Friday, 25 November 2011

Daily Consumer Price Index (DCPI) - Part 1

The Daily Consumer Price Index – DCPI

(i)          Introduction

      Unstable money is the unstable medium of exchange, unstable store of value and unstable unit of account in the economy. Pre–monetary economies had units of account without money being available in the economy. (See Robert J. Shiller, Indexed Units of Account: Theory and Assessment of Historical Experience, Cowles Foundation Discussion Paper No 1171, 1998, p4).

      Today the economic values of all economic items are stated in terms of unstable money. Prices are expressed in unstable monetary units. Unstable money is the generally accepted unstable monetary unit of account used to value and account all economic activity by entities applying the stable measuring unit assumption as part of the traditional Historical Cost Accounting model under which they implement financial capital maintenance in fixed nominal monetary units with unstable real values in the world economy during inflation, deflation and hyperinflation.

      Unstable money is not fixed in constant real value. Unstable money is fixed in nominal value in economies subject to inflation, deflation and hyperinflation. Unstable money is a fixed nominal unit of account with a daily changing real value (purchasing power).  Financial capital maintenance in nominal monetary units, although approved in IFRS and by the United States Financial Accounting Standards Board (FASB) and implemented worldwide, is a very popular accounting fallacy not yet extinct because it is impossible to maintain the real value of capital in nominal monetary units per se during inflation and hyperinflation.

      Bank notes and bank coins cannot currently be inflation–indexed or deflation-indexed which makes it impossible for money or the monetary unit of account to be a perfectly stable unit of constant real value during inflation, deflation and hyperinflation.

(ii)        Unidad de Fomento

      Notwithstanding or despite the above, monetary items in the form of certain time deposits  – not the actual bank notes and coins – and other monetary items, e.g. government and commercial capital market bonds, have been inflation–indexed in Chile since 1967 by means of the Unidad de Fomento which is now a monetized daily indexed unit of account.

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

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