Tuesday, 12 January 2010

Chávez is playing with fire

Venezuela is in hyperinflation since November 2009. PricewaterhouseCoopers published that on 17 December 2009. Everbody in Venezuela is still in denial about that.

Hugo Chávez is playing with fire when he thinks he can abuse sovereignty to create a fantasy economy where he can half his national debt overnight by presidential decree. Gideon Gono´s casino economy in Zimbabwe was also a fantasy economy created with the abuse of sovereignty. Then he single-handedly destroyed it by simply "printing money" continuously in 100 trillion Zimbabwe Dollar notes. There is no Zimbabwe Dollar today. Sovereignty in the wrong hands is like casting perls before swine.

Venezuealan companies now have to implement IAS 29. IAS 29 will make no difference and is not intended to make any difference to hyperinflation in a country. IAS 29 can be used to stabilize Venezuela´s entire non-monetary economy. Not by restating traditional Historical Cost year-end financial statements prepared in terms of the real value destroying HCA model at the end of 2010 applying the year-end CPI rate to make them "more useful", but, by updating all non-monetary items in the country daily at the daily parallel rate.

That would include trade debtors and trade creditors which the International Accounting Standards Board and PricewaterhouseCoopers mistakenly classify as monetary items. They are constant real value non-monetary items and have to be updated daily at the parallel rate in Venezuela.

Implementing IAS 29 by applying the daily parallel rate is, in principle, the same as Brazil´s daily indexation for 30 years from 1964 to 1994. They had a stable and sometimes growing non-monetary economy with up to 2700% annual hyperinflation in their monetary economy. This gave Gustavo Franco and his team a chance to work out a way of how to kill their hyperinflation. It took them 10 years, but, they had a more or less stable non-monetary economy because of daily updating of many if not all non-monetary items at daily rates supplied by the government. If Brazil could have done that for 30 year then Venezuela can do the same.

There is very little chance of this happening when Sir David Tweedie, the Chairman of the IASB, supports the two very popular accounting fallacies, namely the very destructive stable measuring unit assumption and financial capital maintenance in nominal monetary units (which is impossible per se during inflation) as authorized and approved by the IASB in the Framework, Par 104 (a) twenty years ago. The Framework, Par 104 (a) states: "Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power."

The IASB thus authorized and approved the two very popular accounting fallacies and their only and perfect antidote in the exact same statement. The antidote is perfect during inflation, hyperinflation and deflation; the values may not be.

Kindest regards

Nicolaas Smith

PS And Julius Malema and his friends from the ANCYL want to visit Venezuela to see how to nationalize the mines??