Definition of hyperinflation

The generally accepted definition of hyperinflation in the world economy is 100% cumulative inflation over three years. It comes to 26% annual or 1.95% monthly inflation for three years in a row.

The above definition is currently being used by the 147 countries that implement International Financial Reporting Standards as issued by the International Accounting Standards Board. This definition has been used since April 1989 by the millions of accountants, business people, economists and all governments who implement IFRS. 

This definition of hyperinflation is contained in IAS 29 Financial Reporting in Hyperinflationary Economies that was authorized by the IASB in April 1989. 

"Par 3. This Standard does not establish an absolute rate at which hyperinflation is deemed to arise. It is a matter of judgement when restatement of financial statements in accordance with this Standard becomes necessary. 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%."

There is today not one government in the world economy that uses any other definition of hyperinflation. 

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

High Frequency Traders make technology profits

High Frequency Traders make technology profits.

They make almost no profit per trade over almost no time with almost no risk millions of times.

Nicolaas Smith 


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

Daily inflation-indexing of the entire money supply would remove the effect of inflation or deflation (not actual inflation or deflation)

Daily inflation-indexing of the entire money supply would remove the effect of inflation - low, high and hyperinflation - or deflation (not actual inflation or deflation).

This happens daily with the USD 3 trillion plus in global government inflation-indexed bonds.

Chile today inflation-indexes more than 25% of its entire money supply on a daily basis. 

Why not 100%? What is wrong with doing away with the effect of inflation - low, high and hyperinflation - or deflation completely?

Nicolaas Smith

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

Capital Maintenance in Units of Constant Purchasing Power stops destruction of real value under HCA

IFRS and US GAAP authorised Capital Maintenance in Units of Constant Purchasing Power™ (CMUCPP™) maintains the constant purchasing power of constant real value non-monetary items (salaries, wages, pensions, taxes, trade debtors/creditors, equity) only in terms of a Daily CPI in entities that break even in real value in inflation and deflation - ceteris paribus. 

It would stop the global destruction by the stable measuring unit assumption in constant items of hundreds of billions of USD p.a. now taking place under traditional Historical Cost Accounting.

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

Difference between local currency and foreign currency

Foreign currency
  
Foreign currency is always created in a foreign economy. Foreign currency is always a variable real value non-monetary item like, for example, property, plant, equipment, listed and unlisted shares, etc. A foreign currency with a floating exchange rate´s continuously changing daily value is determined in foreign currency markets. Foreign currency gains or losses are recorded in the financial reports under all accounting models including traditional Historical Cost Accounting. Foreign currency is traded daily on many foreign currency exchange markets. A foreign currency with a floating exchange rate has a continuously changing price or real value. A foreign currency with a floating exchange rate can increase and decrease in price daily (minute by minute). 

Local currency

Local currency is always fiat money created in the local economy. A local currency is always a monetary item with an assumed to be perfectly stable real value over time whereas a foreign currency is always a variable real value non-monetary item. However, a local currency´s daily changing real value is determined by the rate of inflation or deflation in the local economy as indicated by the Daily CPI during low inflation, high inflation and deflation and by the Daily US Dollar parallel rate during hyperinflation. Although a local currency is generally not stable in real value, it is assumed that the local currency is perfectly stable in real value over time for the purpose of being used as the "assumed-to-be" perfectly stable monetary unit of account in the local economy for accounting purposes under the Historical Cost and Current Cost Accounting models. Under the Capital Maintenance in Units of Constant Purchasing Power (CMUCPP) accounting model monetary items are generally inflation-adjusted on a daily basis and constant real value non-monetary items are measured daily in units of constant purchasing power generally in terms of the Daily CPI.

Local currency net monetary gains and losses as a result of inflation and deflation are not recorded in the financial reports under HCA and CCA during low inflation, high inflation and deflation. They are calculated and accounted under Capital Maintenance in Units of Constant Purchasing Power during hyperinflation as required under IAS 29 Financial Reporting in Hyperinflationary Economies. During low inflation and deflation local currency is not traded in the local market because local currency is assumed to be perfectly stable in real value over time. Local currency´s real value is indicated by inflation and deflation. However, during high inflation and hyperinflation, local currency is traded in the local market. This market is called the parallel or black market as opposed to the normal foreign exchange market. 

Local currency´s real value is determined by all the underlying value systems in the local economy, e.g., good or bad national governance, a good or bad economy, good or bad monetary policies, a good or bad legal system, a good or bad health system, a good or bad educational system, a good or bad police force, etc, etc. The daily change in local currency´s real value is indicated by the daily change in the Daily CPI during low and high inflation and deflation and by the daily US Dollar parallel rate during hyperinflation.

The total of local currency held locally plus held outside the local economy (as foreign currency by other countries) make up the money supply.  Daily inflation-indexing the local money supply, i.e., all monetary items in the local economy, would eliminate only the effect of inflation or deflation in the local economy: it would leave local inflation or deflation intact. However, it would be as if there is no inflation or deflation in the local economy.

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

Generally accepted definition of hyperinflation

The generally accepted definition of hyperinflation in the world economy is 100% cumulative inflation over three years. It comes to 26% annual or 1.95% monthly inflation for three years in a row.

The above definition is currently being used by the 147 countries that implement International Financial Reporting Standards as issued by the International Accounting Standards Board. This definition has been used since April 1989 by the millions of accountants, business people, economists and all governments who implement IFRS. 

This definition of hyperinflation is contained in IAS 29 Financial Reporting in Hyperinflationary Economies that was authorized by the IASB in April 1989. 

"Par 3. This Standard does not establish an absolute rate at which hyperinflation is deemed to arise. It is a matter of judgement when restatement of financial statements in accordance with this Standard becomes necessary. 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%."

There is today not one government in the world economy that uses any other definition of hyperinflation. 

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