Wednesday, 7 January 2015

Effect of deflation eliminated by daily deflation-indexing of entire money supply

Only the effect of deflation would be eliminated from all un-adjusted monetary items when the entire un-adjusted money supply is deflation-adjusted on a daily basis in terms of the Daily CPI during deflation. This would do nothing to actual deflation in the short term. It would, however, immediately be as if there were no deflation in these monetary items (as qualified) during deflation.

This would only remove the effect of deflation from only un-adjusted monetary items. Some (not all) government inflation-indexed bonds provide for deflation-indexing.

Implementing Capital Maintenance in Units of Constant Purchasing Power in terms of the Daily CPI (instead of Historical Cost Accounting) during deflation would maintain the constant purchasing power (real value) of  all constant real value non-monetary items constant during deflation.

The two measures together would, ceteris paribus, remove the distortions caused by the implementation of the stable measuring unit assumption under Historical Cost Accounting from the economy during deflation.

Nicolaas Smith

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