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Saturday, 3 November 2012

Beating hyperinflation in Iran – like Brazil did in 1994



Beating hyperinflation in Iran – like Brazil did in 1994

Implementing the Daily Index Plan in Iran would beat hyperinflation as follows:

  1. Iran issues a New Currency with xx xxx rials being equal to one New Currency on a specific date.

  1. On the same date, Iran introduces a completely transparent  Daily Index compiled mainly from the US Dollar / New Currency daily free market rate.

  1. Iran requires capital maintenance in units of constant purchasing power in terms of the Daily Index as from that date. This would require all constant real value non-monetary items (the entire constant item economy) and all monetaery items (the entire monetary economy – money supply) to be measured daily in terms of the Daily Index.

Inflation would immediately fall to low levels as it happened in Brazil in 1994 because:

  1. All New Currency monetary items would be indexed daily in terms of the Daily Index. Result: no cost of or gain from inflation: New Currency monetary items would have constant real values over time. Brazil indexed monetary items daily in terms of their Unidade Real de Valor daily index.

  1. All constant real value non-monetary items (constant items), e.g., salaries, wages, rents, fees, royalties, taxes, trade debtors, trade creditors, all non-monetary payables and receivables, taxes payable, taxes receivable, capital (all items in shareholders´ equity), provisions, etc. would be indexed daily in terms of the Daily Index. Result: all constant items would have constant real values over time. Result: a stable non-monetaery economy - like Brazil had.

All variable real value non-monetary item prices (variable items), e.g., property, plant, equipment, inventories, bread, chicken, etc. prices would be determined daily in the free market. When they are not determined daily, they would be updated daily in terms of the Daily Index till the next time they are determined in the free market.
        
  1. The Daily Index would be completely transparent: anyone would be able to check its validity.

Social security measures would remain as they are.

If any institution in Iran prints or creates too much New Currency money it would be automatically reflected in the US Dollar / New Currency daily freemarket rate and consequently in the Daily Index, but because of daily indexing of all monetary and constant items both the monetary and constant item economies would remain stable at whatever rate of inflation.

Brazil used their Unidade Real de Valor Daily Index in combination with their Real Plan to stop hyperinflation very successfully in 1994. The above plan - not exactly the same, in practice - is, in principle, the same plan used by Brazil to stop hyperinflation.

This plan can be implemented without a New Currency and with the Chinese Yuan or any other relatively stable foreign currency instead of the USD Dollar free market rate.

Nicolaas Smith



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