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Tuesday, 26 July 2011

Banks with no fixed assets

Banks with no fixed assets

Updated on 27-7-11

Under financial capital maintenance in units of constant purchasing power during inflation and deflation (CIPPA) there is no stable measuring unit assumption: thus, all monetary items are inflation-adjusted. All bank deposits, monetary item loans, all monetary items (monetary item assets and monetary item liabilities) are inflation adjusted. This completely removes the the cost of or gain from inflation and deflation from the economy. IFRS thus authorizes the elimination of the cost of or gain from inflation and deflation from the economy. There is no net monetary gain or loss when all monetary items are inflation-adjusted on a daily basis as it is currently happening in Chile with the Unidad de Fomento.
Constant items are measured in units of constant purchasing power in terms of IFRS in all accounts under all circumstances and in all published forms.

Variable real value non-monetary items are valued in terms of IFRS. All historical variable items are updated in terms of the CPI during inflation and deflation (either daily  - see the Unidad de Fomento in Chile - or monthly)  and in terms of the daily parallel or daily index rate during hyperinflation.

Variable and constant items are not inflation-adjusted by definition. Inflation is always and everywhere a monetary phenomenon. Inflation has no effect on the real value of non-monetary items. The stable measuring unit assumption (not inflation) erodes the real value of constant items never updated.

All monetary items are inflation-adjusted since inflation can only erode the real value of money and other monetary items.

The result of CIPPA is that a bank that at least breaks even in real terms during inflation and deflation - ceteris paribus - can automatically maintain the constant purchasing power of its capital constant forever even if it has no fixed assets at all. Completely virtual banks are thus possible under CIPPA.

This is only possible under financial capital maintenance in units of constant purchasing power (CIPPA) as originally authorized in IFRS in the Framework (1989), Par 104 (a) as qualified above. All monetary items have to be in the banking system and have to be inflation-adjusted.

Nicolaas Smith

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