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Monday, 24 March 2008

There are three different items in the economy

1. Money
2. Variable value items
3. Constant value items

The first economies only consisted of people and variable value items. Trade was by barter. Variable value items for variable value items.

Then money was invented.

Finally double entry accounting was introduced and constant value items came about.

Money´s value is being destroyed by cash inflation. Low inflation (2%) can reduce this destruction to a minimum. Monetary values more than 31 days old in low inflationary economies are all out of date/wrong.

Variable value items are adequately valued in markets and by International Accounting Standards/GAAPs. Variable values more than 31 days old in low inflationary economies are all out of date/wrong.

Constant value items are being destroyed by the combination of inflation and normal accounting. Ignoring/banning the assumption that money is stable will stop this destruction forever. Constant values more than 31 days old in low inflationary economies are all out of date/wrong.

All values and financial statements more than 31 days old in low inflationary economies are out of date/wrong.

All values in hyperinflationary economies are out of date/wrong at the next parallel rate. This can be from the one day to the next.

All constant value items never updated are destroyed at the inflation or parallel rate.

0% cash inflation which has never been achieved over any sustained period of time will make the real and monetary economy work at 0% inflation.

Stopping the assumption that money is stable which is Real Value Accounting and easy to implement will result in 0% inflation ONLY in CONSTANT real value non-monetary items.

References:

http://www.accountancysa.org.za/resources/ShowItemArticle.asp?ArticleId=1235&Issue=857

http://en.wikipedia.org/wiki/Historical_cost