What demonetization means for us
By: Ali Javed
Tags: Politics, Demonetization, Articles, Economics, Banking

There have been many things that have disappointed me when reflecting upon the actions of human beings as a whole, but there is nothing more disappointing than watching more than 95% of the population as de facto slaves of the established order. We have comforted ourselves in the idea that the wrongdoings have existed from the beginning of civilization and are thus a natural and integral part of our society. We tell ourselves that history proves the dominance of few over many, what right, power or chance do we have against the order of the mighty. We are comfortable with the Utopia of the few but not with the idea of Utopia for many. Is it not true that for the richest 1%, the present order is Utopian, as they have to expend the least to get the most out of the rest of the humanity. But yet again we prove to be the slaves of the system we so much suffer from that we have become incapable of understanding the schemes of the existing order. What is more unfortunate than the slavery of the mind? A body can be freed from the enslavement by the other, but how does one free himself from the captivity of his own mind. The dogmas that it has accepted as truth, how can he free himself from those dogmas, when he does not even realize that he is the victim of his own dogmas. People tell me that I am negative, maybe pessimist, more favorably critical of everything I come across. But I find it the false optimism of the masses that overshadows what can really be termed as optimism. This false optimism based on the information provided by the ruling classes is responsible for the majority of the problems all of us face.We are living in a world where nearly 1/2 of the its population — more than 3 billion people — live on less than $2.50 a day. More than 1.3 billion live in extreme poverty — less than $1.25 a day. Where 1 billion children worldwide are living in poverty. According to UNICEF, 22,000 children die each day due to poverty. Where 805 million people worldwide do not have enough food to eat. Where more than 750 million people lack adequate access to clean drinking water. Diarrhea caused by inadequate drinking water, sanitation, and hand hygiene kills an estimated 842,000 people every year globally, or approximately 2,300 people per day. [1] In India, In 2011, less than 22 percent of Indians lived under the global poverty line.[2]. More than 50% of the world population still suffers from the backwardness that has engulfed humanity from centuries. What greater travesty than the impotence of the nation states, existing on the principle of serving their citizens, exploiting the same citizens for their unending desires.

One of the recent manifestations of this psychology of being deceived by the ruling classes became evident in the policy of the present government to demonetize the 500 and 1000 currency notes. The people were told that the policy was being initiated in order to destroy the flow of black money in the economy while at the same time rendering shadow banking, supporting illegal activities throughout the country, disabled due to the declaration of the intended tender illegal for transaction and other monetary purposes. I had on the very day after a few minutes of PM Modi’s speech written a short intuitive criticism of the sudden initiation of the policy. To my surprise all the four points I had made are now visible country wide. And not to my surprise, not one of my fellow students criticized the policy initiative as something which will adversely affect them at its outset. Even now they cling to lies sold to them by their revered leader. I said to myself, “How could I expect something that is almost impossible in present state of affairs throughout the World, where we topple one party of oppressing elites in favor of the other party of equally oppressing `elites.” What I have realized is that we as a majority of the subjects of the established system are fundamentally incapable of critical analysis. This is because we have never trained our faculty of critique or more suitably we have never been taught to do so. In cognitive neuroscience there is a very fundamental principle often cited with respect to brain neurons — You either use it or you lose it [3]. If an individual does not use one of the faculties of brain, he will be unable to call upon it when the situation requires for. Simply stated — One learns from practicing. Similarly, brain requires practice of its own. The practice of the faculty of criticism. But I am afraid we are only taught to solve pre-established solutions without ever being allowed to find one of our own. I was disappointed in my colleagues who could not without the assistance of anybody else do simple money market equilibrium analysis of the policy implications at hand. After a few days when many have already written articles about the problems associated with the existing policy, everybody has started assuming them to be obvious. What worst crisis than the crisis of the intellect? Even this will offend them because they have created for themselves elaborate castles where they have erected for themselves pseudo-intellectual pillars and feel proud seeing their image reflecting on them. What they have assumed to be the pillars of intellect are unfortunately the pillars of monotonous labor. The troubling part is that we are trading originality with efficiency at a mass scale.

Immediate Effects on Economy

I had argued in my previous article that due to the reduction in supply of money in the economy, equilibrium in the market will settle at a lower level than the market had presently allowed. This will decrease nominal levels of production while real production will remain the same. The GDP will fall in the short run. During the past week we have witnessed this happening all around the country. Markets are shut down because consumers do not have the cash to buy the products and the producers lack the cash to pay back the remaining amount to the consumers. What would one expect when 15% of the currency notes are rendered useless in the economy which makes 86% of the total value of the money supply. Essentially, the government has cut 86% of the value of money supply and replacing it with a much slower rate than is needed to protect the economy from collapsing. Although the money can be exchanged at banks, but the limit to the withdrawal of cash has made the transition extremely difficult. The economy at this point of time is bleeding. Unfortunately, the so called intellectual class is unable to feel the pains of the people dependent upon their analysis and guidance. Either they are incapable of understanding the real damages caused or they benefit from such damages. More than 30 people have died because of sudden demonetization. Sick people who had to stand in the ATM queues and people who did not have enough cash to sustain themselves for a day among others. If this many deaths would have been the result of a terrorist attack, media would have covered the story with an overly nationalist zeal. But that zeal is completely absent when the attack is from within the borders, within the system.

Demonetization has practically destroyed the economy. Markets are shut due to the lack of liquid currency which is the preferred mode of payment in most Indian markets. According to an RBI note from March this year, only 53% of Indians have bank accounts. For all practical purposes the other half seems to be doomed. But PM Modi would not as much recognize the real problems caused to the economy by his under calculated move as most would say. He is too proud to be held accountable for his inefficiency. He should tell the reason to the public for introducing a higher denomination note. Is it not true that the introduction of a 2000 rupee note will make it easier for the black money to be held as it will require half the space for keeping it. It appears 2000 rupee note has a special purpose for helping the people accumulate back money. If not, there was no reason to introduce it. Only 500 rupee notes should have been reintroduced. But Modi will not answer these questions as they will only unveil his treacherous plans if answered.

Modi should also answer the loss of wealth that has occurred due to people buying goods for prices more than the market prices. Gold was sold as high as Rs 90000 per 10 grams. As the gold prices are resettling more than half of the value of the gold is lost. People are in the end left with less money than they initially had.

Benefits to the Banking System and the Super-rich

One of the other aspects I had discussed was the choice of payment that will be promoted in the near future. I had suggested that online transactions will be preferred by the government. All the newspapers were covered with advertisements from PayTM and other online payment services the very next day. It felt as if their heartfelt desire had been fulfilled and the policy was especially designed to benefit them. Some would even go at lengths to say that it was designed for a second banking revolution where banks will have a much greater role to play than it does today. When an economy is transitioned towards a cashless economy, more and more high powered currency is held in the banks. Combined by the slab in daily and weekly withdrawals from the banks the result is that banks are practically forcefully holding public money. This means that these banks will have more money to loan out. Unfortunately the banks are much more favorable towards the business elites than they are towards common men. This inherent skewness forces people like me to have a suspicion towards the banking sector when we know that they are suffering from bad loans given out to the wealth hungry business elites like Ambanis and Adanis. Jahangir S. Pocha in his article ‘It’s time to talk about the bad loans scam’ writes

“A staggering Rs 2.5 lakh crore of public money has been lost by India’s public sector banks. The extent of these “bad loans” is greater than the loss to the exchequer from the 2G scam (Rs 1.76 lakh crore) or Coalgate (Rs 1.86 lakh crore). Yet, no one is talking about this. Worse, the bad loans scam is continuing to unfold. Another Rs 75,000 crore will disappear under the innocuous entry of “bad debts” this year, says rating agency Icra. With that, 5% of the loans made by Indian banks will have gone bad. In layman’s terms, this means the balance sheets of most public sector banks are in as much of a shambles as their branch offices.” [4]

In another Indian Express article George Mathew wrote

“Banks, which are racing to clean up their balance sheets have come out with a whopping 96 per cent jump in non-performing assets (NPAs), or loans which remain overdue for a period of more than 90 days, to Rs 6,29,774 crore as of June 2016 as against Rs 3,20,553 crore in the same period last year. The sharp rise follows the Reserve Bank instruction to banks to classify around 130 stressed accounts as NPAs and make adequate provisioning for them.” [5]

Clearly the state banks are suffering from the crisis of their own. To escape the self-created crisis demonetization was their best bet. All the new replacement currency is flowing back to the economy through the commercial banks. Due to the limit on withdrawal money stays in the banks for a longer period of time than would have otherwise. This money is available to the banks for loaning out for short terms. Simply stating, the loans will be extended to the same people who are responsible for the bad loans of the banks, expecting them to recover the old loans too through their profitable investments. The risk being taken is greater than they can ever manage. If the new loans also go bad for some unconceived reason, the economy will plunge into a recession.

It is the blind public blinded by their trust on the people unworthy of trust who become the instrument of their own destruction. What was being planned by diminishing the supply of money in the market and accumulating them in the banks is far from the understanding of a common man. How would they know? They do not understand how banks and their systems really work. They are only led to believe that banks are the safest haven for their money when in reality they have been responsible for the worst crises in the human history.

Black Money Vs Black Wealth

What is being targeted through demonetization is estimated to be only 6% of the total black money. So much trouble for accounting only 6% of the black money seems to be impractical for all intended purposes especially when the real black money exists in the hands of a few billionaires the government is happy to be serving [6]. They do not keep their money in the form of cash stashed away in some basement of an abandoned building. They keep them in the form of precious metals, offshore accounts, foreign currency, land and other intangible assets. These greedy billionaires then take up loans against these assets and thus get more money for investment in their activities. I believe this is the really black money in the economy which I call ‘Black Wealth’. The black money which the government has targeted will only hurt the economy more. This money used to flow back in the economy in one way or the other without depleting the overall welfare of the state. On the other hand, the money that the banks create against the black wealth of the rich transfers the welfare from the poor to the rich. This is because

The holders of black wealth already hold the black money in the form of intangible assets which exits the economy. They then take up loans against those assets effectively crowding out the currency available for the common man.

The two activities combined causes the wealth to transfer from the rich to the poor that they would not have owned otherwise. This newly created money will then be used by the rich elite in various commercial projects. This further multiplies their wealth. They invest their money when the market prices are low. Due to the increase in demand, other people soon follow, thus buying the same assets for a higher value. A vicious circle is initiated which at every node, every economic transaction causes the wealth to trickle up. Is this not plutocracy? We were only fed false dreams of democracy when what we were actually receiving was a renovated form of slavery which we willingly accepted. What greater travesty than the acceptance of oppression? But speaking the truth only yields contempt and harsh remarks from the oppressed. If we want to fight against corruption and oppression, we will first have to fight against the dogmas of the oppressed. Dogmas that have been cleverly fed by the oppressing elites and their governments. If we are able to understand the machinations of the economic devils lurking in the shadows, we will be able to establish justice in the society. In a collection of brilliant essays ranging over a number of disciplines, Hume reflects on the key aspect of the state — why people obey:

“Nothing appears more surprizing to those, who consider human affairs with a philosophical eye, than the easiness with which the many are governed by the few; and the implicit submission, with which men resign their own sentiments and passions to those of their rulers. When we enquire by what means this wonder is effected, we shall find, that, as Force is always on the side of the governed, the governors have nothing to support them but opinion. It is therefore, on opinion only that government is founded; and this maxim extends to the most despotic and most military governments, as well as to the most free and most popular. The soldan of Egypt, or the emperor of Rome, might drive his harmless subjects, like brute beasts, against their sentiments and inclination: But he must, at least, have led his mamalukes, or prætorian bands, like men, by their opinion.” [7]

It is the opinion of the masses that needs to be swayed in favor of the masses than in the favor of the few. It should be made clear to the Prime Minister that if he is serious about his conviction of rooting out the problem of black money, he should first target his friends who are its biggest hoarders. Black wealth rather than black money should be the target of the government.

Demonetization as a policy to target black money has more adverse effects than positive ones. It seems as though these effects were kept in mind when planning it. The result will be the concentration of more power and wealth in the hands of the few. If welfare of common man is the final goal, then Black Wealth rather than Black money should be targeted.