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Tuesday, 27 November 2012

Zero Erosion Economy


Zero Erosion Economy

 

The Daily Index Plan would result in zero erosion of real value in:

 

1. Constant items in the constant item economy, e.g. salaries, wages, rentals, capital, trade debtors, trade creditors, taxes payable, etc. since all these items would be indexed daily in terms of the Daily CPI or USD daily parallel rate. They would automatically always have constant real values over time since the stable measuring unit assumption is never implemented under capital maintenance in units of constant purchasing power.

 

2. Real price increases and decreases in the variable item economy (e.g. property, plant, equipment, inventories, foreign exchange, etc.) generally determined in free markets with these prices updated daily in terms of the Daily CPI or daily USD parallel rate when they are not determined in the free market on a daily basis in terms of IFRS excluding the stable measuring unit assumption under capital maintenance in units of constant purchasing power.

 

3. Zero erosion in monetary items in the monetary economy - excluding bank notes and coins outside the banking system - since all monetary items, as qualified, would be inflation-indexed on a daily basis in terms of the Daily CPI or daily USD parallel rate. All monetary items in the banking system would be inflation-indexed on a daily basis resulting in zero erosion of real value in monetary items in the banking system.

 

Definition

 

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

 

Examples of monetary items that are not local currency units held are money loans, consumer loans, home loans, car loans, student loans, the capital amounts of bonds, the capital amounts of money market and capital market instruments, notes payable, notes receivable, etc. when these items are not in the form of local currency units held.

 

The Daily Index Plan constitutes

 

(A) capital maintenance in units of constant purchasing power as authorized in IFRS and

 

(B) daily inflation-indexing of the entire money supply, both in terms of the Daily CPI or daily USD parallel rate.

 

The Daily Index Plan would result in zero erosion of real value in (1) constant items as a result of measuring all constant items in units of constant purchasing power and (2) constant real value monetary items as a result of daily inflation-indexing the entire money supply excluding bank notes and coins outside the banking system with both (1) and (2) in terms of a Daily CPI or daily USD parallel rate.

 

In practice it would result in a Zero Erosion Economy (ZEE) at whatever rate of inflation or deflation. Inflation would generally fall to very low levels under the Daily Index Plan since the monetary effect (nature) of money is completely compensated for in a fully inflation-indexed money supply economy under IFRS-authorized capital maintenance in units of constant purchasing power in terms of a Daily Index with complete co-ordination.
 
 


Nicolaas Smith

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

Monday, 26 November 2012

The duration of Iran´s hyperinflation?


The duration of Iran´s hyperinflation?

Hyperinflation was defined by the International Accounting Standards Board in IAS 29 Financial Reporting in Hyperinflationary Economies, Par. 3 in 1989 as cumulative inflation over three years approaching or exceeding 100 percent; i.e., 26 percent annual inflation for three years in a row.

This is the generally accepted definition of hyperinflation since 1989 followed by millions of accountants and economists in all countries (more than 140) implementing International Financial Reporting Standards. It is also the definition followed by the American Institute of Certified Public Accountant´s Centre for Audit Quality´s International Practices Task Force and the US Securities and Exchange Commission.

Brazil was in very high and hyperinflation during 30 years from 1964 to 1994 according to the Central Bank of Brazil. According to Gustavo Franco, the ex-Governor of the Central Bank of Brazil and one of the architects of the very successful Real Plan, just his team took 10 years from 1984 to 1994 to finally beat hyperinflation with the Unidade Real de Valor daily index and the Real Plan.

Venezuela has been in hyperinflation since November 2009. On 17 December 2009 PricewaterhouseCoopers issued the following statement.

“Venezuela enters hyperinflation

 Inflation in Venezuela has been high for a number of years, and cumulative inflation for three years ending 30 November now exceeds 100%. Venezuela should therefore be considered a hyper inflationary economy, and IAS 29, Reporting in hyperinflationary economies, should be applied by entities in Venezuela in financial statements for the year ending 31 December 2009.”

The duration of Iran´s hyperinflation?

The question about how long Iran will stay in hyperinflation is very easy to answer: as long as too many rials are being created in the Iranian economy. When the Iranian government budgets for inflation to be 30% during the next year, then it is absolutely clear that hyperinflation will carry on for at least the next year.  


Iran can stop the effect of hyperinflation overnight at no cost with the Daily Index Plan which is based on Brazil´s 1994 Real Plan. The Real Plan did not use very costly Dollarization to stop hyperinflation. Instead it applied the principles used under Dollarization to stop hyperinflation without costly Dollarization. The Real Plan marked the end of the use of very costly official Dollarization or an equally costly currency board as solutions for hyperinflation.

The Daily Index Plan has two parts:

  1. Capital maintenance in units of constant purchasing power in terms of a Daily Index as authorized in IFRS twenty three years ago and
    2. Inflation-indexing the entire money supply on a daily basis.

Both part 1 and 2 would currently be done in terms of the daily US Dollar free-market (parallel) rate in Iran during hyperinflation.

The Daily Index Plan is guaranteed to stop the effect of hyperinflation (not actual hyperinflation - that depends on the excessive creation of rials) in Iran (or high and hyperinflation in any other economy) at no cost and stabilize the economy.

The Daily Index Plan is recommended for the following countries in hyperinflation:

Belarus

Venezuela

Islamic Republic of Iran

Democratic Republic of Congo

The Daily Index Plan is recommended for the following countries in high inflation:

Ethiopia

Sudan

Guinea

Republic of Yemen

When the US Dollar free-market daily rate is used as the Daily Index during hyperinflation then the economy would be "dollarized" without the US Dollar under the Daily Index Plan but with full monetary policy autonomy available to the Central Bank. The economy would be "dollarized" in  constant real (not nominal) value local currency monetary and non-monetary items maintained constant by the US Dollar daily free-market rate (under the responsibility of the US Federal Reserve) as Daily Index under the Daily Index Plan. The constant real (not nominal) value local currency items would always be exactly equal to their US Dollar equivalents under these circumstances.

All indications are that actual hyperinflation would fall to very low inflation under the Daily Index Plan like it happened under the Real Plan in Brazil in 1994 - only if the creating on new rials are reduced. It is, however, guaranteed that the Daily Index Plan would remove the effect of hyperinflation at any level of hyperinflation. You cannot negate maths.


Nicolaas Smith

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

Friday, 23 November 2012

Hidden and unknow cost of Dollarization (gain to the US)


Hidden and unknow cost of Dollarization (gain to the US)

Dollarization and the Dail Index Plan stop hyperinflation overnight. The Daily Index Plan implements the principles used under Dollarization, but with constant real value local currency monetary items and constant real value local currency non-monetary items implemented via daily indexation as was done with the Brazilian Real Plan in 1994.

Dollarization is a very costly, historically proven, but currently obsolete, irrelevant and unneccessary monetary policy option during high inflation and hyperinflation. Dollarization comes at a huge cost with some of this cost hidden and unknown.

Cost of Dollarization

  1. The entire monetary base (money supply) has to be substituted with US Dollars.
  2. The Central Bank cannot implement any independent monetary policies once the economy is Dollarized.
  3. The hidden and generally unknown cost: The people of the Dollarized country continuously loses the sovereign windfall profit of seigniorage when Dollarization starts and every time new US Dollar bank notes are required as the Dollarized local economy grows. This real profit continuously accrues to the people of the United States of America (plus its multiplier effect) at apparently no cost to them.

Only the Central Bank has the authority to print new money, precisely to allow this windfall profit or seigniorage to accrue for the benefit of the entire population of the country where the money is created (the United States of America, in the case of Dollarization in US Dollars).

Example of the cost of Dollarization

(i) Monetary base in Iran (for example): USD 245 billion = cost of Dollarization in Iran.

(ii) Central Bank Monetary policies given up:

  1. Monetary easing used very successfully in the US, UK and Japan, but refused by Germany for Greece, Ireland and Portugal. These countries are, in priciple, dollarized in Euros. 
  2. Interest rate policies
  3. The ability of the Central Bank to be responsible for labour policies very similar to “full employment” policies in the country, like the Federal Reserve Bank´s very successful labour policy responsibilities in the US economy.
  4. The complete range of other normal Central Bank discretionary monetary policies.
(iii) Loss of Seigniorage - the hidden cost, hardly understood by anyone.

What is seigniorage?

Definition

Seigniorage is the profit the Central Bank (country) makes from the difference between the real value of fiat money bank notes and coins when they are added to the money supply and the cost of printing them.

Only about 8 percent of the money supply is made up of actual bank notes and coins in an advanced economy (based on the US money supply).

Fiat money has a decreasing real value during inflation: 7 billion plus people use generally decreasing real value fiat money each and every day to buy and sell almost everything in the world economy. When too much fiat money is created, this erosion of real value is reflected by the rate of inflation over time. Consumer Price Indices indicate the change in the real value of fiat money in the world economy within their particular local economies. Countries that issue government capital inflation-indexed bonds already have a Daily CPI that indicates the daily change in the real value of their local currency within their local economy.

Example: The economy grows in terms of GDP at 2 percent per annum. The monetary base needs to be increased. The Central Bank  – in the normal course of its activities - orders new fiat money bank notes with a nominal value of USD 4 billion at a cost of USD 100 000 from the bank note supplier, De la Rue, in the UK, for example.

Real value       USD 4 000 000 000

Printing cost                     100 000

Seigniorage            3 999  900 000

The Central Bank (country) is free to do whatever it wants with the newly printed fiat money bank notes and coins in terms of its articles of association. For example, lend it to commercial banks in terms of monetary policy in order to create more fiat money (this time not printing new bank notes and coins) in the economy via fractional reserve banking, buy new computers, new office blocks, new cars, etc. The Central Bank can also pay the newly printed money as a dividend to the Government who can do anything it wants with the newly printed money – in terms of the constitution, e.g., pay civil service, army, police, health services, military, education salaries, buy or develop / maintain nuclear weapons, if it were a member of the official Nuclear Club (Russia, China, US, Israel, UK, France, India, Pakistan, others ?), etc.

Countries like Zimbabwe, Panama, Ecuador, (Argentina, in the recent past) and other Dollarized countries as well as the increase in the use of the US Dollar outside the US economy continuously contribute in this way to the increase in the short and long term welfare and security of the people of the United States of America at no apparent cost to the people of the United States of America for an indefinite period of time - to the possible detriment of the people of these Dollarized countries. It would be a detriment if these countries were able to do better for their people by not being Dollarized as compared to the stability that Dollarization brings compared to its huge costs as indicated above.

This avoidance of Dollarization is now possible in terms of the Daily Index Plan, i.e., capital maintenance in units of constant purchasing power as authorized in IFRS twenty three years ago plus daily inflation-indexing of the entire money supply, both in terms of a Daily Consumer Price Index (the USD daily parallel rate during hyperinflation). The Daily Index Plan results (guaranteed) in the local economy being “Dollarized” in terms of constant local currency monetary and non-monetary items instead of actual United States Dollars. It results in the local economy operating with monetary and non-monetary items of completely stable real value: i.e., constant (not nominal) real value local currency monetary and non-monetary items of perfectly stable real value.

If Iran were to Dollarize her economy, the people of Iran would continuously contribute to the short and long term welfare and security of the people of the United States of America for an indefinite period of time (forever) at apparently no cost to the people of the United States of America but at a cost (e.g., continuous loss of seigniorage, etc.) to the people of Iran, if Iran were to stay Dollarized for an indefinite period of time – possibly to the overall short and long-term detriment of the people of Iran. This aspect needs credible, specific value, verifiable and peer-reviewed research to determine its real economic implications.

Seignoreige is a windfall profit which only comes about as a result of the double-entry accounting model in the same way as capital, as we know it, comes about. It is the initial accounting of a real value that exists or is newly created in the economy: in the case of capital, as a result of laws (company, commercial and other laws) and the existing real value of net assets. In the case of seigniorage, as a result of the sovereign law of legal tender giving rise to newly created real value in the economy (newly printed fiat money bank notes and coins) and the accumulated economic value of all the underlying value systems in the economy, e.g., sound governance, sound economic policies, sound political policies, sound monetary policies (e.g., no oversupply of the money base as indicated by inflation and hyperinflation), sound accounting policies, sound educational policies, sound health policies, sound international relations, sound legal system, sound defence system, etc.

Nothing of the above was or is specifically “engineered” by the government of the United States of America or any entity in the US. All of it came about as a result of specific historical economic circumstances that resulted in Dollarization in the past. Dollarization in the past was a direct reflection of the level of undestanding or lack of understanding of, e.g. the effect of the stable measuring unit assumption (Historical Cost Accounting) in the economy, daily inflation-indexing of the entire money supply, etc.

The US Dollar is almost always used for Dollarization. It is estimated that 50% of US Dollars is used outside the US economy because of the extraordinary success of the US economy and Federal Reserve Bank over the last at least 100 years: because of the faith people in general have in the US Dollar as a relatively stable currency and unit of account. 

Chile, Angola, Turkey and especially the large Brazilian economy beat hyperinflation without resorting to Dollarization. The Brazilian Real Plan in 1994 signalled the end of official Dollarization as a remedy during hyperinflation. The Real Plan very successfully used the principles implemented under Dollarization without using actual Dollarization in US Dollars to the great and indefinite advantage of the people of Brazil.

Zimbabwe´s spontaneous Dollarization in 2008 occured outside the realm of official monetary policy implementation: the povo (people) decided what to do, not the government of Zimbabwe (Robert Mugabe) or the Central Bank (Gideon Gono) as the agent of the government. Zimbabwe is a very open economy (on the consumer level) surrounded by stable economies, especially the large South African economy which could be up to 100 times larger than the Zimbabwean economy.

As Nelson Mandela stated: (Economic collapse in) Zimbabwe was a case of failure of leadership: clearly true as far as monetary policy, amongst many policies, was concerned.

There is absolutely no necessity for Iran now - or any other country in the future - to Dollarize, except possibly in the case of spontaneous Dollarization by the people of a relatively small economy in total economic chaos like Zimbabwe in 2008. Spontaneous Dollarization cannot be controlled under a total lack of official monetary policy initiatives in a very open economy. It is a matter of survival for the people of the country and they take matters into their own hands like they did in Zimbabwe in 2008 when the government is incapable of looking after their economic well being.

Dollarization is not necessary at present (2012). All Dollarized economies can successfully end Dollarization by implementing IFRS authorised capital maintenance in units of constant purchasing power and daily inflation-indexing of the entire money supply, both in terms of a Daily CPI. The correct implementation of the Daily Index Plan is guaranteed (by proven economic, mathematical and IFRS authorized accounting principles) to result in an economy operating in constant real value local currency monetary and non-monetary items.

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Nicolaas Smith

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

The US Dollar is the substitute for a global unit of real value

The US Dollar is the substitute for a global unit of real value.

Nicolaas Smith

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

Buy the Kindle ebook at Amazon.com for $2.99 or £1.53 or €2.68

Thursday, 22 November 2012

Global seigniorage profits to the US of America

Global seigniorage profits to the US of America

What is seigniorage?

Investopedia explains 'Seigniorage'

"Seigniorage may be counted as revenue for a government when the money that is created is worth more than it costs to produce it. This revenue is often used by governments to finance a portion of their expenditures without having to collect taxes."
Explanation:

Seigniorage is simply the difference between the total nominal value of new bank notes introduced into the economy and the cost to print them.

It is a complete windfall profit to the Central Bank, i.e., to the country or the welfare of the people of the country where the new bank notes are introduced into the economy.

This windfall profit "without having to collect taxes" accrues to the welfare of the people of the  United States of America from the eonomies of countries that are Dollarized, for example Zimbabwe, Panama, Ecuador and from all dollarization outside the US economy for an indefinite period of time while these countries are Dollarized and from all Dollarization outside the US economy.

Nicolaas Smith


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

Buy the Kindle ebook at Amazon.com for $2.99 or £1.53 or €2.68



Monday, 19 November 2012

Capital maitenance in units of constant purchasing power is halal


Capital maintenance in units of constant purchasing power is halal and Sharia-based since it only operates in real values.

Nicolaas Smith

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

Sunday, 18 November 2012

Most destructive assumption ever made by mankind

Most destructive assumption ever made by mankind

The stable measuring unit assumption. Assuming, in practice, that money is perfectly stable during inflation and deflation.

The Historical Cost Accounting model is based on the stable measuring unit assumption. Ban Historical Cost Accounting (i.e., the stable measuring unit assumption) and you stop the effects of inflation and deflation.

Nicolaas Smith

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

Buy the Kindle ebook at Amazon.com for $2.99 or £1.53 or €2.68


Friday, 16 November 2012

Dollarization with total local monetary policy autonomy


Dollarization with total local monetary policy autonomy

The Daily Index Plan, namely, capital maintenance in units of constant purchasing power as authorized in IFRS twenty three years ago as an option to HCA plus daily inflation-indexing the entire money supply under complete co-ordination, both in terms of the daily US Dollar free-market rate would result in a constant (real value) local currency always being exactly equal to the US Dollar (used during hyperinflation).

The local hyperinflationary economy would in practice in the economy be Dollarized in terms of the constant (real value) local currency - not in terms of actual, physical US Dollars. Monetary and constant items would be constant in real value and their constant real values would remain constant in US Dollar terms too (exactly the same as).

The fundamental difference with actual Dollarization is that the local Central Bank would have complete monetary autonomy. That is what is completely lost / given up under Dollarization.

A Daily indexed local currency monetary item and a Daily indexed local currency constant real value non-monetary item are constant real value local currency items. They would always be exactly equal in real value to their  respective foreign currency equivalents when the daily free-market foreign currency exchange rate is used as the index during hyperinflation. The Daily CPI is used during low inflation and deflation.

Eg.: US Dollar : Iranian Rial exchange rate = 1 :35 000

The indexed local currency would be:

Local currency value divided by USD rate:

35 000 rials/35 000 = 1 which is the amount of US Dollars.

Thus: a constant real value local currency (monetary or constant real value non-monetary) item is always exactly equal to its US Dollar equivalent when the US Dollar exchange rate is used as the index during hyperinflation.

When the entire monetary and constant item economies are indexed daily in terms of the daily US Dollar rate, then they are Dollarized in constant (real value) local currency units, not in physical US Dollars.

It is a fact that official Dollarization or a Currency Board stops hyperinflation overnight at a huge cost in US Dollars, but with no local monetary policy autonomy. Dollarization or a Currency Board is a monetary policy straight-jacket and is very costly.

Anyone - not only Prof. Steve Hanke - can stop hyperinflation overnight with Dollarization or a Currency Board. It´s no big deal. No-one would use it now that the Daily Index Plan - based on the Brazilian Real Plan - is available as an IFRS at no cost.

The Daily Index Plan, i.e., capital maintenance in units of constant purchasing power plus daily inflation-indexing the entire money supply, both in terms of the daily US Dollar parallel rate, stops hyperinflation overnight at no cost and maintains total local monetary policy autonomy.

The official or unofficial Dollarization and a currency board solutions are thus made obsolete and irrelevant by the Daily Index Plan.

The Daily Index Plan equals Dollarization in constant real value local currency values: no US Dollars required.

The daily US Dollar rate is simply used as a relatively stable unit of account in the absence of a Daily Consumer Price Index. This is similar to pre-monetary economies which used units of account without money being available in the economy (Shiller). An economy could use the US Dollar parallel exchange rate as a relatively stable unit of account without a single US Dollar being exchanged in the economy.

The US Dollar is thus being used as subsitute for a universal unit of real value.

Any relatively stable foreign currency, e.g., the Euro or the Yuan, can be used instead of the US Dollar.

The US Dollar is used in this way during hyperinflation when reliable Daily CPI data are not avaliable. 

The Daily CPI is used as the Daily Index during low inflation, high inflation and deflation. All countries with government capital inflation-indexed bonds, including Venezuela in hyperinflation, already have a Daily CPI.

Nicolaas Smith

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

Buy the Kindle ebook at Amazon.com for $2.99 or £1.53 or €2.68

Monday, 12 November 2012

IFRS will stop hyperinflation in Iran overnight at no cost


IFRS will stop hyperinflation in Iran overnight at no cost

International Financial Reporting Standards consist of

The Conceptual Framework (2010)

IASs (International Accounting Standards),

SICs (IAS Interpertations)

IFRSs (International Financial Reporting Standards)

IFRICs (IFRS Interpretations)

According to the original Framework (1989), Par. 104 (a) [now the Conceptual Framework (2010), Par. 4.59 (a)] “Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.”

Financial capital maintenance in units of constant purchasing power was thus authorized as an option to the traditional Historical Cost Accounting model in IFRS twenty three years ago. Financial capital maintenance in nominal monetary units is implemented under the HCA model.

The fundamental difference between the two models is that the stable measuring unit assumption is implemented under the HCA model while it is never implemented under financial capital maintenance in units of constant purchasing power.

The mission of the International Accounting Standards Board is that IFRS should be implemented by all countries in the world economy. Most countries do. Political orientation or the fact that a country possesses nuclear weapons or not, or signed the Nuclear Non-Proliferation Treaty or not, or is part of the Nuclear Club or not, does not play a role in IASB policies.

I support the IASB position.

The implementation now by Iran of financial capital maintenance in units of constant purchasing power in terms of a Daily Index or daily rate would stop hyperinflation in Iran overnight at no cost.

This model is currently (2012) an option authorized in IFRS.

It will be required by the IASB in 6 to 8 years´ time. The IASB voted unanimously in May 2012 to submit the replacement of IAS 29 Financial Reporting in Hyperinflationary Economies to research based on the draft IFRS ´X`CAPITAL MAINTENANCE IN UNITS OF CONSTANT PURCHASING POWER. Draft IFRS ´X` is based on the core principle that capital maintenance in units of constant purchasing power in terms of a Daily Index or daily rate will be required (not optional) in countries with annual inflation equal to or greater than 10 percent or cumulative inflation equal to or greater than 26 percent over three years.

If Iran would have implemented financial capital maintenance in units of constant purchasing power in terms of a Daily Index or daily rate a few years ago, there would be no effect of hyperinflation or inflation in the Iranian economy today.

There may still be hyperinflation today, but there would be no effect of hyperinflation with daily inflation-indexing of the entire rial money supply and daily measurement of all constant real value non-monetary items in the Iranian constant item economy in terms of a Daily Index or other daily rate under complete co-ordination (everyone doing it).

I propose that Iran implements financial capital maintenance in units of constant purchasing power in terms of a Daily Index or daily rate as soon as possible in order to stop the effect of hyperinflation in the Iranian monetary economy as well as the actual implementation of the stable measuring unit assumption in the Iranian constant item economy.

I am involved in the promotion of this model for a number of years already because I played an active part in its development over the last 16 years, specifically by (1) implementing it in the form of accounting dollarization in the company where I worked in Angola´s hyperinflationary economy in 1996, (2) first identifying that the non-monetary economy is sub-divided in the variable real value non-monetary item economy (variable item economy) and the constant real value non-monetary item economy (constant item economy) in 2005 and (3) identifying in 2011 the fact that daily instead of monthly indexing is required to obtain the full advantage of the model and (4) first identifying at the end of 2011 that daily inflation-indexing the entire money supply under complete co-ordination would remove the entire cost of or gain from (the effect of) low inflation, high inflation, hyperinflation and deflation from the monetary economy (except in actual bank notes and coins).

It is logical that Iran, the country with currently the highest rate of hyperinflation in the world, would be the most interested in an IFRS that would stop the effect of hyperinflation overnight in Iran at no cost.

I tried to propose this model to Argentina (in high inflation with 10 or 20 percent inflation per annum) earlier this year and I also tried to contact the Venezuelan (in hyperinflation) national accounting standard setter for this purpose before I very recently got involved with promoting this model in Iran. I only got involved after Prof. Steve Hanke, a top American economics professor who had already stopped 10 hyperinflations in the past, had suggested two solutions to Iran that would stop hyperinflation overnight. If an American professor - while the United States of America, his government, is leading the implementation of economic sanctions against Iran - can suggest solutions to Iran that would stop hyperinflation overnight, then, surely, I am also allowed to do that.

The difference is that the IFRS solution I suggest comes at no cost and is guaranteed to work when it is implemented correctly under complete co-ordination, since it amounts to Dollarization in constant local currency units – not in US Dollars or via a currency board: Prof. Hanke´s two very costly solutions that would certainly also stop hyperinflation overnight in Iran.

I plan to propose this IFRS model to Ethiopia (20 percent inflation), Mongolia (15.6 percent inflation), Tanzania (15.7 percent inflation), Angola (10% inflation), (Nigeria 11.7 percent inflation) and other countries currently in high inflation, before it will be required in these countries by the IASB in the near future.

Succeeding to stop hyperinflation overnight at no cost in Iran with this IFRS solution would hasten by 10 or 20 years´ its implementation in the United States of America, Israel, the European Union and the rest of the world which would result in these countries and the rest of the world economy operating in constant monetary and constant item economies, i.e., as if there were no low inflation or deflation - at whatever level of inflation or deflation.

So, this is not just about stopping hyperinflation overnight at no cost in Iran. This is about implementing this IFRS in the entire world economy in the near future.

When it will happen on a worldwide basis is not certain now. What is certain is that it will happen: it is an inevitable process. We have always improved in the past. We will not stop improving now.

The IASB does not own the financial capital maintenance in units of constant purchasing power in terms of a Daily Index or daily rate accounting model, just as no one owns the HCA model. Basic accounting models cannot be patented.

If Iran were not currently implementing IFRS, then the process would be even easier.


Nicolaas Smith

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

Buy the Kindle ebook at Amazon.com for $2.99 or £1.53 or €2.68

Friday, 9 November 2012

Perfect solution for stopping Iran´s hyperinflation overnight at no cost


Perfect solution for stopping Iran´s hyperinflation overnight at no cost

 

When a top American professor suggests overnight solutions to hyperinflation to Iran, then I can too.

 

The difference is that the Daily Index Plan comes at no cost to Iran. Very costly Dollarization or an equally costly currency board, as suggested by Prof. Steve Hanke to Iran, are now obsolete and irrelevant solutions.

 

One half of the Daily Index Plan – capital maintenance in units of constant purchasing power eliminating the entire cost of the stable measuring unit assumption from the Iranian constant item economy - was authorized in International Financial Reporting Standards twenty three years ago, includes a perfect solution and will soon be required by the International Accounting Standards Board worldwide. The other half also uses the perfect solution: the US Dollar daily exchange rate being used as the Daily Index for the Iranian rial´s exchange rate with the US Dollar resulting in a constant rial always being exactly equal to the US Dollar.

 

The other half: Daily indexing of the entire rial money supply which would eliminate the complete cost of hyperinflation from the Iranian monetary economy overnight at no cost.


Nicolaas Smith

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

Buy the Kindle ebook at Amazon.com for $2.99 or £1.53 or €2.68

Global unit of real value


Global unit of real value

 

The consumer basket is the global unit of real value.


Nicolaas Smith

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

Buy the Kindle ebook at Amazon.com for $2.99 or £1.53 or €2.68

How to stop hyperinflation in Iran overnight at no cost


How to stop hyperinflation in Iran overnight at no cost

 

Step 1

 

Implement capital maintenance in units of constant purchasing power as authorized in IFRS in terms of the US Dollar parallel rate as the Daily Index in Iran. This would stop the cost of the stable measuring unit assumption – not the cost of hyperinflation – in Iran. This would maintain the constant purchasing power (real value) of capital constant for an indefinite period of time in all Iranian companies that at least break even in real value – all else being equal – at all levels of inflation or hyperinflation. This would maintain the capital investment base in Iran constant in real value for an indefinite period of time – as qualified above.

 

The Iranian Accounting Standards Authority has to authorize an Iranian Accounting Standard requiring (not optional) this from all companies in Iran.

 

This would be required (not optional) from all countries in the world implementing IFRS with annual inflation equal to or greater than 10 percent per annum or cumulative inflation equal to or greater than 26 percent over three years – in 6 to 8 years´ time.

 

This would end the 3000-year-old, globally implemented, generally accepted, traditional Historical Cost Accounting model in these countries. It would be the start of the end of the Historical Cost paradigm - the only accounting paradigm the world has ever known.

 

This would result in all salaries, wages, rents, royalties, fees, taxes, capital, retained profits, all other items in equity, etc. being maintained constant in real value in these companies in Iran on a permanent basis – as qualified above.

 

Step 2

 

Inflation-index the entire rial money supply on a daily basis in terms of the US Dollar parallel rate. This would end the cost of hyperinflation – not actual hyperinflation – in Iran. It would be as if there is no hyperinflation in Iran in all monetary items except in rial bank notes and coins.

 

The Central Bank of Iran has to pass regulations requiring this in Iran.

 

This would transform all monetary items (excluding rial bank notes and coins – they have their nominal values permanently printed on them) into constant real value monetary items in Iran.

 

Both measures require complete co-ordination (everyone doing it).

 

When Step 1 and Step 2 are functioning correctly in Iran:

 

Step 3

 

The Central Bank of Iran has to create a new currency and float it in the foreign exchange market or simply float the existing rial. This would end the US Dollar parallel rate in Iran. The local economy would be stable by then.

 

Excluding deliberate creation of excessive monetary items in Iran, this would result in stopping actual hyperinflation in rial bank notes and coins over a very short period like it was done in Brazil in 1994 with the Real Plan. The cost of hyperinflation, on the other hand, would automatically be eliminated permanently by daily inflation-indexing of the money supply in terms of the US Dollar free-market rate.

 

The above Daily Index Plan includes capital maintenance in units of constant purchasing power in terms of a Daily Index as authorized in IFRS which the Brazilian Real Plan did not have in 1994.

 

The above steps would end the cost of hyperinflation and the cost of the stable measuring unit assumption in Iran. The Iranian economy would stabilize in the very short term: the Iranian monetary and constant item economies would operate in constant real values at whatever rate of inflation or hyperinflation.

 

The above Daily Index Plan can be implemented by any country to stop the cost of and gain from any level of inflaton or deflation and the cost of the stable measuring unit assumption at no cost.

 

Low inflationary, high inflationary and deflationary countries would not need to introduce new currencies and would use their Daily Consumer Price Index (not the US Dollar rate) as the Daily Index.

 

This no cost Daily Index Plan eliminates Dollarization and a currency board as solutions to hyperinflation.

 

What is required is the first country implementing complete inflation-indexing of the entire money supply. Chile inflation-indexes 25 percent of its broad M3 for some years already. The accounting part of the Daily Index Plan would be required (not optional) in IFRS in the near future.


Nicolaas Smith

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

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Thursday, 8 November 2012

The Daily Index Plan: A monetary and accounting plan

The Daily Index Plan: A monetary and accounting plan

The plan is called the Daily Index Plan because the daily index is the common factor in maintaining both the monetary and constant item economies constant. It is different from (better than) the Unidade Real de Valor daily index as well as from the Real Plan monetary reform implemented by Brazil in 1994.


The Daily Index Plan is not simply a daily index like the URV was and it is also not exactly the same as the Real Plan. It is a combination of principles and concepts which were used in both the URV daily index and in the Real Plan monetary reform. But it is neither simply the one nor simply the other and it is also not a simple combination of the two.

The Daily Index Plan is a combination of principles and concepts used in the URV and Real Plan plus capital maintenance in units of constant purchasing power in terms of a Daily Index.

The principles and workings of the Daily Index Plan are so mathematically correct and logical in real value that I am now completely confindent in stating that it can be used to stop the total effect of hyperinflation – not actual hyperinflation in bank notes and coins (their nominal values are still permanently printed on them) – in the monetary economy as well as the very destructive effect of the stable measuring unit assumption in the constant item economy overnight at no cost when the plan is implemented correctly with complete coordination.

The crucial factor is the fact that the US Dollar daily rate is used as the index. Then, logically (mathematically), a constant local currency is always exactly equal to the US Dollar. So, you are effectively running your economy in US Dollars (Dollarization) when you daily index your complete local currency money supply and all constant items in your economy to the daily US Dollar rate. We all know Dollarization stops hyperinflation overnight, but at the cost of having sufficient US Dollars available overnight.

Because you use a constant local currency you can still have hyperinflation when someone injects too many nominal local currency units into the economy, but the Daily Index Plan would always remove the total cost of hyperinflation as well as the total cost of the stable measuring unit assumption from the economy under complete co-ordination.

With the Real Plan in 1994 (which was only a monetary reform plan – Brazil actually went back to Historical Cost Accounting – a step backwards, but that is another story) the actual URV index was changed into a new currency - the Real currency. The previous currency was withdrawn from circulation, but the URV index was almost 100 percent constructed with (made up of) the official (not a parallel) Daily US Dollar rate in Brazil and the population was already used to (for 30 years) working with daily indexing with the URV and other government-supplied daily indices. This was all done by the Brazilian Government via the Central Bank of Brazil. Well, the Central Bank was completely independent because the head of state was not involved (not interested) in the workings of the Central Bank at all.

It is thus possible to stop the total effect of low inflation, high inflation, hyperinflation and deflation and the stable measuring unit assumption overnight at no cost in any economy. The accounting part was the important part that  was missing (the weakness) in the Real Plan. The Daily Index Plan is thus the complete economic plan: a better plan than the Real Plan. The Real Plan was only a monetary reform. The Daily Index Plan is a monetary and a fundamental accounting – an economic – reform plan.

 

Nicolaas Smith

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

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Wednesday, 7 November 2012

The Generally Accepted Definition of Hyperinflation

The Generally Accepted Definition of Hyperinflation

The International Accounting Standard Board´s definition of hyperinflation is the generally accepted definition in the world economy since April 1989, the date IAS 29 was authorized.

The IASB defines hyperinflation in IAS 29 Financial Reporting in Hyperinflationary Economies, Par. 3 (e) as follows:


"the cumulative inflation rate over three years is approaching, or exceeds, 100%."
 
The IASB´s definition if followed by millions of accountants and all countries implementing International Financial Reporting Standards since April 1989.
 
In 1956, Phillip Cagan wrote The Monetary Dynamics of Hyperinflation, generally regarded as the first serious study of hyperinflation and its effects. In it, he defined a hyperinflationary episode as starting in the month that the monthly inflation rate exceeds 50%, and it ending when the monthly inflation rate drops below 50% and stays that way for at least a year.[4] Economists usually follow Cagan’s description.
 
No country in the world follows Cagan´s definition for any purpose or is required to follow Cagan´s definition.



Nicolaas Smith

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

Buy the Kindle ebook at Amazon.com for $2.99 or £1.53 or €2.68