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Wednesday, 20 February 2008

Inflation and the stable measuring unit assumption are the two universal enemies.

Inflation IS the universal enemy as far as monetary items are concerned. Each one per cent rise in inflation instantaneously destroys more hunderds of billions of US Dollars in all monetary items throughout the whole economy. It is very difficult to arrive at zero per cent inflation. Two per cent inflation - defined incorrectly as "price stability" - destroys 51% of the real value of all monetary items over 35 years time.

The combination of inflation and the stable measuring unit assumption is the universal enemy as far as constant real value non-monetary items (historical cost items) NEVER updated (eg. retained income) are concerned. Each one per cent rise in inflation destroys even more hunderds of billions of US Dollars in the real value on constant real value non-monetary items NEVER updated each and every year on top of the hundreds of billions of US Dollars currently being destroyed each and every year by current inflation world wide.

Your contribution need not be deleted. The other side of the story need to be added.

You are only referring to one component of inflation, namely, cash inflation. What about the hunderds of billions of US Dollars destroyed each and every year in all companies´ retained income balances world wide in inflationary economies by the combination of inflation and the stable measuring unit assumption?

Revoke the stable measuring unit assumption (as mandated by the International Accounting Standards Board in IAS 29 in hyperinflationary economies) and you stop the second component of inflation forever. That is easy. It is simply an accounting procedure. Arriving at zero inflation is much more difficult to eliminate cash inflation.

Inflation and the stable measuring unit assumption are the two universal enemies