Month: January 2017

Today, in 2017, we live in a world of constant flux. The greater recession that began in 2008 continues to plague the world economy, forcing governments to participate in unprecedented ‘Quantitative Easing (QE)’ to stabilize their economies and weaken their currencies. The stability bought with QE has come at an enormous price, as the amount of debt accumulated to keep markets from imploding is reaching crazy levels. The debt overhang will have to be dealt with at some point, and when it does, the government could seek out your savings to pay for it.

Some wise words from one of the world’s most successful International Men and speculators, Doug Casey:

“The day is coming when your local government may stop seeing you as a milk cow and start seeing you as a beef cow, and you want to have options before that day.”

In James Rickards’ new book, The Road to Ruin, Rickards refers to a freezing of the world’s financial system to quell the contagion of a future financial crisis. Sounds crazy? Well, it isn’t. Ask residents and bank account holders in Cyprus circa 2012. Their bank deposits became the cash used to bail-out their “too big to fail” banks. Bank accounts were frozen and 10% removed as a levy or ‘bail-in’ tax to the Cypriot banks, which were severely affected by the struggles of the Greek economy, the downgrading of Cypriot bond credit rating, and finally, exposure to an over-leveraged housing sector.

 

Modi’s War on Cash

In November of last year, the Indian government took a major step towards invoking more control over its people, with the removal of the 500 and 1000 rupee bank notes. To gain a better perspective on the situation in India, I corresponded with Mr. Jayant Bhandari, who knows firsthand the affects of this devastating move by the government.

For those unfamiliar with Bhandari, he has worked for U.S. Global Investors, Casey Research, and published his writing on a number of different platforms. Bhandari is very well respected in the resource sector community, and not only provides sound advice from an investment stand point, but also has a solid grasp of politics, the economy, and culture.

Bhandari now works independently and is continuously travelling the world looking for investment opportunities, primarily in the resource sector. Also, he runs a yearly seminar in Vancouver, entitled Capitalism and Morality, which is attended by resource sector heavy weights, Doug Casey and Rick Rule.

 

The Interview:

Brian: Mr. Bhandari, could you please give readers who are unfamiliar with India’s currency ban a few points on what has happened over the last 2 months since the ban of 500 and 1000 Rupee bank notes?

Jayant: On the night of 8th November 2016, Indian Prime Minister came on the TV to declare that these two highest denomination bank notes, equivalent to US$7.50 and US$15 respectively would no longer be legal tender. Their banning meant that 86% of the monetary value of all currency in circulation disappeared overnight. This created a major crisis in the country—people suddenly had no money. India is mostly a cash based economy. Without cash it was no longer possible for people transact. Money died that night.

When the banks opened, there were long lineups everywhere in the country. People were trying to convert their banned notes into smaller denomination notes, which were still legal tender. But banks did not have those. People wasted a huge amount of time lining up at banks. And then went home empty handed. Even if you could get hold of cash, the maximum allowed was Rs 4,000 (about US$60).

If businesses could not pay, they had to lay off people. If people could not buy, businesses suffered. India is an extremely poor country. A vast majority lives on daily earnings. They had no option but to start going hungry. Anything between 20% and 80% of the economic activity as a result might have come to a halt. Tens of millions of people were laid off.

Now, 50% of Indians have no bank account. So these people did not even have the option to deposit their cash. At least 150 people died in lineups. And then you can imagine how many died unheard and how many tens of millions suffered silently. The situation hasn’t really changed much even after these two months. The problem is that once you destroy the economy it is extremely difficult—almost impossible—to revive it.

 

Brian: The New York Times reports, “The ban is intended both to curb the flow of counterfeit money and to take aim at terrorist organizations that rely on unaccounted-for cash. It is also expected to help the government clean up a system that has relied on cash to pay bribes and avoid taxes.” ~ New York Times

Has the Indian government succeeded in their attempt to curb the flow of counterfeit money and reduce cash that is available to terrorists and bribing?

Jayant: India is an extra-ordinarily corrupt country. As a result of the ban, the tax authorities suddenly got a lot of new power. They increased their raids on people’s homes to look for unaccounted money. They started asking for higher bribes. They got paid what they asked for. I am told that the general level of bribes have gone up 100%.

Now, corruption exists because there are too many complex regulations. Instead of reducing these regulations and decentralizing, Modi has increased regulations and centralization of India.

Moreover, Modi has protected bureaucracy from legal actions. This is truly Orwellian, for the real corrupt people have been sheltered, while small businesses, which have no choice but to pay bribes, were troubled.

Hundreds of millions of Indians desperately poor, who earn a dollar or two a day, had neither unaccounted money nor the capability to collect bribes. These people suffered and went to bed hungry for no reason.

In other words, corruption has gone up, not down.

The new notes are much more prone to be counterfeited. The paper is of bad quality and the ink tends to smear. There have been many reports of bad printing. These bills are certainly of worse quality than those banned.

Terrorism… Someone truly naive might think that troubles in Kashmir can be ended by banning cash. The troubles have continued relentlessly. In fact, under Modi troubles at the border with Pakistan have significantly increased. Modi has massively increased India’s military budget. This combined with increased nationalism and Hindu fanaticism, in which Modi has a huge hand, has brought India very close to a war with Pakistan.

Ironically, Indian army has killed many multiples of its own people than it has of aliens. Indian armed forces operate with impunity in Kashmir, in the north eastern parts, and in tribal areas. They run a regime of terror in these areas. Across the country, fake encounter killings are the norm. Any alleged criminal should expect to be beaten up by the police, the reason no sane person—even if he is raped or assaulted—calls the police. I do make reports once in a while and end up police station just to make sure I keep myself updated.  

 

Brian: It is ironic that governments feel they need to intervene on corruption, when in my mind, at least, politicized economies are what fuel corruption. Ergo, further government regulation, such as a currency ban, only leads to further and more pronounced corruption and greater instability.

In your 8 part series on India’s currency ban (thus far), you have spoken about Prime Minister Narenda Modi’s popularity and his almost cult like following. How has Modi influenced the public?

 Jayant: Modi is a bully. He has been behind encouraging fanaticism among Hindus for the last two decades or more. Indians crave for a strong leader—this helps people transfer responsibilities of their lives to someone else. In short, all you need is demagoguery and sociopathy to rule Indians.

 

Brian: In James Rickards’ book, The Road to Ruin, he discusses shock doctrine and how fear is used to advance new policies that are used to quell fears but, typically, come at the cost of everyone’s liberty.

In your opinion, what do you think Modi’s next moves will be during this time of turmoil and fear?

Jayant: : I completely agree with what Rickards says. Modi did want to generate fear in the society and he has archived that. Indians never had much liberty, but now their situation is worse and getting worse by the day. In my view, India is rapidly on the path to becoming a police state.

Modi has destroyed India’s economy. He will now have to keep plugging holes. You simply cannot undertake a massive social engineering project of this kind and not have to keep doing patch up jobs.

He will likely impose capital controls to stop people from moving their wealth abroad. Modi has also been generating fear among gold owners. He will very likely restrict how much gold people can own.

Apart from having to keep doing patch up jobs, Modi will also have to keep people thinking that he is doing something. He has recently offered a slew of free stuff to the poorest people and to the Middle Class. Of course this means that more money will be stolen from these people. Unlike what happens in the West, not even a part is returned back in India. Indian politicians and bureaucrats keep all of it for themselves. India pays for schools, roads and bridges that merely exist on paper, with nothing on the ground. They don’t like to steal 5% or 10%. They like to steal all.

I have seen fragile old people sitting outside banks and begging to collect a few dollars of pension they should get. But somehow—even in this electronic age—it does not come to their accounts. They end up going door to door, humiliating and demeaning themselves. These are heart-wrenching sights. But a demagogue likes a humiliated, self-respect lacking society.

Whatever Modi does going forward, it will be for the sole aim of making India a police state and to increase his grip on the society.

 

Brian: From your series of articles, it’s clear that you think the outlook for India’s future is dismal. What would have to change in order for you to see it differently?

Jayant: India is an unnatural country. It was created by the British. There are 1.34 billion people with all kinds of ethnic, religious, regional, lingual etc. differences. All these matter, for India is a tribal society. They don’t necessarily like each other. When India became independent, it would have been much better if they had carved out 30-50 countries or many more. If I had control, I would institute constitutional provisions for regions to secede. And I would undertake rapid decentralization of India.

 

Brian: I don’t think it’s a stretch to believe that other governments from around the world are watching India’s currency ban with a keen eye. With most countries operating at a deficit each year, I am sure that demonetization is an option they would like to pursue.

For readers from the western world, it may seem far-fetched to think that it could happen to them. Can you see other countries following India’s example and pushing towards a cashless society? And, if so, why?

Jayant: In my view the situation with countries in South Asia, the Middle East, Africa and most of South America is dismal. These are tribal people. They will have horrendous social and political problems. Most of what I said so far applies to all these countries. They will all disintegrate within my lifetime, to tribal structures.

 

Brian: Once entrenched, political trends like the war on cash are extremely hard to break. I believe it’s more intelligent to use the knowledge of impending political policy for profit, better known as speculation, or at the very least, take the necessary precautions to protect yourself.

In Part 2 of your series on the India Currency Ban, you state,

“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.”

What advice would you give to people in other countries, where demonetization or a freezing of the financial system is a possibility?

Jayant: In the last 200 years of modern government, people have become very mobile and economies have become extremely complex. At the same time governments have become less competent, for everyone now has a right to vote and those who man the governments are less competent than they were earlier. All these governments are very brittle, much more outside the West than inside it.

While the state is increasingly an unnatural entity, populace are increasingly nationalistic and dependent on their governments. I am not sure how this will play, except that many countries will disintegrate. What I am sure is that there is a lot of pain ahead.

Savers and their wealth will be at huge risks. They will be made scapegoats. They should diversify internationally. And the time to take action is yesterday, particularly for people outside the West.

 

Brian: While Quantitative Easing or money printing by most of the world’s economies has propped up the financial system, thus far, things still appear to be rocky.

Though none of us have crystal balls, if you were to make your best educated guess, is the world’s financial calamity over or are we headed toward further crisis?

 Jayant: What we call money these days is fiat currency. It has no inherent value. Over the last 200 years or more the world has gone through exceptional economic growth. Governments and their printing presses have grown accustomed to continual printing of more and more fiat currency. But now, economies of the West are stagnating. And economies of most emerging markets are in negative-yielding mode, where they have mostly been except for the interlude of the last three decades. Everywhere—expect with some hope from Trump Presidency—the world is doing more of what created the original problems.

 

Brian: I tend to agree with the late Richard Russell, as he said before passing, “in the future to come, it isn’t who makes the most, but loses the least.”

 

Mr. Bhandari, thank you very much for answering my questions.

 

Catch Mr. Bhandari’s Musings on Investing on his website, or you can follow him through social media on his Facebook page or on Twitter, @JayantBhandari5

 

Until next time,

 

Brian