Daily Times

Every time a simplistic version of an economic decision is flouted, it reminds me of Fredric Bastiat’s excellent paper titled, “That which is seen, and that which in not seen.” Economic decisions can have uncertain consequences, which even economists cannot predict or foresee. In fact, if economists were good at predicting anything, would they not have seen the 2008 financial crisis? Even the Queen of England, during a briefing by academics at the London School of Economics on the turmoil in the international markets, asked, “Why did nobody notice it?” For the record, her majesty never got a coherent answer. And do we want to believe these very people that making 88 percent of the currency illegal with a stroke of the pen will marginalise the corrupt?

So let’s first shatter the first fallacy that demonetisation will impact the corrupt. Does anybody believe that the powerful corrupt, as an example belonging to the income tax department or the police, will be the last ones in line to get their ill-gotten currency exchanged? The corrupt are corrupt because they have power susceptible to abuse. To venture a guess, the powerful corrupt are behind the scheme to buy the cancelled notes at a steep discount and make a killing; for them, it is an opportunity to make more money. Knowing how deep their tentacles reach, they probably have the fresh currency delivered at home before it even gets to the banks.

The only way to end corruption is to punish the corrupt severely, and this is precisely where the judicial system of most developing nations falters. In this scenario, even if the corrupt do lose their loot, which I for one don’t subscribe too, the result will be more corruption to make up these losses. And why do we believe that smaller notes in any manner hamper graft; all it means is more mattresses and a bigger basement. On the other hand, foreign currencies might replace the domestic currency as the currency of choice for the corrupt, with consequent nightmarish economic impact.

And why would that happen? Fiat currency, as in paper money, is a currency because your government has declared it to be a legal tender. For those of you who are not aware, it is not backed by gold or any other commodity. The populace believes in the domestic currency and uses it as a medium of exchange and storage of wealth because they trust their government. Will the masses going forward trust their government after it has destroyed 88 percent of its own money? Can a government, which has violated this sacred trust, be trusted with the common man’s money in the banks going forward? Dear readers, how many of you will, under similar circumstances, continue to store your wealth in bank accounts hereafter, knowing very well that there is already a precedent for the government to confiscate money directly from the bank accounts of the common man, as in the case of Greece?

Already gold is selling at a premium to the international market in India. If their government thinks it can ban the purchase of gold and control smuggling across a very large and porous border, then even moronic is not the right word to describe it. India might even have the dubious honour of taking the world back to the gold standard; perhaps all it wanted was the Nobel Prize!

The gullibility of the middle class, supporting this decision is utterly remarkable. This enthusiasm emanates from the view that they are insulated from the impact of this decision because they are honest citizens who have ID cards and keep their money in the bank. Except, remember that even they cannot take out their money at will now and what little money is available in smaller notes is quickly being hoarded. They will eventually feel the pain too, but for now, their callous selfishness prevents them from seeing their developing country men suffer.

Most of the poor don’t have ID cards, which means that they are not in a position to exchange whatever meagre currency they had stashed away for rainy days. The argument that they should get registered is synonymous with the famous utterance, “Let them eat cake” since the poor don’t even have birth certificates or any other similar proof required to get an ID card and obviously don’t have the resources to pay expediting costs. And what about the families living on daily wages? With only 12 percent of currency left, which is fast being hoarded in the escalating uncertain environment, who will hire or pay a daily wager? Perhaps things will get normalised in the next few months but to expect that the weak can survive a few months without eating gives a new meaning to the word “sadistic.”

It will also not be easy to replace approximately 12.5 trillion cancelled money, previously in circulation. First of all, there is no way of knowing how much of this currency represented the wealth of the corrupt, and how much was necessary to the real economy, including the informal economy. Without this knowledge, the government will struggle with the hit and trial method, and that can take a very long time. Also, the informal economy runs on cash in entirety. Forget the long term effect, and once again, refrain from assuming the simple effect that it will be good for the economy since everything will henceforth be merged into the formal economy. In the short term, people will lose their businesses, and a vast populace will end up being jobless. As an example, imagine the consequences for smaller farmers who borrowed money and now can’t sell their produce at the required price because there is simply not enough cash.

It would be rational to assume that all of the money, which is not accounted for when the dust settles, does not entirely belong to the corrupt. Even if only 10 percent of it represents the wealth of honest common men, what right did their government have to steal it from them? And yes, it is highway robbery since whatever currency is not surrendered goes to government coffers as dividend payout by the central bank. And guess who gained from all this chaos. With more money in the bank, the interest rates will go down, which suits the larger borrowers; the government and the wealthy. Given space limitations, I will skip elaborating upon the myth of the GDP here, with a promise to write about it soon, and also ignore the impacts of deflation, which in a nutshell is not something to look forward too.

I for one sincerely believe that economic theory is incapable of predicting the future; hence the above should not be taken as predictions. At best, all of the above are likely effects derived from simple logic which is not visible to laymen. What is, however, predictable in the aftermath of economic chaos across the border is a further escalation of cross-border atrocities and adventures to divert attention from one of the biggest manmade mess ever created. Additionally, there is already a growing perception, or expectation, at home that our government might consider a similar action; and perceptions matter. In this case, the nut behind the wheel is the most dangerous part of the vehicle driving the economy.

The writer is a chartered accountant based in Islamabad and can be reached at syed.bakhtiyarkazmi@gmail.com