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Thursday, 17 April 2008

0% Inflation only in constant real value non-monetary items

South Africa

Year-on-year inflation February 2008: 9.8%

Actual Historical Cost Paradigm: Assumes 0% inflation only for constant real value non-monetary items NEVER updated, eg. retained income, accumulated losses, trade debtors, trade creditors, capital reserves, provisions, etc., while actual inflation is 9.8%.
Some constant real value non-monetary items are often not fully updated, eg. salaries, wages, rents, fees, royalties, value added taxes, income taxes, company taxes, etc.

Basket of consumer goods

Feb 2007 R100

Feb 2008 R109.8

1. Monetary Inflation 9.8% per annum (destruction of real value of money and other monetary items)

2. Non-monetary inflation (destruction of real value in constant real value non-monetary items never or not fully updated)

(A) 9.8% per annum only for constant real value non-monetary items never updated.

(B) Less than 9.8% per annum for constant real value non-monetary items not fully updated.


1. Monetary Items M3 Value Destroyed

9.8% or R1.714692 trillion x 0.098 = R168.039 billion

2. Non-monetary Items Value Destroyed by South African accountants

(a)Constant real value non-monetary items never updated

Eg. Retained Income

Value Destroyed 9.8% or R???.??? billion x 0.098 = R??.??? billion

Plus 9.8% of all other constant real value non-monetary items never updated.

(b) Constant real value non-monetary items not fully updated

Eg. salaries, wages, rents, fees, royalties, value added taxes, income taxes, company taxes, etc.


Value Destroyed ?% or R???.??? billion x 0.0? = R??.??? billion

Total: A few hundred billion Rand per annum: each and every year.
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Real Value Paradigm: All (past and present) constant real value non-monetary items fully updated all the time to the latest CPI value in low inflationary economies (the latest parallel rate or daily index rate in hyperinflationary economies).

Basket of consumer goods for the purpose of calculating monetary inflation:

Feb 07 R100 Monetary cost

Feb 08 R109.8 Monetary cost

1. Monetary inflation 9.8%

Monetary Items M3

Value Destroyed

9.8% or R1.714692 trillion x 0.098= R168.039 billion


2. Non-monetary inflation: impossible: no historical costs.

Non-monetary inflation: 0%

Constant real value non-monetary items updated at 9.8%

Basket of consumer goods for the purpose of "calculating" non-monetary inflation only in constant real value non-monetary items:

Feb 07 R109.8 (Historical values restated to Feb 08 CPI rate) Perceived value only possible at the current value base.

Feb 08 R109.8 ALL CONSTANT real value non-monetary items automatically updated/maintained/not destroyed in the normal business practice at the CPI rate: the current value base.

Value Destroyed

Zero - in all constant real value non-monetary items

Value to be maintained by SA accountants in the economy when they stop their assumption that money is perfectly stable only for the purpose of valuing constant real value non-monetary items. They are allowed to stop this assumption and they will stop this assumption under hyperinflation but not under non-hyperinflationary conditions.:

9.8% of retained income plus 9.8% of all other constant real values previously never updated plus value maintained in all other constant real value non-monetary items previously not fully updated.

Total: A few hunderd billion Rand per annum: each and every year.

PS. I plan to calculate some actual values for the SA economy.