Citizens of countries all over the world love cash and they get very nervous when governments try to monitor the use of it or are seen to mess with it in any way. However, technology and habits are working against cash as most people now pay for goods and services electronically. Only just recently, Citigroup announced that its Australian branches will no longer accept cash. The bank says that there is no demand for it.
In India, an unprecedented assault against cash of a different kind is taking place. In a move that has surprised everybody, India’s prime minister, Narendra Modi, has said that India will withdraw 500 and 1,000 rupee bank notes from the banking system overnight. The bank intends on issuing new 500 and 2,000 rupee notes to replace them. The government say the move is designed to curb corruption, counterfeiters and dredge up potentially billions of rupees in the underground economy.
Citizens have 50 days to exchange the notes and government railways, hospitals, buses and airlines will only accept the old notes for a further 72 hours only. The move has the potential to cause chaos because around 46% of all notes or in denominations of 500 and 1,000 rupees. After the 50 day period the old notes will be worthless.
India has billions of rupees of black market cash and many owners will be reluctant to exchange it for the new notes lest they become a target of the government’s anti-corruption regime. The move in India is a bold step from a government which was swept to power promising to bring billions of rupees of black market money into India’s financial system. It follows a recent tax amnesty that has garnered around $USD10 billion.
YieldReport has previously reported in moves in Europe to eliminate the use of large denomination bank notes. The move has been mooted under the guise of putting the brake on corruption and money laundering but cynics say that cash is a barrier to negative interest rates working effectively.
In essence, the unprecedented monetary policy decisions in Europe to introduce negative interest rates gives investors an incentive to withdraw money from the banking system and store it in cash rather than be penalised by paying to store money in a bank. It also means negative interest rates are not working as an incentive for investors to spend or invest, thereby stimulating the economy.
