Hidden Motives That Control A Nations Citizens

Hidden Motives That Control A Nations Citizens India’s War on Cash

A Note on Gold and India – What is Driving the Gold Price? – Author 

It is well-known that India’s government wants to coerce its population into “modernizing” its financial behavior and abandoning its traditions. The recent ban on large-denomination banknotes was not only meant to fight corruption.


very-bad-boyObviously, this very bad Indian has way too much cash. Just look at him, he looks suspicious!

Photo via thenewsminute.com


In fact, as our friend Jayant Bhandari has pointed out, fresh avenues for corruption  immediately opened up upon enactment of the ban (see “Gold Price Skyrockets in India After Currency Ban” – Part 1Part 2 and Part 3).

It is a nigh apodictic certainty that governments are lying – whether outright or by omission – when they impose such drastic measures. It should be clear how the State operates once one recognizes its true nature and realizes that “we” are definitely not the State.

Thus there are several reasons for the currency ban that have nothing to do with the official justification forwarded by the government. One is of course that the government hopes to be able to confiscate a sizable proportion of the citizenry’s  – allegedly “ill-gotten” – wealth.

special one-off tax penalty will be imposed on deposits government officials arbitrarily deem “too large” – under the cover that only criminals will be deprived of their possessions, for the benefit of public at large (meaning: Modi’s supporters. As an aside, this may well turn out to be a major miscalculation).

Another reason is that the government wants to coerce people into transferring much of the cash they currently hold into the banking system. This will transform their cash into digital money substitutes.

This increase in deposit money will be a great boon for India’s fractionally reserved banks. It represents extremely cheap funding for them and will enable them to vastly expand credit creation ex nihilo. At the same time, the government will achieve far greater control over the economic life of its citizens.


Indians and Gold- A Rational Love Affair

In the recent past, India’s government has also launched several initiatives aimed at reducing gold purchases by Indian citizens. For one thing, it is asserted that the gold hoards held by citizens are “unproductive” and a sign of India’s backwardness that needs to be eradicated in the name of modernization.

Another  official reason is that government wants to lower the country’s trade deficit. Since India isn’t producing much gold, it is importing quite a lot; in recent years gold imports oscillated around 700 tons per year.


1-india-balance-of-trade3xIndia’s trade deficit over the past decade – cick to enlarge.


The world’s governments are almost without exception comprised of  economically ignorant mercantilists who believe that a trade deficit is a symptom of declining wealth. Naturally, India’s government is no different in this respect.

This mercantilist view of trade is one of the most “sticky” and widespread economic errors in history (evidently, not only prices and wages are “sticky”…). It is a direct result of viewing the economy through a collectivist lens instead of through the lens of methodological individualism.

The government’s efforts included raising a tariff on gold imports (ever since, India’s gold import statistics are no longer reliable, as a lot of gold is smuggled in), as well as urging the creation of assorted “paper gold” products by commercial banks.

The latter were supposed to entice citizens to deposit their gold with banks in exchange for paper receipts. You have one guess why the government would be eager to see that happen.

India’s citizens have a traditional affinity for gold. Gold is not only a “love trade”  for Indians though, as our friend Ronnie Stoeferle puts it. They also buy gold because they don’t trust their government and its economic policies.


gold-jewellery-reLooking good, ma’am.

Photo credit: Reuters


As has just been demonstrated again, this is quite a healthy attitude – even if the  government of the day is widely considered to be “good for the economy” (Mr. Modi’s government has indeed adopted a number of positive economic reforms as well in the past).

Not only can it be very costly to trust the government, there is obviously also a big difference between looking at and fondling actual metal, as opposed to a bank receipt for a gold deposit. If you try it, you will see it is just not the same.

Indian women love gold adornments and gold jewelry plays a major role as a wedding present that concurrently serves as a store of wealth. Hence the government’s efforts to “wean the citizenry off gold” have completely failed to gain traction.


What If India Bans Gold Imports?

It remains to be seen if the government will get away unscathed with the recent demonetization of large denomination banknotes. As Jayant has pointed out, Mr. Modi has actually enjoyed widespread popular support for the measure – at least initially. Certain segments of society continue to be supportive, depending on the degree to which they are actually affected by the ban.


money-atms_825_ptiThe degree of Modi’s support is presumably inversely proportional to the length of time spent in such queues.

Photo via twitter.com


After two weeks of increasing chaos and ample demonstrations of government ineptitude, the political opposition has finally decided to join the fray and is now beginning to forcefully denounce the measure.

Parliament was adjourned after an “uproar” over the currency ban,  the opposition is organizing an “all India protest” for November 28, as it is now united in opposing the ban.  Moreover, allegations that the plan was leaked to certain people in advance have surfaced (that wouldn’t surprise us one bit).

As Jayant has rightly pointed out in the third part of his articles on the currency ban, the evolving situation is forcing the government to continually issue new ad hoc decrees in order to stop people from successfully fighting the edict.

Similar to the attempts of the post-revolutionary assembly of France to defend the assignat in the late 18thcentury, it is resorting to increasingly repressive steps (the most recent one is that it has apparently suddenly shortened the grace period for banknote exchanges, concurrently with announcing that it will impose a  tax penalty on “too large” deposits).

This has led to speculation that gold may be in the government’s cross hairs next.  As the thinking goes, if it can ban certain banknotes, surely it can also enact a ban on gold imports? As an aside, an outright ban on gold ownership seems highly unlikely, as that would probably cause more than just an “uproar”.


kalyan_jewellers_2367472gBanning gold ownership is out of the question.

Photo credit: Kalyan jewellers


Also, some of the largest gold hoards are held by temples – in other words, the country’s religious establishment would undoubtedly be less than amused. Gold imports are a different matter though.

recent article posted at Zerohedge discusses the possibility and attempts to estimate what the potential impact on gold prices might be. First let us consider the question whether the recent decline in gold prices may have had anything to do with rumors about India imposing a ban on gold imports. We would argue this is extremely unlikely.

First of all, at the recent peak in gold prices, the net speculative position in gold futures had reached a record high. Even though one needs to interpret the commitments of traders in gold futures in a more nuanced manner than many observers are wont to do, we have pointed out on several occasions that this made the market very vulnerable to a shake-out. The only question was when it would start and how extensive it would be.


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