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Monday, 30 July 2012

FORGET INFLATION!?


FORGET INFLATION!?

MONETARY ITEMS

Definition

Monetary items are units of local currency held and items with an underlying monetary nature being substitutes of the former.

MEASUREMENT BASIS

The measurement basis used to measure monetary items over time under financial capital maintenance in units of constant purchasing power as authorized in IFRS in the Conceptual Framework (2010), Par. 4.59 (a) is the following:

Measurement in terms of the Daily Consumer Price Index.

This requires the calculation and accounting of net monetary losses and gains only while third party entities you deal with still implement Historical Cost Accounting and apply the stable measuring unit assumption.

ADVANTAGE OF DAILY INFLATION-ADJUSTMENT OF ALL MONETARY ITEMS

Inflation-adjustment on a daily basis of the entire money supply under full co-ordination will eliminate the entire cost of inflation (not actual inflation) from the entire economy. In practice (maybe in 100 years´ time) this will result in no-one being concerned about the actual rate of inflation since monetary item balances will maintain their real values over time.

Chile currently (2012) inflation-adjusts 20 to 25 per cent of its entire broad M3 money supply on a daily basis in terms of their Unidad de Fomento which is a monetized daily indexed unit of account used in the country since 1967 according to the Central Bank of Chile.

At least USD 3 trillion is currently (2012) being inflation-adjusted on a daily basis in terms of country-specific Daily Consumer Price Indices in the world economy. USD 798 billion is today (29-07-2012)  being inflation-adjusted on a daily basis in terms of the US Daily CPI in the US economy.

Yes, under complete inflation-adjustment of the entire money supply with complete co-ordination (everyone doing it) we can forget about inflation. Unfortunately that may only happen in 100 years´ time.

We are still a long way away from that. However, I have no doubt that it will happen one day.

We had a form of it in Angola in 1996 in Auto-Sueco (Angola), the company where I worked. We had it during hyperinflation of 3200 per cent per annum because I implemented accounting-dollarization as from 1 January 1996 in the company. We updated all our trade debtors, new car, new truck, spare parts prices and workshop service rates daily in term of the daily US Dollar black market or parallel rate.

We stopped our fear of hyperinflation with daily updating of all non-monetary items.

Low inflation countries can do the same with daily inflation-adjusting the entire money supply and the implementation of financial capital maintenance in units of constant purchasing power in terms of a Daily CPI as authorized in IFRS.

This will take a very long time to come about, but I am sure we will all eventually do it.

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