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Wednesday, 18 September 2013

Daily indexation is a measurement paradigm

Daily indexation is a measurement paradigm
“The inflation-indexing seems right, though not simple since it seems like it then becomes a political matter to be specifying which things become indexed or not. It also seems to exclude protection for those with no income, while weighing heavily on the responsibility of accounting systems, which is a flag for points of failure in Venezuela.”
“it seems like it then becomes a political matter to be specifying which things become indexed or not.
Daily indexation is a measurement paradigm totally different from traditional Historical Cost Accounting. It is a national measurement basis / paradigm once it is being implemented in an economy like it was implemented in Brazil and other Latin American countries during high and hyperinflation from 1964 till 1994. It is fundamentally different from the globally implemented, 3000-year-old, traditional nominal Historical Cost paradigm. The stable measuring unit assumption is implemented under the HC paradigm. It is assumed money is perfectly stable whenever economic items are measured in nominal monetary units during inflation and deflation - at whatever rate of inflation or deflation.
The stable measuring unit assumption is NEVER implemented under DAILY INDEXATION, i.e., the Constant Item Constant Purchasing Power paradigm. This is instinctively understood by consumers and business people, including all street traders (some of whom have never been to school) in hyperinflationary economies. However, it is a mystery to the members of the International Accounting Standards Board (IASB), the IASB Interpretations Committee and the IASB staff members who combined have 100s of years of experience of nominal Historical Cost Accounting and the stable measuring unit assumption during LOW inflation as well as combined hundreds of years of training and high level education in nominal HCA and the stable measuring unit assumption during LOW inflation. They are clueless about daily price rises during hyperinflation.


There is no money illusion in a hyperinflationary economy. Everyone knows for a fact that the local currency loses real value daily during hyperinflation. No-one doubts that.
Once DAILY indexation is implemented officially on a national basis as instinctively already happening in Venezuela in the DAILY indexing of many non-monetary prices in terms of the DAILY US Dollar parallel rate, then it is (becomes) a national measurement paradigm which it already currently is only for those prices being updated DAILY in Venezuela in terms of the DAILY US Dollar parallel rate.
So, it is not “a political matter to be specifying which things become indexed or not”. All items are indexed.
This will not stop hyperinflation in the short term. As long as the Central Bank of Venezuela keeps on creating too many Bolivars, there will be hyperinflation.
But, (1) DAILY INDEXATION of all monetary items would stop the real value eroding EFFECT of hyperinflation in all monetary items indexed daily - as it was done in Brazil from 1964 to 1994. It will be as if there is no hyperinflation - during actual hyperinflation. Currently the real value eroding EFFECT of low inflation is stopped in at least USD 2.4 Trillion in DAILY INDEXED government capital inflation-indexed bonds worldwide - during low inflation worldwide.
(2) Measurement of all NON-MONETARY items in units of constant purchasing power based on a DAILY INDEX would maintain their constant purchasing power constant DURING hyperinflation - as was done in Brazil from 1964 to 1994.
Venezuela has been indexing issued share capital, retained profits, accumulated losses, capital reserves, provisions, etc. in terms of the 12  monthly published Consumer Price Indices since 2009. Why? Because the government indicated that these items have to be indexed like this? No. It is done because Venezuela implements International Financial Reporting Standards, namely IAS 29 Financial Reporting in Hyperinflationary Economies since 2009.
Changing IAS 29 to REQUIRE DAILY INDEXING would mean that the DESTRUCTION of current year results in the Venezuelan economy over the last four years as the result of Venezuelan accountants implementing the stable measuring unit assumption - as required in IAS 29 - during the 355 non-month-end days of the year (they only use the 12 month-end CPIs as generally accepted over the last 24 years since its authorization under the current version of IAS 29) would stop.
Once companies start using DAILY INDEXING to maintain the real value (constant purchasing power) of their current year results instead of destroying part of it at the rate of hyperinflation, then DAILY INDEXING would become the national measurement paradigm in Venezuela as A REQUIREMENT of IAS 29 and not as a requirement of the Venezuelan government.
When DAILY INDEXING is done in terms of the Venezuelan Daily CPI (because doing it correctly in terms of the daily US Dollar parallel rate is currently illegal in Venezuela), then DAILY INDEXING of all items would become the national daily measurement paradigm because everyone will experience - see - the economy stabilising.
“It also seems to exclude protection for those with no income.”
DAILY INDEXING of all items means the economy would operate in real values. That means profits would be maintained in real value. That means taxes would be calculated AND PAID in real (constant purchasing power) values. That means social subsidies would be maintained in real values. Thus there would be much better protection for those with no income under DAILY INDEXATION than under the current system.
“while weighing heavily on the responsibility of accounting systems, which is a flag for points of failure in Venezuela.”
You mean the REQUIREMENTS of International Financial Reporting Standards implemented outside the control of the government.
What is happening in Venezuela today - illegal arbitraging low cost items to the Colombian market, the arbitrage between the official and parallel rate, etc. are all because of the invisible hand of self-interest.
Once DAILY INDEXING is the national paradigm in Venezuela as a result of its REQUIREMENT in IAS 29, then that invisible hand of self-interest would ensure that the economy stabilises by everyone striving to maintain his or her values constant over time: Business owners would welcome DAILY INDEXING of all prices, trade debtors, trade creditors and all items in their profit and loss accounts; workers would welcome DAILY INDEXING of salaries and wages and benefits; property owners would welcome DAILY INDEXING of rents and the government would welcome DAILY INDEXING of all taxes. Banks would welcome DAILY INDEXING of all loans made. No-one would lose any real value because of hyperinflation (in the perfect application of this process).
That is what happened in Brazil and many other Latin American countries with DAILY INDEXATION from 1964 till 1994.
It would be the same in Venezuela.
Nicolaas Smith 

Read extorres´s response in How to implement indexation in Venezuela.

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