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How Fiat currency can go up in smoke overnight; a study of Indian rupee demonetization

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Written by   123
1 year ago

In most likelihood you already know about the demonetization that happened in India on 8th November 2016.

Either you do or don't know about it, read on the analysis of the underlying problem.

It was like any other day in the country of India when out of nowhere the Prime Minister declared that from now onwards the two most highest denominations of Indian Rupee notes are no longer valid and are just worthless piece of paper.

And just like that 86% of the cash supply was gone in an instant.

Now without going into politics of it all or analysis if that was a good decision or not, let's just focus on the fact why it is possible at all?

Many of the Cryptocurrency critics like to argue that they are not real and just made up numbers, made up from thin air and isn't originated from and be generated by something real somewhere.

Looking at you Bill Maher.

It is not only foolish on their part as much as funny, because they are essentially describing national currency.

Not just some specific currency but any and all currency. It only has value as long as a large group of people will it into existence, and can easily be taken away.

Now lets look at the demonetized Indian currency notes:

  1. They were issued by a real sovereign government with a written promise signed by the govern of the central bank to pay a sum of certain amount.

  2. The country is 10th largest by GDP in the world

  3. It is a important geo-political country with global influence

  4. It is a democratic republic with multi-party system

  5. It has a large share in international trade

Yet despite all this the government just came in and announced that currency is worthless and it did just became that.

Why is that?

Because no matter which country you live in you pay your tax in the country's currency, which is like your subscription to that country.

Even if the entire citizenry says they are not going to accept this order and continue to use old currency, they can't pay their taxes with it for which they are legally bound to pay.

The country's government can say that they are doing it to fight corruption, terrorism or whatever, but if you are just a average person then suddenly all that you have earned in your entire life could be wiped out in an instant. And its mostly the poor people who are the most effected by this, the daily wage earners, the low income earners without bank accounts and the like.

The problem just isn't that the value of a fiat currency can be inflated but the biggest problem is the centralization.

Would a President or Prime Ministry come out and say that Bitcoin as no value, well yeah they can, but they have no power to enforce that. All they can do is stop the conversion of fiat to Crypto through their banks and financial institutes.

Now what is the problem here?

Any currency, fiat or crypto, doesn't have any inherent value. They only have value as a medium of exchange for things with actual utility, like water, food or medicines.

No not Gold, it is again a medium of of exchange or benchmarking for the value of goods and services.

Now all this incident has done has shown us a true dangers of centralization.

You may think that perhaps India and its currency is not not relevant and would never happen to your country since your not living in the third world!

Well, here is the facts, the basic principal remains the same. You need the local currency to pay tax and therefore have to accept the value determined by the government we can in any interest good or bad take away that value because it is only promised and ensured by that centralized agency.

Again if you think your government is different or rule of law is supreme in your country, then you aren't paying attention.

A government is not a person it is an organization of people and those people are replaced even in dictatorships. History is full of examples when rule of law went out the door even in the developed first world.

Let's take a look at US dollar now, it is for most part the world's currency. Imagine is the President one day declares that all the US dollar held by the Chinese are invalid because the debt held by them is through unfair and fraudulent practices. to distinguish them currency only the new bills will be valid with old ones no longer being honoured.

Any reason can be giving by a centralized power to make their 'Promise to pay the bearer the sum' invalid.

This doesn't mean the the governments are going to do this, maybe not, most likely not. But Indian rupee demonetization is a shocking reminder that this is an possibility and government do hold that power.

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Written by   123
1 year ago
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