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Sunday, 16 November 2014

Inflation and deflation would have no effect on the economy ...

Inflation (low, high and hyperinflation) and deflation would have no effect on the economy when all items expressed in terms of money are indexed in terms of all (at least daily) changes in the general price level in terms of the Daily Consumer Price Index. There would still be inflation or deflation, but there would be no effect of inflation or deflation. It would be as if there were no inflation or deflation. 

Every economic item is expressed in terms of a fiat monetary unit of measure in a non-dollarized economy: a salary, a wage, capital, interest, a tax, rent, money, a debt, a loan, property, plant, equipment, inventory, shares and every other item: all expressed in terms of local currency fiat money. In a dollarized economy all items within the economy are expressed in terms of a foreign currency which is normally a relatively stable variable real value non-monetary item; in the vast majority of cases, the US Dollar.

The Daily CPI is based on the monthly published CPI. When the monthly published CPI is not available, for example, when a government refuses to publish it during hyperinflation, then the daily US Dollar parallel rate would be used as the Daily Index, i.e., all items would be Dollar-indexed daily.

Chile daily indexes more than 25% of its money supply in terms of their Unidad de Fomento daily index. All mortgages are indexed daily in Colombia. Globally, more than three trillion US Dollars in government inflation-indexed bonds are inflation-adjusted daily in terms of an official Daily CPI. Inflation has no effect on the real value of the capital amounts of these daily inflation-adjusted items.

The Brazilian economy was indexed from 1964 to 1994. The most successful daily index was their Unidade Real de Valor Daily Index used in 1994 as part of their Real Plan to stop hyperinflation overnight at no cost. 

The IFRS authorized Capital Maintenance in Units of Constant Purchasing Power accounting model requires the use of the Daily CPI during all levels of inflation (low, high and hyperinflation) and deflation. 

Nicolaas Smith 

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