Saturday, 26 February 2011

Money illusion

Historical Cost accountants regard all non-monetary items stated at HC, whether they are variable real value non-monetary HC items or constant real value non-monetary HC items to be fundamentally the same, namely, simply non-monetary items when they implement their very erosive stable measuring unit assumption as part of the traditional HCA model during low inflationary periods.

This is the result of money illusion. People make the mistake of thinking that money is stable in real value in a low inflationary environment. Inflation always and everywhere erodes the real value of money and other monetary items over time. It is thus impossible for money to be stable in real value during inflation. On the other hand, inflation has no effect on the real value of non-monetary items over time.

The monetary unit of measure in accounting is the base money unit of the most relevant currency. Money is not stable in real value during inflation. This means that the monetary unit of measure in accounting is not a stable monetary unit of measure during inflation and deflation. Accountants´ unstable monetary unit of measure or unstable monetary unit of account is the only generally accepted unit of measure that is not an absolute value. It does not contain a fundamental constant. All other generally accepted units of measure of time, distance, velocity, mass, momentum, energy, weight, etc are absolute values, e.g. second, minute, hour, metre, yard, litre, kilogram, pound, mile, kilometre, inch, centimetre, gallon, ounce, etc.

Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.

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