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Friday, 30 May 2008

Nicolaas Smith on 2008/05/30 12:34:37 AM - Re: Ben

Nicolaas Smith on 2008/05/30 12:34:37 AM - Re: Ben

Finweek

Ben, I am sure you will agree that it is not very easy to grasp something that took one person 13 years to unravel by reading a few lines in an article comment.

It will not worsen cash inflation. You must understand that a price increase as a result of higher demand is not inflation.

A price increase as a result of demand staying exactly the same is inflation. The first is simply a genuine price increase, the second is inflation.

You may not know, but this was done for 30 years by Brazil and not under low inflation but under hyperinflation of up to 2000% per annum. They updated all non-monetary items in the real economy DAILY including salaries and they had positive economic growth - under hyperinflation because they stabalized their real economy.

Updating all constant items simply keeps everything the same in the real economy and does not kill the real economy. You are only worried about salaries. That is only one constant item. What about the rest of them? Issued capital and retained income maintaining the investment and capital base of the economy instead of destroying it year after year? That will make a massive difference and for an indefinite period of time - forever.

Firms update salaries but their issued capital and retained income are also updated as well as taxes to the government. All constant items are simply kept at the same real values and their real values are not destroyed at the rate of inflation when they are never updated, eg. retained income. As Logan pointed out: salaries are updated in any case. Instead of giving an annual once off increase of now 11.1% to just maintain the real value, the updating is done monthly. I am sure you understand that. So, with salaries you have exactly the same, more or less. So that takes care of your worry about increasing prices for salaries.

It will be the same as the present. Isn´t this obvious? When people demand higher wages it does not automatically worsen inflation - only when it is higher than the inflation rate and higher than the productivity increase if there was actually an increase in productivity. I think that puts your worry about passing the salary increase on to the company´s products every month to rest. Now it is done yearly. When accountants abandon the stable measuring unit assumption it will be done monthly instead of yearly - so nothing will really change as far as salary increases and product price increase are concerned.

I am sure you agree. So this will not cause massive inflation and spiral out of control. So, that sort out salaries. Now updating issued share capital, retained income, trade debtors, trade creditors, taxes etc will maintain all these items´ real values instead of destroying hundreds of billions of Rand in SA´s real economy each and every year. This will increase GDP, economic growth and job creation