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Tuesday, 14 September 2010

Basel is nominal

Bank capital requirements are increased in NOMINAL TERMS as per new Basel rules.

Result: their capital is always declining in REAL TERMS during inflation; i.e. their accountants unknowingly destroy the real value of their capital with their very destructive stable measuring unit assumption.

In 1989 the International Accounting Standards Board authorized the Framework, Par 104 (a). It states:

"Financial capital maintenance can be measured in either nominal monetary units OR UNITS OF CONSTANT PURCHASING POWER." (my capitals)

Simply stated: All banks (and all companies) would maintain the REAL VALUE of their capital (equity) CONSTANT FOREVER as long as they break even - all else being even - under any level of inflation or deflation with financial capital maintenance in units of constant purchasing power whether they own any revaluable fixed assets or not.

US GAAP does not even allow financial capital maintenance in units of constant purchasing power.

No-one implements it because:

1. Very few people understand the real value maintaining effect of financial capital maintenance in units of constant purchasing power.

2. Very few people understand the destruction caused by accoutants´ stable measuring unit assumption where under accountants simply assume there is no such thing as inflation and deflation: they simply assume money was, is and always will be perfectly stable ONLY for the purpose of valuing/measuring ALL balance sheet constant real value non-monetary items as well as most - not all - income statement items: accountants (very smartly) look after their own very good salaries: they inflation-adjust them as well as rental payments, etc. But, only these items: nothing else.
3. Financial capital maintenance in nominal monetary units per se - logically and mathematically impossible during inflation and deflation - is the paradigm since the invention of money: i.e. at least for the last 3000 years.
Copyright © 2010 Nicolaas J Smith