Fourth advantage of daily inflation-indexing the entire money supply

Another (the fourth) very important benefit of daily inflation-indexing the entire money supply at all levels of inflation and deflation under complete co-ordination (which is the rejection of the stable measuring unit assumption in the monetary economy) would be that it would logically compliment the rejection of the stable measuring unit assumption in the constant item economy (the non-monetary or real economy being made up of the constant and variable item economies) under financial capital maintenance in units of constant purchasing power in terms of a Daily CPI or other daily index as already authorised in IFRS.

Financial capital maintenance in units of constant purchasing power as authorised in IFRS would automatically maintain the constant purchasing power of equity (capital) constant for an indefinite period of time in all entities that at least break even in real value - all else being equal - at all levels of inflation and deflation.

This means the constant real value of the entire capital investment base in an economy would automatically be maintained constant for an indefinite period of time as qualified above, i.e., in all entities that at least break even in real value, all else being equal under financial capital maintenance in units of constant purchasing power.

Nicolaas Smith

Buy the Kindle ebook at Amazon.com for $2.99 or £1.53 or €2.68

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Daily inflation-indexing the entire money supply an inevitable future step

Daily inflation-indexing the entire money supply an inevitable future step

 

Daily inflation-indexing of the entire money supply in terms of already existing Daily CPIs is an inevitable future step in the world economy.

(i)The first known inflation–indexed bond was issued by the Massachusetts Bay Company in 1780.

(ii) The British government began issuing inflation–linked Gilts in 1981. The market for inflation–linked bonds has grown rapidly since then - with the use of Daily CPI´s.

(iii) The IASB originally authorised financial capital maintenance in units of constant purchasing power in the original Framework in 1989.

(iv) Non-monetary items were then split in variable real value non-monetary items (property, plant, equipment, inventories, etc.) and constant real value non-monetary items (issued share capital, all items in shareholders´equity, salaries, wages, rents, trade debtors, trade creditors) in 2005 making the development of an accounting model based on financial capital maintenance in units of constant purchasing power in terms of a Daily CPI or other daily index possible.

(v) The draft IFRS 'X' CAPITAL MAINTENANCE IN UNITS OF CONSTANT PURCHASING POWER in terms of a Daily CPI or other daily index was submitted to the IASB in January 2012. An IFRS based on IFRS 'X' should be authorised in 6 to 8 years´ time.

(vi) Some years´ after that countries could start inflation-indexing their entire money supplies.

 

Buy the Kindle ebook at Amazon.com for $2.99 or £1.53 or €2.68

 

 

Nicolaas Smith

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Benefits of daily inflation-indexing the entire money supply

Benefits of daily inflation-indexing the entire money supply

 

The benefits of daily inflation-indexing the entire money supply at all levels of inflation and deflation under complete co-ordination (everyone doing it) would be:

1. It would remove only the entire cost of or gain from inflation and deflation from only (except from actual bank notes and coins) the entire monetary economy - inflation has no effect on the real value of non-monetary items - under complete co-ordination at all levels of inflation and deflation. It would do nothing to actual inflation or deflation. The monetary economy, however, would operate as if there is no inflation or deflation - at whatever level of inflation and deflation. Monetary items (excluding bank notes and coins) would have constant real values over time.

 

2. As far as comparing its benefits to the benefits of a currency board or dollarization to stop hyperinflation is concerned: it would remove the entire cost of hyperinflation from the entire monetary economy (excluding bank notes and coins) while an economy using a currency board or dollarizaton to stop hyperinflation would still be subject to the cost of and gain from inflation or deflation of the currency board currency or dollarization currency as well as the cost of or gain from the stable measuring unit assumption in the currency board currency or dollarization currency.

 

3. There would be no currency board currency (foreign exchange) needed.

 

Buy the Kindle ebook at Amazon.com for $2.99 or £1.53 or €2.68

 

 

Nicolaas Smith

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Running an economy in constant values

Iran is currently in hyperinflation.

 

When the whole money supply is inflation-adjusted or hyperinflation-adjusted on a daily basis under complete co-ordination (everyone doing it) in terms of a Daily CPI or daily black market rate there would still be inflation and hyperinflation in only the monetary economy, but no cost of /gain from inflation or hyperinflation. Monetary items, excluding bank notes and coins, would have constant real values. It would be as if there is no inflation or deflation or hyperinflation in the economy.

Inflation and deflation obviously have no effect on the real value of non-monetary items. The stable measuring unit assumption as implemented under traditional Historical Cost Accounting is destroying Iran´s non-monetary economy. It is impossible for hyperinflation to destroy Iran´s non-monetary economy.

Under hyperinflation daily inflation-adjustment of the entire money supply is possible by means of the daily black market rate. Under low inflation, high inflation and deflation this is possible by means of the Daily CPI that exists in all countries issuing government inflation-indexed bonds (95+ per cent of the world economy). These bonds trade daily and are priced daily in terms of a Daily CPI which is normally a one or two month lagged daily interpolation of the monthly published CPI. TIPS are priced like that daily.

Chile currently inflation-adjusts 25 percent of its broad M3 money supply on a daily basis in terms of their Unidad de Fomento. At least USD 3.5 trillion is inflation-adjusted daily in the global sovereign inflation-indexed bond market.

Whereas daily inflation-adjustment of the complete money supply would remove the cost/gain from inflation / deflation, including hyperinflation (not inflation/deflation or hyperinflation), from only the monetary economy (excluding from actual bank notes and coins), financial capital maintenance in units of constant purchasing power, the IASB´s alternative to Historical Cost Accounting, authorized in IFRS in 1989, in terms of a daily CPI or daily black market rate would remove the total cost of the stable measuring unit assumption from the entire economy; i.e., abandoning the HCA model.

It is thus currently possible to run an entire economy with constant real value monetary items (excluding bank notes and coins) and constant real value non-monetary items. The split of non-monetary items in variable real value non-monetary items and constant real value non-monetary items is inferred in IFRS.

I could explain this to Iran, but then the US government would be very upset with me. I have no intention of explaining this to Iran. They may read it on my blog though.

I am trying (quite unsuccessfully so far) to get Venezuela, which is in hyperinflation in terms of the IASB´s definition, to abandon traditional HCA and to change over to IFRS-authorized financial capital maintenance in units of constant purchasing power in terms of their Daily CPI. Venezuela issues government inflation-indexed bonds and this Daily CPI is available in the country.

 

Buy the Kindle ebook at Amazon.com for $2.99 or £1.53 or €2.68

 

 

 

Nicolaas Smith

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.