Tuesday, 8 June 2010

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

Copyright © 2010 Nicolaas J Smith

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