Enemy Number One
The
stable measuring unit assumption
is the number one enemy in the economy.
In
the
A. Monetary Economy the stable
measuring unit assumption causes
(1)
the
cost of inflation (not actual inflation),
(2)
the
cost of hyperinflation (not actual hyperinflation) as well as
(3)
the
deflation effect: the creation of real value in monetary items never
deflation-adjusted daily during deflation (not actual deflation).
Inflation
/ hyperinflation is caused by an increase in the general price level. An increase
in the general price level is caused by various economic factors, an important
one being an excessive increase in the money supply. Deflation is caused by a
decrease in the general price level.
With
no stable measuring unit assumption (i.e., implementing IFRS-authorised Capital
Maintenance in Units of Constant Purchasing Power) – inflation-indexing and
hyperinflation-indexing all monetary items on a daily basis in terms of a Daily
Index - there would be no cost of inflation / hyperinflation and no deflation
effect. Thus, with no HCA (instead implementing CMUCPP), there would be no cost
of inflation or cost of hyperinflation during inflation and hyperinflation.
In
the
B. Constant Real Value Non-monetary Economy the stable measuring unit
assumption causes
(1)
the
erosion of the real value of constant real value non-monetary items never
maintained constant during inflation and hyperinflation and
(2)
the
creation of real value in constant items never maintained constant during
deflation.
With
no stable measuring unit assumption – no HCA (i.e., implementing IFRS-authorised
CMUCPP) – measuring all constant items daily in units of constant purchasing
power in terms of a Daily Index – the erosion of constant real value in
constant items never maintained constant during inflation / hyperinflation and
the creation of real value in constant items never maintained constant during
deflation, would be stopped 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, including during hyperinflation.
The
stable measuring unit assumption is implemented under
(1)
The
traditional, generally accepted, globally implemented Historical Cost
Accounting model during low inflation, high inflation and deflation and
(2)
The
failed IAS 29 Financial Reporting In
Hyperinflationary Economies model during hyperinflation.
The
stable measuring unit assumption is never
implemented under the IFRS-authorised
Capital Maintenance in Units of Constant Purchasing Power in terms of a Daily
Index model as proposed as a replacement of the failed IAS 29 model in IFRS
´X`CAPITAL MAINTENANCE IN UNITS OF CONSTANT PURCHASING POWER.
Nicolaas Smith
Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.
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