https://scroll.in/article/827887/understanding-demonetisation-why-theres-a-war-on-cash-and-you-are-in-the-middle-of-it
OPINION Understanding demonetisation: Why there’s a war on cash (and you are in the middle of it) We can’t understand demonetisation and its aftermath if we don’t locate it within the global offensive against cash. First part of a three-part essay. Image credit: From 'The Dark Knight'/ The Joker burns the money 14 hours ago Tony Joseph There is a global war on cash. What we have seen in India in the last couple of months is part of that war. This is a difficult point for many opponents of the demonetisation exercise to accept because it interferes with the narrative that demonetisation is a story of political malice marrying incompetence. Suggesting that there were other motives too, whether good or bad, is seen as diluting the charge of incompetence. But we have to take facts as they come. If we do not do that, we will not be able to grapple with the real issues or understand what is going on. The timing and reasoning for demonetisation may have been shaped by political opportunity and the schedule of the Assembly elections, but the move towards cashless economy was happening anyway. And demonetisation did give it a big push. At a very high human cost, of course. (Please click here for an explanation of how different threads/initiatives came together to cause an explosion on November 8.) A two thousand note holder selling desi dry fruits wrapped in Rs 500 & Rs 1000 notes.(2016) pic.twitter.com/DdQsgXa67F — History of India (@RealHistoryPic) November 8, 2016 Who is waging the war? But who is waging the war, and why? And thereby hangs a long tale. For ease of articulation, first the summary, and then the substantiation. The war on cash is being waged by four major groups. One, existing financial services providers such as banks and credit card companies. Two, technology companies, including start-ups, with financial services ambitions (known as Fintechs in current terminology). Three, governments. And four, Central banks. It is difficult to imagine a more powerful combination of forces. It is not that they have the same objectives. In fact, they have different objectives that sometimes conflict. But their interests are complementary when it comes to driving cash out of existence. For example, new start-ups like PayTM may take away business from existing financial service companies and ruin some of their business models, but for both groups, physical currency is either a mortal enemy or is of little use. There is little profit to be made from it and, for banks, it costs money to count, manage, store and move cash. But the moment currency turns into digital bits, two opportunities present themselves – one, to charge tiny little fees on every single transaction and two, to create a data trail of income and expenditure of customers that would come in handy to sustain new services and business models. So it makes sense for banks and fintechs to join hands to chase cash away. We have got two words for you: Paytm Karo. — Paytm (@Paytm) November 8, 2016 India is right in the middle of this battleground, for two main reasons. One, India is seen as having the basic infrastructure in place – in terms of bank accounts and mobile penetration – to be able to take the jump to a cashless economy. Two, it has also been identified as a country with very large potential gains from the war. But as in all wars, the question arises: how will the booty from this war be distributed? The summary answer is that while the gains for the initiators of the war on cash are tangible and immediate (think of the video of the PayTM chief executive officer’s celebratory dancing), for others caught in it, the gains are amorphous. So how do we weigh the overall costs and benefits, and equally importantly, how do we know how the pain and the gain are going to be distributed? The best way to understand the war and to find answers to the questions raised above is to see how the idea of a cashless economy developed. Such a chronology will allow us to grasp how the war was conceived and who joined the battle when and why. We know that plastic has been replacing cash worldwide in a slow and steady manner for decades, causing many to predict the death of cash prematurely. Cash today forms only 22% to 68% of transactions by volume in advanced economies. Norway, Australia and Denmark lead the digital pack while Japan, Germany and South Korea are among those who still prefer cash to cashless, with the United States falling somewhere in between, with a figure of 49%. But the theoretical scaffolding and reasoning for eliminating cash altogether began being put together only after the financial crisis of 2008. 'If what we think doesn’t cause our competition to wet their pants, have we thought at all?' https://t.co/VZdScYtQks — scroll.in (@scroll_in) January 18, 2017 The Great Recession As we know, the Great Recession that began in 2008 pushed advanced economies into a long-term situation of low growth, low investment and low inflation, and central banks in these countries began to cut interest rates down to zero to stimulate investment and spending. But they found to their horror that zero or near-zero interest rates were not enough to get their economies humming again. In fact, some countries went even marginally lower than Zero, with Denmark being the first in 2012, followed by several of Europe’s central banks in 2014 and Japan in 2016. Interest rates are the single most powerful tool that Central banks have, to control inflation or stagnation. If the economy is heating up and inflation is going beyond the targeted rate, central banks raise interest rates thus cooling down investment and consumer spending. People save more and spend less, bringing down inflation and along with it, growth. But if the economy is stagnant and inflation is lower than targeted, with not enough investment or consumer demand, central banks reduce interest rates to stimulate demand. Economic theory suggests that pushing interest rates significantly below zero might have been necessary to pull many advanced economies out of the funk they have been in since 2008. NASA's picture of Indians staying up whole night counting their 500 & 1000 Re notes pic.twitter.com/3fzoXPkDy7 — Atul Khatri (@one_by_two) November 8, 2016 A negative interest rate means that if you keep Rs 100 with your bank for a year, instead of getting back, say Rs 105 including a 5% interest, you may get back only Rs 99.90 – the rest being taken as, say, 0.1% negative interest rate. The expectation is that negative interest rates will force banks, businesses and individuals to lend, invest or spend their money rather than keep it idle, because there’s a cost to keeping it idle. The lower a negative interest rate is, the higher the stimulus to spending and growth, just as the higher a positive interest rate is, the greater the restraint on spending. Now this is great in theory, but there is a practical problem. Central banks can take interest rate as high as they want without limit, but they cannot take it into seriously negative territory for a simple reason: if it goes there, everyone would just take their cash out of the banks and keep it in safe deposit boxes. No spending happens, and the central bank objectives are not met. In other words, economists argue that there is an asymmetry in the way central banks can use interest rates. They have immense power to cool down an overheating economy, but only limited power to stimulate a stagnant economy by bringing down interest rates sufficiently. The technical term economists use to describe this situation is Effective Lower Bound, or ELB – the negative interest rate below which people will just withdraw their money from banks. Since there is a convenience to keeping money in the bank, the ELB is usually not exactly zero, but a little below zero – say, - 0.5% or -1%. People don’t mind keeping their money in the bank if the negative interest rate is a minor annoyance, because there is a convenience to operating with a bank account and say, a debit card. After the Great Recession, this is the situation that central banks found themselves in: operating close to ELB. And it is in this situation that some economists started pushing a new idea that sounded horrendous to many: eliminating cash altogether. If there is no cash, people cannot take their money out of banks, and central banks can take interest rates as much below zero as needed. In other words, eliminating cash will improve the ability of central banks to fight stagnation and improve growth. Of course, this is like a forced appropriation of people’s savings and many would find it outrageous. But the economists would counter: so what’s new? People today hold cash even when there is inflation, knowing that the value of their holding is decreasing every day, and this is merely the opposite situation: there is no inflation or very low inflation, and instead there is a negative interest rate on your savings that you can’t escape. Watch out for the second part of this three-part article on Sunday, January 29: Part II: Who is behind the war on cash – and why Tony Joseph is a former Editor of BusinessWorld and can be reached at [email protected]. -- Peace Is Doable -- You received this message because you are subscribed to the Google Groups "Green Youth Movement" group. To unsubscribe from this group and stop receiving emails from it, send an email to [email protected]. To post to this group, send an email to [email protected]. Visit this group at https://groups.google.com/group/greenyouth. For more options, visit https://groups.google.com/d/optout.
