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Friday, 4 December 2009

Inflation - a nebulous subject

Who drives inflation, Kalinka asked a day or two ago. As I said: that is a very sensitive question – especially in South Africa.

Inflation is a huge, hazy, vague, indistinct and confusing subject because of the monetary nature of money and the human nature of consumers and business people. We could have solved the problem very quickly if money was not a store of value (and only a medium of exchange and unit of account) and consumers and business people were not human beings. Remember, central bankers have to guess the collective effects of hundreds of millions of consumers and business people (greedy wall street bankers) exercising their individual self-interests.

I do not like discussing inflation because I question everything, I have already seen many theories disproved, I am not a macroeconomist, nor a central banker, every Tom, Dick and Harrry  are experts in inflation and how it comes about is not that important to me.

It’s correct measurement is. Thank heavens for the people in the past who developed the Consumer Price Index. I could not believe it when I saw that Statistics SA had the calculation wrong in the past. That should never, ever happen.

We know exactly what the problem is in accounting: the stable measuring unit assumption and we know exactly how to get rid of it: financial capital maintenance in units of constant purchasing power as authorized by the IASB in the Framework, Par. 104 (a) twenty years ago. When our accountants stop assuming there is no such thing as inflation and never has been in the past as far as the valuation of the reported Retained Profits and other constant items in the SA economy are concerned, there will be zero real value destruction in the constant item economy.

We will be left with the final problem in real value destruction in the three economic items. IFRS solve the valuation of variable item problems. Abandoning the stable measuring assumption will stop real value destruction in constant items. Then we are left with the destruction of the real value of money and other monetary items by inflation. The last frontier before real value Nirvana: a world where we do not destroy the real value of our medium of exchange simply by the way our economy works as our accountants are currently unknowingly destroying the real value of existing reported Retained Profits of all SA companies simply by the way they do accounting.

Accountants admit it is happening - or something is happening - I don´t think they really know what. The best they can do is to state that "inflation influences reported results". They mistakenly blame inflation as driven by the ANC´s economic policy and the SARB´s monetary policy - in their opinion. They are so wrong.

Kalinka, I still have to answer your question about who drives inflation. As you can see it is very foggy out there.

That will be in the next blog.

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