What do you think of Indian Government's decision to demonetize 500, 1000 notes?
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Re-register your money NOW (or within 50 days) or it's worthless.
It's probably one of the most ballsy brilliant plans in any modern economy pulled off.
The short turnover term makes sure that you can't really transform that money into gold or bitcoin or whatever, because who the hell is going to take the fall
So the question is, what will the exchange rate be?
They just pushed a reset switch on the parallel economy. But its not something that won't grow up again. This step was necessary. After this, they will have to bring down taxes for effectively preventing a parallel economy. And sometime in the future, something like a max-100Rs note will push users to use digital payments everywhere.
I think this is a safe experiment towards removing high-value currency notes. Won't be surprised if 2000 notes are recalled after some time and those might have been introduced just for convenience.
Its also a veiled attack on political parties, including his own (and they can't even complain)
Maybe even bait (no note between 500 and 2000) for new black money, that you can cut again some time later.
This move is going to hurt the labor class the most. A significant percentage of those don't have bank accounts, and I'm not sure how convenient would it be for them to exchange the illegal currency.
A majority of the those having tons of black money already stash it in safe havens abroad. A lot invest it in real estate.
The suggested reason for the move is not at all convincing and the method isn't well-thought out either.
As for the labor class, I just bought vegetables from poor vendors/farmers and they were all praising this step, even the illiterate understand how this is good for them in the long run.
But the mood might not be very bright in business communities(And there is chance you talked to them).
Remember in India only 3% of the population pay taxes (Yea 3%, really shocking. Many small and medium businesses don't file tax. This move will ultimately make them move cash into the bank and could later bring them into tax bracket.
Edit: reference for % population paying taxes http://bit.ly/2fDR7by
I talked to a number of lower income small tradesmen, maids, drivers, security guards etc. today as I went to work today and everyone was uniformly very supportive of the move and willing to make adjustments required.
It is quite customary in Europe, and frankly everywhere on the planet, for tradesmen, shopkeepers, ... to not register 100% of their receipts as income. That way they can increase their income by not paying tax on a decent part of it. Keep in mind that these people would have highly variable incomes, would have unpaid invoices, ... all sorts of things that can't really be checked.
It's not like we're talking bribery and drugs money here. Of course that's exactly what the government would like you to think. In practice the purpose of this is to give the government greater and more direct control over the economy.
Europe has done the same [1], for ostensibly the same reason, but fact of the matter is that it's being done to prevent people from avoiding the extra tax the ECB wants to create : negative interest rates [2]. Right now Europeans can keep money outside of the banking system in large quantities if they so desire. Killing the large notes takes this right away, not by law, but in practice.
The problems are twofold. Firstly are practical problems. Eliminating cash, either totally or simply for larger transactions introduces costs (for small time merchants, 3-5% would be typical in Europe), clearing risks (just because a bank transfer happens or is confirmed does not mean the bank can't take the money back, most merchants would treat this as an extra 2-20% cost depending on the business they're in), extraneous risks (bank accounts can be blocked by various means, the banks themselves, the IRS, or simple stupidity ... without regard to how it affects their owners. You can lose access to any bank account and you have little immediate recourse). And of course, governments don't want to help anyone out with these problems, they're merely interested in imposing themselves as having total control over all money, not just their own.
Secondly the moral issue, or the slippery slope if you wish. Do we want to give governments this power ? Do you want governments to be able to prove, for instance, that you gamble online (can it be used in divorce cases to prove you can't be trusted with money, for instance ?), or that you watch porn, or have weird hotel bookings, or ... Do we want the IRS to simply have the power to do a big data search for anyone having transactions of 3x their monthly income or more and block them ? Because that's the power that's being handed to them by these sorts of measures. They will use this power, even if probably not right now.
There's related issues. Does the central bank have the power to do this ? In practice it does, but why isn't this being discussed in parliament and publicly debated ?
[1] http://www.nytimes.com/2016/05/05/business/international/ecb... [2] https://www.sovereignman.com/trends/it-finally-happened-500-...
Except northern Europe (although not Belgium). But yeah, it's pretty common.
>fact of the matter is that it's being done to prevent people from avoiding the extra tax the ECB wants to create : negative interest rates [2].
You can avoid that tax by keeping your money in anything but money - which is what the ECB wants. Just buy an index fund. That's what you should do anyway.
Whichever way you do that, it involves extra risk. Central banks/governments forcing people to take more risk ... well let's put it this way ... we all know what comes next.
2 reasons. Firstly there's a reason they're doing this, so there's already a problem. By definition that would be a problem that puts asset prices at risk. So it means that risks on most assets are higher than generally believed (because the government is pushing the measure of that risk - interest rates - forcibly down, you are bound to underestimate risk as a result). What if the reason behind some of those risks surfaces ?
One of the things the government is doing here is forcing the banks/funds/... to take comparatively massive risks with your pension. The results are already surfacing, but they're getting worse - fast. And the government will have to bail these out, as not doing that will kill the livelihood of tens of millions of people, which will not come without huge consequences.
Second reason is, that even if there's not already a disastrous problem, this takes the capital preservation + profit motive away from markets and (partially) replaces it with pleasing the government/central banks. Central control has always failed, and this next attempt will be no different. The nail factory in Soviet Russia story seems apt here, and is obviously a massive oversimplification, but the basic problem is there.
What the banks would like people to do is invest in productive capacity and consumer goods; this feeds the "virtuous circle" of employment and economic growth. Investing in businesses would have a normal, uncorrelated risk profile.
What I think people are struggling with is the prospect of big, correlated, exogenous risks like global warming and the collapse of global trade into protectionism. If that kind of thing happens the total amount of value in the economy goes down - so who bears that risk? Do we try to distribute it equally, or put it all on governments which may not be able to bear that kind of systemic collapse? Or do we let the capital-holding class protect themselves while real wages collapse and the risk falls on those least able to bear it?
"black money" = Money that has been tax evaded or received via illegal means. This is mostly kept in cash (in boxes, mattresses, hidden rooms) or converted to gold or bitcoins or foreign currency(via currency gray/black market)
Example1: You earned 100 and were supposed to pay 20% tax. So the post-tax amount is 80.
If you paid the tax, 80 is white money and 20 was paid to govt.
If you did not pay the tax, you save 20 but entire 100 is your black money.
Example 2: Black money - could be money received by accepting a bribe.
Under the rule, anyone who is paying their taxes and have done things legally, have nothing to worry about. They can submit all the 500, 1000 rupee bills directly in their account (no limit), if they've paid taxes on it. If they haven't paid taxes on it, they will be taxed in the current financial year but then government will also have the liberty to ask the source of your income which can land you in trouble if you're unable to show a legit source.
I just don't really see that it would have such big impact. Sure, 500 E in 100 euro bills takes up 5 times more space (thickness is the same), which makes it harder to transport and easier to find. But still.
Just for the sake of curiosity, the height of 1 Million Euros:
100 Euro notes = 1 meter
500 Euro notes = 20 cm
(Dimensions are 147 * 82 * 1 vs 160 * 82 * 1 mm, so not that much difference)
I'm just not sure if that would actually have a meaningful impact.
There have been quite a few exceptions that have come in a little late, such as making all tolls free (toll gates started refusing to give change) and allowing the usage of the old bills on public transportation, at hospitals, at fuel stations, etc.
The big issue is the implementation. Are they going to be able to fully carry out the plan?
I find Modi giving terrorism as one of excuses, very disingenuous.
They might put RFID in them, but it won't be the "tracking chip" people imagine.
This is the reason why low value notes eventually end up as coins which are cheaper to manufacture.
Embedding an electronic tracker into a Rs. 500 or even a Rs. 2000 note would cost more than those amounts unless the Indian Government decides to outsource the currency printing to some place like China!
Of course it will start again, hopefully we push for a cashless economy before that becomes a problem;