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Wednesday, 22 February 2012

All monetary items are always affected by inflation and deflation.

All monetary items are always affected by inflation and deflation

A monetary item should always be inflation-adjusted daily in terms of the Daily CPI or other daily rate. This has never been and is currently (2012) still not possible with physical bank notes and coins. The net monetary loss or gain thus needs to be calculated and accounted during the current financial period under financial capital maintenance in units of constant purchasing power (CIPPA). This is also true for other monetary items not inflation-adjusted daily. All monetary items are always affected by inflation and deflation.

Under the stable measuring unit assumption it is assumed that changes in the purchasing power of money are not sufficiently important to require capital maintenance in units of constant purchasing power on a daily basis. Another way to state the stable measuring unit assumption is to state that it is assumed that the real value of money is perfectly stable over time. The stable measuring unit assumption is applied to the measurement of certain non-monetary items and all monetary items under HCA. It is not applied under CIPPA.

 It is not assumed that bank notes and coins have nominal values over time: it is a fact, not an assumption. It is a fact (2012) that the nominal value of a bank note or coin is perfectly stable over time.

The real values of monetary items inflation-adjusted daily are still affected by inflation and deflation, but, by inflation-adjusting or deflation-adjusting them their real values are maintained constant by contract. They have constant real values over time, e.g. capital inflation-indexed government bonds. They are, however, not constant real value monetary items. That would only be the case at permanently sustainable zero inflation. Inflation and deflation thus always affect the real values of all monetary items within an economy. The real values of monetary items inflation-adjusted daily are maintained constant by contract. The entire cost of inflation (not actual inflation) in all monetary items (excluding bank notes and coins) would be eliminated when the total money supply (as qualified) is inflation-adjusted daily.

Nicolaas Smith

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