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Saturday 31 May 2014

IFRS / US GAAP authorized solution to the Historical Cost Mistake

IFRS / US GAAP authorized solution to the Historical Cost Mistake

Financial capital maintenance in units of constant purchasing power is authorized in both IFRS and US GAAP as the alternative to Historical Cost Accounting, i.e., financial capital maintenance in nominal monetary units (or the Historical Cost Mistake).

The Historical Cost Mistake is, obviously, fixed with Daily Indexing: Capital Maintenance in Units of  Constant Purchasing Power in terms of the Daily CPI during low inflation and high inflation and deflation and in terms of the US Dollar parallel rate during hyperinflation. 

Daily Indexing 

1. Accounting Daily Indexing
2. Comprehensive Daily Indexing

1. Accounting Daily Indexing is implementing CMUCPP in terms of the Daily CPI instead of HCA. That only eliminates the destruction of the real value of constant real value non-monetary items never or not fully maintained constant in real value by HCA. Accounting Daily Indexing keeps the constant real value non-monetary economy perfectly stable by stopping the stable measuring unit assumption in accounting, i.e. stopping HCA. 

2. Under Comprehensive Daily Indexing, Accounting Daily Indexing is combined with daily inflation-indexing of the entire money supply in terms of the Daily CPI. Daily inflation-indexing of all monetary items additionally eliminates the effect of inflation and deflation from only monetary items. However, daily inflation-indexing of all monetary items does not stop inflation or deflation. Daily inflation-indexing of all monetary items stops the destruction of the real value of monetary items over time by inflation and it stops the increase in the real value of monetary items over time during deflation. It only eliminates the effect of inflation and deflation on only monetary items. It would be as if there is no inflation or deflation - while actual inflation or deflation continues.

For example, Daily Inflation-indexing the $3 trillion in global government inflation-indexed bonds maintains the real value of this USD 3 trillion perfectly stable over time on a daily basis, but it does not stop the inflation or deflation in the countries concerned. The inflation or deflation continues, but it is as if there is no inflation or deflation for the holders of the $3 trillion sovereign capital inflation-adjusted bonds inflation-indexed daily in all the different countries where the actual inflation and deflation continue while these monetary conditions are created by the specific central banks. 

Daily inflation-indexing only removes the effect of inflation and deflation. It does not stop inflation or deflation. It is as if there is no inflation or deflation.  
Accounting and Comprehensive Daily Indexing are free, authorized under IFRs and US GAAP and available to all countries and economies. 

Daily Indexing is free. It kills the need for very costly Dollarization or a currency board at no cost while the countries'  central banks maintain their full monetary creation and monetary policy powers (what they lose under Dollarization and a currency board).

Nicolaas Smith Copyright © 2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Friday 30 May 2014

Bitcoin can never be a monetary item

Bitcoin is a decentralized digital peer-to-peer payment protocol with a spontaneously monetized unit of account. The Bitcoin System's unit of account, bitcoin, is used as a digital medium of exchange on the Bitcoin payment platform. The monetized bitcoin is a very unstable store of value.

bitcoin is the unit of account of the Bitcoin block chain system. bitcoin will never be used as the official monetary unit of account or monetary unit of measure in any accounting model.

Spontaneous monetization of bitcoin

Bitcoin is an open decentralized system. Anyone can participate. Monetization also had to be spontaneous.

On 22 May, 2010 "laszlo" spontaneously monetized bitcoin at $0.0025 for 1BTC. He paid 10 000 BTC for 2 pizzas costing about $25.

Money is supposed to be perfectly stable in real value. Money never was or is or ever will be perfectly stable in real value on a sustainable basis over time. A Consumer Price Index is thus required to calculate a unit of constant purchasing power. Implementing Capital Maintenance in Units of Constant Purchasing Power (CMUCPP) in terms of the Daily CPI (during low and high inflation and deflation) and the USD parallel rate during hyperinflation, including daily inflation-indexing of the entire money supply stabilizes the real value of the money supply as well as the real value of all constant real value non-monetary items in an economy. 

The fact that bitcoin was spontaneously monetized and thereafter evolved to increase in real value - it has a limit of 22 million bitcoins in 100 years' time - means bitcoin was never intended to have a perfectly stable real value over time or even a relatively stable real value that can be assumed to be perfectly stable like in the case of all fiat currencies (all national monetary units). 
Bitcoin can thus never be real money. Bitcoin can never be a monetary item. It is not money or a monetary item. It is a variable real value non-monetary item similar to rare stamps. 

Monetary items constitute the money supply. Bitcoins will never be part of any country's money supply. Bitcoin can thus also never be subject to monetary inflation and monetary deflation because it is not assumed to be perfectly stable in real value. 

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

Friday 16 May 2014

It is misleading to state that bitcoin is subject to monetary inflation and deflation

A Consumer Price Index can only be calculated in the case of the currency in which the consumer items is priced being a fiat currency, i.e., it is assumed to be perfectly stable in real value under the traditional Historical Cost paradigm. No fiat currency is, in fact, generally perfectly stable in real value. All fiat currencies are thus assumed to be perfectly stable, i.e., the stable measuring unit assumption is applied. 

The CPI is then used to, e.g., inflation-adjust government indexed bonds (TIPS) on a daily basis, measure financial capital maintenance in units of constant purchasing power as in IAS 29 Financial Reporting in Hyperinflationary Economies, etc.

Bitcoin is not assumed to be perfectly stable in real value. It is not a fiat currency. It is a property as per the US IRS. It is, in fact, a variable real value non-monetary item just like any other property, plant or equipment. 

Since bitcoin is not assumed to be perfectly stable in real value (heaven forbid!), it is thus not subject to the economic concept of monetary item inflation, being a sustained increase - not in a specific price, but, in the general price level, or deflation, being a sustained decrease - not in a specific price, but, the general price level. 

It is thus a complete mistake to associate bitcoin with monetary inflation and deflation as indicated by the change in a CPI. 

On the other hand:

It is true that any single price increase is also described as inflation of that specific price. However, it is clearly understood in economics that it is not the same as monetary inflation being a sustained increase in the general price level which normally includes simultaneous decreases (also described as deflation) in various specific prices. This, nonetheless, confuses most people. 

In the same way a decrease in a specific price is described as deflation in that specific price. It is also clearly understood in economics that it is not the same as monetary deflation being a sustained decrease in the general price level which normally includes simultaneous increases (also described as inflation) in various specific prices. However, this also confuses most people.

It is thus misleading to state that bitcoin is subject to monetary inflation and deflation. It is not.

Nicolaas Smith

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

Despite what Bloomberg states: Monetary deflation or inflation is impossible in bitcoin

Both the economic science concept of monetary item inflation and the economic science concept of monetary item deflation are impossible with bitcoin because bitcoin is a variable real value non-monetary item (a property, not a currency - not money or a monetary item - as the US IRS stated - or "fundamentally not a currency" as the People's Bank of China (Central Bank of China) stated).
The economic science concept of inflation, unfortunately, has not only one, but, two meanings (which is sadly, but unavoidably and very humanly, rather confusing):
(1) Inflation is sometimes used to simply  mean a price increase in any single price, for example, the Bank of England sometimes states "house price inflation" when it actually means the increase in house prices in the UK: a single sector price increase in the UK, not a sustained increase in the general price level in terms of the Pound as measured in terms of the UK CPI measured in terms of the monetary item, the UK Pound - the undoubtedly main definition of inflation for people in the UK. Inflation used in this sense of simply any single price increase (not a general price level increase resulting in the decrease of the real value of the monetary item, the UK Pound) thus has as its opposite that deflation is simply any price decrease (not a general price level decrease resulting in the increase in the real value of the monetary item, the UK Pound). 
(2) Secondly, inflation is almost always (luckily and scientifically) correctly used to mean "a sustained increase in the general price level" when the general price level is taken to be indicated by the Consumer Price Index, which is calculated in terms of a fiat local currency which is assumed to be perfectly stable - when in fact the fiat currency, generally, is almost never perfectly stable (maybe perfectly stable - zero inflation - for only one or a maximum of two months in a row).
Deflation is thus impossible in bitcoin for simply the same reason: bitcoin is not a fiat currency with a real value assumed to be perfectly stable over time.
Fiat money is always a monetary item. That is: it forms part of a country's money supply. There is not one bitcoin included in any country's money supply: thus, another clear proof that bitcoin is not a monetary item (not money) although everyone calls it a virtual or digital or cryptocurrency. There is no problem with calling bitcoin a digital currency: that is how the man and woman in the street speak about bitcoin. The man or woman in the street regards any widely used medium of exchange as "money". In economic science, however, bitcoin is not a monetary item: its is a variable real value non-monetary item as very correctly indicated by the US IRS which ruled it is a property (part of Property, Plant and Equipment) and not a currency: not a monetary item or "fundamentally not a currency" as the Chinese PBOC correctly ruled.
Bitcoin has been classified as property (a variable real value non-monetary item - not a monetary item) in the US. Bitcoin has not been classified as a monetary item in any country although everybody calls it a digital currency.
Bitcoin can never be a monetary item. To become a monetary item, bitcoin has to be perfectly stable in real value or assumed to be perfectly stable in real value, like all fiat currencies are under Historical Cost Accounting, the traditional accounting model used to account almost all economic activity in the world economy.
Bitcoin speculators (the WinkleVoss Twins, et al), who are 99.9% responsible for the bitcoin phenomenon would be totally mortified if anyone would be so absolutely silly to succeed in making bitcoin perfectly stable in real value. They would die on the spot. They and the WinkleVoss Twins are betting their life´s savings on the view that bitcoin would skyrocket in price because it is limited to a total of 22 million bitcoins in about 100 year's time. So be it. Good luck to them.
However, if the bitcoin price were to take off exponentially in 100 year's time when the 22 millionth (last) bitcoin is mined with increased massive demand for bitcoin in the world economy, then it would not be because of deflation (the increase in the real value of a nominal value fiat currency - which bitcoin is not - because of a sustained decrease in the general price level indicated by the CPI which is measured in terms of that "assumed-to-be-perfectly-stable fiat currency".)
It would simply be because of a hopefully (by the WinkleVosses and other speculators) massive increase in demand for a stopped-in-supply bitcoin. It would have absolutely nothing to do with deflation or a sustained decrease in the general price level of a fiat currency that is assumed to be perfectly stable in real value - which bitcoin is not.
Anyone (for example - with all due respect for a great publication - Bloomberg) stating that bitcoin is subject to inflation (not the price increase definition) or deflation, does not understand the economic concept of monetary inflation and deflation with reference to a fiat currency that is assumed to be perfectly stable in real value.
There are a lot of things I do not understand.
To construct a CPI measured in Bitcoin is thus very silly since there are generally no consumer prices stated in bitcoin and most probably never will be.

Nicolaas Smith 

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

Sunday 4 May 2014

What is money?

I) AS DEFINED IN ECONOMICS

In terms of economics, an item has to fulfil all the following requirements, at the same time, to be considered "money" and thus a monetary item:


1. a widely used medium of exchange which overcomes the double coincidence of wants problem,

2. a relatively stable store of real value, 

3. a relatively stable real value unit of account

and

4. legal tender.

This money is a monetary item. Monetary items constitute the money supply.

Money´s real value is eroded by inflation and increased by deflation. 

Prices are widely quoted in this money.

The Daily CPI reflects the general price level. Items in the consumer basket used to calculate the Daily CPI are priced in terms of this money.

This money is used to calculate a unit of constant purchasing power in terms of the Daily CPI in order to

(a) eliminate the effect of inflation and deflation from monetary items and 

(b) eliminate the effect of the stable measuring unit assumption from constant real value non-monetary items.

II) AS SEEN BY THE MAN IN THE STREET

Money is anything that is a widely used medium of exchange.

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