Global seigniorage profits to the US of America

Global seigniorage profits to the US of America

What is seigniorage?

Investopedia explains 'Seigniorage'

"Seigniorage may be counted as revenue for a government when the money that is created is worth more than it costs to produce it. This revenue is often used by governments to finance a portion of their expenditures without having to collect taxes."
Explanation:

Seigniorage is simply the difference between the total nominal value of new bank notes introduced into the economy and the cost to print them.

It is a complete windfall profit to the Central Bank, i.e., to the country or the welfare of the people of the country where the new bank notes are introduced into the economy.

This windfall profit "without having to collect taxes" accrues to the welfare of the people of the  United States of America from the eonomies of countries that are Dollarized, for example Zimbabwe, Panama, Ecuador and from all dollarization outside the US economy for an indefinite period of time while these countries are Dollarized and from all Dollarization outside the US economy.

Nicolaas Smith


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Capital maitenance in units of constant purchasing power is halal

Capital maintenance in units of constant purchasing power is halal and Sharia-based since it only operates in real values.

Nicolaas Smith

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Most destructive assumption ever made by mankind

Most destructive assumption ever made by mankind

The stable measuring unit assumption. Assuming, in practice, that money is perfectly stable during inflation and deflation.

The Historical Cost Accounting model is based on the stable measuring unit assumption. Ban Historical Cost Accounting (i.e., the stable measuring unit assumption) and you stop the effects of inflation and deflation.

Nicolaas Smith

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Dollarization with total local monetary policy autonomy

Dollarization with total local monetary policy autonomy

The Daily Index Plan, namely, capital maintenance in units of constant purchasing power as authorized in IFRS twenty three years ago as an option to HCA plus daily inflation-indexing the entire money supply under complete co-ordination, both in terms of the daily US Dollar free-market rate would result in a constant (real value) local currency always being exactly equal to the US Dollar (used during hyperinflation).

The local hyperinflationary economy would in practice in the economy be Dollarized in terms of the constant (real value) local currency - not in terms of actual, physical US Dollars. Monetary and constant items would be constant in real value and their constant real values would remain constant in US Dollar terms too (exactly the same as).

The fundamental difference with actual Dollarization is that the local Central Bank would have complete monetary autonomy. That is what is completely lost / given up under Dollarization.

A Daily indexed local currency monetary item and a Daily indexed local currency constant real value non-monetary item are constant real value local currency items. They would always be exactly equal in real value to their  respective foreign currency equivalents when the daily free-market foreign currency exchange rate is used as the index during hyperinflation. The Daily CPI is used during low inflation and deflation.

Eg.: US Dollar : Iranian Rial exchange rate = 1 :35 000

The indexed local currency would be:

Local currency value divided by USD rate:

35 000 rials/35 000 = 1 which is the amount of US Dollars.

Thus: a constant real value local currency (monetary or constant real value non-monetary) item is always exactly equal to its US Dollar equivalent when the US Dollar exchange rate is used as the index during hyperinflation.

When the entire monetary and constant item economies are indexed daily in terms of the daily US Dollar rate, then they are Dollarized in constant (real value) local currency units, not in physical US Dollars.

It is a fact that official Dollarization or a Currency Board stops hyperinflation overnight at a huge cost in US Dollars, but with no local monetary policy autonomy. Dollarization or a Currency Board is a monetary policy straight-jacket and is very costly.

Anyone - not only Prof. Steve Hanke - can stop hyperinflation overnight with Dollarization or a Currency Board. It´s no big deal. No-one would use it now that the Daily Index Plan - based on the Brazilian Real Plan - is available as an IFRS at no cost.

The Daily Index Plan, i.e., capital maintenance in units of constant purchasing power plus daily inflation-indexing the entire money supply, both in terms of the daily US Dollar parallel rate, stops hyperinflation overnight at no cost and maintains total local monetary policy autonomy.

The official or unofficial Dollarization and a currency board solutions are thus made obsolete and irrelevant by the Daily Index Plan.

The Daily Index Plan equals Dollarization in constant real value local currency values: no US Dollars required.

The daily US Dollar rate is simply used as a relatively stable unit of account in the absence of a Daily Consumer Price Index. This is similar to pre-monetary economies which used units of account without money being available in the economy (Shiller). An economy could use the US Dollar parallel exchange rate as a relatively stable unit of account without a single US Dollar being exchanged in the economy.

The US Dollar is thus being used as subsitute for a universal unit of real value.

Any relatively stable foreign currency, e.g., the Euro or the Yuan, can be used instead of the US Dollar.

The US Dollar is used in this way during hyperinflation when reliable Daily CPI data are not avaliable. 

The Daily CPI is used as the Daily Index during low inflation, high inflation and deflation. All countries with government capital inflation-indexed bonds, including Venezuela in hyperinflation, already have a Daily CPI.

Nicolaas Smith

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Global unit of real value

Global unit of real value

 

The consumer basket is the global unit of real value.

Nicolaas Smith

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The Daily Index Plan: A monetary and accounting plan

The Daily Index Plan: A monetary and accounting plan

The plan is called the Daily Index Plan because the daily index is the common factor in maintaining both the monetary and constant item economies constant. It is different from (better than) the Unidade Real de Valor daily index as well as from the Real Plan monetary reform implemented by Brazil in 1994.

The Daily Index Plan is not simply a daily index like the URV was and it is also not exactly the same as the Real Plan. It is a combination of principles and concepts which were used in both the URV daily index and in the Real Plan monetary reform. But it is neither simply the one nor simply the other and it is also not a simple combination of the two.

The Daily Index Plan is a combination of principles and concepts used in the URV and Real Plan plus capital maintenance in units of constant purchasing power in terms of a Daily Index.

The principles and workings of the Daily Index Plan are so mathematically correct and logical in real value that I am now completely confindent in stating that it can be used to stop the total effect of hyperinflation – not actual hyperinflation in bank notes and coins (their nominal values are still permanently printed on them) – in the monetary economy as well as the very destructive effect of the stable measuring unit assumption in the constant item economy overnight at no cost when the plan is implemented correctly with complete coordination.

The crucial factor is the fact that the US Dollar daily rate is used as the index. Then, logically (mathematically), a constant local currency is always exactly equal to the US Dollar. So, you are effectively running your economy in US Dollars (Dollarization) when you daily index your complete local currency money supply and all constant items in your economy to the daily US Dollar rate. We all know Dollarization stops hyperinflation overnight, but at the cost of having sufficient US Dollars available overnight.

Because you use a constant local currency you can still have hyperinflation when someone injects too many nominal local currency units into the economy, but the Daily Index Plan would always remove the total cost of hyperinflation as well as the total cost of the stable measuring unit assumption from the economy under complete co-ordination.

With the Real Plan in 1994 (which was only a monetary reform plan – Brazil actually went back to Historical Cost Accounting – a step backwards, but that is another story) the actual URV index was changed into a new currency - the Real currency. The previous currency was withdrawn from circulation, but the URV index was almost 100 percent constructed with (made up of) the official (not a parallel) Daily US Dollar rate in Brazil and the population was already used to (for 30 years) working with daily indexing with the URV and other government-supplied daily indices. This was all done by the Brazilian Government via the Central Bank of Brazil. Well, the Central Bank was completely independent because the head of state was not involved (not interested) in the workings of the Central Bank at all.

It is thus possible to stop the total effect of low inflation, high inflation, hyperinflation and deflation and the stable measuring unit assumption overnight at no cost in any economy. The accounting part was the important part that  was missing (the weakness) in the Real Plan. The Daily Index Plan is thus the complete economic plan: a better plan than the Real Plan. The Real Plan was only a monetary reform. The Daily Index Plan is a monetary and a fundamental accounting – an economic – reform plan.

 

Nicolaas Smith

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The Generally Accepted Definition of Hyperinflation

The Generally Accepted Definition of Hyperinflation

The International Accounting Standard Board´s definition of hyperinflation is the generally accepted definition in the world economy since April 1989, the date IAS 29 was authorized.

The IASB defines hyperinflation in IAS 29 Financial Reporting in Hyperinflationary Economies, Par. 3 (e) as follows:

"the cumulative inflation rate over three years is approaching, or exceeds, 100%."

 

The IASB´s definition if followed by millions of accountants and all countries implementing International Financial Reporting Standards since April 1989.

 

In 1956, Phillip Cagan wrote The Monetary Dynamics of Hyperinflation, generally regarded as the first serious study of hyperinflation and its effects. In it, he defined a hyperinflationary episode as starting in the month that the monthly inflation rate exceeds 50%, and it ending when the monthly inflation rate drops below 50% and stays that way for at least a year.^[4] Economists usually follow Cagan’s description.

 

No country in the world follows Cagan´s definition for any purpose or is required to follow Cagan´s definition.

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Fourth advantage of daily inflation-indexing the entire money supply

Another (the fourth) very important benefit of daily inflation-indexing the entire money supply at all levels of inflation and deflation under complete co-ordination (which is the rejection of the stable measuring unit assumption in the monetary economy) would be that it would logically compliment the rejection of the stable measuring unit assumption in the constant item economy (the non-monetary or real economy being made up of the constant and variable item economies) under financial capital maintenance in units of constant purchasing power in terms of a Daily CPI or other daily index as already authorised in IFRS.

Financial capital maintenance in units of constant purchasing power as authorised in IFRS would automatically maintain the constant purchasing power of equity (capital) constant for an indefinite period of time in all entities that at least break even in real value - all else being equal - at all levels of inflation and deflation.

This means the constant real value of the entire capital investment base in an economy would automatically be maintained constant for an indefinite period of time as qualified above, i.e., in all entities that at least break even in real value, all else being equal under financial capital maintenance in units of constant purchasing power.

Nicolaas Smith

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Daily inflation-indexing the entire money supply an inevitable future step

Daily inflation-indexing the entire money supply an inevitable future step

 

Daily inflation-indexing of the entire money supply in terms of already existing Daily CPIs is an inevitable future step in the world economy.

(i)The first known inflation–indexed bond was issued by the Massachusetts Bay Company in 1780.

(ii) The British government began issuing inflation–linked Gilts in 1981. The market for inflation–linked bonds has grown rapidly since then - with the use of Daily CPI´s.

(iii) The IASB originally authorised financial capital maintenance in units of constant purchasing power in the original Framework in 1989.

(iv) Non-monetary items were then split in variable real value non-monetary items (property, plant, equipment, inventories, etc.) and constant real value non-monetary items (issued share capital, all items in shareholders´equity, salaries, wages, rents, trade debtors, trade creditors) in 2005 making the development of an accounting model based on financial capital maintenance in units of constant purchasing power in terms of a Daily CPI or other daily index possible.

(v) The draft IFRS 'X' CAPITAL MAINTENANCE IN UNITS OF CONSTANT PURCHASING POWER in terms of a Daily CPI or other daily index was submitted to the IASB in January 2012. An IFRS based on IFRS 'X' should be authorised in 6 to 8 years´ time.

(vi) Some years´ after that countries could start inflation-indexing their entire money supplies.

 

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Nicolaas Smith

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Benefits of daily inflation-indexing the entire money supply

Benefits of daily inflation-indexing the entire money supply

 

The benefits of daily inflation-indexing the entire money supply at all levels of inflation and deflation under complete co-ordination (everyone doing it) would be:

1. It would remove only the entire cost of or gain from inflation and deflation from only (except from actual bank notes and coins) the entire monetary economy - inflation has no effect on the real value of non-monetary items - under complete co-ordination at all levels of inflation and deflation. It would do nothing to actual inflation or deflation. The monetary economy, however, would operate as if there is no inflation or deflation - at whatever level of inflation and deflation. Monetary items (excluding bank notes and coins) would have constant real values over time.

 

2. As far as comparing its benefits to the benefits of a currency board or dollarization to stop hyperinflation is concerned: it would remove the entire cost of hyperinflation from the entire monetary economy (excluding bank notes and coins) while an economy using a currency board or dollarizaton to stop hyperinflation would still be subject to the cost of and gain from inflation or deflation of the currency board currency or dollarization currency as well as the cost of or gain from the stable measuring unit assumption in the currency board currency or dollarization currency.

 

3. There would be no currency board currency (foreign exchange) needed.

 

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Nicolaas Smith

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Running an economy in constant values

Iran is currently in hyperinflation.

 

When the whole money supply is inflation-adjusted or hyperinflation-adjusted on a daily basis under complete co-ordination (everyone doing it) in terms of a Daily CPI or daily black market rate there would still be inflation and hyperinflation in only the monetary economy, but no cost of /gain from inflation or hyperinflation. Monetary items, excluding bank notes and coins, would have constant real values. It would be as if there is no inflation or deflation or hyperinflation in the economy.

Inflation and deflation obviously have no effect on the real value of non-monetary items. The stable measuring unit assumption as implemented under traditional Historical Cost Accounting is destroying Iran´s non-monetary economy. It is impossible for hyperinflation to destroy Iran´s non-monetary economy.

Under hyperinflation daily inflation-adjustment of the entire money supply is possible by means of the daily black market rate. Under low inflation, high inflation and deflation this is possible by means of the Daily CPI that exists in all countries issuing government inflation-indexed bonds (95+ per cent of the world economy). These bonds trade daily and are priced daily in terms of a Daily CPI which is normally a one or two month lagged daily interpolation of the monthly published CPI. TIPS are priced like that daily.

Chile currently inflation-adjusts 25 percent of its broad M3 money supply on a daily basis in terms of their Unidad de Fomento. At least USD 3.5 trillion is inflation-adjusted daily in the global sovereign inflation-indexed bond market.

Whereas daily inflation-adjustment of the complete money supply would remove the cost/gain from inflation / deflation, including hyperinflation (not inflation/deflation or hyperinflation), from only the monetary economy (excluding from actual bank notes and coins), financial capital maintenance in units of constant purchasing power, the IASB´s alternative to Historical Cost Accounting, authorized in IFRS in 1989, in terms of a daily CPI or daily black market rate would remove the total cost of the stable measuring unit assumption from the entire economy; i.e., abandoning the HCA model.

It is thus currently possible to run an entire economy with constant real value monetary items (excluding bank notes and coins) and constant real value non-monetary items. The split of non-monetary items in variable real value non-monetary items and constant real value non-monetary items is inferred in IFRS.

I could explain this to Iran, but then the US government would be very upset with me. I have no intention of explaining this to Iran. They may read it on my blog though.

I am trying (quite unsuccessfully so far) to get Venezuela, which is in hyperinflation in terms of the IASB´s definition, to abandon traditional HCA and to change over to IFRS-authorized financial capital maintenance in units of constant purchasing power in terms of their Daily CPI. Venezuela issues government inflation-indexed bonds and this Daily CPI is available in the country.

 

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Nicolaas Smith

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.

DEFINITION OF FINANCIAL CAPITAL MAINTENANCE IN UNITS OF CONSTANT PURCHASING POWER

DEFINITION OF FINANCIAL CAPITAL MAINTENANCE IN UNITS OF CONSTANT PURCHASING POWER

Financial capital maintenance in units of constant purchasing power is the automatic maintenance of the real value (constant purchasing power) of capital (equity), based on the principle that the real value (constant purchasing power) of equity is always equal to the real value of net assets for an indefinite period of time in all entities that at least break even in real value – all else being equal – at all levels of inflation and deflation, including during hyperinflation as authorised in current IFRS in The Conceptual Framework (2010), Par. 4.59 (a) in terms of a Daily Consumer Price Index or other daily index.

STABLE MEASURING UNIT ASSUMPTION NEVER IMPLEMENTED

The stable measuring unit assumption is never implemented under financial capital maintenance in units of constant purchasing power.

Financial capital maintenance in units of constant purchasing power is not Constant Purchasing Power Accounting, i.e., it is not the restatement of non-monetary items in Historical Cost or Current Cost financial statements during hyperinflation.

Financial capital maintenance in units of constant purchasing power is the same as to CONSTANT ITEM PURCHASING POWER ACCOUNTING as described in the Kindle e-book CONSTANT ITEM PURCHASING POWER ACCOUNTING per IFRS.  You can download a free Kindle Reading Application here.

VALUE DATE

The value date under financial capital maintenance in units of constant purchasing power is always the current date, i.e., today, namely today´s Daily CPI or today´s market price or other daily index. All items are always stated, viewed, accessed, printed, published and presented at today´s real value. Tomorrow all the prices are different. They are valued of updated daily.

The Daily CPI is normally a one or two month lagged, daily interpolation of the monthly published CPI used in all countries issuing government capital inflation-indexed bonds to price these bonds on a daily basis.

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Nicolaas Smith

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Managerial Accounting under Financial Capital Maintenance in Units of Constant Purchasing Power

Financial capital maintenance in units of constant purchasing power is the same as Constant Item Purchasing Power Accounting at all levels of inflation and deflation, including during hyperinflation.

It is a departure from Historical Cost Accounting. The fundamental difference is that the stable measuring unit is never implemented under financial capital maintenance in units of constant purchasing power. Everything is done at real value: in Managerial Accounting too. I equate Managerial Accounting to Cost and Management Accounting.

Simply take any item in Managerial Accounting and update it to its current real value, i.e. it´s value today at today´s Daily CPI.

First you will have to find the Daily CPI for your country. If your government issues government capital inflation-indexed bonds, then you already have a Daily CPI in your country. The Daily CPI for your country is the one or two month lagged daily interpolated index that is used in your country to price your government inflation-indexed bonds on a daily basis: these bonds are bought and sold on a daily basis in your country´s capital markets.

If your country, like Venezuela, does not issue government inflation-indexed bonds, then you have to calculate the Daily CPI in your country from your country´s monthly published CPI using the formula for the calculation of the Unidad de Fomento in Chile as described by Prof. Robert Shiller. It is detailed as follows:

‘The formula for computation of the UF on day t is:

UF _t = UF _t–1 × (1+ π) ^1/d

where π is the inflation rate for the calendar month preceding the calendar month in which t falls if t is between day ten and the last day of the month (and d is the number of days in the calendar month in which t falls), and π is the inflation rate for the second calendar month before the calendar month in which t falls if t is between day one and day nine of the month (and d is the number of days in the calendar month before the calendar month in which t falls).’

Shiller 1998:3

The above formula applies to the UF in Chile where the CPI for the current calendar month used to be available on the tenth of the next calendar month. The general case formula for a UF–based Daily CPI is stated as follows:

On day t

DI _t = DI _t–1 X (1 + π) ^1/d

where π is the monthly inflation rate for the second calendar month before the calendar month in which t falls if t is on or between day one and the day of publication of the CPI of the previous calendar month (and d is the number of days in the calendar month before the calendar month in which t falls), and π is the inflation rate for the calendar month preceding the calendar month in which t falls if t is on or between the day the CPI for the previous calendar month is published and the last day of the month (and d is the number of days in the calendar month in which t falls).

You have to use the general case formula.

All you do then is multiply any item in your Managerial Accounts by the update factor you derive from dividing the value of your Daily CPI today, with the value of the Daily CPI on the date the item was purchased / came about / was contributed / etc. Then you have its real value today.

Since the Daily CPI changes daily, all your Managerial Accounts (and financial accounting) values change daily in terms of the daily changing Daily CPI.

There you have it.

Obviously you have to abandon the Historical Cost Accounting model and change over to the Financial Capital Maintenance in Units of Constant Purchasing Power model (which is the same as Constant Item Purchasing Power Accounting) in your financial accounting.

This is authorised at all levels of inflation and deflation, including during hyperinflation, in The Conceptual Framework (2010), Par. 4.59 (a).

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Nicolaas Smith

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Financial capital maintenance in units of constant purchasing power during hyperinflation is authorized in current IFRS

Financial capital maintenance in units of constant purchasing power during hyperinflation is authorized in current IFRS

Under IAS 29 Financial Reporting in Hyperinflationary Economies, financial capital maintenance in nominal monetary units is implemented; i.e., the Historical Cost Accounting model which includes the application of the stable measuring unit assumption during hyperinflation.

‘‘Inflation-adjusted financial statements are an extension to, not a departure from, historical cost accounting.’

PricewaterhouseCoopers, Understanding IAS 29, 2006, Page 5.

IAS 29 was implemented during the last six years of hyperinflation in Zimbabwe with no effect at all.

IAS 29 is only required for the restatement of Historical Cost or Current Cost financial statements during hyperinflation.

IAS 29, Par. 8 states:

‘The financial statements of an entity whose functional currency is the currency of a hyperinflationary economy, whether they are based on a historical cost approach or a current cost approach, shall be stated in terms of the measuring unit current at the end of the reporting period.’

IAS 29 is thus not required when an entity implements financial capital maintenance in units of constant purchasing power during hyperinflation as authorized at all levels of inflation and deflation, including hyperinflation, in current IFRS in The Conceptual Framework (2010), Par. 4.59 (a) which states:

‘Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.’

Financial capital maintenance in units of constant purchasing power during hyperinflation is thus authorized in terms of current IFRS.

The stable measuring unit assumption is, in principle, never implemented under financial capital maintenance in units of constant purchasing power. When it is implemented in practice, e.g., with the measurement of monetary items in nominal monetary units, then the net monetary loss or gain is calculated and accounted under financial capital maintenance in units of constant purchasing power accounting.

Financial capital maintenance in units of constant purchasing power is not Constant Purchasing Power Accounting, i.e., it is not the restatement of non-monetary items in Historical Cost or Current Cost financial statements.

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Nicolaas Smith

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Historical Cost financial statements technically always wrong

Historical Cost financial statements technically always wrong

 

All HC financial reports are out of date the day after the date of the financial report because the Daily Consumer Price Index is generally different every day. HC financial statements are generally never published on the date of the financial statements.

 

This fact is very easily understood during hyperinflation as stated by the South African Institute of Chartered Accountants in 2008. Under IAS 29, HC or CC financial statements are “restated” in terms of the monthly published CPI at the balance sheet date. The stable measuring unit assumption is applied during hyperinflation in terms of IAS 29. IAS 29 is an extension to not a departure from HCA as stated by PwC and required by IFRS. All financial reports prepared in terms of IAS 29 are out of date the day after the date of the financial reports.

 

Under the CIPP paradigm all finacial reports are updated daily to the current, i.e., today´s, date in terms of the Daily CPI or other daily index during low and high inflation and deflation and hard currency parallel rate or other daily index during hyperinflation.

 

Digital CIPP financial reports are never out of date: they are always updated to the current, i.e., today´s, daily index or rate.

 

All digital CIPP non-monetary accounts in the ledger are never out of date: they are always updated to the current, i.e., today´s, daily index or rate. They are updated daily. It is better not to print hardcopy CIPP financial reports since hard copy financial reports are out of date the day after the date of the financial report.

 

HC financial reports are generally never valid in terms of the current, i.e., today´s real values or Daily CPI. All HC financial reports are thus technically always wrong in that sense while all CIPP financial reports are technically always right in that sense.

 

All financial reports perpared in terms of IAS 29 have very little use at all as a result of always being very out of date.

 

Digital CIPPA financial reports are never out of date.

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Nicolaas Smith

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.