When Government Decrees Your Cash Worthless

Posted On Nov 17, 2016 By Dave Gonigam

  • Tourist nightmare: When your cash is suddenly no good
  • Rickards on the bizarre side effects of India’s bank note ban
  • Cyprus 2013… India 2016… Will you be ready?
  • Three sectors that were rallying before the election — and still are
  • Lawsuit implies people eat blueberry doughnuts for health benefits
  • Blue chips take a back seat to small caps… inflation via shrunken packages… what really caused a stock market correction last December (not January)… and more!

It’s not just everyday Indians who’ve gotten tripped up by the sudden bank note ban there. Tourists are in a bind, too.

Before the edict came down a week ago Tuesday, a British woman named Varsha did three ATM withdrawals of 10,000 rupees each — the maximum allowed. That translates to about $441 total.

Then came the order banning 500- and 1,000- rupee notes — which made up about 85% of all circulating cash in India. As we said the day after it happened, the stated reason was to crack down on “black money” cash transactions that escape tax. As we said two days ago, the hidden agenda includes a crackdown on smugglers trying to escape India’s gold import duty.

Citizens and visitors alike are now scrambling to exchange the banned bank notes for new ones. But Varsha is having little luck. Many banks don’t have the new notes. Those that do have long lines and will exchange a maximum of 4,000 rupees, or about $59.

“Luckily,” Varsha tells the BBC, “some of the restaurants I go to are still accepting the old notes, and so I can get fed and then rely on the small change to buy my daily incidentals like water, fruit etc.

“Sadly, the waiters do not get a tip from me, as those small notes are so precious, but I have promised them a big tip when I manage to finally exchange some of my money.”

Doesn’t sound like a fun trip. At least Varsha can go back home.

“Imagine that — the money in your wallet or purse is instantly made worthless by government decree,” says Jim Rickards. “That’s what happened.

“There were limited exceptions for hospitals and gas stations. Naturally, gas lines formed everywhere, and some people rushed to hospitals to prepay for future medical care with now worthless bank notes. The other exception to worthlessness was if you deposited the notes in the bank. There you would receive ‘digital credit’ in your account.

“Of course, the tax man was waiting at the bank to ask you where you got the money. Those without an acceptable answer could expect trouble from the Indian Revenue Service.”

That’s what it’s called. They’ve got their own IRS…

The results have been — no other word for it — bizarre. “One immediate consequence,” Jim goes on, “is that paper money began trading at a discount to face value.

“In plain English, you might be able to sell your illegal 1,000-rupee note to a middleman for 750 rupees in smaller denominations. You would get legal tender for your worthless 1,000-rupee note. The middleman presumably has some connection with the banks that allows him to deposit the funds without being harassed by the tax authorities.

“It’s not unusual for bonds to trade at a discount due to changes in interest rates or credit quality, but this is the first time I’ve ever seen cash trading at a discount.”

Jim did, however, anticipate a development just like this in Chapter 1 of his new book, The Road to Ruin. Have you ordered your free copy yet?

Another freaky distortion: “Gold is selling in India for over $2,000 per ounce,” says Jim.

As we write this morning, the bid on most global markets is $1,227. That’s a helluva spread.

“This is because Indian citizens are rushing to buy gold for cash. The gold dealers can then deposit the cash for full value. This is just another form of discount on the face value of the cash. It’s not that gold is more valuable; it’s just that your $2,000 is worth only $1,227 (in rupee equivalents) when it comes time to buy the gold.”

Not to put too fine a point on it, but this kind of chaos is a milder version of what to expect whenever the next global financial crisis rolls around and the global power elite implement their “ice-nine” plan — described in detail in The Road to Ruin.

The template was set during the economic crisis in Cyprus in 2013. Bank bailouts? That was soooo 2008. The angry masses wouldn’t put up with it.

Instead, there were bail-ins. Big money depositors found their money converted to shares of whatever crappy bank they had the misfortune of doing business with.

Everyday Cypriots, meanwhile, were subject to things like an ATM withdrawal limit of 400 euros — about $520 at the time. ATMs that had cash also had long lines. But most ATMs had no cash.

2008 was scary. But not like that. Will you be ready? The Road to Ruin shows you what’s coming… and the exclusive Agora Financial edition has a bonus chapter showing you how to position your portfolio right now. It’s yours free, as long as you can spot us $4.95 for shipping. You’ll get a boatload of other benefits for acting today — they’re spelled out right here.

After snapping a seven-day winning streak yesterday, the Dow is treading water today. At last check, the index stands at 18,850.

Like yesterday, small caps are tearing it up by comparison. The small-cap Russell 2000 is lifting higher past the 1,300 level it crested yesterday for the first time.

Gold is holding its own at $1,229 as the dollar index pushes the 100.5 level. That would be another 13-year high.

Herewith, the economic numbers of note…

  • Consumer price index: Up 0.4% in October, thanks largely to rising energy prices. The year-over-year increase is inching up — now 1.6%. As always, any resemblance to your own cost of living is purely coincidental
  • Housing starts: Up a silly 25.5% in October, to the strongest level since August 2007. However… permits are always a better indicator of future activity, and those are up only 0.3%
  • Mid-Atlantic manufacturing: Make it three straight months of growth, according to the Philly Fed survey. The new orders component of the number looks terrific.

The last of those numbers is one more sign that the worst is over for U.S. factories — for now.

“Trends always go further than we can imagine or know,” our resident trend follower Michael Covel reminds us.

The strongest performers in the post-election Trump bump include financials (easier banking regulation), industrials (the $1 trillion infrastructure stimulus) and defense (because having a military budget bigger than the next seven countries combined isn’t enough).

But… “What most investors don’t realize is that the financial, industrial and defense sectors were already trending higher before the election results,” says Michael.

“Those who listened to ‘experts’ and sold everything because of a predicted Trump crash lost a big opportunity. Those who were following the trend were already making money. And they can continue to make more: My proprietary trend following system shows that these three sectors remain in an uptrend.”

In addition, Michael’s high-end trading system is signaling a new trade this coming Monday. Previous signals this year have pointed the way to average gains of 674%. Explore Michael’s system for yourself right here.

Stupid lawsuit tricks: A guy from California has filed a $5 million class action against Krispy Kreme… because its “glazed blueberry cake” doughnut doesn’t contain any blueberries.

Fraud! Misrepresentation!

From the suit, filed by one Jason Saidian: “The donuts sold in-store by [Krispy Kreme] are displayed in a tray behind a glass counter, along with a small placard in front of each tray that provides the name of the donut variety. No ingredients list is provided or available to customers in-store.”

Indeed, the doughnuts contain only “blueberry gumbits” made from corn syrup and artificial coloring.

This greatly upsets Mr. Saidian because, again according to the text of his suit, blueberries “have the potential to limit the development and severity of certain cancers and vascular diseases… and neurodegenerative diseases of aging.”

Which is true. As you might know, blueberries are a considered a “superfood.” But c’mon: Nobody buys a Krispy Kreme blueberry doughnut in hopes of loading up on the antioxidant properties of blueberries…

“Another issue regarding inflation,” a reader writes. “Look at paper goods. Not only are the rolls getting narrower, the tubes are getting bigger in diameter.

“The dairy industry is the most notorious, yogurt cups and ice cream containers getting smaller.

“Yesterday, I bought a ‘fifth’ of Bols triple sec. It was down to 700 ml, from 750.

“Mayo now comes in 30 oz. jars, not the old quart.

“As long as it says so on the label, it’s OK. My mayonnaise jars have been a quart since I could first read a label (65 years ago or so). Same with a half gallon of ice cream.

“Mayo and peanut butter are the sneakiest, because the jar is the same size except for the big dimple in the bottom.

“Is this cost push or demand pull? I think it’s everybody just doing whatever they can to get as much money as they can before it’s too late. I’m doing the same. Raising rates and slow pay wherever I can. All of my clients are slow pay, too. Some over a year.”

“There have been numerous mentions in The 5 about the December 2015 interest rate hike leading to an 11% stock market correction,” a reader prefaces a question.

“However, didn’t the ferocity of the correction really start as a result of the Bank of Japan moving to negative rates, which lit the fire under gold — which then skyrocketed on its journey upward?  I have not read, that I recall, any mention of the negative rates. Only the Fed’s quarter-point hike.

“Regarding Fed Vice Chair Stan Fischer’s remarks and what I interpret from Jim Rickards as ‘complacency’ or perhaps antiquated modeling for perhaps not being accurate with the outlook, here are my questions:

  1. An improving quarter of earnings (a glitter of hope) after so many depressing quarters.
  2. What seems like a record of recent mergers and acquisitions.
  3. Emerging markets able to withstand a quarter-point hike because the global economy is showing signs of improvement.

“If Fischer didn’t seem to be worried — and it does not appear our corporations are worried — with all the M&A, what am I missing? Isn’t productivity showing some improvement? Since Trump’s election and the skyrocketing dollar, which does not appear to be slowing, I don’t disbelieve Jim’s analysis now. My question is his analysis prior to the election.”

The 5: The S&P sat near 2,075 around the time of the Fed’s decision. It quickly tumbled below 1,850 even before the Bank of Japan shifted to negative rates. Likewise, gold put in a bottom in late December — a month before the BoJ decision.

And don’t forget the related catalyst for that 11% correction — a “stealth devaluation” by China anticipating the Fed’s move. As we write today, the renminbi is at an eight-year low.

Spooky, huh?

Best regards,

Dave Gonigam
The 5 Min. Forecast

P.S. One more scary aspect about the Indian bank note switcheroo: “India is using indelible ink on fingers to ensure people get only one chance to change their big bank notes,” says the BBC. “To clamp down on holders of unlawfully held or untaxed cash, depositors can only make such transactions once and so the banks are using the ink to prevent them from making multiple deposits.”

It’s a low-tech form of financial tyranny, for sure. But it’s a preview of coming attractions here in the developed world — as Jim Rickards details in his latest book, The Road to Ruin.

Order through us and your copy will include a special bonus chapter — not available at Amazon or your neighborhood bookstore — with Jim’s favorite road map for navigating the severe bear market he sees coming. If you can spot us $4.95 shipping, that’s all you’ll pay. Order here.]


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