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Sunday, 20 April 2008

Inflation destroys R168 billion of real value in M3 and SA accountants some unknown value in the real economy.

SA can prevent the destruction of real value by non-monetary inflation in the real economy by banning the stable measuring unit assumption. Stated in another way: ban SA accountants´ silly assumption that money is perfectly stable only for the purpose of valuing constant real value non-monetary items never updated, eg. retained income, or not fully updated, eg. salaries, wages, taxes, etc.

The accounted part of the R168 billion destroyed in M3 would be taken to the profit and loss account as a net monetary loss. It is not presently done like that.

SA accountants currently destroy hundreds of billions of Rand in retained income real value and in all other constant values never of not fully updated each and every year. They are killing that part of the real economy. This is an unknown percentage lower than 10% per annum of the real economy. This destruction of real value only happens in constant real value non-monetary items never or not fully updated. Salaries and wages are not always fully updated, for example. The full 10% destruction only takes place in constant values never updated, eg. retained income.

That is one of SA´s structural problems. Another is the 3 to 6% inflation target. It should be targeted at an upper limit of 2% like in Europe and the US.

South Africa can maintain more than 98% of real value in the economy by limiting inflation to a maximum of 2%. That is how the major part of the world economy maintains more than 97% of real value at the moment.

Money has three functions:

1. Medium of exchange
2. Store of value
3. Unit of account

A central bank can maintian more than 98% of all real value by keeping inflation at 2%. This is the result of money´s third function.

At expected 10% inflation the SARB is maintaining more than 90% of real value in the real economy. How much more is not known. 10% of M3 or R168 billion is definitely being destroyed in the monetary economy. None of this real loss is accounted in SA at the moment.

SA accountants destroy an unknow value running into the hundreds of billions of Rand in all constant real value non-monetary items never or not fully updated, eg. retained income.