Please Change Cash Here

Towards the end of 2016, India shocked their population by announcing the sudden withdrawal a majority of currency in circulation. On the 14th November, India announced they were scrapping their 500 and 1000 rupee notes – a move affecting +85% of all rupees in circulation.

This blog post will explain that the root for the move and will analyse whether the long run benefits of the moves will achieve their publicly proclaimed benefits.

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India’s Gold Monetisation Scheme

In India there is a government scheme to encourage the circulation of gold trapped in private hands to help encourage domestic economic growth. It creates a domestic source of capital that did not previously exist and reduces the reliance on temperamental foreign direct investment.

The theory is that the increased circulation of value will encourage capitalist forces to prompt and deepen private investment throughout the economy – instead of the country’s vast private golden wealth sitting idle in inactive private hands.

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Bail-ins and bail-outs

Since the start of 2016, there has been a rule in the EU that no bank can be “bailed out” by an EU state without first attempting a”bail-in”. That is EU regulations now ensure that those who own a bank’s capital (bond holders) and those that own the bank (shareholders) must first sacrifice before those who do not directly profit from the bank (taxpayers) can intervene.

This is different from 2008, when no such rules existed. During that time, state bailouts would rescue private investors at the cost of the public purse. Private investors were not responsible for being the first responders to protect their investments. Now however, EU rules dictate that bondholders must sacrifice first. These are individuals who are owed payment first. Then shareholders, who generally sacrifice from tangential collapsing share prices – and the loss of any dividends.

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