The quagmire of counterfeit currency – II

In the German movie, Die Fälscher or The Counterfeiters (2007), a fictionalized account of the real events based on the memoir written by Slovakian Jew, Adolf Burger (imprisoned by the Nazi authorities on the charges of forging certificates of baptisma for the jews to pass them off as Christians in order to save them from persecution) is presented. This man was chosen for his skill of forging nearly exact copies of the originals, to be a part of the grand design of subverting the allied economy by executing Operation Bernhard, which  meant to flush counterfeit notes in British empire to destroy the purchasing power of the British Pound. As a consequence, the British government had to remove most of its currency from the market. The film is delightful watch and I would urge the readers to see it for its beautiful story telling and screenplay.

In recent times, the major outcry against the counterfeit currency came from non other than the United states, which became the victim of the superdollar. In the field of economics, it is well known that

Increased money supply leads to high inflation. The deluge of cash and limited production leads to the decrease in the purchasing power of the money and more real money is now needed to balance the market to control the raised prices of manufacturing and decrease real money incomes of the households. The Federal bank has to pump in more money and industrial sector has to increase the production capacities and this starts a vicious cycle which is hard to break once it starts.

High demand & low supply = Increase in Price (High Inflation)

Financial action task force issued a Money laundering report in the year 2013 regarding the crisis at hand. The Reserve Bank of India issued a detailed study of the impact of the counterfeit currency and the gist is that between the fiscal year 2014-2015, there were  594,446 fake currency notes in circulation that were detected, up from 488,273 in previous year. The Rs. 500 note was  the most common denomination that was favored by the counterfeiters due to its outreach in most of the levels of socio-economic strata. Then came the Rs. 100 and Rs. 1000 notes at second and third place, respectively.

final-table-ficn

It is well known from the old times that most counterfeit Indian currency notes along with other international currencies were printed in government printing presses near Peshawar in Pakistan during the cold war era. The centers have moved since then and improved in their quality of producing fake currency notes. The Directorate of Revenue Intelligence (DRI), claims that ISI is pouring FICN in India through several countries including Sri Lanka, Nepal, Bangladesh, Vietnam, Thailand, Singapore and Malaysia. Besides these countries, a large number of Indians are employed in the Middle East countries and when they come on annual leave or avail the transfer of residence facility the ISI collaborators send FICN through them. Nepal has been extensively used for this purpose due to the porous borders it shares with India. Bangladesh is another major transit route for counterfeit Indian currencies being trafficked from Pakistan. Pakistani nationals were involved in 48 % of fake currency racket cases in Thailand, Malaysia, Myanmar, and Sri Lanka.

The Nobel laureate Robert Mundell improved upon the statement of Gresham’s Law, mentioned in the previous post, and could be expressed as,

“Bad money drives out good if they exchange for the same price.”

The reverse of Gresham’s Law, that good money drives out bad money whenever the bad money becomes nearly worthless (Demonetized), has been named “Thiers’ Law” by economist Peter Bernholz. This Law will only operate in the inflationary regime when the increase of the new flexible exchange rate and of the rate of inflation lower the real demand for the inflating money.

Circulation of counterfeit currency in India causes:

  • Devaluation of Rupee and very high Inflation.
  • Dumping of Goods at Cheaper Rates. (favorable to China)
  • Weakens the nation economically, socially and politically.
  •  Loss of Public Confidence in the monetary system and policies of the government.
  • Non-reimbursement of the money lost to the fake currency by Banks.

The circulation of fake currency threatens India’s economy while the profit that is earned from doing so is used to fund covert activities targeting India. It is claimed that ISI makes an annual profit of Rs 5 billion ($73 million) from these activities and funding of the Bollywood movies through underworld links, given an average of 30 to 40 percent profit on the face-value of the notes. The same money is said to be used to fund terrorist groups in India. This is one reason bollywood is inviting Pakistan artists to work in the industry because their producers are across the border. In this light listen to the ‘Ae dil hai mushkil’ song again…the lyrics …

 

Raanjhan de yaar Bulleya
Sunle pukaar Bulleya
Tu hi toh yaar Bulleya
Murshid (teacher) mera, Murshid mera
Tera mukaam kamle
Sarhad ke paar Bulleya
Parvardigar Bulleya
Haafiz ( Haafez Sayyed??)tera, Murshid mera

Main taan gul se lipti titli ki tarah muhajir hoon
Ek pal ko thehroon, pal mein udd jaaun (cross border Insurgents\Terrorists??)
Ve main tan hoon pagdandi
labhdi ae jo raah jannat ki (72 virgins??)
Tu mude jahan main saath mud jaaun

Tere kaarvan mein shamil hona chahun (Jihadi groups??)
Kamiya taraash ke main kaabil hona chahun

[Hidden meanings behind simple words, maybe?]

So, in all when we happily go to watch latest bollywood flicks and pay for the killing of our own countrymen and destruction of the nation. Who knows??!

The main purpose of demonetization was to check current rates of inflation and then insurgency and terror funding, smuggling, narcotics, human trafficking etc in that order, perhaps. Further, the idea could have been to bolster domestic currency from losing out its credibility in the global markets, thereby triggering adverse socio-economic impacts. I hope the present government turns out to be more prudent in coming years and take further steps to quash this menace of fake currency. The cashless society would be a welcome step in that direction.

Nice videos that explain the how the value of money is created.

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