How to implement Daily Indexing in Venezuela - Part 1

How to implement Daily Indexing in Venezuela - Part 1

extorres Says:

From The Devil´s Excrement in response to 

(First read) Daily indexing is a measurement paradigm

September 18, 2013 at 11:19 pm

"Thank you so much for such a detailed reply. I see now that your suggestion is to make a change external to the politics, which, though much more interesting and impressive, brings up a different issue. You seem to imply that no one loses, but those who are currently taking advantage of the seigniorage would stop reaping its benefits, which is tantamount to their losing. What actions do you think they could take to counter this loss? Even if these people decided not to fight it and instead help stabilize the system, the economy then effectively becomes dollarized, which brings a whole branch of other ramifications, including salaries going down…

I hear what you are saying about Brazil, but that is not the only way to bring down inflation, nor do I think Brazil’s story has reached an end, nor was the indexation the only factor helping Brazil those years. One big difference, for example, is the percentage that the oil industry represents of Venezuela’s economy. Contrast your suggestion against distributing all income from oil directly, daily, and equally to all citizens. Since the oil is sold in dollars, that is another form of indexation, while not excluding the non earners, as your suggestion seems to do. It would also achieve a healthy incentive structure of getting the government to focus on the success of the people so that it would reap greater income from taxes."

My response to the above comment.

Nicolaas Smith

Daily indexation is a measurement paradigm

Daily indexation is a measurement paradigm

From The Devil´s Excrement

“The inflation-indexing seems right, though not simple since it seems like it then becomes a political matter to be specifying which things become indexed or not. It also seems to exclude protection for those with no income, while weighing heavily on the responsibility of accounting systems, which is a flag for points of failure in Venezuela.”

“it seems like it then becomes a political matter to be specifying which things become indexed or not.”

Daily indexation is a measurement paradigm totally different from traditional Historical Cost Accounting. It is a national measurement basis / paradigm once it is being implemented in an economy like it was implemented in Brazil and other Latin American countries during high and hyperinflation from 1964 till 1994. It is fundamentally different from the globally implemented, 3000-year-old, traditional nominal Historical Cost paradigm. The stable measuring unit assumption is implemented under the HC paradigm. It is assumed money is perfectly stable whenever economic items are measured in nominal monetary units during inflation and deflation - at whatever rate of inflation or deflation.

The stable measuring unit assumption is NEVER implemented under DAILY INDEXATION, i.e., the Constant Item Constant Purchasing Power paradigm. This is instinctively understood by consumers and business people, including all street traders (some of whom have never been to school) in hyperinflationary economies. However, it is a mystery to the members of the International Accounting Standards Board (IASB), the IASB Interpretations Committee and the IASB staff members who combined have 100s of years of experience of nominal Historical Cost Accounting and the stable measuring unit assumption during LOW inflation as well as combined hundreds of years of training and high level education in nominal HCA and the stable measuring unit assumption during LOW inflation. They are clueless about daily price rises during hyperinflation.

There is no money illusion in a hyperinflationary economy. Everyone knows for a fact that the local currency loses real value daily during hyperinflation. No-one doubts that.

Once DAILY indexation is implemented officially on a national basis as instinctively already happening in Venezuela in the DAILY indexing of many non-monetary prices in terms of the DAILY US Dollar parallel rate, then it is (becomes) a national measurement paradigm which it already currently is only for those prices being updated DAILY in Venezuela in terms of the DAILY US Dollar parallel rate.

So, it is not “a political matter to be specifying which things become indexed or not”. All items are indexed.

This will not stop hyperinflation in the short term. As long as the Central Bank of Venezuela keeps on creating too many Bolivars, there will be hyperinflation.

But, (1) DAILY INDEXATION of all monetary items would stop the real value eroding EFFECT of hyperinflation in all monetary items indexed daily - as it was done in Brazil from 1964 to 1994. It will be as if there is no hyperinflation - during actual hyperinflation. Currently the real value eroding EFFECT of low inflation is stopped in at least USD 2.4 Trillion in DAILY INDEXED government capital inflation-indexed bonds worldwide - during low inflation worldwide.

(2) Measurement of all NON-MONETARY items in units of constant purchasing power based on a DAILY INDEX would maintain their constant purchasing power constant DURING hyperinflation - as was done in Brazil from 1964 to 1994.

Venezuela has been indexing issued share capital, retained profits, accumulated losses, capital reserves, provisions, etc. in terms of the 12  monthly published Consumer Price Indices since 2009. Why? Because the government indicated that these items have to be indexed like this? No. It is done because Venezuela implements International Financial Reporting Standards, namely IAS 29 Financial Reporting in Hyperinflationary Economies since 2009.

Changing IAS 29 to REQUIRE DAILY INDEXING would mean that the DESTRUCTION of current year results in the Venezuelan economy over the last four years as the result of Venezuelan accountants implementing the stable measuring unit assumption - as required in IAS 29 - during the 355 non-month-end days of the year (they only use the 12 month-end CPIs as generally accepted over the last 24 years since its authorization under the current version of IAS 29) would stop.

Once companies start using DAILY INDEXING to maintain the real value (constant purchasing power) of their current year results instead of destroying part of it at the rate of hyperinflation, then DAILY INDEXING would become the national measurement paradigm in Venezuela as A REQUIREMENT of IAS 29 and not as a requirement of the Venezuelan government.

When DAILY INDEXING is done in terms of the Venezuelan Daily CPI (because doing it correctly in terms of the daily US Dollar parallel rate is currently illegal in Venezuela), then DAILY INDEXING of all items would become the national daily measurement paradigm because everyone will experience - see - the economy stabilising.

“It also seems to exclude protection for those with no income.”

DAILY INDEXING of all items means the economy would operate in real values. That means profits would be maintained in real value. That means taxes would be calculated AND PAID in real (constant purchasing power) values. That means social subsidies would be maintained in real values. Thus there would be much better protection for those with no income under DAILY INDEXATION than under the current system.

“while weighing heavily on the responsibility of accounting systems, which is a flag for points of failure in Venezuela.”

You mean the REQUIREMENTS of International Financial Reporting Standards implemented outside the control of the government.

What is happening in Venezuela today - illegal arbitraging low cost items to the Colombian market, the arbitrage between the official and parallel rate, etc. are all because of the invisible hand of self-interest.

Once DAILY INDEXING is the national paradigm in Venezuela as a result of its REQUIREMENT in IAS 29, then that invisible hand of self-interest would ensure that the economy stabilises by everyone striving to maintain his or her values constant over time: Business owners would welcome DAILY INDEXING of all prices, trade debtors, trade creditors and all items in their profit and loss accounts; workers would welcome DAILY INDEXING of salaries and wages and benefits; property owners would welcome DAILY INDEXING of rents and the government would welcome DAILY INDEXING of all taxes. Banks would welcome DAILY INDEXING of all loans made. No-one would lose any real value because of hyperinflation (in the perfect application of this process).

That is what happened in Brazil and many other Latin American countries with DAILY INDEXATION from 1964 till 1994.

It would be the same in Venezuela.

Nicolaas Smith 

Read extorres´s response in How to implement indexation in Venezuela.

Copyright (c) 2005-2013 Nicolaas J Smith. All rights reserved. No reproduction without permission.

The IASB´s dismal failure in Venezuela and Belarus - like in Zimbabwe in the past

The IASB´s dismal failure in Venezuela and Belarus - like in Zimbabwe in the past

There are three ways to deal with inflation:

(1) The MONETARY EFFECT of hyperinflation (i.e. the DAILY erosion of the REAL value of the Bolivar - all MONETARY ITEMS in Venezuela not inflation-indexed daily) can be reduced by the Central Bank of Venezuela by reducing the excessive increase in the supply of Bolivars. This is a political matter in Venezuela. The Central Bank of Venezuela can thus reduce inflation by creating fewer new Bolivars.

(2) Dollarization (official or spontaneous) or a currency board will stop hyperinflation overnight. It means the end of the Bolivar. Official dollarization is very costly to the government and you lose ALL your sovereignty over monetary policy. Spontaneous dollarization has no extra cost to the government. You still lose ALL your sovereignty over monetary policy.

(3) The DAILY inflation-indexing of all MONETARY ITEMS in the economy, obviously excluding actual Bolivar bank notes (I don´t know whether you have coins) will do nothing to the rate of hyperinflation (you will still have hyperinflation) but there would be no EFFECT of hyperinflation in the economy. 

Inflation has NO EFFECT on the REAL VALUE of NON-MONETARY ITEMS like taxes payable, taxes receivable, salaries, wages, rents, trade debtors, trade creditors, capital, profits, etc.

The REAL VALUE of the NON-MONETARY ITEMS taxes payable, taxes receivable, salaries, wages, rents, trade debtors, trade creditors, capital, profits, etc. is destroyed by the STABLE MEASURING UNIT ASSUMPTION, i.e., Historical Cost Accounting - by not maintaining them constant in REAL VALUE on a DAILY basis (the general price level changes DAILY or even more than once a day in high hyperinflation). 

Indexing (measuring them in units of constant purchasing power in terms of a DAILY INDEX) taxes payable, taxes receivable, salaries, wages, rents, trade debtors, trade creditors, capital, profits, etc. DAILY in terms of the DAILY CPI in Venezuela - as was done very successfully for 30 years from 1964 to 1994 in Brazil and other Latin American countries in terms of Daily Indices - would maintain the REAL VALUE of taxes payable, taxes receivable, salaries, wages, rents, trade debtors, trade creditors, capital, profits, etc constant over time - as was done - to a large extent - in LA in the past.

This can be done by the International Accounting Standards Board for Venezuela if the IASB were to have the common sense and  good judgement to change International Accounting Standard IAS 29 Financial Reporting in Hyperinflationary Economies (which Venezuelan companies have been implementing since 2009) to REQUIRE it to be implemented in terms of a DAILY INDEX instead of the monthly published CPI as it has been done since 1990. 

That would stabilise ONLY the Venezuelan constant real value NON-MONETARY economy - as it was done in Brazil and the rest of LA in the past. It would do nothing to inflation over the short term.  

Unfortunately this will not happen because the IASB does not have the common sense and good judgement to change IAS 29 to REQUIRE daily indexing. Companies in Venezuela or their multinational owners would also not do it because it is not currently REQUIRED in IAS 29 - although it CAN be done because the DAILY CPI is also a consumer price index just like the monthly published CPI as currently used in IAS 29. 

Nicolaas Smith 

Copyright (c) 2005-2013 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Cost is a measurement basis under financial capital maintenance in units of constant purchasing power

Cost is a measurement basis under financial capital maintenance in units of constant purchasing power


"Updated Historical Cost to be used under financial capital maintenance in units of constant purchasing power."

Agenda Ref 12, IFRIC meeting September 2013, Appendix B, 2.(b)

Michael Stewart, Director of Implementation Activities at the IASB and Kenichi Yoshimura very unfortunately forgot the above in their submission Applicability of the concept of financial capital maintenance defined in constant purchasing power units.

15. Having made a choice of using the financial capital maintenance concept in constant purchasing power units, the entity would develop accounting policies by referring to an IFRS that addresses a transaction, other event or condition analysed in accordance with paragraph 10 of IAS 8. 

IAS 8 state:

10 In the absence of an IFRS that specifically applies to a transaction, other event or condition, management shall use its judgement in developing and applying an accounting policy that results in information that is:

(a) relevant to the economic decision-making needs of users; and

(b) reliable, in that the financial statements:

(i) represent faithfully the financial position, financial

performance and cash flows of the entity;

(ii) reflect the economic substance of transactions, other events

and conditions, and not merely the legal form;

(iii) are neutral, ie free from bias;

(iv) are prudent; and

(v) are complete in all material respects.

11 In making the judgement described in paragraph 10, management shall refer to, and consider the applicability of, the following sources in

descending order:

(a) the requirements in IFRSs dealing with similar and related issues;

and

(b) the definitions, recognition criteria and measurement concepts

for assets, liabilities, income and expenses in the Framework.

The entity would need to adapt each IFRS for the use under that capital maintenance concept because all IFRSs are written to be applied using nominal monetary units in a non-hyperinflationary situation. 

Michael Stewart and Kenichi Yoshimura clearly lack judgement added to their very clear (self-admitted in the case of Kenichi Yoshimura) lack of understanding of financial capital maintenance in units of constant purchasing power.

Michael Stewart, the Director of Implementation Activities at the IASB, even went so far as to state that financial reporting (accounting) has no effect on the economy. He refuses to publicly state that financial reporting (accounting) affects the economy - something all accountants know. I specifically pointed out to him the lack of such a statement from him - after his previous statement. He still refuses to make that statement. He also refuses to admit that he stated that financial reporting has no effect on the economy. He only admits that "I expressed a view about the effect of financial reporting on the economy." He refuses to repeat exactly what he stated. Michael Stewart is the kind of accountant employed at the IASB who influences decision-making at the IASB.

After my above disagreement with Michael Stewart, the IASB stopped working with me on Project IAS 29 Financial Reporting in Hyperinflationary Economies, Paper topic Applicability of the concept of financial capital maintenance defined in constant purchasing power units even though I am the submitter of this Agenda Item Request to the IASB.

Nicolaas Smith Copyright (c) 2005-2013 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Huge lack of understanding of units of constant purchasing power at the IASB

Huge lack of understanding of units of constant purchasing power at the IASB

Oscar Wilde

“He is fond of being misunderstood. It gives him a post of vantage."
― from the stage directions describing Lord Goring, "An Ideal Husband"

There is a huge lack of understanding at the IASB regarding financial capital maintenance defined in terms of units of constant purchasing power.

On 2 January 2013, Kenichi Yoshimura, the author of Agenda Ref 20, Applicability of IAS 29 to financial statements prepared under the concept of financial capital maintenance in constant purchasing power units, stated the following in an email to me while I was still working with the IASB on the above Agenda item:

"Unfortunately, I could not complete the numbers under CMUCPP model (shaded with yellow). This is, I think, due to lack of my understanding of the CMUCPP model."

On 8 January 2013, Michael Stewart, the Director of Implementation Activities at the IASB, very firmly indicated that the IASB is satisfied with the implementation of the failed IAS 29 Financial Reporting in Hyperinflationary Economies which had no positive effect during 8 years of implementation during hyperinflation in Zimbabwe.

When I asked him in a teleconference on 8 January 2013 what the IASB´s response was to the fact that the implementation of the failed IAS 29 had no positive effect during 8 years of implementation during hyperinflation in Zimbabwe, he indicated very firmly that financial reporting (accounting) has no effect on the economy – an indication that is clearly totally wrong. It is very strange and very worrying that a senior director at the IASB makes such an indication. According to him it is what users do with the information in financial reports that affects the economy, not the actual measurement activities happening during financial reporting.

Kenichi Yoshimura clearly demonstrated that lack of understanding when he stated the following in Agenda Ref 20 for the IFRIC Interpretations Committee Meeting on 22-23 January, 2013, in Par 10: 

"Under current IFRS, there is no particular guidance on how to prepare financial statements stated in constant purchasing power units."

That was a completely wrong statement by Kenichi Yoshimura (who was working under the direct guidance of Michael Stewart) as acknowledged by the IASB by now.

In April 2013 the IASB issued a Draft Discussion Paper: Capital Maintenance in which the IASB stated:

Par. "9.48 The concepts of capital maintenance are used in IAS 29 Financial Reporting in Hyperinflationary Economies."

The IASB did not indicate which concept(s??) of capital maintenance are used in IAS 29.

On 3 September 2013 the IASB finally correctly confirmed that financial capital maintenance in units of constant purchasing power is required in IAS 29, 24 years after its authorization in 1989.

Now the IASB is adding yet another contradiction to IFRS by stating that

"The answer to the submitter’s question is that it is not permitted to use the financial capital maintenance concept" (defined in terms of constant purchasing power units as proposed in IFRS "X" INFLATION ) "when the entity’s functional currency is not the currency of a hyperinflationary economy as described in IAS 29."

This is in contradiction to 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." 

US GAAP states:

"Two major concepts of capital maintenance exist, both of which can be measured in units of either money or constant purchasing power: the financial capital concept and the physical capital concept."

US GAAP Concepts Statement Nº 6, Par. 71

Measurement in units of constant purchasing power is used by all accountants worldwide in the updating of salaries, wages, rents, etc. on an annual basis.

The lack of understanding of the above concepts at the IASB is abundantly clear in the contradictory statements by the IASB as indicated above.

The two persons, Michael Stewart and Kenichi Yoshimura, who clearly stated and indicated their lack of understanding of financial capital maintenance in units of constant purchasing power are the authors and driving force behind the statement:

"The answer to the submitter’s question is that it is not permitted to use the financial capital maintenance concept" (defined in terms of constant purchasing power units as proposed in IFRS "X" INFLATION ) "when the entity’s functional currency is not the currency of a hyperinflationary economy as described in IAS 29."

Micheal Stewart having gone so far as to state that financial reporting has no effect in the economy in explaining the IASB´s full support of the use of financial capital maintenance in units of constant purchasing power in terms of the monthly published CPI (IAS 29) which had absolutely no positive effect during hyperinflation in Zimbabwe. The IASB refuses to admit - according to Michael Stewart - that IAS 29 had no positive effect in Zimbabwe although all accountants in the world, except those at the IASB, have the common sense to realise that the implementation of IAS 29 was a complete failure in Zimbabwe.

IAS 29 in terms of the monthly published CPI is currently a complete failure in Venezuela and Belarus.

Financial capital maintenance in units of constant purchasing power in terms of a Daily Index - what the IASB fails to understand - was a huge success in Brazil from 1964 till 1994, something steadfastly ignored by the IASB.

"All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident."

Arthur Schopenhauer, German philosopher (1788 – 1860)

Nicolaas Smith Copyright (c) 2005-2013 Nicolaas J Smith. All rights reserved. No reproduction without permission.

IASB kills the Argentinian Accounting Federation´s 2010 proposal for an IFRS requiring restatement as from 10% inflation per annum

IASB kills the Argentinian Accounting Federation´s 2010 proposal for  an IFRS requiring restatement as from 10% inflation per annum

The Argentinian Accounting Federation in collaboration with the accounting authorities of Brazil, Mexico and Chile sent the IASB a proposal in 2010 entitled IFRS "X" INFLATION which the IASB was going to use as the basis for a research project on Financial Reporting in High Inflationary Economies. IFRS "X" INFLATION was based on restatement, i.e., financial capital maintenance in units of constant purchasing power in terms of the monthly CPI, in economies with annual inflation above 10 percent per annum or 26 percent cumulative inflation over three years. 

The IASB has now killed this Argentinian proposal IFRS "X" INFLATION with the following decision at the September 2013 Interpretation Committee´s meeting as reported by Deloitte  in IAS Plus: 

"The answer to the submitter’s question is that it is not permitted to use the financial capital maintenance concept" (defined in terms of constant purchasing power units as proposed in IFRS "X" INFLATION ) "when the entity’s functional currency is not the currency of a hyperinflationary economy as described in IAS 29."

The Deloitte article is about the IFRIC Potential Agenda Item Request regarding: 

Applicability of the concept of financial capital maintenance defined in constant purchasing power units during non-hyperinflationary conditions.

The Argentinian 2010 proposal IFRS "X" INFLATION was for restatement of financial reports, i.e.,  financial capital maintenance in units of constant purchasing power, in economies with annual inflation above 10 per cent per annum or 26 per cent cumulative inflation over three years. 

Covering letter to Sir David Tweedie from the Argentinian Accounting Federation.

The above IASB decision has now killed the Argentinian Federation´s Proposal IFRS "X" INFLATION.

Financial capital maintenance in units of constant purchasing power during non-hyperinflationary conditions is authorised under US GAAP: 

"Two major concepts of capital maintenance exist, both of which can be measured in units of either money or constant purchasing power: the financial capital concept and the physical capital concept."

US GAAP Concepts Statement Nº 6, Par. 71

I submitted amendments to the Argentinian Accounting Federation´s proposal IFRS "X" INFLATION to the IASB in January 2012 in the form of IFRS "X" CAPITAL MAINTENANCE IN UNITS OF CONSTANT PURCHASING POWER.

Nicolaas Smith 

Copyright (c) 2005-2013 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Venezuela´s non-monetary economy can be stabilised without the intervention of the Venezuelan government

Venezuela´s non-monetary economy can be stabilised by the IASB

Discussion on The Devil´s Excrement

Island Canuck Says:

September 13, 2013 at 2:56 pm

“That would stabilise the Venezuelan economy via IAS 29 without your government being involved.”

That’s a total crock.

How’s that going to control the economy when we are facing severe shortages?

Does this supply dollars to the market because without them we will continue to have severe inflation?

What will this do to the black market which jumped another 8% today?

Really Nicolaas, you obviously do not live here & don’t understand the market forces that are driving the economy.

Reply

• Nicolaas Smith Says:

  
  September 14, 2013 at 5:21 am
  

  Island Canuck,

  Thank you for your comment.

  I lived and worked as financial director in Angola´s hyperinflationary economy from Oct 1994 till Feb 1997. I stopped the EFFECT of THE STABLE MEASURING UNIT ASSUMPTION (not the monetary effect of hyperinflation in the Kwanza, the local currency) in our company´s [Auto-Sueco Angola (the Volvo agent in Angola)] CONSTANT REAL VALUE NON-MONETARY ITEMS (e.g. salaries, wages, trade debtors, trade creditors, issued share capital, etc.) after 15 months of personally experiencing how everyone priced consumer products and property, cars, trucks, etc. EVERY DAY in terms of the DAILY US Dollar parallel rate.

  I followed hyperinflation day by day during 2007 till Nov 2008 in Zimbabwe on an online discussion forum on the internet. Zimbabwe did the same as far as pricing of consumer products, property, cars, trucks, etc. daily in terms of the daily US Dollar parallel rate was concerned, BUT Zimbabwe did not measure salaries, wages, trade debtors, etc. DAILY in terms of the daily US Dollar parallel rate as I did in our company in Angola and as Brazil did in terms of various Daily Indices during the 30 years of their hyperinflation from 1964 till 1994. Zimbabwe measured these items mainly in fixed nominal Historical Cost Terms. They updated them only now and then during hyperinflation of billions percent per annum. That is why the Zimbabwean economy imploded on 20 November 2008. Their economy spontaneously dollarized.

  After my experience in Angola, I studied, for example, how Brazil indexed its economy very successfully in terms of a DAILY INDEX – they called it monetary correction – during 30 years from 1964 to 1994. Other Latin American countries did the same during that period. Chile and Colombia use it till today.

  Daily indexing stabilises non-monetary items´ REAL VALUES (not their NOMINAL monetary values – these still increase daily in terms of the Daily Index ) in the NON-MONETARY ECONOMY. Daily indexing (or daily monetary correction or daily price level accounting) DOES NOT stabilise the monetary economy. While a Central Bank prints too much local currency, there will always be hyperinflation, BUT daily indexing of NON-MONETARY ITEMS (selling prices, salaries, wages, trade debtors, trade creditors, issued share capital, capital reserves, provisions, etc.) stabilises the NON-MONETARY ECONOMY in REAL VALUES.

  It stabilises the NON-MONETARY ECONOMY as follows:

  1. The first step is to update selling prices DAILY. The selling price includes the profit margin. This is currently being done in Venezuela with the products that are priced in terms of the parallel market rate.

  2. The second step is to update trade debtors and trade creditors DAILY. They are not monetary items. They are constant real value non-monetary items. When it is a sale on credit, then the trade debtor is also updated DAILY, so, the profit margin is LOCKED IN. So too in the case of trade creditors. No loss because of the use of the stable measuring unit assumption as it is used today in Venezuela where companies use the Historical Cost Accounting model, i.e., your accountants assume the Bolivar is perfectly stable as far as the value of trade debtors, trade creditors, etc. is concerned.

  3. Thirdly, salaries, wages, rents, etc. are to be updated DAILY in terms of the Daily Index. How can a business do that? Because the profits are locked in, in the daily updated selling prices and the daily updated trade debtors. No loss anywhere. So, they have the money to update salaries and wages daily in terms of the Daily Index – as was done for 30 years in Brazil and other LA countries. This is not something new. I am not simply imagining these things. I am simply saying to Venezuela: copy Brazil.

  Brazil still had hyperinflation in its monetary economy, but they had a relatively stable non-monetary economy with positive economic (GDP) growth during those 30 years.

  4. Of course you cannot keep Bolivars overnight. You have to either pay your creditors, buy non-monetary items (anything you can later sell at the daily updated price) to lock in real value, or buy US Dollars or Colombian money – or buy the shares of international companies quoted on the Caracas stock exchange. I don´t know whether there are any quoted on the Caracas Exchange.

  This process stabilises the non-monetary economy. Not the monetary economy.

  You would state that using the US Dollar parallel rate is illegal in Venezuela. I know that.

  Using the Consumer Price Index is not illegal in Venezuela. Your companies are using the monthly published CPI to implement IAS 29 Financial Reporting in Hyperinflationary Economies since 2009. The Daily CPI is also a Consumer Price Index. The Daily CPI is a daily interpolation of the monthly published CPI. The Venezuelan government uses the Venezuelan Daily CPI to price the Venezuelan government capital inflation-indexed Bolivar bonds on a daily basis. These bonds – Miguel Octavio informed me that they are issued by the Venezuelan government – CAN trade on a daily basis. I am not saying they do trade on a daily basis. According to Miguel, they are tightly held by the major banks in Venezuela. But, they CAN trade on a DAILY basis. So, they are being priced DAILY by the Venezuelan government in terms of the Venezuelan Daily CPI. The Venezuelan Daily CPI already exists.

  This already existing Venezuelan Daily CPI can be used – LEGALLY – as the Daily Index in Venezuela. It already exists.

  So, Daily Indexing can be implemented right now in Venezuela by implementing IAS 29 in terms of the already existing Venezuelan Daily CPI. No-one will do that because it is NOT REQUIRED in IAS 29. IAS 29 has been implemented incorrectly in terms of the monthly published CPI since its inception in 1990.

  That is why I wrote an email to Mr. Hans Hoogervorst, the Chairman of the International Accounting Standards Board
  http://realvalueaccounting.blogspot.pt/2013/09/ias-29-needs-to-be-implemented-in-terms.html
  to try and motivate him to take the lead in getting the IASB to change IAS 29 to REQUIRE it to be implemented in terms of the DAILY CPI.

  So, when IAS 29 is changed to REQUIRE the use of the Daily CPI, Venezuelan companies will be forced to update salaries, wages, rents, trade debtors, trade creditors, capital, etc DAILY in terms of the Daily CPI – without the involvement of the Venezuelan government. This would stabilise the Venezuelan non-monetary economy (as it happened in Brazil from 1964 till 1994) – not the monetary economy – over a short period of time.

  Island Canuck,

  You stated:

  “How’s that going to control the economy when we are facing severe shortages?”

  Stabilising the Venezuelan non-monetary economy would result in a huge improvement of normal economic activity which would in turn result in the reduction of severe shortages.

  You stated:

  “Does this supply dollars to the market because without them we will continue to have severe inflation?”

  Daily Indexing or daily monetary correction would do nothing to severe inflation: as long as the Central Bank of Venezuela increases the Bolivar money supply at 65% per annum then hyperinflation will always have the possibility of getting to 65% per annum. Daily indexing of the entire non-monetary economy – as I described above – makes the level of hyperinflation irrelevant. When you index the entire non-monetary economy daily in terms of a Daily Index that follows the change in the general price level closely, then the non-monetary economy will be stabilised no matter what the level of hyperinflation: see Brazil from 1964 to 1994.

  You stated:

  “What will this do to the black market which jumped another 8% today?”

  It will do nothing to the black market rate. The black market rate will continue rising by up to 65% per annum as long as the Central Bank of Venezuela increases the Bolivar money supply by 65% per annum.

  Daily indexing of the entire non-monetary economy in Venezuela via the Daily CPI being REQUIRED in IAS 29 (without the intervention of the Venezuelan government) would stabilise only the Venezuelan non-monetary economy as it did in Brazil from 1964 to 1994.
  
  

  Venezuela´s non-monetary economy can be stabilised without the intervention of the Venezuelan government.

  
  
  

  I know that the situation in Venezuela is not the same as in Brazil from 1964 to 1994.

  
  
  

  Brazil did not have an illegal US Dollar parallel rate like Venezuela has today. The different governments during those 30 years supplied the Daily Index to the whole Brazilian economy daily using different daily indices. The final Unidad Real de Valor Daily Index was based almost entirely on the official daily US Dollar exchange rate.

  
  
  

  The parallel rate is currently illegal in Venezuela. That is normal in hyperinflationary economies. It was like that in Angola and Zimbabwe too.

  
  
  

  That is why the already existing Venezuelan Daily CPI can be used - LEGALLY - as the Daily Index.

  
  
  

  I know many products have their prices fixed at very low levels by the government in Venezuela. I know the profit on these products are being made in the illegal arbitrage market mainly in Colombia.

  
  
  

  However, daily indexing stabilised the non-monetary and part of the monetary economy in Brazil during hyperinflation from 1964 to 1994. That is a historical fact. It cannot be denied. Now (2013) daily indexing can be forced onto the Venezuelan economy via it being REQUIRED in IAS 29 - without the intervention of the Venezuelan government.

  
  
  

  Unfortunately Daily Indexing is not yet REQUIRED in IAS 29. I am working on that via my communication with Mr. Hans Hoogervorst, the chairman of the IASB. I copied Dr. Rafael Rodriguez Ramos, the President of the Venezuelan Institute of Chartered Accountants.

  
  
  

  Nevertheless, it is important that people in Venezuela are made aware of the advantages of daily indexing and its success in the past in Brazil and other Latin American countries.

  
  
  

  Once there is a momentum to have it implemented in Venezuela under current conditions, then the ways of getting it done will become evident to people in Venezuela involved in the country´s hyperinflationary economy day by day.

  
  
  

  Changing IAS 29 to REQUIRE daily indexing is essential in this process. Whether that is possible in the short term is difficult to judge. It all depends on Mr. Hoogervorst´s reaction to my communication.

  
  
  

  Notwithstanding all the above problems, it is important that people in Venezuela are made aware that the answer to stabilising their non-monetary economy during hyperinflation lies in implementing Daily Indexing via IAS 29 - without the intervention of the Venezuelan government.

Nicolaas Smith Copyright (c) 2005-2013 Nicolaas J Smith. All rights reserved. No reproduction without permission.