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Sunday, 30 March 2008

Alan Greenspan´s definition of price stability.

2% Inflation is 98% stable value or 98% Real Value Accounting.

However, it will still destroy 51% of the value of money and constant values not updated over 35 years.

With the size of our economies today, 2% is a gigantic number.

Low or moderate 2% annual inflation is regarded as "price stability" by many entities including the European Central Bank.

"The ECB’s Governing Council has announced a quantitative definition of price stability:
"Price stability is defined as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%."
"The Governing Council has also clarified that, in the pursuit of price stability, it aims to maintain inflation rates below, but close to, 2% over the medium term."

Low or moderate continuous 2% annual inflation will destroy 51% of the real value of money and retained income as well as all other constant real value non-monetary items never updated over 35 years as any inflation calculator will demonstrate. Low or moderate 2% inflation being "price stability" is thus a very dubious definition.

Alan Greenspan´s definition of price stability is very accurate:

"Price stability obtains when economic agents no longer take account of the prospective change in the general price level in their economic decision-making."

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The annual destruction under low or moderate inflation of 2% of the real value of retained income of all companies with retained income world wide amounts to hundreds of billions of Euros (March 2008 value). That is a significant amount of unnecessary and easily avoidable real value destruction in the world economy each and every year.

2% inflation is a high degree of price stability. It is not actual price stability.

Price stability is a year-on-year increase in the Consumer Price Index of 0% as clearly indicated by Mr Greenspan´s definition.

0% cash inflation has never been achieved over a significant period of time.

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Real Value Accounting will result in 0% non-monetary inflation in the real (non-monetary) economy by simply ignoring accountants´ assumption that money is stable only for the purpose of valuing constant value items, eg. retained income.