This changes the fundamental finanancial capital maintenance concept from financial capital maintenance in nominal monetary units - the global, generally accepted Historical Cost paradigm - to the IFRS and US GAAP authorised financial capital maintenance in units of constant purchasing power in terms of the Daily CPI paradigm.
What are the differences?
1. The stable measuring unit assumption. It is implemented under the HC paradigm. It is never implemented under the CMUCPP in terms of the Daily CPI paradigm.
2. Net monetary gains and losses. Never accounted under HCA. Always accounted under CMUCPP in terms of the Daily CPI.
3. Balance Sheets. HCA balance sheets only balance in nominal value, never in real value. They are normally prepared monthly, quarterly, six monthly and anually. They are never up to date, either in real value or in terms of the general price level - even at first publication/ finalization. CMUCPP in terms of the Daily CPI balance sheets always balance in real value and are always up to date in terms of the general price level at the date they are consulted/viewed. They are prepared at the same intervals - monthly, quarterly, six monthly and yearly, but - once prepared - all the values in a balance sheet are updated daily in terms of the Daily CPI indefinitely. The same is done with the newly prepared balance sheet at the new month end, etc, etc. They are always presented in terms of the current general price level. They are never out of date. The moment the general price level passes into deflation, smaller nominal values means bigger real values, thus maintaining the units of constant purchasing power in terms of the Daily CPI principle. Online automatically updated CMUCPP in terms of the Daily CPI balance sheets is best practice.
4. Negative Interest Rates. HCA during deflation automatically leads to negative interest rates while that is impossible under CMUCPP in terms of the Daily CPI because real value calculation inverts the moment the economy enters into deflation.
The general price level is presented only by the Daily CPI. However, during hyperinflation, the general price level can - on a few days (now and then) - change more than once a day in very exceptional circumstances of runaway or galloping hyperinflation.
Never implementing the stable measuring unit assumption results in the eroding of the real value of money during low, high and hyperinflation being fully compensated for by means of the implementation of the units of constant purchasing power in terms of the Daily CPI principle. See, for example, the implementation of the Unidade Real de Valor during hyperinflation in Brazil in the 1990s. Likewise it fully compensates for the increasing of the real value of money during deflation.
Not implementing the stable measuring unit assumption compensates for the eroding-the-real-value-of-money effect of low, high and hyperinflation during low, high and hyperinflation. It also compensates for the increasing-the-real-value-of-money effect of deflation during deflation.
It is wrong to state that the implementation of the stable measuring unit assumption destroys the real value of money during inflation because, theoretically, all such eroded real value can eventually be restored after long enough (centuries maybe) deflation.
Too good to be true?
The benefits of CMUCPP in terms of the Daily CPI are too good to be true? Not at all: they are based on maths, the Daily CPI, double entry accounting (the three-thousand-year-old free, open, global, decentralised, permissionless block chain - when audited), never implementing the stable measuring unit assumption and always accounting net monetary gains and losses - which make its effect and maintenance automatic and sustainable over time. CMUCPP in terms of the Daily CPI is also authorised in IFRS and US GAAP.
Resistance to change
Rest assured: there is no chance that the world would ever implement CMUCPP in terms of the Daily CPI as a global paradigm change any time soon. The world economy has been based on the nominal Historical Cost Accounting paradigm since the first day inflation was created by a sovereign king a few thousand years ago. We are not going to change that very easily. It may never actually happen. Freedom of thought, however, cannot be stopped.
It is, at least, important that the theoretical work regarding the effects of CMUCPP in terms of the Daily CPI carries on being done. However, although they should, I do not think there is a single central bank seriously studying CMUCPP in terms of the Daily CPI to determine its effect on currency stability and economic stability. They simply do not understand it yet or know about it yet. Normal resistance to change. Nothing wrong with that.
The best hope is that a small, advanced country would implement it and that it would then spread from there.
The best candidate to start CMUCPP in terms of the Daily CPI would be Zimbabwe. They are very close to being a cashless economy and they are very bold - out of necessity - in monetary experiments. However - simply in my respectful opinion (I may be wrong) - they lack in the level of accounting and technological sophistication necessary for such an experiment.
Monetary experimentation boldness they certainly do not lack.
Freely available to any country
Since all these fundamental concepts are freely available to all nations, any nation may implement CMUCPP in terms of the Daily CPI. It would have a very stable currency as a result of a very stable economy as a result of the automatic rejection of the stable measuring unit assumption in its economy.
Is all this new knowledge? Not at all. The Brazilians did it in the 1990s with the Unidade Real de Valor.
I confirmed what I know by studying what happened then. My personal experience came from stopping the fear of hyperinflation in the company where I worked in Angola in 1996 by means of daily US Dollar indexing all items in the company in terms of the daily parallel rate for the local Kwanza. I found out about the Unidade Real de Valor in my subsequent study of the effect of the stable measuring unit assumption during hyperinflation, high inflation, low inflation and deflation.
The URV experience and knowledge are simply being ignored by economists and accountants in general and by the International Accounting Standards Board specifically. Why? Because of the relative stability of the global financial system under the single, three-thousand-year-old, nominal Historical Cost Accounting paradigm. Resistance to change. Very normal.
Let us assume a country implements CMUCPP in terms of the Daily CPI. As a result of its very stable currency, it would then be able to pay for its imports by simply minting its own currency in the form of debt (QE) to the sustainable level its economy can maintain - automatically maintained stable in terms of CMUCPP in terms of the Daily CPI. It would use that newly minted national currency to buy the US Dollars, Euros, Yuans and Yens necessary to pay for increased imports in a sustainable process automatically maintained stable - at the right level - by means of the implementation of the CMUCPP in terms of the Daily CPI paradigm.
Sounds too good to be true? Not at all. See above.
Don´t be surprised when a smaller nation actually starts doing it - out of necessity. It is free. No cost involved. Its only effect is automatically maintaining the constant purchasing power of all constant real value non-monetary items by automatically rejecting the stable measuring unit assumption during all possible economic environments. That would result in a very stable currency because the currency is backed by the underlying economy in which all constant real value non-monetary items would be automatically maintained constant in real value in terms of CMUCPP in terms of the Daily CPI.
Most central banks do not study CMUCPP in terms of the Daily CPI because of the relative stability of the current global financial system. Most central banks do not realise the importance of the nominal Historical Cost Accounting paradigm - the implementation of the stable measuring unit assumption - in global financial instability during deflation and negative rates. All of that may change as a result of the global phenomenon of negative yields on government bonds during deflation under the nominal Historical Cost paradigm implemented in terms of the monthly published CPI. Bloomberg calls it a financial black hole that may engulf the world economy.
Fortunately CMUCPP in terms of the Daily CPI provides a free way to fix the problem. However, there is no chance that any developed economy would implement it. Resistance to change. Three thousand years using nominal Historical Cost Accounting - the stable measuring unit assumption - as the only paradigm ever used by mankind is not going to change overnight. Forget about that.
It is only by accident that both IFRS and US GAAP authorised CMUCPP in terms of the Daily CPI in 1989. It was done unintentionally by both accounting standard setters in a failed attempt to solve the problems created by nominal Historical Cost Accounting - the stable measuring unit assumption - during hyperinflation. Originally authorized in IFRS in the Framework (1989), Par 104 (a) which states: 'Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.' This sentence is unchanged in the current IFRS Conceptual Framework. Both attempts keep on failing after all these years because they both stick with the monthly published CPI which is totally ineffective during hyperinflation as well as low inflation and deflation.
Some smaller countries may be interested in studying CMUCPP in terms of the Daily CPI - out of necessity. It is a free way for them to sustainable automatic currency stability as well as sustainable economic growth that would make them the envy of the nominal Historical Cost world economy.
Who knows what the future may bring?
Nick Smith
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