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Wednesday, 18 September 2013

The IASB´s dismal failure in Venezuela and Belarus - like in Zimbabwe in the past

The IASB´s dismal failure in Venezuela and Belarus - like in Zimbabwe in the past

There are three ways to deal with inflation:

(1) The MONETARY EFFECT of hyperinflation (i.e. the DAILY erosion of the REAL value of the Bolivar - all MONETARY ITEMS in Venezuela not inflation-indexed daily) can be reduced by the Central Bank of Venezuela by reducing the excessive increase in the supply of Bolivars. This is a political matter in Venezuela. The Central Bank of Venezuela can thus reduce inflation by creating fewer new Bolivars.

(2) Dollarization (official or spontaneous) or a currency board will stop hyperinflation overnight. It means the end of the Bolivar. Official dollarization is very costly to the government and you lose ALL your sovereignty over monetary policy. Spontaneous dollarization has no extra cost to the government. You still lose ALL your sovereignty over monetary policy.

(3) The DAILY inflation-indexing of all MONETARY ITEMS in the economy, obviously excluding actual Bolivar bank notes (I don´t know whether you have coins) will do nothing to the rate of hyperinflation (you will still have hyperinflation) but there would be no EFFECT of hyperinflation in the economy. 

Inflation has NO EFFECT on the REAL VALUE of NON-MONETARY ITEMS like taxes payable, taxes receivable, salaries, wages, rents, trade debtors, trade creditors, capital, profits, etc.

The REAL VALUE of the NON-MONETARY ITEMS taxes payable, taxes receivable, salaries, wages, rents, trade debtors, trade creditors, capital, profits, etc. is destroyed by the STABLE MEASURING UNIT ASSUMPTION, i.e., Historical Cost Accounting - by not maintaining them constant in REAL VALUE on a DAILY basis (the general price level changes DAILY or even more than once a day in high hyperinflation). 

Indexing (measuring them in units of constant purchasing power in terms of a DAILY INDEX) taxes payable, taxes receivable, salaries, wages, rents, trade debtors, trade creditors, capital, profits, etc. DAILY in terms of the DAILY CPI in Venezuela - as was done very successfully for 30 years from 1964 to 1994 in Brazil and other Latin American countries in terms of Daily Indices - would maintain the REAL VALUE of taxes payable, taxes receivable, salaries, wages, rents, trade debtors, trade creditors, capital, profits, etc constant over time - as was done - to a large extent - in LA in the past.

This can be done by the International Accounting Standards Board for Venezuela if the IASB were to have the common sense and  good judgement to change International Accounting Standard IAS 29 Financial Reporting in Hyperinflationary Economies (which Venezuelan companies have been implementing since 2009) to REQUIRE it to be implemented in terms of a DAILY INDEX instead of the monthly published CPI as it has been done since 1990. 

That would stabilise ONLY the Venezuelan constant real value NON-MONETARY economy - as it was done in Brazil and the rest of LA in the past. It would do nothing to inflation over the short term.  

Unfortunately this will not happen because the IASB does not have the common sense and good judgement to change IAS 29 to REQUIRE daily indexing. Companies in Venezuela or their multinational owners would also not do it because it is not currently REQUIRED in IAS 29 - although it CAN be done because the DAILY CPI is also a consumer price index just like the monthly published CPI as currently used in IAS 29. 

Nicolaas Smith 

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