Thursday, 11 June 2009

There is magic in lower inflation

Thought Leader

Alan Greenspan correctly stated that low inflation is what sustained economic growth is built upon.

It is very irresponsible to suggest an inflation target of 10% to 15%.

Under the current Historical Cost paradigm there are always TWO simultaneous systemic economy-wide real value destruction processes operating in the economy during inflation: (a) inflation in the monetary economy and (b) SA accountants implementing the Historical Cost Accounting model in the non-monetary or real economy:

(1) 161.6% cumulative inflation since April 1994 have destroyed 61.8% of the real value of the Rand in our monetary economy.

(2) During the same period SA accountants have unknowingly destroyed 61.8% of the real value in the non-monetary or real economy of all Retained Earnings balances that remained in SA companies during that period and in the Shareholders´ Equity of all companies with no fixed assets or a lower percentage in companies with insufficient fixed assets to revalue because our accountants implement the very destructive stable measuring unit assumption as part of the real value destroying traditional Historical Cost Accounting model.

When SA accountants freely choose to measure financial capital maintenance in units of constant purchasing power as per the International Accounting Standards Board´s Framework, Par. 104 (a) which is compliant with International Financial Reporting Standards, they will maintain instead of unknowingly destroy about R200 billion per annum in real value in constant items not updated in the SA real economy for an unlimited period of time and reduce economy-wide value destruction to simply a single destruction process by inflation in the real value of the Rand.

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