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Wednesday, 2 June 2010

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