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Monday, 16 April 2012

Valuing monetary items


Valuing monetary items

Financial reporting values and accounts unstable monetary items on recognition at their nominal values in nominal monetary units under all accounting models. Monetary items are then valued daily in fixed nominal monetary units (unstable in real value) only during the current financial period under financial capital maintenance in units of constant purchasing power (CIPPA) and the net monetary loss or gain is, logically and necessarily, calculated and accounted

All historical monetary items are inflation-adjusted daily in terms of the current (today´s) Daily CPI thereafter, i.e., once they are reported in historical financial reports, whether for comparison purposes or not. The historical net monetary loss or gain (a constant real value non-monetary item once accounted) is thereafter measured in units of constant purchasing power in terms of the current (today´s) Daily CPI or other daily rate over time.

Low inflation, high inflation, deflation and hyperinflation determine the always current generally unstable real value of the unstable monetary unit (US Dollar, Euro, British Pound, Bolívar, Yen, Yuan, etc.) and other unstable monetary items within each country´s monetary economy.

The real value of money held and other unstable monetary items changes equally (all unstable monetary items are affected evenly) on a daily basis at all levels of inflation and deflation. The change is quantified with the daily publication of the Daily CPI or monetized daily indexed unit of account value during low inflation, high inflation and deflation and the daily US Dollar or other hard currency parallel rate or Brazilian-style daily Unidade Real de Valor during hyperinflation. The daily black market or parallel US Dollar exchange rate or street rate is generally constantly (24/7, 365 days a year) available in a hyperinflationary economy.

The Daily CPI is an internal non-monetary index rate between the unstable real value of a fixed nominal monetary unit and a unit of constant real value within an economy. The daily parallel US Dollar (or other hard currency) exchange rate or a Brazilian–style Unidade Real de Valor daily index rate fulfills this role in a hyperinflationary economy.

The nominal values of bank notes and coins currently (2012) cannot be changed daily on the notes and coins. Inflation and deflation always affect the real value of bank notes and coins and all other monetary items. Inflation-adjusting the total money supply would eliminate the entire cost of inflation or hyperinflation (not actual inflation or hyperinflation) from the monetary economy. This would require complete co-ordination. 20 to 25 per cent of the broad M3 money supply in Chile is inflation-adjusted daily in terms of the Unidad de Fomento according to the Banco Central de Chile. $ 2.68 trillion (2009) of sovereign inflation-linked bonds are inflation-adjusted daily worldwide in terms of country specific Daily Consumer Price Indices.

Months of zero annual inflation are rare and generally not sustained for more than a month of two. During hyperinflation the real value of the very unstable monetary unit and all other very unstable monetary items often changes once per day. Prices can double every 24.7 hours during hyperinflation as happened during severe hyperinflation in Zimbabwe. (Hanke, 2010)



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. The capital amounts of inflation-indexed bonds have constant real values over time during inflation. They are, however, not constant real value monetary items in principle. 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.


Nicolaas Smith

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