If Bitcoins were money their creation would immediately be banned by monetary authorities

If Bitcoins were money their creation would immediately be banned by  monetary authorities

For a cryptocurrency (for example, bitcoin)  - or any other item - to be money, i.e., a monetary item, it has to be 

1. a widely accepted medium of exchange

2. a perfectly stable real value store of value

and

3. a perfectly stable real value unit of account

besides also being legal tender in the economy where the money is created.

Monetary items constitute the money supply in the economy where the money is created. 

Non-monetary items are all items that are not monetary items. 

Non-monetary items are sub-divided in 

(a) variable real value non-monetary items, e.g., property, plant, equipment, foreign exchange, listed and unlisted shares, inventory, raw material stock, bitcoins, etc. 

and 

(b) constant real value non-monetary items, e.g., all items in sharehoders´ equity, trade debtors, trade creditors, all items in the profit and loss account, provisions, salaries, wages, pensions, taxes, rents, interest, etc.

More specifically, a monetary item has to be a perfectly stable store of real value which makes it a perfectly stable real value unit of account. 

Fiat money, e.g., the US Dollar, Euro, Yen, Yuan, Ruble, etc., is generally not a perfectly stable store of real value and thus also not a perfectly stable real value unit of account. The US Dollar and the Euro, for example, have an inflation target of 2 percent per annum. That is regarded (another assumption) as "monetary stability" by the monetary authorities.

Mankind over the ages has overcome the problem of money having to be perfectly stable in real value by simply assuming that it is perfectly stable in real value over time by applying the stable measuring unit assumption under the traditional, generally accepted, globally implemented Historical Cost Accounting model to account all economic activity. 

‘The Measuring Unit principle: The unit of measure in accounting shall be the base money unit of the most relevant currency. This principle also assumes the unit of measure is stable; that is, changes in its general purchasing power are not considered sufficiently important to require adjustments to the basic financial statements.’

Walgenbach, Dittrich and Hanson 1973: 429

Problem solved. Money is generally never perfectly stable, so, we solve the problem by simply assuming it is perfectly stable in real value. Ask any accountant or economist and he or she will confirm this. 

Cryptocurrencies, by being variable real value non-monetary items, can thus never be money or monetary items. 

If a cryptocurrency were perfectly stable in real value over time, it would be a monetary item and could be used as a perfectly stable unit of account. However, their creation would immediately be banned by monetary authorities because only a country's central bank has the authority to issue money in an economy. 

Bitcoins are a medium of exchange because many people and companies accept them as such. They are also a variable store of value similar to fiat money. However, bitcoins are not assumed to be perfectly stable in real value and used as such as a unit of account with a perfectly stable real value whereas all fiat currencies (money within those economies) are. Bitcoins are thus not money. Bitcoins can thus never be money or a monetary item.

If bitcoins were money, their creation would immediately be banned by  monetary authorities. This is true for any cryptocurrency.

Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Completely wrong Bitcoin statements

Completely wrong Bitcoin statements

It is completely wrong for The Economist to state that Chronic deflation may keep Bitcoin from displacing its fiat rivals.

Deflation is impossible in Bitcoin. It is impossible in a non-monetary item. A bitcoin is a variable real value non-monetary item. 

Deflation is a sustained decrease in the general price level over time.

Deflation means the real value of a monetary item increases while its nominal value stays the same over time as  a result of a fall in the general price level. 

A monetary item can only be affected by inflation when its real value decreases as a result of a sustained increase in the general price level over time. The nominal value of the monetary item (US Dollar, Euro, Yuan, Yen, etc.) stays the same over time.

All statements linking Bitcoin to inflation or deflation are completely wrong.

Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

IASB agrees with silly idea that capital maintenance is only required during high inflation

IASB still clueless about capital maintenance

The IASB now officially agrees with the silly idea that capital maintenance is only required with the onset of high inflation.

After an analysis of the replies to the Discussion Paper: A Review of the Conceptual Framework, the IASB now officially agrees with the silly idea that capital maintenance is only required with the onset of high inflation. 

15 (c) Capital maintenance – Most respondents agreed with the proposal in the Discussion Paper to leave the existing descriptions and the discussion of capital maintenance concepts in the Conceptual Framework largely unchanged until such time as work on accounting for high inflation indicates a need for a change. Consequently, we do not propose to discuss capital maintenance with you unless work on the measurement section of the Exposure Draft highlights a need to discuss the issue further. 

The IASB simply ignores the statement by the Australian accounting authorities that there is a lack of understanding at the IASB regarding the importance of capital maintenance in the accounting framework. 

The IASB also ignores the statement by The European Accounting Association that "Capital maintenance is a competing objective of financial reporting" in their comment to the above Discussion Paper. 

The ignorance of the functioning of capital maintenance in units of constant purchasing power in terms of a DAILY INDEX at the IASB is shocking especially when it is taken into account that by simply making a very small change to IAS 29 Financial Reporting in Hyperinflationary Economies and requiring DAILY indexing instead of applying the monthly published CPI would stabilize the non-monetary economies in hyerinflationary economies in Venezuela and Belarus over a very short time. 

The IASB has absolutely no understanding of what is written in the previous paragraph although I have been trying to explain it to them since January 2012 in IFRS ´X` CAPITAL MAINTENANCE IN UNITS OF CONSTANT PURCHASING POWER.

The IASB is absolutely clueless about the effects of daily indexing on capital maintenance.

I can see why the US Securities and Exchange Commission refuses to agree to the adoption of IFRS in the US economy. The IASB is very intransigent to the detriment of the world economy.

Nicolaas Smith 

Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Difference between inflation and the stable measuring unit assumption

Difference between inflation and the stable measuring unit assumption

Almost no-one understands the difference between the inflation and the stable measuring unit assumption.

DEFINITION

Inflation is a sustained increase in the general price level over time.  

Inflation results in a decrease in the real value of ONLY money and other monetary items over time. Inflation has NO effect on the real value of non-monetary items over time. Inflation can only affect the real value of monetary items - nothing else. 

DEFINITION

Monetary items constitute the money supply.

DEFINITION

Non-monetary items are all items that are not monetary items.

DEFINITION

The stable measuring unit assumption is the ASSUMPTION made by ONLY historical cost accountants that changes in the purchasing power of money are not sufficiently important to require: 

(i) inflation-indexing all monetary items in terms of all changes in the general price level, that is to say, at least daily and 

(2) the measurement of all constant real value non-monetary items in units of constant purchasing power in terms of all changes in the general price level, that is to say, at least daily.  

SUMMARY

Under the stable measuring unit assumption it is ASSUMED  that money is
PERFECTLY STABLE over time at ALL levels of inflation and deflation.

The ASSUMPTION that money is PERFECTLY STABLE over time at ALL levels of inflation and deflation is obviously completely wrong.

So, what is the difference between inflation and the stable measuring unit assumption? 

The difference is that inflation only erodes the real value of monetary items over time and that the constant purchasing power (real value) of constant real value non-monetary items is eroded, not by inflation, but by the stable monetary unit assumption over time during inflation.

Thus, the real value of monetary items is eroded by inflation while the real value of constant real value non-monetary items is eroded by the stable measuring unit assumption, i.e., by the use of the traditional Historical Cost Accounting model. 

Most accountants and economists (as well as people in general) mistakenly believe that inflation erodes the real value of companies´ capital and retained profits while it is actually an impossibility: inflation can only affect the real value of monetary items - nothing else. Inflation has no effect on the real value of non-monetary items. The real value of constant real value non-monetary items is eroded by the use of the stable measuring unit assumption, i.e., by the use of the traditional Historical Cost Accounting model. 

Nicolaas Smith 

Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

HCA is like shooting yourself in both feet

HCA is like shooting yourself in both feet

Under Historical Cost Accounting you apply the stable measuring unit assumption. That´s a double whammy to the maintenance of real value: (a) you do not maintain the real value of monetary items and (b) you do not maintain the real value of constant real value non-monetary items during inflation and deflation as follows:

1. With monetary items you assume money is perfectly stable and you DO NOT inflation-index all monetary items daily 

and

2. With constant real value non-monetary items you apply the stable measuring unit assumption and you DO NOT measure constant real value non-monetary items in units of constant purchasing power in terms of all changes in the general price level, that is: at least daily. 

There´s you double whammy to real value under HCA.

Under Capital Maintenance in Units of Constant Purchasing Power (CMUCPP) in terms of the Daily CPI you would:

A Maintain the real value of all monetary items by inflation-indexing them daily 

and 

B Maintain the constant purchasing power (real value) of all constant real value non-monetary items constant by measuring them in units of constant purchasing power in terms of the Daily CPI. 

Nicolaas Smith 

Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

What backs the US Dollar?

The US Dollar is backed by all the underlying value systems in the US economy.

The underlying values systems in the US economy include, but are not limited to:

Sound governance
Sound economic policies
Sound education system
Sound justice system
Sound health system
Sound defense system
Sound police system
Sound commerce and industry
Sound infra-structure system
Sound monetary policies
Sound accounting principles
Etc, etc.

The same is true for every other fiat currency. They are backed by all the specific underlying values systems in each economy.

Nicolaas Smith 

Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Quantitative easing

Quantitative easing is the creation of new money by the central bank in the form of loans to commercial banks that does not result in an increase in inflation. A central bank increases commercial banks´ reserves with the central bank by means of valid loans that have to be paid back by the commercial banks. The commercial banks, having more reserves with the central bank, then increase loans to businesses and consumers which boost economic activity in a non-inflationary way.

Nicolaas Smith 

 Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Bitcoin is not money like your local currency

Bitcoin is not money like your local currency

There are three basic economic items in the economy:

1. Monetary items, e.g., bank notes and coins, money loans and all other items in the money supply.

2. Variable real value non-monetary items, e.g., property, plant, equipment, inventory, stocks, shares, patents, stamps, gold, etc. 

3. Constant real value non-monetary items, e.g., salaries, wages, rents, interest, capital, profits, losses, all items in shareholders equity, all items in the profit and loss account, accounts receivable, accounts payable, etc. 

Where do bitcoins fit in?

They are not constant real value non-monetary items. Their real values change daily. 

Are they monetary items? Let´s see: are they the same as money?

For any item to be money it has to have all three of the functions of money:

a) Medium of exchange.

b) Store of value.

c) Unit of account.

Bitcoins are certainly a medium of exchange. Somebody bought a Tesla with bitcoins. They are accepted in some stores. 

Bitcoins are certainly a store of value, albeit an unstable store of value. They started off in 2009 at a few US Dollars each. A few months ago they shot up to over USD 1200 each. Today they are down to USD 480 I see on Google search.

Are bitcoins a unit of account? I know they are accepted as such in Germany for the purpose of making bitcoin transactions taxable, but it is specifically then immediately stated in Germany that bitcoins are far from being a currency or even e-money the same as the pound or dollar or euro. They are not generally accepted as a unit of account. Financial reports are not widely prepared in bitcoins. 

Thus, bitcoins generally only fulfil two of the three functions of money, namely medium of exchange and store of value. Bitcoins are thus not money or monetary items. 

However, in 2013 a federal judge in the US stated they are the same as money. That still does not mean that they are widely being used as a unit of account with companies doing their books in terms of bitcoins. 

It is certainly a fact that bitcoins are generally described as bitcoin money, a currency, virtual currency, digital currency, virtual money or cryptocurrency. There is no doubt about that. These are the popular terms in the news, on the internet, in research papers, etc. However, bitcoins are not generally used as a unit of account. Thus they are not money or a monetary item or a local currency in terms of the economic definition of money or a monetary item.

Bitcoins are variable real value non-monetary items. The US IRS ruled that they are properties. They are similar to (not the same as) gold or silver coins, stamps or any other variable real value non-monetary item being used as a medium of exchange and store of value. Cigarettes are often used as a medium and exchange and store of value (over the very short term) in prisons. 

Bloomberg's report regarding the People's Bank of China: "The central bank will keep watching risks from Bitcoin, which is fundamentally not a currency but an investment target, Sheng Songcheng, head of the monetary authority’s statistics department, told reporters in Beijing on Jan. 15."


Nicolaas Smith 

Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Capital Maintenance feedback summary by the IASB

Purpose of paper 

1. This paper summarises the feedback received on: 

(a) the measurement section of the Discussion Paper A Review of the Conceptual Framework for Financial Reporting. 

(b) Capital Maintenance, discussed in paragraphs 9.45–9.54 of the Discussion Paper. 

2. This paper provides a high level summary of the comments received. 

Where appropriate, we will provide more detailed breakdown of the comments for future meetings. 

Capital Maintenance

Background

58. The Discussion Paper stated that the IASB plans to include the existing descriptions and the discussion of capital maintenance concepts in the revised Conceptual Framework largely unchanged until such time as a new or revised Standard on accounting for high inflation indicates a need for change.

Summary of feedback

59. Most respondents either agreed with this approach or did not comment on it. Those who explicitly agreed with the approach stated that they had encountered few problems either with the capital maintenance concepts in the existing Conceptual Framework or with high inflation. Consequently, they argued that revising or updating the capital maintenance concepts in the Conceptual Framework should not be a priority.

60. A few respondents broadly agreed with the suggested approach to capital maintenance but suggested some changes to the existing guidance including:

(a) stating in the Conceptual Framework a preference for one of the concepts
of capital maintenance;

(b) removing reference to the physical capital maintenance concept because it
is not used in IFRS;

(c) shortening and focusing the discussion of capital maintenance;

(d) removing all discussion of capital maintenance because it was viewed as
irrelevant to most entities.

61. Some respondents disagreed with the suggested approach. They argued that the concept of capital maintenance is of fundamental importance to financial reporting.

"…the Conceptual Framework should articulate an ideal concept of capital maintenance and its relationship to the ideal measurement base. Accordingly, we do not support the proposal that leaves the existing descriptions and discussion of this issue largely unchanged until such time as any project on accounting for high inflation indicates a need for change.

We think this approach suggests a lack of understanding about the fundamental role a capital maintenance concept has within the accounting framework. 

We also consider that our current difficulties with profit measurement and OCI, which have issues of capital maintenance at their root clearly indicate a pressing need to resolve these issues."

CPA Australia and The Institute of Chartered Accountants Australia

62. A few respondents also noted that many jurisdictions are affected by high inflation. Consequently, the IASB should consider capital maintenance concepts when revising the Conceptual Framework. 

One respondent argued for greater use of capital maintenance as defined in terms of units of constant purchasing power.

63. A few respondents expressed the view that the IASB’s suggested approach to capital maintenance confuses two concepts:

(a) capital maintenance; and

(b) the measurement unit (nominal vs constant purchasing power), which is the subject of IAS 29 Financial Reporting in Hyperinflationary Economies. 


IASB Agenda ref 10G 

Copyright (c) 2014 IFRS Foundation

ECB introduces the Real Euro

The European Central Bank today introduces Real Euros for the first time in countries in the European Monetary Union. Real Euros are new Euro notes with an embedded chip that reduces the nominal value of the notes in terms of inflation. During deflation the nominal values appearing on the notes will automatically increase in line with deflation.

This is a way to stabilize the Euro monetary economy in the European Monetary Union. It does away with the real effect of inflation and deflation in the EMU.

For example, during inflation of 2% per annum, the nominal value appearing on a new 100 Real Euro note automatically decreases to 98 Euros.

During deflation of 2% per annum the nominal value appearing on a 100 Real Euro note automatically increases to 102 Euros.

The President of the ECB, Mario Draghi, states that this will keep the value of the Euro money supply stable in real terms in the EMU.

He says that all nominal Euros can be exchanged at banks in Europe as from today for Real Euros.

Economists warn that this will make the effect of deflation even worse in the EMU. People will actually see their money increase in real value and will hang on to the notes even longer (see Japan during deflation) before spending them thus worsening the economy.

On the other hand this will stimulate spending during inflation since people will spend their money sooner - before the Real Euros lose more real value in front of their eyes.

Copyright (c) 2014  Primeiro de Abril All rights reserved. No reproduction without permission.