Bitcoin is a decentralized digital peer-to-peer payment protocol with a spontaneously monetized unit of account. The Bitcoin System's unit of account, bitcoin, is used as a digital medium of exchange on the Bitcoin payment platform. The monetized bitcoin is a very unstable store of value.
bitcoin is the unit of account of the Bitcoin block chain system. bitcoin will never be used as the official monetary unit of account or monetary unit of measure in any accounting model.
Spontaneous monetization of bitcoin
Bitcoin is an open decentralized system. Anyone can participate. Monetization also had to be spontaneous.
On 22 May, 2010 "laszlo" spontaneously monetized bitcoin at $0.0025 for 1BTC. He paid 10 000 BTC for 2 pizzas costing about $25.
Money is supposed to be perfectly stable in real value. Money never was or is or ever will be perfectly stable in real value on a sustainable basis over time. A Consumer Price Index is thus required to calculate a unit of constant purchasing power. Implementing Capital Maintenance in Units of Constant Purchasing Power (CMUCPP) in terms of the Daily CPI (during low and high inflation and deflation) and the USD parallel rate during hyperinflation, including daily inflation-indexing of the entire money supply stabilizes the real value of the money supply as well as the real value of all constant real value non-monetary items in an economy.
The fact that bitcoin was spontaneously monetized and thereafter evolved to increase in real value - it has a limit of 22 million bitcoins in 100 years' time - means bitcoin was never intended to have a perfectly stable real value over time or even a relatively stable real value that can be assumed to be perfectly stable like in the case of all fiat currencies (all national monetary units).
Bitcoin can thus never be real money. Bitcoin can never be a monetary item. It is not money or a monetary item. It is a variable real value non-monetary item similar to rare stamps.
Monetary items constitute the money supply. Bitcoins will never be part of any country's money supply. Bitcoin can thus also never be subject to monetary inflation and monetary deflation because it is not assumed to be perfectly stable in real value.
Nicolaas Smith
Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Friday 30 May 2014
Friday 16 May 2014
It is misleading to state that bitcoin is subject to monetary inflation and deflation
A Consumer Price Index can only be calculated in the case of the currency in which the consumer items is priced being a fiat currency, i.e., it is assumed to be perfectly stable in real value under the traditional Historical Cost paradigm. No fiat currency is, in fact, generally perfectly stable in real value. All fiat currencies are thus assumed to be perfectly stable, i.e., the stable measuring unit assumption is applied.
The CPI is then used to, e.g., inflation-adjust government indexed bonds (TIPS) on a daily basis, measure financial capital maintenance in units of constant purchasing power as in IAS 29 Financial Reporting in Hyperinflationary Economies, etc.
Bitcoin is not assumed to be perfectly stable in real value. It is not a fiat currency. It is a property as per the US IRS. It is, in fact, a variable real value non-monetary item just like any other property, plant or equipment.
Since bitcoin is not assumed to be perfectly stable in real value (heaven forbid!), it is thus not subject to the economic concept of monetary item inflation, being a sustained increase - not in a specific price, but, in the general price level, or deflation, being a sustained decrease - not in a specific price, but, the general price level.
It is thus a complete mistake to associate bitcoin with monetary inflation and deflation as indicated by the change in a CPI.
On the other hand:
It is true that any single price increase is also described as inflation of that specific price. However, it is clearly understood in economics that it is not the same as monetary inflation being a sustained increase in the general price level which normally includes simultaneous decreases (also described as deflation) in various specific prices. This, nonetheless, confuses most people.
In the same way a decrease in a specific price is described as deflation in that specific price. It is also clearly understood in economics that it is not the same as monetary deflation being a sustained decrease in the general price level which normally includes simultaneous increases (also described as inflation) in various specific prices. However, this also confuses most people.
It is thus misleading to state that bitcoin is subject to monetary inflation and deflation. It is not.
Nicolaas Smith
Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Despite what Bloomberg states: Monetary deflation or inflation is impossible in bitcoin
Both the economic science concept of monetary item inflation and the economic science concept of monetary item deflation are impossible with bitcoin because bitcoin is a variable real value non-monetary item (a property, not a currency - not money or a monetary item - as the US IRS stated - or "fundamentally not a currency" as the People's Bank of China (Central Bank of China) stated).
The economic science concept of inflation, unfortunately, has not only one, but, two meanings (which is sadly, but unavoidably and very humanly, rather confusing):
(1) Inflation is sometimes used to simply mean a price increase in any single price, for example, the Bank of England sometimes states "house price inflation" when it actually means the increase in house prices in the UK: a single sector price increase in the UK, not a sustained increase in the general price level in terms of the Pound as measured in terms of the UK CPI measured in terms of the monetary item, the UK Pound - the undoubtedly main definition of inflation for people in the UK. Inflation used in this sense of simply any single price increase (not a general price level increase resulting in the decrease of the real value of the monetary item, the UK Pound) thus has as its opposite that deflation is simply any price decrease (not a general price level decrease resulting in the increase in the real value of the monetary item, the UK Pound).
(2) Secondly, inflation is almost always (luckily and scientifically) correctly used to mean "a sustained increase in the general price level" when the general price level is taken to be indicated by the Consumer Price Index, which is calculated in terms of a fiat local currency which is assumed to be perfectly stable - when in fact the fiat currency, generally, is almost never perfectly stable (maybe perfectly stable - zero inflation - for only one or a maximum of two months in a row).
Deflation is thus impossible in bitcoin for simply the same reason: bitcoin is not a fiat currency with a real value assumed to be perfectly stable over time.
Fiat money is always a monetary item. That is: it forms part of a country's money supply. There is not one bitcoin included in any country's money supply: thus, another clear proof that bitcoin is not a monetary item (not money) although everyone calls it a virtual or digital or cryptocurrency. There is no problem with calling bitcoin a digital currency: that is how the man and woman in the street speak about bitcoin. The man or woman in the street regards any widely used medium of exchange as "money". In economic science, however, bitcoin is not a monetary item: its is a variable real value non-monetary item as very correctly indicated by the US IRS which ruled it is a property (part of Property, Plant and Equipment) and not a currency: not a monetary item or "fundamentally not a currency" as the Chinese PBOC correctly ruled.
Bitcoin has been classified as property (a variable real value non-monetary item - not a monetary item) in the US. Bitcoin has not been classified as a monetary item in any country although everybody calls it a digital currency.
Bitcoin can never be a monetary item. To become a monetary item, bitcoin has to be perfectly stable in real value or assumed to be perfectly stable in real value, like all fiat currencies are under Historical Cost Accounting, the traditional accounting model used to account almost all economic activity in the world economy.
Bitcoin speculators (the WinkleVoss Twins, et al), who are 99.9% responsible for the bitcoin phenomenon would be totally mortified if anyone would be so absolutely silly to succeed in making bitcoin perfectly stable in real value. They would die on the spot. They and the WinkleVoss Twins are betting their life´s savings on the view that bitcoin would skyrocket in price because it is limited to a total of 22 million bitcoins in about 100 year's time. So be it. Good luck to them.
However, if the bitcoin price were to take off exponentially in 100 year's time when the 22 millionth (last) bitcoin is mined with increased massive demand for bitcoin in the world economy, then it would not be because of deflation (the increase in the real value of a nominal value fiat currency - which bitcoin is not - because of a sustained decrease in the general price level indicated by the CPI which is measured in terms of that "assumed-to-be-perfectly-stable fiat currency".)
It would simply be because of a hopefully (by the WinkleVosses and other speculators) massive increase in demand for a stopped-in-supply bitcoin. It would have absolutely nothing to do with deflation or a sustained decrease in the general price level of a fiat currency that is assumed to be perfectly stable in real value - which bitcoin is not.
Anyone (for example - with all due respect for a great publication - Bloomberg) stating that bitcoin is subject to inflation (not the price increase definition) or deflation, does not understand the economic concept of monetary inflation and deflation with reference to a fiat currency that is assumed to be perfectly stable in real value.
There are a lot of things I do not understand.
To construct a CPI measured in Bitcoin is thus very silly since there are generally no consumer prices stated in bitcoin and most probably never will be.
Nicolaas Smith
Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Sunday 4 May 2014
What is money?
I) AS DEFINED IN ECONOMICS
In terms of economics, an item has to fulfil all the following requirements, at the same time, to be considered "money" and thus a monetary item:
1. a widely used medium of exchange which overcomes the double coincidence of wants problem,
2. a relatively stable store of real value,
3. a relatively stable real value unit of account
and
4. legal tender.
This money is a monetary item. Monetary items constitute the money supply.
Money´s real value is eroded by inflation and increased by deflation.
Prices are widely quoted in this money.
The Daily CPI reflects the general price level. Items in the consumer basket used to calculate the Daily CPI are priced in terms of this money.
This money is used to calculate a unit of constant purchasing power in terms of the Daily CPI in order to
(a) eliminate the effect of inflation and deflation from monetary items and
(b) eliminate the effect of the stable measuring unit assumption from constant real value non-monetary items.
II) AS SEEN BY THE MAN IN THE STREET
Money is anything that is a widely used medium of exchange.
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
In terms of economics, an item has to fulfil all the following requirements, at the same time, to be considered "money" and thus a monetary item:
1. a widely used medium of exchange which overcomes the double coincidence of wants problem,
2. a relatively stable store of real value,
3. a relatively stable real value unit of account
and
4. legal tender.
This money is a monetary item. Monetary items constitute the money supply.
Money´s real value is eroded by inflation and increased by deflation.
Prices are widely quoted in this money.
The Daily CPI reflects the general price level. Items in the consumer basket used to calculate the Daily CPI are priced in terms of this money.
This money is used to calculate a unit of constant purchasing power in terms of the Daily CPI in order to
(a) eliminate the effect of inflation and deflation from monetary items and
(b) eliminate the effect of the stable measuring unit assumption from constant real value non-monetary items.
II) AS SEEN BY THE MAN IN THE STREET
Money is anything that is a widely used medium of exchange.
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Sunday 27 April 2014
If Bitcoins were money their creation would immediately be banned by monetary authorities
If Bitcoins were money their creation would immediately be banned by monetary authorities
For a cryptocurrency (for example, bitcoin) - or any other item - to be money, i.e., a monetary item, it has to be
1. a widely accepted medium of exchange
2. a perfectly stable real value store of value
and
3. a perfectly stable real value unit of account
besides also being legal tender in the economy where the money is created.
Monetary items constitute the money supply in the economy where the money is created.
Non-monetary items are all items that are not monetary items.
Non-monetary items are sub-divided in
(a) variable real value non-monetary items, e.g., property, plant, equipment, foreign exchange, listed and unlisted shares, inventory, raw material stock, bitcoins, etc.
and
(b) constant real value non-monetary items, e.g., all items in sharehoders´ equity, trade debtors, trade creditors, all items in the profit and loss account, provisions, salaries, wages, pensions, taxes, rents, interest, etc.
More specifically, a monetary item has to be a perfectly stable store of real value which makes it a perfectly stable real value unit of account.
Fiat money, e.g., the US Dollar, Euro, Yen, Yuan, Ruble, etc., is generally not a perfectly stable store of real value and thus also not a perfectly stable real value unit of account. The US Dollar and the Euro, for example, have an inflation target of 2 percent per annum. That is regarded (another assumption) as "monetary stability" by the monetary authorities.
Mankind over the ages has overcome the problem of money having to be perfectly stable in real value by simply assuming that it is perfectly stable in real value over time by applying the stable measuring unit assumption under the traditional, generally accepted, globally implemented Historical Cost Accounting model to account all economic activity.
‘The Measuring Unit principle: The unit of measure in accounting shall be the base money unit of the most relevant currency. This principle also assumes the unit of measure is stable; that is, changes in its general purchasing power are not considered sufficiently important to require adjustments to the basic financial statements.’
Walgenbach, Dittrich and Hanson 1973: 429
Problem solved. Money is generally never perfectly stable, so, we solve the problem by simply assuming it is perfectly stable in real value. Ask any accountant or economist and he or she will confirm this.
Cryptocurrencies, by being variable real value non-monetary items, can thus never be money or monetary items.
If a cryptocurrency were perfectly stable in real value over time, it would be a monetary item and could be used as a perfectly stable unit of account. However, their creation would immediately be banned by monetary authorities because only a country's central bank has the authority to issue money in an economy.
Bitcoins are a medium of exchange because many people and companies accept them as such. They are also a variable store of value similar to fiat money. However, bitcoins are not assumed to be perfectly stable in real value and used as such as a unit of account with a perfectly stable real value whereas all fiat currencies (money within those economies) are. Bitcoins are thus not money. Bitcoins can thus never be money or a monetary item.
If bitcoins were money, their creation would immediately be banned by monetary authorities. This is true for any cryptocurrency.
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
For a cryptocurrency (for example, bitcoin) - or any other item - to be money, i.e., a monetary item, it has to be
1. a widely accepted medium of exchange
2. a perfectly stable real value store of value
and
3. a perfectly stable real value unit of account
besides also being legal tender in the economy where the money is created.
Monetary items constitute the money supply in the economy where the money is created.
Non-monetary items are all items that are not monetary items.
Non-monetary items are sub-divided in
(a) variable real value non-monetary items, e.g., property, plant, equipment, foreign exchange, listed and unlisted shares, inventory, raw material stock, bitcoins, etc.
and
(b) constant real value non-monetary items, e.g., all items in sharehoders´ equity, trade debtors, trade creditors, all items in the profit and loss account, provisions, salaries, wages, pensions, taxes, rents, interest, etc.
More specifically, a monetary item has to be a perfectly stable store of real value which makes it a perfectly stable real value unit of account.
Fiat money, e.g., the US Dollar, Euro, Yen, Yuan, Ruble, etc., is generally not a perfectly stable store of real value and thus also not a perfectly stable real value unit of account. The US Dollar and the Euro, for example, have an inflation target of 2 percent per annum. That is regarded (another assumption) as "monetary stability" by the monetary authorities.
Mankind over the ages has overcome the problem of money having to be perfectly stable in real value by simply assuming that it is perfectly stable in real value over time by applying the stable measuring unit assumption under the traditional, generally accepted, globally implemented Historical Cost Accounting model to account all economic activity.
‘The Measuring Unit principle: The unit of measure in accounting shall be the base money unit of the most relevant currency. This principle also assumes the unit of measure is stable; that is, changes in its general purchasing power are not considered sufficiently important to require adjustments to the basic financial statements.’
Walgenbach, Dittrich and Hanson 1973: 429
Problem solved. Money is generally never perfectly stable, so, we solve the problem by simply assuming it is perfectly stable in real value. Ask any accountant or economist and he or she will confirm this.
Cryptocurrencies, by being variable real value non-monetary items, can thus never be money or monetary items.
If a cryptocurrency were perfectly stable in real value over time, it would be a monetary item and could be used as a perfectly stable unit of account. However, their creation would immediately be banned by monetary authorities because only a country's central bank has the authority to issue money in an economy.
Bitcoins are a medium of exchange because many people and companies accept them as such. They are also a variable store of value similar to fiat money. However, bitcoins are not assumed to be perfectly stable in real value and used as such as a unit of account with a perfectly stable real value whereas all fiat currencies (money within those economies) are. Bitcoins are thus not money. Bitcoins can thus never be money or a monetary item.
If bitcoins were money, their creation would immediately be banned by monetary authorities. This is true for any cryptocurrency.
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Tuesday 22 April 2014
Completely wrong Bitcoin statements
Completely wrong Bitcoin statements
It is completely wrong for The Economist to state that Chronic deflation may keep Bitcoin from displacing its fiat rivals.
Deflation is impossible in Bitcoin. It is impossible in a non-monetary item. A bitcoin is a variable real value non-monetary item.
Deflation is a sustained decrease in the general price level over time.
Deflation means the real value of a monetary item increases while its nominal value stays the same over time as a result of a fall in the general price level.
A monetary item can only be affected by inflation when its real value decreases as a result of a sustained increase in the general price level over time. The nominal value of the monetary item (US Dollar, Euro, Yuan, Yen, etc.) stays the same over time.
All statements linking Bitcoin to inflation or deflation are completely wrong.
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
It is completely wrong for The Economist to state that Chronic deflation may keep Bitcoin from displacing its fiat rivals.
Deflation is impossible in Bitcoin. It is impossible in a non-monetary item. A bitcoin is a variable real value non-monetary item.
Deflation is a sustained decrease in the general price level over time.
Deflation means the real value of a monetary item increases while its nominal value stays the same over time as a result of a fall in the general price level.
A monetary item can only be affected by inflation when its real value decreases as a result of a sustained increase in the general price level over time. The nominal value of the monetary item (US Dollar, Euro, Yuan, Yen, etc.) stays the same over time.
All statements linking Bitcoin to inflation or deflation are completely wrong.
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Thursday 17 April 2014
IASB agrees with silly idea that capital maintenance is only required during high inflation
IASB still clueless about capital maintenance
The IASB now officially agrees with the silly idea that capital maintenance is only required with the onset of high inflation.
After an analysis of the replies to the Discussion Paper: A Review of the Conceptual Framework, the IASB now officially agrees with the silly idea that capital maintenance is only required with the onset of high inflation.
15 (c) Capital maintenance – Most respondents agreed with the proposal in the Discussion Paper to leave the existing descriptions and the discussion of capital maintenance concepts in the Conceptual Framework largely unchanged until such time as work on accounting for high inflation indicates a need for a change. Consequently, we do not propose to discuss capital maintenance with you unless work on the measurement section of the Exposure Draft highlights a need to discuss the issue further.
The IASB simply ignores the statement by the Australian accounting authorities that there is a lack of understanding at the IASB regarding the importance of capital maintenance in the accounting framework.
The IASB also ignores the statement by The European Accounting Association that "Capital maintenance is a competing objective of financial reporting" in their comment to the above Discussion Paper.
The ignorance of the functioning of capital maintenance in units of constant purchasing power in terms of a DAILY INDEX at the IASB is shocking especially when it is taken into account that by simply making a very small change to IAS 29 Financial Reporting in Hyperinflationary Economies and requiring DAILY indexing instead of applying the monthly published CPI would stabilize the non-monetary economies in hyerinflationary economies in Venezuela and Belarus over a very short time.
The IASB has absolutely no understanding of what is written in the previous paragraph although I have been trying to explain it to them since January 2012 in IFRS ´X` CAPITAL MAINTENANCE IN UNITS OF CONSTANT PURCHASING POWER.
The IASB is absolutely clueless about the effects of daily indexing on capital maintenance.
I can see why the US Securities and Exchange Commission refuses to agree to the adoption of IFRS in the US economy. The IASB is very intransigent to the detriment of the world economy.
Nicolaas Smith
Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
The IASB now officially agrees with the silly idea that capital maintenance is only required with the onset of high inflation.
After an analysis of the replies to the Discussion Paper: A Review of the Conceptual Framework, the IASB now officially agrees with the silly idea that capital maintenance is only required with the onset of high inflation.
15 (c) Capital maintenance – Most respondents agreed with the proposal in the Discussion Paper to leave the existing descriptions and the discussion of capital maintenance concepts in the Conceptual Framework largely unchanged until such time as work on accounting for high inflation indicates a need for a change. Consequently, we do not propose to discuss capital maintenance with you unless work on the measurement section of the Exposure Draft highlights a need to discuss the issue further.
The IASB simply ignores the statement by the Australian accounting authorities that there is a lack of understanding at the IASB regarding the importance of capital maintenance in the accounting framework.
The IASB also ignores the statement by The European Accounting Association that "Capital maintenance is a competing objective of financial reporting" in their comment to the above Discussion Paper.
The ignorance of the functioning of capital maintenance in units of constant purchasing power in terms of a DAILY INDEX at the IASB is shocking especially when it is taken into account that by simply making a very small change to IAS 29 Financial Reporting in Hyperinflationary Economies and requiring DAILY indexing instead of applying the monthly published CPI would stabilize the non-monetary economies in hyerinflationary economies in Venezuela and Belarus over a very short time.
The IASB has absolutely no understanding of what is written in the previous paragraph although I have been trying to explain it to them since January 2012 in IFRS ´X` CAPITAL MAINTENANCE IN UNITS OF CONSTANT PURCHASING POWER.
The IASB is absolutely clueless about the effects of daily indexing on capital maintenance.
I can see why the US Securities and Exchange Commission refuses to agree to the adoption of IFRS in the US economy. The IASB is very intransigent to the detriment of the world economy.
Nicolaas Smith
Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Difference between inflation and the stable measuring unit assumption
Difference between inflation and the stable measuring unit assumption
Almost no-one understands the difference between the inflation and the stable measuring unit assumption.
DEFINITION
Inflation is a sustained increase in the general price level over time.
Inflation results in a decrease in the real value of ONLY money and other monetary items over time. Inflation has NO effect on the real value of non-monetary items over time. Inflation can only affect the real value of monetary items - nothing else.
DEFINITION
Monetary items constitute the money supply.
DEFINITION
Non-monetary items are all items that are not monetary items.
DEFINITION
The stable measuring unit assumption is the ASSUMPTION made by ONLY historical cost accountants that changes in the purchasing power of money are not sufficiently important to require:
(i) inflation-indexing all monetary items in terms of all changes in the general price level, that is to say, at least daily and
(2) the measurement of all constant real value non-monetary items in units of constant purchasing power in terms of all changes in the general price level, that is to say, at least daily.
SUMMARY
Under the stable measuring unit assumption it is ASSUMED that money is
PERFECTLY STABLE over time at ALL levels of inflation and deflation.
The ASSUMPTION that money is PERFECTLY STABLE over time at ALL levels of inflation and deflation is obviously completely wrong.
So, what is the difference between inflation and the stable measuring unit assumption?
The difference is that inflation only erodes the real value of monetary items over time and that the constant purchasing power (real value) of constant real value non-monetary items is eroded, not by inflation, but by the stable monetary unit assumption over time during inflation.
Thus, the real value of monetary items is eroded by inflation while the real value of constant real value non-monetary items is eroded by the stable measuring unit assumption, i.e., by the use of the traditional Historical Cost Accounting model.
Most accountants and economists (as well as people in general) mistakenly believe that inflation erodes the real value of companies´ capital and retained profits while it is actually an impossibility: inflation can only affect the real value of monetary items - nothing else. Inflation has no effect on the real value of non-monetary items. The real value of constant real value non-monetary items is eroded by the use of the stable measuring unit assumption, i.e., by the use of the traditional Historical Cost Accounting model.
Nicolaas Smith
Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Almost no-one understands the difference between the inflation and the stable measuring unit assumption.
DEFINITION
Inflation is a sustained increase in the general price level over time.
Inflation results in a decrease in the real value of ONLY money and other monetary items over time. Inflation has NO effect on the real value of non-monetary items over time. Inflation can only affect the real value of monetary items - nothing else.
DEFINITION
Monetary items constitute the money supply.
DEFINITION
Non-monetary items are all items that are not monetary items.
DEFINITION
The stable measuring unit assumption is the ASSUMPTION made by ONLY historical cost accountants that changes in the purchasing power of money are not sufficiently important to require:
(i) inflation-indexing all monetary items in terms of all changes in the general price level, that is to say, at least daily and
(2) the measurement of all constant real value non-monetary items in units of constant purchasing power in terms of all changes in the general price level, that is to say, at least daily.
SUMMARY
Under the stable measuring unit assumption it is ASSUMED that money is
PERFECTLY STABLE over time at ALL levels of inflation and deflation.
The ASSUMPTION that money is PERFECTLY STABLE over time at ALL levels of inflation and deflation is obviously completely wrong.
So, what is the difference between inflation and the stable measuring unit assumption?
The difference is that inflation only erodes the real value of monetary items over time and that the constant purchasing power (real value) of constant real value non-monetary items is eroded, not by inflation, but by the stable monetary unit assumption over time during inflation.
Thus, the real value of monetary items is eroded by inflation while the real value of constant real value non-monetary items is eroded by the stable measuring unit assumption, i.e., by the use of the traditional Historical Cost Accounting model.
Most accountants and economists (as well as people in general) mistakenly believe that inflation erodes the real value of companies´ capital and retained profits while it is actually an impossibility: inflation can only affect the real value of monetary items - nothing else. Inflation has no effect on the real value of non-monetary items. The real value of constant real value non-monetary items is eroded by the use of the stable measuring unit assumption, i.e., by the use of the traditional Historical Cost Accounting model.
Nicolaas Smith
Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Wednesday 16 April 2014
HCA is like shooting yourself in both feet
HCA is like shooting yourself in both feet
Under Historical Cost Accounting you apply the stable measuring unit assumption. That´s a double whammy to the maintenance of real value: (a) you do not maintain the real value of monetary items and (b) you do not maintain the real value of constant real value non-monetary items during inflation and deflation as follows:
1. With monetary items you assume money is perfectly stable and you DO NOT inflation-index all monetary items daily
and
2. With constant real value non-monetary items you apply the stable measuring unit assumption and you DO NOT measure constant real value non-monetary items in units of constant purchasing power in terms of all changes in the general price level, that is: at least daily.
There´s you double whammy to real value under HCA.
Under Capital Maintenance in Units of Constant Purchasing Power (CMUCPP) in terms of the Daily CPI you would:
A Maintain the real value of all monetary items by inflation-indexing them daily
and
B Maintain the constant purchasing power (real value) of all constant real value non-monetary items constant by measuring them in units of constant purchasing power in terms of the Daily CPI.
Nicolaas Smith
Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Under Historical Cost Accounting you apply the stable measuring unit assumption. That´s a double whammy to the maintenance of real value: (a) you do not maintain the real value of monetary items and (b) you do not maintain the real value of constant real value non-monetary items during inflation and deflation as follows:
1. With monetary items you assume money is perfectly stable and you DO NOT inflation-index all monetary items daily
and
2. With constant real value non-monetary items you apply the stable measuring unit assumption and you DO NOT measure constant real value non-monetary items in units of constant purchasing power in terms of all changes in the general price level, that is: at least daily.
There´s you double whammy to real value under HCA.
Under Capital Maintenance in Units of Constant Purchasing Power (CMUCPP) in terms of the Daily CPI you would:
A Maintain the real value of all monetary items by inflation-indexing them daily
and
B Maintain the constant purchasing power (real value) of all constant real value non-monetary items constant by measuring them in units of constant purchasing power in terms of the Daily CPI.
Nicolaas Smith
Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Friday 11 April 2014
What backs the US Dollar?
The US Dollar is backed by all the underlying value systems in the US economy.
The underlying values systems in the US economy include, but are not limited to:
Sound governance
Sound economic policies
Sound education system
Sound justice system
Sound health system
Sound defense system
Sound police system
Sound commerce and industry
Sound infra-structure system
Sound monetary policies
Sound accounting principles
Etc, etc.
The same is true for every other fiat currency. They are backed by all the specific underlying values systems in each economy.
Nicolaas Smith
Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
The underlying values systems in the US economy include, but are not limited to:
Sound governance
Sound economic policies
Sound education system
Sound justice system
Sound health system
Sound defense system
Sound police system
Sound commerce and industry
Sound infra-structure system
Sound monetary policies
Sound accounting principles
Etc, etc.
The same is true for every other fiat currency. They are backed by all the specific underlying values systems in each economy.
Nicolaas Smith
Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Friday 4 April 2014
Quantitative easing
Quantitative easing is the creation of new money by the central bank in the form of loans to commercial banks that does not result in an increase in inflation. A central bank increases commercial banks´ reserves with the central bank by means of valid loans that have to be paid back by the commercial banks. The commercial banks, having more reserves with the central bank, then increase loans to businesses and consumers which boost economic activity in a non-inflationary way.
Nicolaas Smith
Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Nicolaas Smith
Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Thursday 3 April 2014
Bitcoin is not money like your local currency
Bitcoin is not money like your local currency
There are three basic economic items in the economy:
1. Monetary items, e.g., bank notes and coins, money loans and all other items in the money supply.
2. Variable real value non-monetary items, e.g., property, plant, equipment, inventory, stocks, shares, patents, stamps, gold, etc.
3. Constant real value non-monetary items, e.g., salaries, wages, rents, interest, capital, profits, losses, all items in shareholders equity, all items in the profit and loss account, accounts receivable, accounts payable, etc.
Where do bitcoins fit in?
They are not constant real value non-monetary items. Their real values change daily.
Are they monetary items? Let´s see: are they the same as money?
For any item to be money it has to have all three of the functions of money:
a) Medium of exchange.
b) Store of value.
c) Unit of account.
Bitcoins are certainly a medium of exchange. Somebody bought a Tesla with bitcoins. They are accepted in some stores.
Bitcoins are certainly a store of value, albeit an unstable store of value. They started off in 2009 at a few US Dollars each. A few months ago they shot up to over USD 1200 each. Today they are down to USD 480 I see on Google search.
Are bitcoins a unit of account? I know they are accepted as such in Germany for the purpose of making bitcoin transactions taxable, but it is specifically then immediately stated in Germany that bitcoins are far from being a currency or even e-money the same as the pound or dollar or euro. They are not generally accepted as a unit of account. Financial reports are not widely prepared in bitcoins.
Thus, bitcoins generally only fulfil two of the three functions of money, namely medium of exchange and store of value. Bitcoins are thus not money or monetary items.
However, in 2013 a federal judge in the US stated they are the same as money. That still does not mean that they are widely being used as a unit of account with companies doing their books in terms of bitcoins.
It is certainly a fact that bitcoins are generally described as bitcoin money, a currency, virtual currency, digital currency, virtual money or cryptocurrency. There is no doubt about that. These are the popular terms in the news, on the internet, in research papers, etc. However, bitcoins are not generally used as a unit of account. Thus they are not money or a monetary item or a local currency in terms of the economic definition of money or a monetary item.
Bitcoins are variable real value non-monetary items. The US IRS ruled that they are properties. They are similar to (not the same as) gold or silver coins, stamps or any other variable real value non-monetary item being used as a medium of exchange and store of value. Cigarettes are often used as a medium and exchange and store of value (over the very short term) in prisons.
Bloomberg's report regarding the People's Bank of China: "The central bank will keep watching risks from Bitcoin, which is fundamentally not a currency but an investment target, Sheng Songcheng, head of the monetary authority’s statistics department, told reporters in Beijing on Jan. 15."
Nicolaas Smith
Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
There are three basic economic items in the economy:
1. Monetary items, e.g., bank notes and coins, money loans and all other items in the money supply.
2. Variable real value non-monetary items, e.g., property, plant, equipment, inventory, stocks, shares, patents, stamps, gold, etc.
3. Constant real value non-monetary items, e.g., salaries, wages, rents, interest, capital, profits, losses, all items in shareholders equity, all items in the profit and loss account, accounts receivable, accounts payable, etc.
Where do bitcoins fit in?
They are not constant real value non-monetary items. Their real values change daily.
Are they monetary items? Let´s see: are they the same as money?
For any item to be money it has to have all three of the functions of money:
a) Medium of exchange.
b) Store of value.
c) Unit of account.
Bitcoins are certainly a medium of exchange. Somebody bought a Tesla with bitcoins. They are accepted in some stores.
Bitcoins are certainly a store of value, albeit an unstable store of value. They started off in 2009 at a few US Dollars each. A few months ago they shot up to over USD 1200 each. Today they are down to USD 480 I see on Google search.
Are bitcoins a unit of account? I know they are accepted as such in Germany for the purpose of making bitcoin transactions taxable, but it is specifically then immediately stated in Germany that bitcoins are far from being a currency or even e-money the same as the pound or dollar or euro. They are not generally accepted as a unit of account. Financial reports are not widely prepared in bitcoins.
Thus, bitcoins generally only fulfil two of the three functions of money, namely medium of exchange and store of value. Bitcoins are thus not money or monetary items.
However, in 2013 a federal judge in the US stated they are the same as money. That still does not mean that they are widely being used as a unit of account with companies doing their books in terms of bitcoins.
It is certainly a fact that bitcoins are generally described as bitcoin money, a currency, virtual currency, digital currency, virtual money or cryptocurrency. There is no doubt about that. These are the popular terms in the news, on the internet, in research papers, etc. However, bitcoins are not generally used as a unit of account. Thus they are not money or a monetary item or a local currency in terms of the economic definition of money or a monetary item.
Bitcoins are variable real value non-monetary items. The US IRS ruled that they are properties. They are similar to (not the same as) gold or silver coins, stamps or any other variable real value non-monetary item being used as a medium of exchange and store of value. Cigarettes are often used as a medium and exchange and store of value (over the very short term) in prisons.
Bloomberg's report regarding the People's Bank of China: "The central bank will keep watching risks from Bitcoin, which is fundamentally not a currency but an investment target, Sheng Songcheng, head of the monetary authority’s statistics department, told reporters in Beijing on Jan. 15."
Nicolaas Smith
Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Tuesday 1 April 2014
Capital Maintenance feedback summary by the IASB
Purpose of paper
1. This paper summarises the feedback received on:
(a) the measurement section of the Discussion Paper A Review of the Conceptual Framework for Financial Reporting.
(b) Capital Maintenance, discussed in paragraphs 9.45–9.54 of the Discussion Paper.
2. This paper provides a high level summary of the comments received.
Where appropriate, we will provide more detailed breakdown of the comments for future meetings.
Capital Maintenance
Background
58. The Discussion Paper stated that the IASB plans to include the existing descriptions and the discussion of capital maintenance concepts in the revised Conceptual Framework largely unchanged until such time as a new or revised Standard on accounting for high inflation indicates a need for change.
Summary of feedback
59. Most respondents either agreed with this approach or did not comment on it. Those who explicitly agreed with the approach stated that they had encountered few problems either with the capital maintenance concepts in the existing Conceptual Framework or with high inflation. Consequently, they argued that revising or updating the capital maintenance concepts in the Conceptual Framework should not be a priority.
60. A few respondents broadly agreed with the suggested approach to capital maintenance but suggested some changes to the existing guidance including:
(a) stating in the Conceptual Framework a preference for one of the concepts
of capital maintenance;
(b) removing reference to the physical capital maintenance concept because it
is not used in IFRS;
(c) shortening and focusing the discussion of capital maintenance;
(d) removing all discussion of capital maintenance because it was viewed as
irrelevant to most entities.
61. Some respondents disagreed with the suggested approach. They argued that the concept of capital maintenance is of fundamental importance to financial reporting.
"…the Conceptual Framework should articulate an ideal concept of capital maintenance and its relationship to the ideal measurement base. Accordingly, we do not support the proposal that leaves the existing descriptions and discussion of this issue largely unchanged until such time as any project on accounting for high inflation indicates a need for change.
We think this approach suggests a lack of understanding about the fundamental role a capital maintenance concept has within the accounting framework.
We also consider that our current difficulties with profit measurement and OCI, which have issues of capital maintenance at their root clearly indicate a pressing need to resolve these issues."
CPA Australia and The Institute of Chartered Accountants Australia
62. A few respondents also noted that many jurisdictions are affected by high inflation. Consequently, the IASB should consider capital maintenance concepts when revising the Conceptual Framework.
One respondent argued for greater use of capital maintenance as defined in terms of units of constant purchasing power.
63. A few respondents expressed the view that the IASB’s suggested approach to capital maintenance confuses two concepts:
(a) capital maintenance; and
(b) the measurement unit (nominal vs constant purchasing power), which is the subject of IAS 29 Financial Reporting in Hyperinflationary Economies.
IASB Agenda ref 10G
Copyright (c) 2014 IFRS Foundation
1. This paper summarises the feedback received on:
(a) the measurement section of the Discussion Paper A Review of the Conceptual Framework for Financial Reporting.
(b) Capital Maintenance, discussed in paragraphs 9.45–9.54 of the Discussion Paper.
2. This paper provides a high level summary of the comments received.
Where appropriate, we will provide more detailed breakdown of the comments for future meetings.
Background
58. The Discussion Paper stated that the IASB plans to include the existing descriptions and the discussion of capital maintenance concepts in the revised Conceptual Framework largely unchanged until such time as a new or revised Standard on accounting for high inflation indicates a need for change.
Summary of feedback
59. Most respondents either agreed with this approach or did not comment on it. Those who explicitly agreed with the approach stated that they had encountered few problems either with the capital maintenance concepts in the existing Conceptual Framework or with high inflation. Consequently, they argued that revising or updating the capital maintenance concepts in the Conceptual Framework should not be a priority.
60. A few respondents broadly agreed with the suggested approach to capital maintenance but suggested some changes to the existing guidance including:
(a) stating in the Conceptual Framework a preference for one of the concepts
of capital maintenance;
(b) removing reference to the physical capital maintenance concept because it
is not used in IFRS;
(c) shortening and focusing the discussion of capital maintenance;
(d) removing all discussion of capital maintenance because it was viewed as
irrelevant to most entities.
61. Some respondents disagreed with the suggested approach. They argued that the concept of capital maintenance is of fundamental importance to financial reporting.
"…the Conceptual Framework should articulate an ideal concept of capital maintenance and its relationship to the ideal measurement base. Accordingly, we do not support the proposal that leaves the existing descriptions and discussion of this issue largely unchanged until such time as any project on accounting for high inflation indicates a need for change.
We think this approach suggests a lack of understanding about the fundamental role a capital maintenance concept has within the accounting framework.
We also consider that our current difficulties with profit measurement and OCI, which have issues of capital maintenance at their root clearly indicate a pressing need to resolve these issues."
CPA Australia and The Institute of Chartered Accountants Australia
62. A few respondents also noted that many jurisdictions are affected by high inflation. Consequently, the IASB should consider capital maintenance concepts when revising the Conceptual Framework.
One respondent argued for greater use of capital maintenance as defined in terms of units of constant purchasing power.
63. A few respondents expressed the view that the IASB’s suggested approach to capital maintenance confuses two concepts:
(a) capital maintenance; and
(b) the measurement unit (nominal vs constant purchasing power), which is the subject of IAS 29 Financial Reporting in Hyperinflationary Economies.
IASB Agenda ref 10G
Copyright (c) 2014 IFRS Foundation
ECB introduces the Real Euro
The European Central Bank today introduces Real Euros for the first time in countries in the European Monetary Union. Real Euros are new Euro notes with an embedded chip that reduces the nominal value of the notes in terms of inflation. During deflation the nominal values appearing on the notes will automatically increase in line with deflation.
This is a way to stabilize the Euro monetary economy in the European Monetary Union. It does away with the real effect of inflation and deflation in the EMU.
For example, during inflation of 2% per annum, the nominal value appearing on a new 100 Real Euro note automatically decreases to 98 Euros.
During deflation of 2% per annum the nominal value appearing on a 100 Real Euro note automatically increases to 102 Euros.
The President of the ECB, Mario Draghi, states that this will keep the value of the Euro money supply stable in real terms in the EMU.
He says that all nominal Euros can be exchanged at banks in Europe as from today for Real Euros.
Economists warn that this will make the effect of deflation even worse in the EMU. People will actually see their money increase in real value and will hang on to the notes even longer (see Japan during deflation) before spending them thus worsening the economy.
On the other hand this will stimulate spending during inflation since people will spend their money sooner - before the Real Euros lose more real value in front of their eyes.
Copyright (c) 2014 Primeiro de Abril All rights reserved. No reproduction without permission.
This is a way to stabilize the Euro monetary economy in the European Monetary Union. It does away with the real effect of inflation and deflation in the EMU.
For example, during inflation of 2% per annum, the nominal value appearing on a new 100 Real Euro note automatically decreases to 98 Euros.
During deflation of 2% per annum the nominal value appearing on a 100 Real Euro note automatically increases to 102 Euros.
The President of the ECB, Mario Draghi, states that this will keep the value of the Euro money supply stable in real terms in the EMU.
He says that all nominal Euros can be exchanged at banks in Europe as from today for Real Euros.
Economists warn that this will make the effect of deflation even worse in the EMU. People will actually see their money increase in real value and will hang on to the notes even longer (see Japan during deflation) before spending them thus worsening the economy.
On the other hand this will stimulate spending during inflation since people will spend their money sooner - before the Real Euros lose more real value in front of their eyes.
Copyright (c) 2014 Primeiro de Abril All rights reserved. No reproduction without permission.
Sunday 30 March 2014
Difference between monetary values and monetary items
All economic/accounting/financial values expressed in terms of the monetary unit of account - whether they refer to non-monetary or monetary items - are stated as monetary values: the unit of account is a monetary unit of account.
Definition: Monetary items constitute the money supply.
When an item is part of a country´s money supply, then it is a monetary item. It is expressed as a monetary value since it is expressed in terms of the monetary unit of account.
All non-monetary items - variable and constant real value non-monetary items - expressed in terms of the monetary unit of account are stated as monetary values, but they are not monetary items.
All monetary items are monetary values but not all monetary values are monetary items.
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Definition: Monetary items constitute the money supply.
When an item is part of a country´s money supply, then it is a monetary item. It is expressed as a monetary value since it is expressed in terms of the monetary unit of account.
All non-monetary items - variable and constant real value non-monetary items - expressed in terms of the monetary unit of account are stated as monetary values, but they are not monetary items.
All monetary items are monetary values but not all monetary values are monetary items.
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Thursday 27 March 2014
Daily CPI formula used by France
The formula for calculating the French and Eurozone Daily CPIs is available HERE.
The following Daily CPI´s have been added to the Daily CPI / Monetized Daily Indexed Unit of Account list on the right hand side of this blog:
Eurozone Daily CPI
French Daily CPI
Mexican Monetized Daily Indexed Unit of Account
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
The following Daily CPI´s have been added to the Daily CPI / Monetized Daily Indexed Unit of Account list on the right hand side of this blog:
Eurozone Daily CPI
French Daily CPI
Mexican Monetized Daily Indexed Unit of Account
Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Tuesday 25 March 2014
Argentinian and Uruguayan Daily CPIs
The Argentinian Daily CPI and the Uruguayan Daily CPI are new additions to the Daily CPI / Daily Monetized Unit of Account links on the right hand side of this blog.
The Daily CPI links now include:
1. Chile
2. Colombia
3. Iceland
4. Serbia
5. Turkey
6. UK
7. Uruguay
8. US
9. US unofficial Daily CPI
10. Other unofficial Daily CPIs
The above official Daily CPIs and all others not yet linked on this blog are used in these countries to value/price their specific government inflation-indexed bonds on a DAILY basis in the global USD 3 trillion (2014) market for these sovereign bonds.
Countries that calculate their Daily CPIs in the form of a Daily Monetized Unit of Account and express them in terms of either 1 or 100 units of local currency at the base date, use these DMUAs also to value/price other items besides their government inflation-indexed bonds in their economies. This is of great advantage in these specific DMUA economies.
Chile inflation-index a number of monetary items and non-monetary items in their economy on a DAILY basis besides their sovereign inflation-indexed bonds. So much so that they inflation-adjust more than 25% of their money supply on a DAILY basis. There is thus NO EFFECT of inflation in 25% of Chile´s money supply. If they were to increase that to 100% of their money supply they would have NO EFFECT of inflation in 100% if their money supply at whatever rate of low, high or hyperinflation and deflation.
Colombia use their Real Value Unit DMUA to inflation-index all mortgage bonds in the country on a DAILY basis.
Uruguay use their Unidad Indexada to inflation-adjust some monetary items besides their sovereign inflation-indexed bonds on a DAILY basis.
Nicolaas Smith
Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
The Daily CPI links now include:
1. Chile
2. Colombia
3. Iceland
4. Serbia
5. Turkey
6. UK
7. Uruguay
8. US
9. US unofficial Daily CPI
10. Other unofficial Daily CPIs
The above official Daily CPIs and all others not yet linked on this blog are used in these countries to value/price their specific government inflation-indexed bonds on a DAILY basis in the global USD 3 trillion (2014) market for these sovereign bonds.
Countries that calculate their Daily CPIs in the form of a Daily Monetized Unit of Account and express them in terms of either 1 or 100 units of local currency at the base date, use these DMUAs also to value/price other items besides their government inflation-indexed bonds in their economies. This is of great advantage in these specific DMUA economies.
Chile inflation-index a number of monetary items and non-monetary items in their economy on a DAILY basis besides their sovereign inflation-indexed bonds. So much so that they inflation-adjust more than 25% of their money supply on a DAILY basis. There is thus NO EFFECT of inflation in 25% of Chile´s money supply. If they were to increase that to 100% of their money supply they would have NO EFFECT of inflation in 100% if their money supply at whatever rate of low, high or hyperinflation and deflation.
Colombia use their Real Value Unit DMUA to inflation-index all mortgage bonds in the country on a DAILY basis.
Uruguay use their Unidad Indexada to inflation-adjust some monetary items besides their sovereign inflation-indexed bonds on a DAILY basis.
Nicolaas Smith
Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Friday 14 March 2014
Daily indexing will stop your tears forever, Argentina
The Argentinian Accounting Federation sent a proposal to the IASB in 2010 regarding financial reporting in high inflationary economies (available in IFRS 'X'). I amended their proposal in 2012 with IFRS 'X' CAPITAL MAINTENANCE IN UNITS OF CONSTANT PURCHASING POWER. I suggested capital maintenance in units of constant purchasing power in terms of a DAILY INDEX similar to what stabilized the Brazilian economy during high and hyperinflation from 1964 to 1994. Brazilian accountants called it ´correcção monetária`.
My amendment was ignored by both the Argentinian Accounting Federation and the IASB. The IASB at one stage even wanted to throw my amendments in the rubbish bin. Maybe that is where IFRS ´X´is now at the IASB - despite Hans Hoogervorst´s assurances to the contrary.
When I first read, a year or two ago, that the Argentinian government was faking inflation, I knew that they would land up in an economic disaster.
Now we have this:
Unfortunately the IASB is still in love with historical cost accounting even during high inflation. "The cheque amount is what represents cost" is currently still very forcefully stated by a top IASB member in public when discussing accounting during high inflation which could reach up to 25% per annum. What a joke.
Watch Argentina and Venezuela to see historical cost accountants destroying two big economies - aided and abetted by the IASB.
Nicolaas Smith
Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
My amendment was ignored by both the Argentinian Accounting Federation and the IASB. The IASB at one stage even wanted to throw my amendments in the rubbish bin. Maybe that is where IFRS ´X´is now at the IASB - despite Hans Hoogervorst´s assurances to the contrary.
When I first read, a year or two ago, that the Argentinian government was faking inflation, I knew that they would land up in an economic disaster.
Now we have this:
Soaring Prices Fuel Frustrations Among Weary Argentines
IFRS 'X' is still valid today. It will always be valid while there is inflation and deflation. DAILY INDEXING would give Argentina economic stability over a very short period of time. The IASB could REQUIRE it in IAS 29. The Board could encourage it immediately while correcting IAS 29 in a very short time.Unfortunately the IASB is still in love with historical cost accounting even during high inflation. "The cheque amount is what represents cost" is currently still very forcefully stated by a top IASB member in public when discussing accounting during high inflation which could reach up to 25% per annum. What a joke.
Watch Argentina and Venezuela to see historical cost accountants destroying two big economies - aided and abetted by the IASB.
Nicolaas Smith
Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Thursday 27 February 2014
Ukraine and Venezuela can achieve economic stability in the very short run with help from the IASB
The implementation of capital maintenance in units of constant purchasing power in terms of a DAILY index which follows all - at least DAILY - changes in the general price level would GUARANTEE stability in the REAL VALUE (constant purchasing power) of
salaries
wages
rents
taxes
trade debtors
trade creditors
all non-monetary payables
all non-monetary receivables
all items in the income statement
all profits
all losses
issued share capital
retained earnings
capital reserves
all other items in shareholders´equity
provisions
etc.
at any level of high or hyperinflation in Ukraine and Venezuela in the very short run. This requires the calculation and accounting of net monetary losses and gains.
This would stabilize the constant real value non-monetary economies in Ukraine and Venezuela in the very short run.
This was done very successfully in Brazil from 1964 to 1994 with "correcção monetária" or DAILY indexing which is CMUCPP in terms of a DAILY INDEX.
Extending DAILY INDEXING or "correcção monetária" or CMUCPP in terms of a DAILY INDEX to include the daily inflation-adjustment of all monetary items with all cash in the banking system (obviously not 100% possible) and it would GUARANTEE the stability of the REAL VALUE of these inflation-indexed monetary items at all levels of high and hyperinflation in Ukraine and Venezuela in the very short run. There would still be high or hyperinflation in Ukraine and Venezuela but there would be no EFFECT OF high or hyperinflation just like the effect of low and high inflation is eliminated in the global USD 3 trillion in government capital inflation-indexed bonds (e.g. TIPS) currently inflation-adjusted DAILY during low and high inflation in terms of the DAILY CPI in a great number of countries in the world economy.
Chile already inflation-indexes 25% + of all monetary items in its economy on a DAILY basis during low inflation since 2012. Chile started indexing in 1967 in its economy. They adopted DAILY INDEXING since 1990.
Robert Shiller decried governments´ lack of interest in DAILY INDEXING years ago.
The IASB can achieve that today in a very short time by requiring DAILY INDEXING in IAS 29 Financial Reporting in Hyperinflationary Economies by means of the short turn-around process for correcting an issued IFRS.
Venezuela is implementing IAS 29 since 2009. Ukraine is or would soon be in high inflation. IAS 29 in terms of the monthly published CPI does NOT achieve the above monetary and non-monetary stability as very well proven during the 6 years IAS 29 was implemented at the end of Zimbabwe´s hyperinflation.
Nothing stops the IASB from requiring DAILY INDEXING in IAS 29 and nothing stops the IASB from encouraging it immediately and changing IAS 29 to require it over the very short term.
The above would also stabilize the foreign currency exchange rates of Ukraine and Venezuela with the rest of the world economy - obviously only with all else being equal. DAILY INDEXING would always guarantee internal economic stability no matter what happens with the external exchange rate. Internal economic stability generally always has a stabilizing effect on the external exchange rate - all else being equal.
What a difference DAILY INDEXING of all monetary items and all constant real value non-monetary items would make in Ukraine and Venezuela. Ask Robert Shiller and Gustavo Franco. Franco was one of the architects of the Real Plan in Brazil in 1994.
All of the above also hold true for Argentina and all other countries in high and hyperinflation. The constant purchasing power of constant real value non-monetary items and inflation-indexed monetary items is not only to be maintained constant in real value with the onset of high inflation or only during hyperinflation. CMUCPP in terms of a DAILY INDEX is required at all levels of inflation and deflation: during low inflation and deflation too.
Nicolaas Smith
Copyright (c) 2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
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