Pages

Wednesday, 20 June 2012

Hyperinflation has no effect on the real value of non–monetary items

Hyperinflation has no effect on the real value of non–monetary items

Hyperinflation only erodes the real value of the monetary unit extremely rapidly. Hyperinflation has no effect on the real value of non–monetary items. All non–monetary items (variable and constant real value non–monetary items) maintain their real values during hyperinflation when they are measured in units of constant purchasing power daily in terms of a daily parallel rate (a black market or street rate) normally the daily official or unofficial US Dollar or other unofficial hard currency parallel exchange rate or an official Brazilian–style daily URV non–monetary index normally almost totally based on the daily US Dollar exchange rate as Brazil did during 30 years of very high and hyperinflation.

The stable measuring unit assumption (HCA) – not hyperinflation – unknowingly, unnecessarily and unintentionally erodes the real value of constant real value non–monetary items not maintained constant as fast as hyperinflation erodes the real value of the local currency and other monetary items, e.g., loans stated in the local currency, because all economic items (monetary, variable and constant items) in the hyperinflationary economy are measured in terms of the hyperinflationary monetary unit. A monetary meltdown erodes all real value only in the monetary economy; i.e., in the local currency money supply.

Hyperinflation is not always stopped with first a period of severe hyperinflation in the final stage and then a complete monetary meltdown. Hyperinflation was successfully overcome by various countries, e.g., Turkey, Brazil and Angola, without dollarization or a monetary meltdown.

Brazil actually grew their non–monetary economy in real value during 30 years of very high and hyperinflation of up to 2000 per cent per annum from 1964 to 1994 and never had severe hyperinflation followed by a complete monetary meltdown at the end. Brazil stopped its hyperinflation with the Real Plan in 1994. Brazil managed to have years of positive Gross Domestic Product growth during those 30 years of very high and hyperinflation because the various governments during those three decades supplied the population with a daily non–monetary index based almost entirely on the daily US Dollar exchange rate with their monetary unit. It was used to update most non–monetary items (variable and constant real value non–monetary items), e.g., goods, services, equity, trade debtors, trade creditors, salaries payable, wages payable, taxes payable, etc., in the hyperinflationary economy daily.

Brazil would not have been able to maintain its non–monetary or real economy relatively stable with actual real GDP growth during hyperinflation if it had applied restatement of HC or CC financial statements in terms of the period–end monthly published CPI as required in IAS 29 Financial Reporting in Hyperinflationary Economies during that period. IAS 29 does not require continuous daily measurement of all non–monetary items in terms of a daily index during hyperinflation. IAS 29 does not require continuous daily updating of all non-monetary items in terms of the US Dollar parallel rate or a Brazilian–style URV daily index rate. IAS 29 simply requires restatement of Historical Cost and Current Cost financial statements during hyperinflation applying the monthly Consumer Price Index at the end of the reporting period (monthly, quarterly, six monthly or annual) – generally available a month or two months after the current month – to make these financial statements more useful. It is not the intention of IAS 29 to, and in its current form it cannot, stop the continuous daily rapid erosion of the real value of constant real value non–monetary items never maintained constant as Brazil did for 30 years of high and hyperinflation generating positive economic growth.

This daily very rapid erosion of constant real value non-monetary items never maintained constant is caused, not by hyperinflation, but, by the implementation of the stable measuring unit assumption (HCA) during hyperinflation. Applying the monthly CPI a month or two months after the current month is very ineffective during hyperinflation as far as the constant real non–monetary value of salaries, wages, rentals, equity, trade debtors, trade creditors, etc., positive economic growth, economic stability in the real or non–monetary economy, the maintenance of internal demand and the continuous daily maintenance of the real value of all non–monetary items during hyperinflation are concerned. All non–monetary items (variable and constant items) have to be updated daily in terms of the parallel US Dollar rate or a Brazilian–style URV daily index rate in order to maintain the real economy relatively stable during hyperinflation in the local currency monetary unit. That would be financial capital maintenance in units of constant purchasing power (CIPPA) during hyperinflation.

When the stable measuring unit assumption is implemented under HCA or financial capital maintenance in nominal monetary units also originally authorized in IFRS in the Framework (1989), Par. 104 (a), it is assumed, in practice, that there was, is and never ever will be inflation, deflation or hyperinflation as far as the valuation of constant real value non–monetary items are concerned. It is assumed, in principle, that money was, is and will always in the future be perfectly stable at all levels of inflation, hyperinflation and deflation.

Various accounting authorities are requesting a fundamental review of IAS 29. See IFRS X Capital Maintenance in Units of Constant PurchasingPower.  

David Mosso state:

Neither IFRS 29 nor FAS 89 is complete in the sense of a single authoritative standard.

Mosso 2011

Severe hyperinflation is defined by the IASB as a period at the end of completely uncontrolled hyperinflation when exchangeability between the hyperinflationary monetary unit and most relatively stable foreign currencies does not exist. The wording of the IASB definition thus confirms that at least one exchangeability has to exist for prices to be established in the hyperinflationary monetary unit; i.e., for severe hyperinflation to exist. Severe hyperinflation is only present when there is still exchangeability with at least one relatively stable foreign currency in order for prices to continue to be set in the hyperinflationary monetary unit in terms of this final exchangeability. The one exchange rate that lasted till the end of severe hyperinflation in Zimbabwe was the Old Mutual Implied Rate (OMIR).


The ratio of the Old Mutual share price in Harare to that in London equals the Zimbabwe dollar/sterling exchange rate.

Hanke and Kwok 2009: 8

Hyperinflation (severe or not) stops the moment exchangeability between the local hyperinflationary currency and all foreign currencies does not exist.



Zimbabwe’s hyperinflation came to an abrupt halt. The trigger was an intervention by the Reserve Bank of Zimbabwe. On November 20, 2008, the Reserve Bank’s governor, Dr. Gideon Gono, stated that the entire economy was “being priced via the Old Mutual rate whose share price movements had no relationship with economic fundamentals, let alone actual corporate performance of Old Mutual itself” (Gono 2008: 7–8). In consequence, the Reserve Bank issued regulations that forced the Zimbabwe Stock Exchange to shut down. This event rapidly cascaded into a termination of all forms of non–cash foreign exchange trading and an accelerated death spiral for the Zimbabwe dollar. Within weeks the entire economy spontaneously “dollarized” and prices stabilized.

Hanke and Kwok 2009: 9–10

There was severe hyperinflation in Zimbabwe while there was exchangeability (prices could still be set in the ZimDollar) with at least one relatively stable foreign currency – the British Pound in this case as it was made possible via the OMIR. When this last exchangeability stopped it was not possible to set prices in the ZimDollar anymore and severe hyperinflation stopped: no exchangeability means no hyperinflation. That was a monetary meltdown. The entire ZimDollar money supply had no value as from that date on.


Nicolaas Smith

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.