to salvage what they have.

They have stopped worrying about creating value. Everyone is talking about what to do with the banned banknotes, for even if they are fully accounted for, people fear that the increasingly rapacious tax authorities will make trouble anyway.

Uncertainty has gripped the populace. Not everyone is capable of grasping the situation and dealing with it.

People are now converting whatever they can into gold, silver, and mostly for the first time into the US dollar and other foreign currencies as well, all of which are trading at huge premiums. Money is also moving out of the country. Gold has shot up to as much as $2,800 per ounce, if you can find it.

Lesson for Modi: The reason people trust Switzerland is because it has hundreds of years of history of protecting private property. Singapore has done an equally good job, but it still lags behind Switzerland, because trust requires a very, very long history of institutional honesty and integrity. India is back to level zero for now. When future generations look back, they will see the current demonetization as the worst event in the history of post-colonial India.

Finally, the new bills have actually worsened the counterfeiting problem they were supposed to solve. People do not have any experience with what the new banknotes look like. Within a mere three days, counterfeits are already in circulation. Contrary to the government’s claims, the new bills are not any more sophisticated than the old ones and are made of simple paper.

A mere three days after the first release of the new banknotes, fake currency is already in circulation
A mere three days after the first release of the new banknotes, fake currency is already in circulation

Why Has the Government Miscalculated?

The most productive job Modi ever had was running a tea-shop at a railway station, which he then gave up to become a bully. He is a complete stranger to complex thought. He is simplistic in his thinking and does not understand the second-order consequences of his actions.

First he increased Hindu fanaticism, then he participated in collectivizing people using nationalism, then he created problems with Kashmir through his heavy-handedness.

He completely failed to liberalize the economy or remove corruption from public life, which is an almost impossible job. Quite ironically, Modi is making it possible for public servants to escape scrutiny, the very people who are the fountainhead of all corruption.

A simplistic mind is also arrogant. Such a mind — unable to conceive the possibility of unintended consequences — thinks all that has to be done is to issue orders and everything will fall in place. Alas, this may work when shooting innocent people in Kashmir and in other destructive ventures, but when it comes to institutionalizing social progress, a more complex and intelligent approach is needed.

All of India’s institutions have continued to deteriorate since the British have left. They are rotting away and are in shambles. India had some breathing space over the past three decades because of the free gifts of the internet and cheap telephony which it got from the West.

This has merely made Indian governments more rapacious and so-called educated Indians more arrogant. They collectively lack the capacity to improve India’s institutions after having destroyed them. Demonetization may well be the straw that will break the camel’s back by accelerating the deterioration of India’s institutions toward the point of breakdown, perhaps in weeks if not already in coming days.

Conclusion – What Can One Do?

As Indian, be a speculator – even if the government does not like it and will blame you for all ills. Try to keep as much of your money in cash, in Rs 100 notes. Rs 2,000 notes have no value when you go shopping for groceries. Keep a supply of water and dried food sufficient for a few months’ needs.

Cash is disappearing and even before that the economy was stumbling. It might take just one more small domino — more strain on liquidity — to bring about systemic problems in the economy that could bring crucial transactions, businesses and supply lines to a halt.

If systemic violence spreads, everything will be complicated further. Think of Zimbabwe. It pays to be prepared, particularly when we are ruled by zombies.

Image captions by PT. Photos and videos by courtesy of Jayant Bhandari.

Jayant Bhandari grew up in India. He advises institutional investors on investing in the junior mining industry. He writes on political, economic and cultural issues for several publications. He is a contributing editor of the Liberty magazine. He runs a yearly seminar in Vancouver titled Capitalism & Morality.