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Friday, 13 January 2012

Entire money supply can be inflation-adjusted on a daily basis

Poor demand at inflation-linked auction (Fin24 article)

Total co-ordination (everybody doing it) of inflation-adjusting all monetary items in the SA or any other economy on a daily basis in terms of a Daily Consumer Price Index which is simply a lagged, daily interpolation of the CPI would remove the total cost of inflation (not actual inflation in only Rand notes and coins) from only the monetary economy in SA. That would mean zero cost of inflation or zero inflation only in the SA monetary economy excluding in actual Rand notes and coins (normally about 7% of the money supply).

A glimpse of what the future holds.

The inflation-linked bonds mentioned in this article trade daily. That means there is already a Daily index calculated to determine the daily price of the above bonds. SA and all (most) countries in the world which issue government inflation-linked bonds already calculate and use Daily indices on a daily basis to determine the daily price of these inflation-linked bonds.

Chile currently inflation-indexes about 20 to 25 per cent of its broad M3 money supply on a daily basis (according to the Central Bank of Chile) in terms of their Unidad de Fomento which is their monetized daily indexed unit of account.

A Daily CPI does not need to be monetized. The UF has been in use since 1967.

Nicolaas Smith

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