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Wednesday, 11 May 2011

Capital deficiency during sub–prime crisis

Capital deficiency during sub–prime crisis


The world economy would be more robust today if only continuous financial capital maintenance in units of constant purchasing power were authorized in the Framework (1989), Par 104 (a). The implementation of the Constant Item Purchasing Power Accounting model would today automatically maintain the existing constant real values of all companies´ and banks´ shareholders´ equity and all other constant items constant since then in companies and banks that at least break even, instead of the erosive stable measuring unit assumption unknowingly, unintentionally and unnecessarily eroding their real values never maintained as it forms part of traditional Historical Cost Accounting at a rate equal to the annual rate of inflation year in year out during low inflationary periods. The stable measuring unit assumption is based on the fallacy that the erosion of the real value of the monetary unit (money) is not sufficiently important to implement continuous financial capital maintenance in units of constant purchasing power during low inflation. The HCA model is implemented because financial capital maintenance in nominal monetary units – a complete fallacy - was also approved in IFRS in the exact same Framework (1989), Par 104 (a).

If only real value maintaining financial capital maintenance in units of constant purchasing power (CIPPA) were approved in 1989 it would have made a significant difference over this period as verified by the huge capital injections required as a result of the capital deficiency problems caused by the continuous unknowing, unnecessary and unintentional erosion by the implementation of the very erosive stable measuring unit assumption of the existing constant real value of banks´ and companies´ shareholders´ equity never maintained constant under the HCA model as evidenced during the recent sub–prime financial crisis.


Nicolaas Smith

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