You’ve probably all heard that Indian Prime Minister Modi ordered two of the most common high denomination bills (500 and 1,000 rupee) out of circulation and that they would no longer be legal tender after only a few days.
India’s economy is, well, not modern. Most people do not have or use credit cards. Only 53 percent have a bank account, and cash is still preferred for transactions. 43 percent of those who have a bank hadn’t used their bank account in the last year.
India also has a vast corruption problem and huge black and grey markets. The corruption makes it very difficult to fix problems, whether they be removing pollution from the Ganges, building enough toilets so people stop shitting in the streets, or anything else.
The black money (money never taxed or declared) market is supposed to comprise about 23 to 26 percent of the Indian economy. I don’t know if that’s a low estimate (I doubt it’s high).
Black money and corruption go hand-in-hand, for obvious reasons: You can’t declare the bribes you receive or gave, at least not with some way of laundering them first.
So cleaning up black money should help clean up corruption.
But many Indians live in the black money economy. It’s just that simple. Someone gives them money, they spend it, no one is declaring it.
De-monetization isn’t just about a couple of bills, it’s about pushing people towards electronic money, which can be easily tracked. There have even been suggestions of forcing beggars to use electronic money.
I regard this push to de-monetization as fundamentally insane in an economy like India’s, and it screams rentism. Yeah, black money can’t be taxed, but it also isn’t “bank-fee’d” away. When everything is electronic through banks (this isn’t bitcoin), then transaction fees and so on eat away at it. Every hand it goes through can make a little stick, and only very strict law can make it not happen.
It’s free money from the point of intermediaries; they have to do very little to get it once the system is set up.
It’s leeching. Nearly pure rentism.
I do not support universal e-cash for this reason. It is to easy to do rentism, and rentism (transaction taxes and fees) kills monetary velocity and kills economies. The move to transaction taxes (GST) is one of the things that took the oomph out of Western economies, and it was designed to do so, to reduce inflation by reducing spending.
Despite our era’s absolutely crazed fixation with inflation, there is NO evidence that inflation from about 10 percent a year on down does ANY harm to the economy in and of itself and there is plenty of evidence that moderate levels of inflation have a myriad of good effects on the economy.
Yes, people who earned their money in the past hate inflation. Too bad, past contributions should be discounted, and proper government policy can easily ensure that people are still taken care of and have enough. Crippling the economy so that people who earned their money years and years ago retain power long past their period of productive contribution is economic malpractice.
Give people who can’t/shouldn’t/don’t work a decent income through a pension/welfare plan or even a basic income system and get rid of all transaction taxes except for those where you deliberately want to slow down a particular type of economic activity, rather than all activity altogether. If it’s carbon you don’t want to see too much of, tax it. If oil inflation is the problem, figure out how to tax that, and so on.
Demonetization without very strict anti-rentism is a bad idea. India is a shitty country to try to demonetize due to its lack of technological infrastructure. It’s also not ideal, ironically, because of it is weak rule of law, vast corruption and huge inequality in both money and power.
India, in general, is far more of a clusterfuck than most understand, including many middle class Indians. Calories per capita are lower than they were 30 years ago, and most people are worse off than they were before neoliberal dogma took over.
Meanwhile, much Indian agriculture runs off of aquifers, and they are being depleted, leading to farmer suicides. Climate change is making the monsoons erratic, and it is causing problems with runoff from the Himalayas, which is to say, where northern India gets most of its water. Earlier this year, one of the source rivers for the Ganges was dry for weeks.
India is going to go pear-shaped. The question is when, but when it does, I expect hundreds of millions to die. The issue will be water, pure and simple, but India’s inability to deal with even basic problems like open defecation and pollution of the Ganges, means it literally cannot deal with longer term issues.
Reforms, which have, yes, created a robust middle class, have not improved the situation of most Indians. Yes, many stats say they have, but when I find out that calories/capita is down, I start thinking that GDP/capita is not measuring real welfare. It’s not like Indians were overfed 30 years ago.
I simply DO NOT believe many of the Panglossian statistics that people are using to say the world is the greatest ever. In many cases, I can’t prove it (and no, unless you have a 100k you want to give me, I’m not going to prove it), but I know, for example, that proverty stats in America are absolute bullshit: The poverty level has not kept up with increases in cost of living, especially in food, rent, and medicine. Not even close–and that’s using formal inflation statistics, which systematically understate price rises in various categories.
So, when the US stats are shit, and knowing what I know about how places like India and most sub-Saharan African countries run, and how incentives to show progress work for the people who measure this shit, I just do not believe a lot of the stats.
I think the world is in worse condition than many make out. I know India is. I’m now receiving information that China is as well (more on that at a later date, maybe).
So, shit is going to hit the fan, we are in worse shape than we think we are, we are strangling all growth rather than merely counterproductive growth, and we are lying to ourselves about the real shape of our countries and our world, and when we’re not lying about it, we’re ignoring it.
This is going to get ugly. Hundreds of millions in India. And the same in many other places.
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mistah charley, ph.d.
A few points, starting with the smallest first:
1)I had to go to Wikipedia to find out what you meant by “pear-shaped” in this context (their third sense, “failure”)- prior to that I was confused because I was thinking of “pear-shaped” in terms of an age distribution, or perhaps income – but you are being more metaphorical than that.
2)That things will get ugly, sooner or later, in one country or another, or several, or more or less everywhere at once, is certainly possible and in some places probable. Foresight and/or capability to prepare ahead of time are often lacking. One of the things I admire about the Mormons is that they explicitly require consideration of and preparation for dire scenarios – for example, every family is supposed to have on hand a year’s worth of food, and once a week they eat what they would be eating if they were living off of that stockpile.
3)Which brings me to my third point – one way of preparing for dire scenarios is making use of the “store of value” function of money – if my income is greater than my expenditure, and I have money in the bank, then not only can I use it for something I am “saving up for later” – such as buying a car for cash, instead of on the installment plan, which is something I have done more than once – but also I have it available for unexpected emergencies. Or perhaps expected emergencies, like reaching the end of my employable life and still needing/wanting to be able to pay for food and shelter and maybe even amenities of my own choice. Why should money I earned ten or twenty or fifty years ago, but didn’t spend then, be worth less now than it would have been had I used for a trip to Disneyland at the time? Is rewarding thrift the same as promoting rentism? Have I misunderstood you? Do you have reasons for thinking so which could be explained in this context?
Hugh
I agree. Indian demonetization looks more like a scheme than a plan. That is it screams not being thought through, as in, for example, why did no one consider what the consequences might be of abruptly unplugging a quarter or more of the Indian economy? To execute such a switch over would entail the creation of a huge amount of new financial infrastructure. This was not done. Moreover, as Ian notes, a key goal would be to avoid simply replacing one corrupt, exploitative system with another. In part, this might be done with something like a free postal bank. But this would probably still leave tens of millions with no real way to live in or operate in such a system. It might smoke out some low and middle level corruption, but India’s rich likely have already found ways to offshore money. And bribes and graft don’t have to involve just money. There is land, gold, goods, and services. Demonetization strikes me as a program dreamt up by an MBA to fight corruption. It looks great on paper and is a disaster when it meets the real world.
I would just add that Pakistan is even more of a basket case than India. Both are likely to become completely unstable, and both have nuclear weapons.
China has a two thousand year history of being rock solid until it fractures and splinters with little or no transition between the two states. In the last few years, it has had a succession of bubbles, most notably in real estate, commodities, and debt. It has continued to increase capacity in the face of a world economic slowdown as well as secular stagnation in most developed countries: the US, Europe, and Japan, i.e. its natural markets.
I have predicted for some time now that the world is going to destablize and that there will likely be a large die-off in the second half of the century. The motivating factors will be overpopulation, climate change, resource exhaustion, especially water and energy, and habitat and species loss. Corrupt rich and elites, weak and weakening civil institutions and civil society will stymie effective action. Just look at how ridiculous our ruling classes have become. In the US, we just had an insane election choosing between two steaming piles of shit. Europe is breaking up, and political leadership and vision are nowhere to be found. South Korea’s President just got impeached. Brazil is a free for all between competing crooks. Turkey’s Erdogan wants to set himself up as sultan which has put the country’s currency, and shortly its economy, in freefall. Putin is a thug. The Saudi autocrats are sitting on a powder keg and tossing matches.
In the past, the line used to be that there have always been corrupt politicians. There have always been countries on the edge or over it. So really the present is no different. Except this time, it is. In the past, there were also countervailing tendencies. Corruption and inequality would spark crusades against them. While some countries destablized, this was offset by increasing stablization elsewhere. The difference now is that even as the problems proliferate and worsen, we are not seeing any alternatives and counterbalancing forces.
V. Arnold
@ mistah charley, ph.d.
You make some very good points.
But, I would take it one step further; the future being strived for is one of zero cash, everywhere. This is just a first step.
People need to understand just what a store of value actually is; and it’s not cash (paper money) or coin of the realm (unless it’s gold or silver),
Think hard about this coming reality; your livelihood depends on it.
Gold and silver. Not diamonds, high quality watches, art work, or trendy crap.
It could also be tools; probably not power tools.
The stock market has gone insane, heading to 20,000 or more; why?
The fundamentals do not support this insanity; major warning; pay attention and prepare for the worst.
Things are moving far faster than anything I would have expected: A major paradigm shit at double time speed; be forewarned and prepare…
paul
Our Growth is what is destroying the biosphere.
We need less, or none of it.
Tom
@Hugh
You’re wrong about Turkey and Erdogan. Erdogan is increasing democracy and the new proposed constitution will allow parliament to remove the President from Office and override a Presidential Decree which is not possible under the current constitution.
Also the Turkish Economy is doing fine.
Ian Welsh
Money is control and it is permission. By buying things, or hiring people, you determine the shape of people’s lives, of society and so on.
The more money you have, the more of this you can do.
Money is gained (note I did not say earned) by doing what other people want done, who have money (or the ability to create money.)
The further in the past whatever it is that you did to gain that money is, the more it should (not always) be no longer related to what is happening today; the needs or wants of today. It certainly should not lose all value, just as the past does not lose all value, but it should not control the present and thus the future as much as stuff done today does.
You see this in its most extreme cases in things like the 19th century trusts, still operating today, or the recent study which found that those families who were rich in Medici Florence are still rich today.
The dead hand of the past must lose its grip on the present. Further in the past it is, the more it should lose that grip.
This matters most with intergenerational money (which should mostly be simply removed, beyond a simple domicile and a living allowance cushion, at most), but it also matters for work done by people still alive.
This may be worth a separate post, there’s more to it, like the conservation test (if a fence is down the middle of the road, you can remove it after you can tell me why it was put there), but that’s, I think, as much as I can go into in a comment.
There is also vast confusion, in many circles, about what money is: part of the problem is that money serves a number of purposes, of which “store of value” is only one. It’s a topic I’ve hit at angles a number of time, especially money as information and money as permission, but I’ve never hit it full on because so far it seems like more trouble than it’s worth due to the near fanatical devotion of MMT types to that particular theory of money.
Stirling S Newberry
It is not a local revolution, the US, the EU – both in whole and in parts – South Korea, Philippines. Exactly what percentage do you need to qualify it as a global revolution. N+x?
It may not go violent, but violence is a tertiary movement – there is no predicting when one person’s actions will blow up. Such as Serbia in 1914. Because the entire point is to keep it summary so that small actions which benefit a few people will work. The old generation will not do it, but now there is a new generation which is coming into their prime.
And they will react differently…
( on another note:
https://symbalitics.blogspot.com/2016/12/julia-naschtagelen.html
the next installment of Julia is up, as far as I can tell there is no picture of night figures by Nolade. he is an awful man, but great artist)
Effem
Seems to me high inflation is mostly a tool to enrich leveraged real estate owners. I’d rather not.
Stirling S Newberry
high inflation without compensation, the old formula in new guise. it is not the taking away, but the not giving back.
DMC
Ian’s not arguing for HIGH inflation, he’s arguing that the current obsession with ANY inflation in the teeth of an ongoing recession is counterproductive for those not sitting on great masses of capital. The stock market is going gangbusters, largely on the strength of stock buy-backs, so the economy superficially looks good, until you consider the record low labor participation rates, as opposed to the official unemployment rates that ignore vast swathes of the otherwise employable population.
different clue
If “rentism” in this article means the same thing as “self-appointed toll-gating”; would it be better to just say “self-appointed toll-gating” for clarity to people without the technical vocabulary even if it is clumsier?
Hugh
I’ve been analyzing Bureau of Labor Statistics jobs data for years, and I wanted to say that virtually none of the figures or terms mean what people think they mean or measure what people think they measure.
I think Tom’s last gig before the current one shoveling Erdogan hasbara was as the PR guy on the Titanic. The ship is fine just on an extended cruise. Let’s not exaggerate a couple of ice cubes tossed in the water.
Gaianne
Ian–
Thanks for bringing up India and the demonetization. I have seen only a few, very brief, media reports, a few stories about local troubles in particular industries, and Indian posters reassuring everyone that everything is fine and the demonetization makes sense. It feels like a media black-out.
Of course demonetization does not make sense. It is frankly astonishing that a national government would repudiate its own currency. Not that this never happens: After the First World War the French government, under the burden of the War debt, replaced old Francs with New Francs–and on fairly unfavorable terms, too. But, firstly, the French carried through and distributed the new currency, and secondly, faith and confidence in the government declined sharply, as it had to.
But the Indian government plainly had no real plan to replace the old notes. (Only a plan to plan) They are now rushing out new notes, late, and some of them are not even properly printed. Typical Indian incompetence? Maybe–but on such a scale that even that is hard to believe.
Everything we are told by the Indian government is bullshit. The new notes will discourage counterfeiting? Not if they are half-printed. At this point, what constitutes legal tender in India anyway? And what about the black money–can it really be extinguished like this?
Maybe black money can be extinguished, but only at the very lowest levels of commerce. Three decades ago, for a casual, individual shopper–which is what, as a tourist, I was–10 rupees was a typical, useful denomination. Nobody makes change, so you are always using small bills–many of them–and a 10 rupees note was a small bill. Now, decades later, the rupee has declined by a factor of five against the dollar, so my ten rupee note would now have to be replaced by a fifty. In that context, for a small businessman like the sort I was dealing with then, a 500 rupee note now is not a large bill–it may be the smallest bill he uses when dealing with suppliers!
The demonetization seems to be designed to destroy precisely the lower levels of business and the kinds of shops I was dealing with then. The few reports we have suggest this: Farmers who can’t ransom their seeds out of storage, weavers who cannot buy silk, clothes-makers who cannot buy cloth, and so on.
Of course, my first thought when hearing about the demonetization: “Time to switch your transactions to gold.” But I would have been too late: The rich have already done this, and the price of gold has now doubled. I gather the use of other currencies–such as dollars–is illegal, but I suppose people will start using them anyway.
So how does any of this make sense? The government’s claims are obviously bogus. From this side of two oceans we are expecting famine in 2017–I am, and I expect it will involve millions–and that is the best outcome, the scenerios get worse from there. So what is Modi’s plan?
The obvious plan involves, a large, private villa on the French Riviera. There are several ways Modi could be cashing out bigtime, right now. It would be a pretty big player seeking profit from the wrecking of the Indian economy, and that player would have to pay substantially for the services required to make it happen. That would be one plan.
Are there any, less obvious, plans?
–Gaianne
Steeleweed
“…people who earned their money in the past hate inflation. [and] retain power long past their period of productive contribution…”
I am perfectly capable of “productive contribution”. In fact, I could contribute far more than most of those currently working at my former profession, having had 50 years of cutting-edge experience and being one of the top people worldwide in the business. My Involuntary Retirement is attributable entirely to age discrimination, stemming from the fact that corporations can get services cheaper from younger people or those abroad living on cheaper economies. The services won’t be as good, but they will be ‘close enough for government work’ in their estimation.
I earned my pension and Social Security. Inflation has been manageable over the last 20 years, but that could change.
…retain power…
Just exactly what power do you attribute to me?
different clue
@Gaianne,
I offer the alternative hypothesis that Modi didn’t/ doesn’t have any plan at all. Or even a scheme. This is purely a big grand gesture by someone who thinks he will cement his grand historic fame by doing something really really big.
bruce wilder
“self-appointed toll-gating”
I’d prefer that to “rentism” myself, precisely because I do understand the technical term, economic rent, and do not regard its undiscriminating use as a pejorative to be wise or appropriate.
Bjornasson
Hi Ian,
I have been a recent reader of your work, and have immense appreciation for it. Even accounting for confirmation bias (I am very likely to already agree with what you write), I believe that the world is finally shedding the illusions that have kept many radical critiques of it at the margins. As someone from India studying in the States (for now), I have the exact same concerns that you point out.
India’s cities are horrible – they lack the infrastructure for the population and economic activity they have accumulated and the gap is only going to widen as rural labor emigration/urban poverty increases in the future. The amount of pollution, filth and traffic – combined with homelessness and slums – has only increased since the 1990 neoliberal reforms took hold. There is no understanding of ecology or limits to growth; people still dream of a new American middle class of 1.3 billion. At the same time, annual droughts afflict 300-400 million and half the working population toils on increasingly uneconomic farms.
I have been trying to convince my parents of this fact but they are too tied (understandably) to the work they have built up to realize that there is no reason for their current prosperity to continue for much longer in the future. This has given me reason to begin writing, especially on the political economy and energy contradictions of India.
I don’t intend to blog-whore, but feel free to delete this comment/ignore if you think otherwise, but I have written on India’s clusterfuck of an energy policy here: https://permanentsettlement.wordpress.com/2016/10/04/indias-contradictory-energy-policy/
and demonetization here: https://permanentsettlement.wordpress.com/2016/11/15/demonetization-too-much-too-soon/.
Thanks for writing so honestly and fearlessly about these issues. It is way beyond time that we started acknowledging the world for what it truly is, because our head-on collision with reality is imminent and we need to be prepared.
different clue
@Bruce Wilder,
Thank you for the kind words. I suggested “self-appointed toll-gating” because I really don’t understand “economic rent-seeking” myself. It is one of those professional terms of academic economist art that I have to struggle with every time I see it. As a reasonably bright layman, I would like a word or phrase to convey the meaning that fits this case. If you think my phrase indicates that I have understood the problem posed by sticky-fingered digital chokepoint tolltakers as indicated by the phrase I coined, then perhaps the next little job is to coin an easier shorter phrase or word for it.
By the way, Harvard economist Kenneth Rogoff has been agitating to make America cashless in stages. “Anti-corruption” and “anti-crime” and “tax collection” are his excuses. His obvious goal is to hold everybody and their munny hostage to the cyber-digital elite and the super-snooper spy-state tracking every digital cashless transaction. One wonders if he was giving advice to the Modi government. ( I lately heard him whining on a radio program about how the Modi government “did it wrong”. De-monetization can never fail. It can only be failed.)