IASC Foundation to become IFRS Foundation on 1 July 2010

"IASC Foundation to become IFRS Foundation on 1 July 2010



On 1 July 2010 the IASC Foundation will formally change its name to the IFRS Foundation.

The change represents the next step in a process to simplify the names in use across the organisation announced following the conclusion of the Constitutional Review in 2010. The International Financial Reporting Interpretations Committee (IFRIC) and the Standards Advisory Council (SAC) have already been renamed as the IFRS Interpretations Committee and the IFRS Advisory Council, respectively.

The name of the International Accounting Standards Board (IASB) will remain unchanged."

© 2010 International Accounting Standards Committee Foundation

Monetary items

International Financial Reporting Standards definitions:

1. IAS 21 Par 8 Monetary items are units of currency held and assets and liabilities to be received or paid in a fixed or determinable number of units of currency.

So, if you buy a mobile phone on credit and pay it´s fixed price in two month´s time, then your mobile phone is a monetary item according to IFRS.

Obviously wrong.

2. IAS 29 Par 12 Monetary items are money held and items to be received or paid in money.

If you buy a mobile phone on credit and its fixed price is to be paid in two month´s time in money, then your mobile phone is a monetary item according to IFRS.

Obviously wrong.

The correct definition of monetary items:

Monetary items constitute the Money supply.

Updated on 11-05-2013

Trade debtors and trade creditors are constant real value non-monetary items.

Kindest regards

Nicolaas Smith
realvalueaccounting@yahoo.com

Copyright © 2010 Nicolaas J Smith

Money versus real value

In practice, money has a specific real value for a month at a time in an internal economy or monetary union during low inflation and deflation. It changes every time the CPI changes. A monetary note or monetary coin has its nominal value permanently printed on it. Its nominal value does not and now cannot change.

Today monetary units are mostly created in economies subject to inflation. The Japanese economy is regularly in a state of deflation. The Japanese Yen increases in real value inside the Japanese economy during deflation.
Money refers to a monetary unit used within the economy or monetary union in which it is created. This does not refer to the foreign exchange value of a monetary unit which is not the subject of this book. The foreign exchange value of a monetary unit refers to its exchange value in relation to another monetary unit normally the monetary unit of another country or monetary region.

The real value of money would remain the same over time only at sustainable zero per cent annual inflation. Money would thus have an absolutely stable real value only at sustainable zero per cent annual inflation. This has never happened on a permanent basis in any economy. Now and then countries achieve zero annual inflation for a month or two at a time. But never for a sustainable period of a year or more.

Kindest regards

Nicolaas Smith
realvalueaccounting@yahoo.com

Copyright © 2010 Nicolaas J Smith

Measurement in units of constant purchasing power is not generally understood

This is what is stated in the book Principles of Generally Accepted Accounting Practice which reflects what is stated in the IASB´s Framework for the Preparation and Presentation of Financial Statements:

“2.7 Concepts of Capital and Capital Maintenance

The framework identifies two concepts of capital and capital maintenance, the selection of which should be based on users´ needs. It does not say how these needs should be established, nor does it consider the possibility that different user groups may prefer different concepts of capital maintenance.

Financial capital maintenance makes profit dependent upon end-of-period net assets exceeding beginning-of-period net assets (whether measured in nominal units of units of constant purchasing power).

Physical capital maintenance makes profit dependent upon end-of-period physical productive capacity (or operating capability) exceeding that of the beginning of the period.

In both cases, distributions to and contributions from owners must be excluded.

Physical capital maintenance requires the adoption of the current cost basis of measurement, whereas financial capital maintenance does not require the use of a particular basis of measurement, according to paragraph 106 of the framework.

The framework indicates that the principle difference between the two concepts is the treatment of the effect of the changes of prices of assets and liabilities of the enterprise. This is described in paragraphs 108-9 as follows:

* Under the concept of financial capital maintenance where capital is defined in terms of nominal monetary units, profit represents the increase in nominal money capital over the period. Thus, increases in the prices of assets held over the period, conventionally referred to as holding gains, are, conceptually, profits. They may not be recognised as such, however, until the assets are disposed of in an exchange transaction. When the concept of financial capital maintenance is defined in terms of constant purchasing power units, profit represents the increase in invested purchasing power over the period. Thus, only that part of the increase in the prices of assets that exceeds the increase in the general level of prices is regarded as profit. The rest of the increase is treated as a capital maintenance adjustment and, hence, as part of equity.

* Under the concept of physical capital maintenance when capital is defined in terms of the physical productive capacity, profit represents the increase in that capital over the period. All price changes affecting the assets and liabilities of the entity are viewed as changes in the measurement of the physical productive capacity of the entity; hence, they are treated as capital maintenance adjustments that are part of equity and not as profit.”

This is wrong in at least two aspects:

1. There are – in principle (remember that IFRS are principles based standards) – not only two, but three concepts of capital and capital maintenance authorized in IFRS.

2. Measurement in units of constant purchasing power does affect the economy.

The three concepts of capital defined in IFRS during low inflation and deflation are:

•(A) Physical capital. See paragraph 102 of the Framework.

•(B) Nominal financial capital. See paragraph 104 of the Framework.

•(C) Constant purchasing power financial capital. See paragraph 104 of the Framework.

The three concepts of capital maintenance authorized in IFRS during low inflation and deflation are:

•(1) Physical capital maintenance: optional during low inflation and deflation. Current Cost Accounting model prescribed by IFRS. See Par 106 of the Framework.

•(2) Financial capital maintenance in nominal monetary units (Historical cost accounting): authorized by IFRS but not prescribed—optional during low inflation and deflation. See Par 104 (a) of the Framework. Financial capital maintenance in nominal monetary units per se during inflation and deflation is a fallacy: it is impossible to maintain the real value of financial capital constant with measurement in nominal monetary units per se during inflation and deflation.

•(3) Financial capital maintenance in units of constant purchasing power: authorized by IFRS but not prescribed—optional during low inflation and deflation. See Par 104(a) of the Framework. Prescribed in IAS 29 during hyperinflation. Constant Purchasing Power Accounting. Only financial capital maintenance in units of constant purchasing power per se can maintain the real value of financial capital constant during inflation and deflation in all entities that at least break even—ceteris paribus—for an indefinite period of time. This would happen whether these entities own revaluable fixed assets or not and without the requirement of more capital or additional retained profits to simply maintain the existing constant real value of existing shareholders´ equity constant.

It is a Generally Accepted Accounting Practice that measurement in units of constant purchasing power does affect the economy (see the inflation-adjustment of salaries and wages, etc in the world economy).


Copyright © 2010 Nicolaas J Smith

Capital maintenance to be excluded from IFRS

Capital maintenance to be excluded from IFRS

Last updated on 4 May, 2012

The current International Accounting Standards Board´s Framework for the Preparation and Presentation of Financial Statements includes eight paragraphs dedicated to the Concepts of Capital and Capital Maintenance.

The Framework - with the exception of the Concepts of Capital and Capital Maintenance - is in the process of being updated. The Joint “Conceptual Framework project aims to update and refine the existing concepts to reflect the changes in markets, business practices and the economic environment that have occurred in the two or more decades since the concepts were first developed.

Its overall objective is to create a sound foundation for future accounting standards that are principles-based, internally consistent and internationally converged. Therefore the IASB and the US FASB (the boards) are undertaking the project jointly” according to the IASB.

The Concepts of Capital and Capital Maintenance are not included in the phases to be updated in the Joint Conceptual Framework Project.

Kevin McBeth, FASB Conceptual Framework Project Manager (Phase C Measurement) stated in email correspondence with me: "In the measurement phase the staff suggested that capital and capital maintenance be discussed in the measurement phase, as it was in the original FASB Conceptual Framework. However, to date the Boards have not taken a decision on where, or even whether, those topics will be included in the converged framework."

It is thus not clear where, or even whether the Concepts of Capital and Capital Maintenance as stated in the current Framework, Paragraphs 102 to 110 will be included in the new Conceptual Framework. According to Kevin McBeth, the Concepts of Capital and Capital Maintenance may even be excluded from the future converged Conceptual Framework.

Kindest regards

Nicolaas Smith
realvalueaccounting@yahoo.com

Update:

The Capital Maintenance section of the original Framework (1989) was retained in the latest Conceptual Framework (2010).

Copyright © 2010-2012 Nicolaas J Smith

Real value to be destroyed by SA accountants over the next 30 years - Part II

We can see from Table 3 what the difference would be when SA accountants freely decide to measure financial capital maintenance in units of constant purchasing power as the IASB-authorized them to do 21 years ago in the Framework, Par 104 (a).

The destruction of real value in constant items never maintained which SA accountants treat as monetary items would stop completely. There would only be real value destruction in the value of the Rand because of inflation. At 6.4% annual inflation only R124 billion in real value would be destroyed in the economy as a whole instead of the current about R324 billion over a period of 12 months. Over five years the cumulative total of real value destruction would drop from R1 620 billion to R 624 billion, over 10 years from R3 240 billion to R1 249 billion, over 20 years from R6 480 billion to R2 498 billion and over 30 years from R9 720 billion to R3 747 billion.

SA accountants unknowingly destroy existing real values in existing constant items never maintained with their very destructive stable measuring unit assumption. When they stop their stable measuring unit assumption they would knowingly maintain about R200 billion in existing constant item real values during every period of 12 months in the SA real economy amounting to R1 000 billion over 5 years, R 2 000 billion over 10 years, R4 000 over 20 years and R6 000 billion over 30 years. Boosting the SA real economy with these real values would make a significant difference to growth and employment in the economy over those periods.

Obviously a further reduction of inflation to an annual average of 4% would improve the SA monetary economy even more. Over 30 years it would maintain a further R1 140 billion in the monetary economy on top of the R6 000 to be gained when SA accountants freely switch over to financial capital maintenance in units of constant purchasing power.

There would never more be any destruction of real value in constant items never maintained because of a fundamentally flawed basic model of accounting under which SA accountants simply assume there is no such thing as inflation and never has been, only for the valuation of constant items, when they measure financial capital maintenance in units of constant purchasing power during low inflation. This is exactly the same as stating that there would never more be destruction of the real value of the Rand in the monetary economy at the level of R228 billion per annum (12 x 19 billion) as long as average annual inflation never again reaches 12%. There would be zero per cent real value destruction in constant items – all else being equal – with financial capital maintenance in units of constant purchasing power at all levels of inflation and deflation.

Stating that the SARB is responsible for limiting the destruction of the real value of the Rand and other monetary items by inflation to a maximum of 6 per cent or R117 billion per annum is the same as stating that the SARB is responsible for maintaining 94 percent or R1 808 billion of the R1 925 billion total per annum of the real value of the Rand and other monetary items in the SA monetary economy.

It is also the same as stating that SA accountants only unknowingly maintain 94 % or R3 133 billion per annum of the about R3 333 billion of the real value of constant items never maintained they unknowingly treat as monetary items in the SA constant item economy under the Historical Cost paradigm since they unknowingly destroy the remaining 6% or R200 billion annually of the real value of constant items never maintained. They would maintain the real value of the R3 333 billion in constant items constant forever in all SA companies at least breaking even – all else being equal – at all levels of inflation and deflation whether these companies have fixed assets or not.

It is evident from the above why Alan Greenspan stated that low inflation is what sustainable economic growth is built on.

Kindest regards

Nicolaas Smith
realvalueaccounting@yahoo.com

Copyright © 2010 Nicolaas J Smith

Real value to be destroyed by SA accountants over the next 30 years - Part I

Link to tables

Table 2 above is a good estimate of the state of real value destruction in the SA economy at the moment: In the 12 month period ending in August, 2009, inflation actually destroyed R1 952.799 billion x 0.064 = R124.9 billion in the real value of the Rand in the SA monetary economy. At the same time SA accountants unknowingly destroyed about R200 billion in the real value of constant items never maintained which they treat as monetary items in the SA constant item economy. About R324 billion in real value was thus destroyed in the SA economy in the 12 months to August, 2009 by inflation and unknowingly by SA accountants implementing their very destructive stable measuring unit assumption.


If inflation stays at 6.4% for the next five years and SA accountants keep on unknowingly destroying the real values of constant items never maintained which they treat as monetary items with their very destructive stable measuring unit assumption then a cumulative total of R1 620 billion in real value would be destroyed in the SA economy – all else being equal. The cumulative totals of real value destruction under these circumstances for 10, 20 and 30 years would be R3 240 billion, R6 480 billion and R9 720 billion respectively. These are huge values of real value destruction in the SA economy. The part which SA accountants unknowingly, unnecessarily and unintentionally destroy can easily be eliminated completely.

Kindest regards

Nicolaas Smith
realvalueaccounting@yahoo.com

Copyright © 2010 Nicolaas J Smith

They simply don´t understand it.

SA accountants (and everyone else) make the mistake of blaming the destruction of companies´ profits and capital by their choice of traditional HCA - which includes the stable measuring unit assumption - on inflation.

SA accountants identify the problem, namely, that the real values of companies´ profits and capital are being destroyed over time when implementing HCA during low inflation. They make the mistake of blaming inflation instead of their own free choice of the stable measuring unit assumption. This is camouflaged by IFRS approval in the Framework, Par 104 (a) of the stable measuring unit assumption- the stealth enemy in the SA economy wreaking more havoc than inflation, its convenient cover.

The US Financial Accounting Standards Board also blames inflation:

“In Mr. Mosso's view, conventional accounting measurements fail to capture the erosion of business profits and invested capital caused by inflation.”

Statement of Financial Accounting Standard No. 33, P. 24
Everyone only sees one enemy being responsible for all of the invisible and untouchable systemic real value destruction in the economy. They think inflation is responsible for all real value destruction.

SA accountants already confused by inflation illusion (just like everyone else), further feel that the SARB with its monetary policies and the SA government with its economic policies should "influence" inflation which would then "influence reported results” by inflation. But, it is not inflation destroying the real value of companies´ profits and capital, it is accountants´ choice of traditional HCA which includes their very destructive stable measuring unit assumption. This second enemy is a stealth enemy camouflaged by IFRS approval in the Framework, Par 104 (a) since the way it operates is not understood by SA accountants and accounting lecturers at SA universities. If they understood it, they would have stopped it by now with financial capital maintenance in units of constant purchasing power as they had been authorized by the IASB in the Framework, Par 104 (a) in 1989.
Copyright © 2010 Nicolaas J Smith

Lock up anyone who messes with CPI

The change in the Consumer Price Index - which indicates the rate of inflation or deflation - is the only way we know what is happening with the real value of fiat money. This affects everyone in an economy. Messing around with the CPI should be a criminal offence punishable with a severe prison sentence.

See the following report on Bloomberg:

Economists and politicians, including former central bank President Alfonso Prat-Gay, have challenged official data since former President Nestor Kirchner started to replace personnel at the Buenos Aires-based statistics institute in January 2007.

Kirchner´s wife is the current Argentine President who will most probably be in South Africa if Maradonna´s team get to the final.

The lack of understanding the fact that accountants implementing Historical Cost Accounting is the cause of the destruction of the real value of constant real value non-monetary items (salaries, wages, issued share capital, retained earnings, all other items in shareholders´ equity, trade debtors, trade creditors, all other non-monetary receivables and all other non-monetary payables, etc) makes everone so concerned about inflation when, in fact, they can stop that unknowing, unnecessary and unintentional destruction by accountants when accountants freely change over to financial capital maintenance in units of constant purchasing power as authorized in International Financial Reporting Standards in the Framework, Par 104 (a) twenty one years ago.

Kindest regards

Nicolaas Smith
realvalueaccounting@yahoo.com

Copyright © 2010 Nicolaas J Smith

Two economic enemies

There are two economic enemies destroying real value systematically in the SA economy. The first enemy - inflation - is an economic process. The second enemy is a Generally Accepted Accounting Practice.
The second economic enemy is SA accountants´ free choice of traditional Historical Cost Accounting which includes their very destructive stable measuring unit assumption. This second process of systemic real value destruction manifests itself in accountants´ stable measuring unit assumption only in the constant item part of the SA non-monetary or real economy when they freely choose to measure financial capital maintenance in nominal monetary units (one of the three popular accounting fallacies on which current IFRS are based) when they implement the traditional HCA model in SA companies during low inflation as approved in the IASB´s Framework, Par 104 (a) which is compliant with IFRS.
Copyright © 2010 Nicolaas J Smith

Two enemies in the economy

Constant real value non-monetary items never maintained constant are treated like monetary items when their nominal values are never updated as a result of the implementation of the stable measuring unit assumption as part of the traditional Historical cost accounting model during low inflation and deflation.

“The Measuring Unit principle: The unit of measure in accounting shall be the base money unit of the most relevant currency. This principle also assumes the unit of measure is stable; that is, changes in its general purchasing power are not considered sufficiently important to require adjustments to the basic financial statements.”

Paul H. Walgenbach, Norman E. Dittrich and Ernest I. Hanson, (1973), Financial Accounting, New York: Harcourt Brace Javonovich, Inc. Page 429.

Inflation is the primary enemy in the monetary economy and the central bank is the enemy of inflation.

The second enemy is the stable measuring unit assumption. Financial capital maintenance in units of constant purchasing power as originally authorized in IFRS in the Framework (1989), Par 104 (a) in 1989 is the enemy of the stable measuring unit assumption during low inflation and deflation. In principle, it is assumed that money, the monetary unit of measure, is perfectly stable during low inflation and deflation; that is, it is assumed that changes in its general purchasing power are not sufficiently important to require financial capital maintenance in units of constant purchasing power during low inflation  and deflation where under the nominal constant real non-monetary values of all existing constant items in the real economy is updated by applying the monthly change in the annual CPI in order to maintain their constant real values constant forever in all entities that at least break even. The stable measuring unit assumption unknowingly, unintentionally and completely unnecessarily erodes the real values of existing constant items never maintained constant during low inflation to the amount of about R167 billion in the SA constant item economy each and every year while the HCA model is implemented and inflation remains at about 4.8% per annum.

The stable measuring unit assumption is a stealth enemy camouflaged by US GAAP and IFRS authorization which makes it IFRS compliant and the generally accepted accounting fallacy that the erosion of companies´ capital and profits is caused by inflation: hardly anyone knows or understands that when the very destructive stable measuring unit assumption is implemented, it unknowingly, unintentionally and unnecessarily erodes the existing constant real value of constant items never maintained constant at a rate equal to the annual rate of inflation under HCA during low inflation. Some people who already know about it claim that it makes no difference to the economy. The fact that the stable measuring unit assumption is unnecessarily eroding about R167 billion per annum in the SA real economy, and hundreds of billions of US Dollars in the world´s real economy, does make a difference.

Nicolaas Smith

Copyright © 2010 Nicolaas J Smith

It is not inflation doing the destroying

It is not inflation doing the destroying as the IASB, the FASB and SA accountants mistakenly believe.

It is SA accountants´ free choice of the very destructive stable measuring unit assumption during low inflation as it forms part of financial capital maintenance in nominal monetary units – the Historical Cost Accounting model – as authorized in IFRS in the Framework, Par 104 (a) twenty one years ago.

SA accountants would knowingly maintain the real values of all constant real value non-monetary items constant (amounting to about R167 billion per year while inflation stays at about 4.8% per annum) in all companies that at least break even forever – all else being equal - no matter what the level of inflation or deflation when they reject the stable measuring unit assumption and implement financial capital maintenance in units of constant purchasing power during low inflation and deflation.

This would be done without requiring extra money or extra retained profits simply to maintain the existing constant real value of existing constant real value non-monetary items constant.


Copyright © 2010 Nicolaas J Smith

SA accountants are clueless about the destructive nature of the stable measuring unit assumption.

Increases in the general price level (inflation) destroy the real value of the Rand (the functional currency) and other monetary items with an underlying monetary nature (e.g. loans and bonds) equally in the monetary economy. However, inflation has no effect on the real value of variable real value non-monetary items (e.g. land, buildings, goods, commodities, cars, gold, real estate, inventories, finished goods, foreign exchange, etc) and constant real value non-monetary items (e.g. issued share capital, retained profits, capital reserves, other shareholder equity items, salaries, wages, rentals, pensions, trade debtors, trade creditors, taxes payable, taxes receivable, deferred tax assets, deferred tax liabilities, etc).

SA accountants freely choose to implement the stable measuring unit assumption during low inflation when they value constant items never maintained, e.g. companies´ capital and profits, in nominal monetary units; i.e. when they choose to measure financial capital maintenance in nominal monetary units in terms of the IASB´s Framework, Par 104 (a) or in terms of SA GAAP.

SA accountants´ choice of implementing the stable measuring unit assumption instead of measuring constant items´ real values in units of constant purchasing power results in the real values of these constant real value non-monetary items never maintained with sufficient revaluable fixed assets being destroyed at a rate equal to the annual rate of inflation because inflation destroys the real value of the Rand which is the monetary measuring unit of account in the SA economy.


Copyright © 2010 Nicolaas J Smith

Two processes of systemic real value destruction in the SA economy.

There are two processes of systemic real value destruction in the SA economy, although everybody thinks there is only one economic enemy. This is a mistake. The one enemy is well known. It is inflation. This economic enemy manifests itself in the Rand´s store of value function and only destroys real value in the SA monetary economy at the rate of inflation. Inflation is the enemy in the monetary economy and the Governor of the Reserve Bank is the enemy of inflation. Inflation per se has no effect on the real value of non-monetary items.

“Purchasing power of non monetary items does not change in spite of variation in national currency value.”

Prof Dr. Ümit GUCENME, Dr. Aylin Poroy ARSOY, Changes in financial reporting in Turkey, Historical Development of Inflation Accounting 1960 - 2005, Page 9.

Inflation, by itself, cannot destroy the real value of variable real value non-monetary items or constant real value non-monetary items items. It is impossible. Inflation is destroying the real value of the Rand and all other monetary items only in the SA monetary economy at the rate of 4.8 % per annum, at the moment (value date: April, 2010 CPI 111.3). The actual amount of real value destroyed in the real value of Rand notes and coins and other monetary items (bank loans, other monetary loans and deposits, etc) over the twelve months to April, 2010 amounted to about R100 billion.

The second process of real value destruction – the second enemy - is the unknowing, unintentional and completely unnecessary destruction by SA accountants of the real value of only constant items never maintained only in the SA constant item economy. This is the result of their implementation of the very destructive stable measuring unit assumption during low inflation as part of the traditional Historical Cost Accounting model used by most, if not all, SA companies.

Kindest regards

Nicolaas Smith
realvalueaccounting@yahoo.com

Copyright © 2010 Nicolaas J Smith

Inflation normally rises to the upper level of the inflation targeting range

When a central bank governor says that the central bank’s primary task or objective is price stability what she or he means is that the central bank would be fulfilling its primary task, in an economy with low levels of inflation, when prices in general are slowly rising over time (that well known definition of inflation again). The flip side of the coin is that the real value of the national monetary unit is slowly being destroyed by inflation over time.

A central bank’s primary task being a high degree of price stability is the same as saying a central bank’s main responsibility is ensuring that inflation is maintained at a very low level. This low level was generally accepted in first world economies to be 2 percent per annum. The latest sub-prime crisis raised doubts about the 2% level being sufficient in the event of large shocks to the economy.

“In a world of small shocks, 2 percent inflation seemed to provide a sufficient cushion to make the zero lower bound unimportant.” P4


“Should policymakers therefore aim for a higher target inflation rate in normal times, in order to increase the room for monetary policy to react to such shocks? To be concrete, are the net costs of inflation much higher at, say, 4 percent than at 2 percent, the current target range?” P11

Rethinking Monetary Policy, IMF Staff Position Note, Olivier Blanchard, Giovanni Dell´Ariccia and Paulo Mauro, Feb, 2010.

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 a high degree 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% of the real value of constant items never maintained, e.g. companies´ capital and profits never maintained with sufficient revaluable fixed assets, per annum and 51% over 35 years time with their very destructive stable measuring unit assumption. This unknowing and unnecessary 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.
SARB

“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.” SARB.

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
realvalueaccounting@yahoo.com

Copyright © 2010 Nicolaas J Smith

It is not what it appears to be.

When we discuss, write about, talk about or analyze our functional currency, we call it money and describe it using the term money with the implicit assumption that this money we are dealing with is stable - as in fixed - in real economic value in our low inflationary economies. We thus assume at the same time that prices are more or less stable in low inflationary economies too.

The term stable is normally accepted by the public at large to indicate a permanently fixed situation or position or state or price or value. A stable – as in fixed – price over time would be drawn as a horizontal line on a chart. A slowly increasing price over time would be drawn as a slightly rising line on a chart. A slowly decreasing value over time would be drawn as a slightly declining line on a chart. When we say production of a commodity is stable we accept that the absolute number of items being produced is not fluctuating but is at the same level all the time.

The term stable as used by economists, however, does not mean a fixed price or level, even though that is what the public in general thinks it means. The term stable in economics today means slowly increasing or slowly decreasing – depending on what it is being applied to. The term price stability as used by economists today does not mean that prices in general stay the same, but that prices in general are rising slowly – which is, as we are all taught, the popular definition of inflation.

The term stable money as used by economists equally does not mean that the real value of national monetary units they are talking about stays the same in the economy – even though that is what the public in general thinks it means. What they mean with stable money is that the real value of a national monetary unit is slowly being destroyed by inflation over time.

Kindest regards

Nicolaas Smith
realvalueaccounting@yahoo.com

Copyright © 2010 Nicolaas J Smith

3 to 6% inflation is not absolute "price stability"

There is no money illusion in hyperinflationary economies. People know that hyperinflation destroys the real value of their money very quickly. Central bank governors aid and abet money illusion by regularly stating in their monetary policy statements that they are “achieving and maintaining price stability.”

“The MPC remains fully committed to its mandate of achieving and maintaining price stability.”

TT Mboweni, Governor. 2009-06-25: Statement of the Monetary Policy Committee, SARB.

It is not always pointed out by governors of central banks that the “price stability” they mention, refers to their definition of “price stability”. Jean-Claude Trichet, the President of the European Central Bank, is a central bank governor who regularly mentions that 2% inflation is their definition of price stability. Absolute price stability is a year-on-year increase in the Consumer Price Index of zero per cent. The SARB´s definition of “price stability” “is for CPI inflation to be within the target range of 3 to 6 per cent on a continuous basis.”

The SARB would aid in reducing money illusion and non-monetary real value destruction in the SA economy by stating:

The MPC remains fully committed to its mandate of achieving and maintaining the SARB´s chosen level of price stability which is for CPI inflation to be within the target range of 3 to 6 per cent on a continuous basis. Absolute price stability is a year-on-year increase in the CPI of zero per cent. Current 4.8 % annual inflation destroyed about R100 billion of the real value of the Rand over the past 12 months to the end of April, 2010. A one per cent decrease in inflation would maintain about R20 billion per annum of real value only in the SA monetary economy and about R33 billion in the non-monetary economy as a result of the reduction in the level of unknowing destruction by SA accountants in the real value of constant real value non-monetary items never maintained in consequence of the implementation of their very destructive stable measuring unit assumption as it forms part of traditional Historical Cost Accounting; i.e. financial capital maintenance in nominal monetary units during low inflation as authorized in International Financial Reporting Standards in the Framework, Par 104 (a) in 1989.

Kindest regards
Nicolaas Smith
realvalueaccounting@yahoo.com

Copyright © 2010 Nicolaas J Smith

Hyperinflation in SA? Only with Malema.

In Zimbabwe hyperinflation reached such high levels that the real value of the country’s entire money supply was wiped out.

Towards the end of the hyperinflationary spiral the real value of the ZimDollar halved every 24.7 hours according to Steve Hanke from Cato Institute.

Eventually the ZimDollar had no value at all.

South Africa has never experienced hyperinflation.

I used to believe that SA will never experience hyperinflation.

With the success of Julius Malema in South Africa I have changed my opinion.

SA can possibly experience hyperinflation if Julius Malema one day becomes president of South Africa.

Kindest regards

Nicolaas Smith
realvalueaccounting@yahoo.com

Copyright © 2010 Nicolaas J Smith