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Thursday, 27 February 2014

Ukraine and Venezuela can achieve economic stability in the very short run with help from the IASB


The implementation of capital maintenance in units of constant purchasing power in terms of a DAILY index which follows all - at least DAILY - changes in the general price level would GUARANTEE stability in the REAL VALUE  (constant purchasing power) of 

salaries

wages

rents

taxes

trade debtors

trade creditors

all non-monetary payables

all non-monetary receivables

all items in the income statement

all profits

all losses

issued share capital

retained earnings 

capital reserves 

all other items in shareholders´equity

provisions 

etc. 

at any level of high or hyperinflation in Ukraine and Venezuela in the very short run. This requires the calculation and accounting of net monetary losses and gains.

This would stabilize the constant real value non-monetary economies in Ukraine and Venezuela in the very short run.

This was done very successfully in Brazil from 1964 to 1994 with "correcção monetária" or DAILY indexing which is CMUCPP in terms of a DAILY INDEX.


Extending DAILY INDEXING or "correcção monetária" or CMUCPP in terms of a DAILY INDEX to include the daily inflation-adjustment of all monetary items with all cash in the banking system (obviously not 100% possible) and it would GUARANTEE the stability of the REAL VALUE of these inflation-indexed monetary items at all levels of high and hyperinflation in Ukraine and Venezuela in the very short run. There would still be high or hyperinflation in Ukraine and Venezuela but there would be no EFFECT OF high or hyperinflation just like the effect of low and high inflation is eliminated in the global USD 3 trillion in government capital inflation-indexed bonds (e.g. TIPS) currently inflation-adjusted DAILY during low and high inflation in terms of the DAILY CPI in a great number of countries in the world economy.

Chile already inflation-indexes 25% + of all monetary items in its economy on a DAILY basis during low inflation since 2012. Chile started indexing in 1967 in its economy. They adopted DAILY INDEXING since 1990.

Robert Shiller decried governments´ lack of interest in DAILY INDEXING years ago. 

The IASB can achieve that today in a very short time by requiring DAILY INDEXING in IAS 29 Financial Reporting in Hyperinflationary Economies by means of the short turn-around process for correcting an issued IFRS.

Venezuela is implementing IAS 29 since 2009. Ukraine is or would soon be in high inflation. IAS 29 in terms of the monthly published CPI does NOT achieve the above monetary and non-monetary stability as very well proven during the 6 years IAS 29 was implemented at the end of Zimbabwe´s hyperinflation.

Nothing stops the IASB from requiring DAILY INDEXING in IAS 29 and nothing stops the IASB from encouraging it immediately and changing IAS 29 to require it over the very short term.

The above would also stabilize the foreign currency exchange rates of Ukraine and Venezuela with the rest of the world economy - obviously only with all else being equal. DAILY INDEXING would always guarantee internal economic stability no matter what happens with the external exchange rate. Internal economic stability generally always has a stabilizing effect on the external exchange rate - all else being equal.

What a difference DAILY INDEXING of all monetary items and all constant real value non-monetary items would make in Ukraine and Venezuela. Ask Robert Shiller and Gustavo Franco. Franco was one of the architects of the Real Plan in Brazil in 1994.

All of the above also hold true for Argentina and all other countries in high and hyperinflation. The constant purchasing power of constant real value non-monetary items and inflation-indexed monetary items is not only to be maintained constant in real value with the onset of high inflation or only during hyperinflation. CMUCPP in terms of a DAILY INDEX is required at all levels of inflation and deflation: during low inflation and deflation too.

Nicolaas Smith 

Copyright (c) 2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.