Monday, 25 July 2011

Unidad de Fomento

Hi Motley Fool,

Thank you very much for your comment on my previous blog. I tried to reply via the "Reply" link on my blog and the "Comment" option on my and your blogs, but, nothing worked. So, here is my reply.

I did not know about the UF.

Yes, the Unidad de Fomento results in Chile implementing most of Constant Item Purchasing Power Accounting (CIPPA) since 1967. The wiki article does not indicate whether they account the net monetary gain or loss from inflation. The UF is similar to the Brazilian Unidade Real de Valor (URV). Brazil supplied their economy with a daily index from 1964 to 1994. I also do not know whether Brazil calculated the net monetary loss or gain. I will have to find out.

This will strenghten the case for CIPPA tremendously. I state in the book that all that is missing is due process before CIPPA will replace the Historical Cost Accounting model.

Chile has already taken the next step without the rest of the world even being ready to take the first step towards implementing financial capital maintenance in units of constant purchasing power (CIPPA): Chile not only update constant real value non-monetary items and historical variable real value non-monetary items, but, also monetary items. This is a logical next step. I just did not realize that Chile has been doing it since 1967. So, it seems to me Chile learnt from Brazil. Now it is time for us to learn from them.

"It was created on January 20, 1967, for the use in determining principal (monetary item) and interest (constant item) in international secured loans for development, subject to revaluation according to the variations of inflation. Afterwards it was extended to all types of bank loans (monetary items), private or special financing (monetary items), purchases or investments on installments (constant items), contracts (constant items), and some special situations. Also it is used in legal standards such as the par value of stock/capitalization of companies (constant items), fines (constant items), etc. It has become the preferred and predominant measure for determining the cost of construction (historical variable items: Historical Cost), values of housing (historical variable items) and any secured loan (monetary items), either private or of the Chilean government."

The Wiki article is a very good example of the fact that everyone thinks inflation erodes the real value of non-monetary items: the stable measuring unit assumption is not mentioned at all in the article.

Thank you very much for this information.

Kind regards,


Nicolaas Smith

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