Saturday, 8 May 2010

The SARB talks 3 to 6% but everybody is happy with 6 or below

We know that inflation is always and everywhere the destruction of real value in money and other monetary items over time. We also know that inflation has no effect on the real value of non-monetary items over time.

The maintenance of price stability (still) means that the primary task of a central bank in a first world economy is to limit the destruction of real value in money and other monetary items by inflation to a maximum of 2 percent per annum within an economy or common monetary area. Continuous two per cent annual inflation destroys 2% of the real value of money and other monetary items per annum and 51% over 35 years.

Under the current Historical Cost paradigm it also means that accountants unknowingly destroy 2% per annum of the real value of constant real value non-monetary items never maintained, e.g. companies´ capital and profits never maintained constant with sufficient revaluable fixed properties, and 51% over 35 years time with their very destructive stable measuring unit assumption as implemented under HCA. This unknowing destruction by accountants would be eliminated completely when accountants freely choose to measure financial capital maintenance in units of constant purchasing power during low inflation as they have been authorized in IFRS in the Framework, Par 104 (a) in 1989.

“The South African Reserve Bank is the central bank of the Republic of South Africa. It regards its primary goal in the South African economic system as the achievement and maintenance of price stability.

The South African Reserve Bank conducts monetary policy within an inflation targeting framework. The current target is for CPI inflation to be within the target range of 3 to 6 per cent on a continuous basis.”

The SARB may state officially that it has an inflation targeting range of 3 to 6 per cent per annum. In practice that target is 6 per cent per annum because inflation normally rises to the upper level of the inflation targeting range. The SARB´s official task is thus to limit the destruction of the real value of the Rand currently to 6 per cent per annum.

What does that mean in practice?

Kindest regards

Nicolaas Smith

Copyright © 2010 Nicolaas J Smith

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