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Wednesday, 13 October 2010

Severe Hyperinflation: Prof Steve Hanke´s opinion

I am of the opinion that hyperinflation - let alone severe hyperinflation - is impossible when exchangeability between the currency and a relatively stable foreign currency does not exist, as defined by the IASB in Par D28 (b) in their current Exposure Draft - Severe Hyperinflation:

D28 The currency of a hyperinflationary economy is subject to severe hyperinflation if it has both of the following characteristics:
(a) a reliable general price index is not available to all entities with transactions and balances in the currency,
(b) exchangeability between the currency and a relatively stable foreign currency does not exist,

I asked Prof Steve Hanke who is a world authority on currency boards and hyperinflation for his opinion. Steve H. Hanke is a Professor of Applied Economics at The Johns Hopkins University and a Senior Fellow at the Cato Institute.

This is his reply:

"The proposed amendment is to provide guidance on how an entity should resume presenting financial statements in a hyperinflationary economy. I don't have a problem with the substance of the proposal: it seems fair an entity should resume reporting after its functional currency has changed to one that is not hyperinflationary, or when the relative value of the hyperinflationary currency can be determined through a reliable price level or exchange rates.


I agree with you that the wording "severe hyperinflation" might not be most accurate in describing the situation where the relative value of the hyperinflationary currency is unrecognizable. Perhaps "unrecognizable currency value during hyperinflation" is a better name for the condition which is dubbed "severe hyperinflation" in the proposal. I see it as a nomenclature problem."

Copyright © 2010 Nicolaas J Smith