CIPPA removes the entire cost of erosion from the economy

CIPPA removes the entire cost of erosion from the economy

Inflation–adjusting all monetary items (all money and all monetary item assets and all monetary item liabilities) in the economy daily in terms of a Daily CPI or monetized daily indexed unit of account would eliminate the cost of or gain from inflation completely from the economy during low and high inflation and deflation. Chile inflation-adjusts 20 to 25 per cent (2011) of its broad M3 money supply daily in terms of the Unidad de Fomento. USD 2.9 trillion (2009) of government inflation-indexed bonds are inflation-indexed daily worldwide in terms of the Daily CPI.

This has been authorized in International Financial Reporting Standards in the original Framework, Par 104 (a) which states ‘Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power’ since 1989 because financial capital maintenance in units of constant purchasing power means there is no stable measuring unit assumption at all in the economy under Constant Item Purchasing Power Accounting. All monetary items, constant items and historical variable items would, in principle, be inflation–adjusted, measured in units of constant purchasing power or updated, respectively, daily in terms of a Daily CPI under financial capital maintenance in units of constant purchasing power (CIPPA). The net monetary loss or gain would be calculated and accounted when monetary items are not inflation-adjusted daily. The constant item loss or gain would be calculated and accounted when constant items are not measured in units of constant purchasing power daily. Losses and gains in variable items would be treated in terms of IFRS, excluding the stable measuring unit assumption.

All three basic economic items would thus be free from the stable measuring unit assumption under financial capital maintenance in units of constant purchasing power (CIPPA):

1. Historic and current period monetary items would be inflation–adjusted on a daily basis in terms of the current (today´s) Daily CPI (UF in Chile): no stable measuring unit assumption. The net monetary loss or gain would be calculated when monetary items are not inflation-adjusted daily during the current accounting period.

2. Historic and current period constant items would be measured in units of constant purchasing power on a daily basis in terms of the current (today´s) Daily CPI (UF in Chile): no stable measuring unit assumption. The net constant item loss or gain would be calculated when constant items are not measured in units of constant purchasing power daily during the current accounting period.

3. Current period variable items would be valued daily in terms of IFRS excluding the stable measuring unit assumption. Historical variable items (e.g., yesterday´s value) would be updated daily in terms of the current (today´s) Daily CPI during inflation and deflation: no stable measuring unit assumption. Variable item losses and gains would be treated in terms of IFRS, excluding the stable measuring unit assumption.

Inflation–adjusting all monetary items daily does not stop inflation since inflation is always and everywhere a monetary phenomenon (Friedman). However, it would eliminate the entire cost of or gain from inflation and deflation from the economy under complete co-ordination.

Measuring all constant items in units of constant purchasing in terms of a Daily CPI or other daily index would eliminate the complete cost of the stable measuring unit assumption from the economy under complete co-ordination.

Financial capital maintenance in units of constant purchasing power in terms of a Daily CPI or other daily index (CIPPA) would thus remove the entire cost of erosion from the economy under complete co-ordination. The cost of inflation in only the real value of monetary items in the monetary economy and the cost of the stable measuring unit assumption in only constant items never maintained constant in the constant item economy.

Nicolaas Smith

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