Sunday, 6 October 2013

Prof. Steve Hanke, Your definition of hyperinflation is just nonsense.

Prof. Steve Hanke stated:

"Hyperinflation begins when a country experiences an inflation rate of greater than 50% percent per month — which comes out to about 13,000% per year. Although it experienced elevated inflation around the time of the Revolution and the Civil War, the United States has never passed this magic mark. At present, the U.S. inflation rate, measured by the consumer price index (CPI), is less than 2% per year. So, to say that the U.S. is on its way to hyperinflation is just nonsense."

IAS 29 Financial Reporting in Hyperinflationary Economies, Par. 3 states:

"Hyperinflation is indicated by characteristics of the economic environment of a country which include, but are not limited to, the following:

(a) the general population prefers to keep its wealth in non-monetary assets
or in a relatively stable foreign currency. Amounts of local currency held are immediately invested to maintain purchasing power;

(b) the general population regards monetary amounts not in terms of the local currency but in terms of a relatively stable foreign currency. Prices may be quoted in that currency;

(c) sales and purchases on credit take place at prices that compensate for
the expected loss of purchasing power during the credit period, even if the period is short;

(d) interest rates, wages and prices are linked to a price index; and

(e) the cumulative inflation rate over three years is approaching, or exceeds, 100%."

Millions of accountants worldwide, including those in American multinationals with subsidiaries in a hyperinflationary economy like Venezuela, have been following the International Accounting Standard Board´s definition since 1989 when IAS 29 was authorised.

I am 100% sure that the US Financial Accounting Standards Board, the Federal Reserve Bank, the SEC and the US Government would never wait till the US has reached Prof. Hanke´s "magic" threshold of 13 000 percent inflation per annum before requiring all American companies to implement Capital Maintenance in Units of Constant Purchasing Power (which is required in IAS 29) in terms of the US Daily Reference CPI-Us

Prof. Hanke steadfastly refuses to follow the generally accepted definition of hyperinflation. He follows Phillip Cagan´s outdated definition.

Prof. Hanke: Your definition of hyperinflation is just nonsense. 

Join the world and accept the IASB´s definition.

Nicolaas Smith 

Copyright (c) 2005-2013 Nicolaas J Smith. All rights reserved. No reproduction without permission.

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