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Monday, 14 January 2013

Enemy Number One


Enemy Number One

 

The stable measuring unit assumption is the number one enemy in the economy.

 

In the

 

A. Monetary  Economy the stable measuring unit assumption causes

 

(1)        the cost of inflation (not actual inflation),

(2)        the cost of hyperinflation (not actual hyperinflation) as well as

(3)        the deflation effect: the creation of real value in monetary items never deflation-adjusted daily during deflation (not actual deflation).

 

Inflation / hyperinflation is caused by an increase in the general price level. An increase in the general price level is caused by various economic factors, an important one being an excessive increase in the money supply. Deflation is caused by a decrease in the general price level.

 

With no stable measuring unit assumption (i.e., implementing IFRS-authorised Capital Maintenance in Units of Constant Purchasing Power) – inflation-indexing and hyperinflation-indexing all monetary items on a daily basis in terms of a Daily Index - there would be no cost of inflation / hyperinflation and no deflation effect. Thus, with no HCA (instead implementing CMUCPP), there would be no cost of inflation or cost of hyperinflation during inflation and hyperinflation.

 

In the

 

B. Constant Real Value Non-monetary Economy the stable measuring unit assumption causes

 

(1)        the erosion of the real value of constant real value non-monetary items never maintained constant during inflation and hyperinflation and

(2)        the creation of real value in constant items never maintained constant during deflation.

 

With no stable measuring unit assumption – no HCA (i.e., implementing IFRS-authorised CMUCPP) – measuring all constant items daily in units of constant purchasing power in terms of a Daily Index – the erosion of constant real value in constant items never maintained constant during inflation / hyperinflation and the creation of real value in constant items never maintained constant during deflation, would be stopped for an indefinite period of time in all entities that at least break even in real value – all else being equal – at all levels of inflation and deflation, including during hyperinflation.

 

The stable measuring unit assumption is implemented under

 

(1)        The traditional, generally accepted, globally implemented Historical Cost Accounting model during low inflation, high inflation and deflation and

(2)        The failed IAS 29 Financial Reporting In Hyperinflationary Economies model during hyperinflation.

 

The stable measuring unit assumption is never implemented under the IFRS-authorised Capital Maintenance in Units of Constant Purchasing Power in terms of a Daily Index model as proposed as a replacement of the failed IAS 29 model in IFRS ´X`CAPITAL MAINTENANCE IN UNITS OF CONSTANT PURCHASING POWER.




Nicolaas Smith

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