No stable measuring unit assumption (stop HCA) and the entire cost of inflation is removed from the economy
Inflation-adjusting all monetary items (all monetary item assets and all monetary item liabilities) in the economy eliminates the cost of or gain from inflation completely from the economy when all monetary items are in the banking system: there is no net monetary gain or loss when all monetary items are inflation-adjusted daily as they are apparently doing in Chile with the Unidad de Fomento (UF) and all monetary items are in the banking system.
This has been authorized in International Financial Reporting Standards in the original Framework (1989), Par 104 (a) which states "Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power" for the last 22 years since financial capital maintenance in units of constant purchasing power - as authorized in IFRS - means there is no stable measuring unit assumption at all in the economy under Constant Item Purchasing Power Accounting.
All three basic economic items are thus free from the stable measuring unit assumption:
1. Monetary items are inflation-adjusted on a daily basis in terms of the daily CPI (UF in Chile) under financial capital maintenance in units of constant purchasing power during inflation and deflation (Constant Item Purchasing Power Accounting) as authorized in IFRS: no stable measuring unit assumption.
Non-monetary items are split in
(a) constant real value non-monetary items (e.g. shareholders´ equity, trade debtors, trade creditors, salaries, wages, rents, all other items in shareholders´ equity, all other items in the income statement, etc.) and
(b) variable real value non-monetary items (e.g. property, plant, equipment, shares, stock, foreign exchange, etc.)
2. Constant items are measured in units of constant purchasing power in terms of the CPI under financial capital maintenance in units of constant purchasing power during inflation and deflation (CIPPA) as authorized in IFRS: no stable measuring unit assumption.
3. Variable items are measured in terms of IFRS. Historical variable items are updated in terms of the CPI during inflation and deflation (CIPPA) as authorized in IFRS: no stable measuring unit assumption
Inflation-adjusting all monetary items daily does not stop inflation since inflation is always and everywhere a monetary phenomenon (Friedman). However, it eliminates the entire cost of or gain from inflation and deflation from the economy when all monetary items are in the banking system.
I am sure Chilean accountants do not account the net monetary loss or gain from inflation because there is no net monetary loss or gain from inflation when they inflation-adjust all monetary items in Chile on a daily basis in terms of the UF.
Nicolaas Smith
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
A negative interest rate is impossible under CMUCPP in terms of the Daily CPI.
Wednesday, 27 July 2011
Tuesday, 26 July 2011
Banks with no fixed assets
Banks with no fixed assets
Updated on 27-7-11
Under financial capital maintenance in units of constant purchasing power during inflation and deflation (CIPPA) there is no stable measuring unit assumption: thus, all monetary items are inflation-adjusted. All bank deposits, monetary item loans, all monetary items (monetary item assets and monetary item liabilities) are inflation adjusted. This completely removes the the cost of or gain from inflation and deflation from the economy. IFRS thus authorizes the elimination of the cost of or gain from inflation and deflation from the economy. There is no net monetary gain or loss when all monetary items are inflation-adjusted on a daily basis as it is currently happening in Chile with the Unidad de Fomento.
Constant items are measured in units of constant purchasing power in terms of IFRS in all accounts under all circumstances and in all published forms.
Variable real value non-monetary items are valued in terms of IFRS. All historical variable items are updated in terms of the CPI during inflation and deflation (either daily - see the Unidad de Fomento in Chile - or monthly) and in terms of the daily parallel or daily index rate during hyperinflation.
Variable and constant items are not inflation-adjusted by definition. Inflation is always and everywhere a monetary phenomenon. Inflation has no effect on the real value of non-monetary items. The stable measuring unit assumption (not inflation) erodes the real value of constant items never updated.
All monetary items are inflation-adjusted since inflation can only erode the real value of money and other monetary items.
The result of CIPPA is that a bank that at least breaks even in real terms during inflation and deflation - ceteris paribus - can automatically maintain the constant purchasing power of its capital constant forever even if it has no fixed assets at all. Completely virtual banks are thus possible under CIPPA.
This is only possible under financial capital maintenance in units of constant purchasing power (CIPPA) as originally authorized in IFRS in the Framework (1989), Par 104 (a) as qualified above. All monetary items have to be in the banking system and have to be inflation-adjusted.
Nicolaas Smith
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Updated on 27-7-11
Under financial capital maintenance in units of constant purchasing power during inflation and deflation (CIPPA) there is no stable measuring unit assumption: thus, all monetary items are inflation-adjusted. All bank deposits, monetary item loans, all monetary items (monetary item assets and monetary item liabilities) are inflation adjusted. This completely removes the the cost of or gain from inflation and deflation from the economy. IFRS thus authorizes the elimination of the cost of or gain from inflation and deflation from the economy. There is no net monetary gain or loss when all monetary items are inflation-adjusted on a daily basis as it is currently happening in Chile with the Unidad de Fomento.
Constant items are measured in units of constant purchasing power in terms of IFRS in all accounts under all circumstances and in all published forms.
Variable real value non-monetary items are valued in terms of IFRS. All historical variable items are updated in terms of the CPI during inflation and deflation (either daily - see the Unidad de Fomento in Chile - or monthly) and in terms of the daily parallel or daily index rate during hyperinflation.
Variable and constant items are not inflation-adjusted by definition. Inflation is always and everywhere a monetary phenomenon. Inflation has no effect on the real value of non-monetary items. The stable measuring unit assumption (not inflation) erodes the real value of constant items never updated.
All monetary items are inflation-adjusted since inflation can only erode the real value of money and other monetary items.
The result of CIPPA is that a bank that at least breaks even in real terms during inflation and deflation - ceteris paribus - can automatically maintain the constant purchasing power of its capital constant forever even if it has no fixed assets at all. Completely virtual banks are thus possible under CIPPA.
This is only possible under financial capital maintenance in units of constant purchasing power (CIPPA) as originally authorized in IFRS in the Framework (1989), Par 104 (a) as qualified above. All monetary items have to be in the banking system and have to be inflation-adjusted.
Nicolaas Smith
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Monday, 25 July 2011
Unidad de Fomento
Hi Motley Fool,
Thank you very much for your comment on my previous blog. I tried to reply via the "Reply" link on my blog and the "Comment" option on my and your blogs, but, nothing worked. So, here is my reply.
I did not know about the UF.
Yes, the Unidad de Fomento results in Chile implementing most of Constant Item Purchasing Power Accounting (CIPPA) since 1967. The wiki article does not indicate whether they account the net monetary gain or loss from inflation. The UF is similar to the Brazilian Unidade Real de Valor (URV). Brazil supplied their economy with a daily index from 1964 to 1994. I also do not know whether Brazil calculated the net monetary loss or gain. I will have to find out.
This will strenghten the case for CIPPA tremendously. I state in the book that all that is missing is due process before CIPPA will replace the Historical Cost Accounting model.
Chile has already taken the next step without the rest of the world even being ready to take the first step towards implementing financial capital maintenance in units of constant purchasing power (CIPPA): Chile not only update constant real value non-monetary items and historical variable real value non-monetary items, but, also monetary items. This is a logical next step. I just did not realize that Chile has been doing it since 1967. So, it seems to me Chile learnt from Brazil. Now it is time for us to learn from them.
"It was created on January 20, 1967, for the use in determining principal (monetary item) and interest (constant item) in international secured loans for development, subject to revaluation according to the variations of inflation. Afterwards it was extended to all types of bank loans (monetary items), private or special financing (monetary items), purchases or investments on installments (constant items), contracts (constant items), and some special situations. Also it is used in legal standards such as the par value of stock/capitalization of companies (constant items), fines (constant items), etc. It has become the preferred and predominant measure for determining the cost of construction (historical variable items: Historical Cost), values of housing (historical variable items) and any secured loan (monetary items), either private or of the Chilean government."
The Wiki article is a very good example of the fact that everyone thinks inflation erodes the real value of non-monetary items: the stable measuring unit assumption is not mentioned at all in the article.
Thank you very much for this information.
Kind regards,
Nicolaas.
Nicolaas Smith
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Thank you very much for your comment on my previous blog. I tried to reply via the "Reply" link on my blog and the "Comment" option on my and your blogs, but, nothing worked. So, here is my reply.
I did not know about the UF.
Yes, the Unidad de Fomento results in Chile implementing most of Constant Item Purchasing Power Accounting (CIPPA) since 1967. The wiki article does not indicate whether they account the net monetary gain or loss from inflation. The UF is similar to the Brazilian Unidade Real de Valor (URV). Brazil supplied their economy with a daily index from 1964 to 1994. I also do not know whether Brazil calculated the net monetary loss or gain. I will have to find out.
This will strenghten the case for CIPPA tremendously. I state in the book that all that is missing is due process before CIPPA will replace the Historical Cost Accounting model.
Chile has already taken the next step without the rest of the world even being ready to take the first step towards implementing financial capital maintenance in units of constant purchasing power (CIPPA): Chile not only update constant real value non-monetary items and historical variable real value non-monetary items, but, also monetary items. This is a logical next step. I just did not realize that Chile has been doing it since 1967. So, it seems to me Chile learnt from Brazil. Now it is time for us to learn from them.
"It was created on January 20, 1967, for the use in determining principal (monetary item) and interest (constant item) in international secured loans for development, subject to revaluation according to the variations of inflation. Afterwards it was extended to all types of bank loans (monetary items), private or special financing (monetary items), purchases or investments on installments (constant items), contracts (constant items), and some special situations. Also it is used in legal standards such as the par value of stock/capitalization of companies (constant items), fines (constant items), etc. It has become the preferred and predominant measure for determining the cost of construction (historical variable items: Historical Cost), values of housing (historical variable items) and any secured loan (monetary items), either private or of the Chilean government."
The Wiki article is a very good example of the fact that everyone thinks inflation erodes the real value of non-monetary items: the stable measuring unit assumption is not mentioned at all in the article.
Thank you very much for this information.
Kind regards,
Nicolaas.
Nicolaas Smith
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Friday, 22 July 2011
Money is an unstable store of value
Money is an unstable store of value
Unstable money is an unstable store of value. Unstable money is a depreciating store of value during inflation and an appreciating store of value during deflation.
Unstable money has to maintain most of its real value over the short term in order to be accepted as an unstable medium of exchange. It would not solve barter’s double coincidence of wants problem if it could not be stored over time and still remain valuable in exchange.
The fact that inflation is eroding the real value of unstable money means it is a store of depreciating real value during inflation. Money was a store of value right from the start. First types of money consisted of gold or silver coins. The metals from which the coins were made had an actual real value in themselves and these coins could be melted down and the metal could be sold in its bullion form when the bullion price was above the coin price. Next money was not made of precious metal but money consisted of bank notes, the real values of which were fully backed by gold reserves. Today depreciating or appreciating fiat money´s real value is backed by all the underlying value systems in an economy while the actual bank notes and coins simply represent depreciating real value since the materials the notes and coins are made of have almost no intrinsic value. Although the store of value function and permanently fixed nominal values of depreciating or appreciating bank notes and bank coins are legally defined, fiat money´s real value is determined by all the underlying values systems in an economy. The change in fiat money´s depreciating or appreciating real value is indicated by the economic processes of inflation and deflation respectively.
The abuse of money’s store of value function led to inflation.
Money is a liquid medium of exchange; i.e. it is readily available as cash and it is normally easy to obtain on demand in banks in most economies under normal economic conditions – all else being equal. A property, e.g. a well–located plot of land with a well–maintained and well–equipped building – which is a variable real value non–monetary item – is also a store of value. It is however quite an illiquid store of value. The real value is not immediately available in easily transportable and divisible cash. Money’s high liquidity makes it more desirable as a store of value in comparison with other stores of value like gold, property, marketable securities, bonds, etc. Money is obviously not the best store of value in an inflationary economy where its real value is continuously being eroded by inflation. Money is normally available in convenient smaller denominations which facilitate everyday small purchases. As such, money is very user friendly. It is easily transportable especially with electronic transfer facilities.
Inflation actually manifests itself in money’s store of value function since inflation always and everywhere erodes the real value of only money and other monetary items. Inflation does not manifest itself in money’s medium of exchange function in the case of spot transactions (since the exchange is made between money and the other item considered to be equal in real value to the money amount at the moment of exchange) or unit of account function (the stable measuring unit assumption manifests itself in money´s unit of account function) which vindicates the fact that inflation can only erode the real value of money and monetary items; i.e. inflation has no effect on the real value of non–monetary items. Money is always a medium of exchange of equal real value at the moment of exchange. Free market prices are adjusted in the market in a price setting process that takes the decreasing real value of money during inflation or the increasing real value of money during deflation into account (amongst many other factors) so that economic items (the product or service or right and the amount of money) of equal real value are exchanged at the moment of exchange.
Depreciating money has a constantly decreasing real value during inflation. Depreciating “bank money” deposits have the same attributes as depreciating money with the single exception that they are not physical depreciating bank notes and bank coins but accounted depreciating monetary items. The depreciating money represented by depreciating bank money also has a depreciating store of value function during inflation. Money appreciates in real value during deflation.
Nicolaas Smith
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Unstable money is an unstable store of value. Unstable money is a depreciating store of value during inflation and an appreciating store of value during deflation.
Unstable money has to maintain most of its real value over the short term in order to be accepted as an unstable medium of exchange. It would not solve barter’s double coincidence of wants problem if it could not be stored over time and still remain valuable in exchange.
The fact that inflation is eroding the real value of unstable money means it is a store of depreciating real value during inflation. Money was a store of value right from the start. First types of money consisted of gold or silver coins. The metals from which the coins were made had an actual real value in themselves and these coins could be melted down and the metal could be sold in its bullion form when the bullion price was above the coin price. Next money was not made of precious metal but money consisted of bank notes, the real values of which were fully backed by gold reserves. Today depreciating or appreciating fiat money´s real value is backed by all the underlying value systems in an economy while the actual bank notes and coins simply represent depreciating real value since the materials the notes and coins are made of have almost no intrinsic value. Although the store of value function and permanently fixed nominal values of depreciating or appreciating bank notes and bank coins are legally defined, fiat money´s real value is determined by all the underlying values systems in an economy. The change in fiat money´s depreciating or appreciating real value is indicated by the economic processes of inflation and deflation respectively.
The abuse of money’s store of value function led to inflation.
Money is a liquid medium of exchange; i.e. it is readily available as cash and it is normally easy to obtain on demand in banks in most economies under normal economic conditions – all else being equal. A property, e.g. a well–located plot of land with a well–maintained and well–equipped building – which is a variable real value non–monetary item – is also a store of value. It is however quite an illiquid store of value. The real value is not immediately available in easily transportable and divisible cash. Money’s high liquidity makes it more desirable as a store of value in comparison with other stores of value like gold, property, marketable securities, bonds, etc. Money is obviously not the best store of value in an inflationary economy where its real value is continuously being eroded by inflation. Money is normally available in convenient smaller denominations which facilitate everyday small purchases. As such, money is very user friendly. It is easily transportable especially with electronic transfer facilities.
Inflation actually manifests itself in money’s store of value function since inflation always and everywhere erodes the real value of only money and other monetary items. Inflation does not manifest itself in money’s medium of exchange function in the case of spot transactions (since the exchange is made between money and the other item considered to be equal in real value to the money amount at the moment of exchange) or unit of account function (the stable measuring unit assumption manifests itself in money´s unit of account function) which vindicates the fact that inflation can only erode the real value of money and monetary items; i.e. inflation has no effect on the real value of non–monetary items. Money is always a medium of exchange of equal real value at the moment of exchange. Free market prices are adjusted in the market in a price setting process that takes the decreasing real value of money during inflation or the increasing real value of money during deflation into account (amongst many other factors) so that economic items (the product or service or right and the amount of money) of equal real value are exchanged at the moment of exchange.
Depreciating money has a constantly decreasing real value during inflation. Depreciating “bank money” deposits have the same attributes as depreciating money with the single exception that they are not physical depreciating bank notes and bank coins but accounted depreciating monetary items. The depreciating money represented by depreciating bank money also has a depreciating store of value function during inflation. Money appreciates in real value during deflation.
Nicolaas Smith
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Thursday, 21 July 2011
Functions of money
Functions of money
1. Unstable medium of exchange
We use payment with unstable money instead of barter to exchange real values in our economies in the transactions we enter into when we buy and sell goods, services, ideas, rights and any kind of property whether physical, virtual or intellectual. Unstable money is the lifeblood of an economy even though it is continuously changing in real value. Without unstable money the creation and exchange of real value in an economy would be severely restricted, as it would become a barter economy.
Nicolaas Smith
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Money performs the following three functions:
1. Unstable medium of exchange
2. Unstable store of value
3. Unstable unit of account
1. Unstable medium of exchange
Money has the basic function that it is an unstable medium of exchange of equivalent real values at the moment of exchange. It overcomes the inconveniences of a barter economy where there must be a double coincidence of wants before a trade can take place. For a trade to take place in a barter economy one person must want exactly what the other person has to offer, at the exact time and place where it is offered.
In a monetary economy the real value of goods and services are measured in terms of unstable money, the unstable monetary medium of exchange, which is generally accepted to buy any other good or service. Without this function or attribute the invention cannot be money.
Nicolaas Smith
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Wednesday, 20 July 2011
Consumer Price Index - Part 2 of 2
Consumer Price Index - Part 2 of 2
We also use the annual change in the CPI as a measure to calculate the creation of real value in monetary items and constant real value non–monetary items never maintained constant (nominal values never decreased in line with deflation) over time in a deflationary economy that uses the HCA model.
Financial capital maintenance is measured in units of constant purchasing power by valuing only constant items – per se – in terms of the change in the CPI on a monthly basis during inflation and deflation (CIPPA). Financial capital maintenance is measured in units of constant purchasing power by valuing all non–monetary items (variable and constant items) – per se – on a daily basis in terms of the change in the US Dollar parallel rate (when it exists officially or unofficially) or a Brazilian–style daily non–monetary index during hyperinflation (Constant Purchasing Power Accounting – CPPA).
There is no CPI in a barter economy as there is no money in such an economy. The CPI is essential to correctly index the real value of constant items in the economy with continuous measurement of financial capital maintenance in units of constant purchasing power (CIPPA) being used as the fundamental model of accounting during inflation and deflation.
The nominal value of money stays the same over time while the real value of money is automatically determined by inflation and deflation: eroded by inflation and increased by deflation, respectively. The nominal value of a constant item changes inversely with the level of the CPI with measurement in units of constant purchasing power under CIPPA resulting in its real value remaining constant during inflation and deflation. The real value of money changes inversely with the level of inflation.
The CPI is the sine qua non in an inflationary and deflationary economy to correctly fix the problem created by the fact that money is the only universal unit of account that is not a stable unit of measure: the monetary unit of account has no fundamental constant. Under the Historical Cost paradigm (implementing the HCA model) it is assumed that money is perfectly stable in all cases where the stable measuring unit assumption is applied.
It would be difficult to measure the erosion in the real value of money and the creation of real value in money correctly during inflation and deflation, respectively, and to correctly implement financial capital maintenance in units of constant purchasing power without the CPI during inflation and deflation. The CPI is calculated during hyperinflation, but, it is impossible to maintain the constant purchasing power of constant items constant in terms of the CPI that becomes available a month or more after a transaction or event during hyperinflation of hundreds of millions or more per cent per annum. The daily change in the parallel or index rate is used for that purpose during hyperinflation. See Brazil´s use of daily indexing during very high and hyperinflation from 1964 to 1994.
Financial capital maintenance in units of constant purchasing power in terms of the CPI makes it relatively easy to fix the problem and to stop the erosion of hundreds of billions of US Dollars in real value in the world´s constant item economy each and every year during low inflation.
Nicolaas Smith
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
We also use the annual change in the CPI as a measure to calculate the creation of real value in monetary items and constant real value non–monetary items never maintained constant (nominal values never decreased in line with deflation) over time in a deflationary economy that uses the HCA model.
Financial capital maintenance is measured in units of constant purchasing power by valuing only constant items – per se – in terms of the change in the CPI on a monthly basis during inflation and deflation (CIPPA). Financial capital maintenance is measured in units of constant purchasing power by valuing all non–monetary items (variable and constant items) – per se – on a daily basis in terms of the change in the US Dollar parallel rate (when it exists officially or unofficially) or a Brazilian–style daily non–monetary index during hyperinflation (Constant Purchasing Power Accounting – CPPA).
There is no CPI in a barter economy as there is no money in such an economy. The CPI is essential to correctly index the real value of constant items in the economy with continuous measurement of financial capital maintenance in units of constant purchasing power (CIPPA) being used as the fundamental model of accounting during inflation and deflation.
The nominal value of money stays the same over time while the real value of money is automatically determined by inflation and deflation: eroded by inflation and increased by deflation, respectively. The nominal value of a constant item changes inversely with the level of the CPI with measurement in units of constant purchasing power under CIPPA resulting in its real value remaining constant during inflation and deflation. The real value of money changes inversely with the level of inflation.
The CPI is the sine qua non in an inflationary and deflationary economy to correctly fix the problem created by the fact that money is the only universal unit of account that is not a stable unit of measure: the monetary unit of account has no fundamental constant. Under the Historical Cost paradigm (implementing the HCA model) it is assumed that money is perfectly stable in all cases where the stable measuring unit assumption is applied.
It would be difficult to measure the erosion in the real value of money and the creation of real value in money correctly during inflation and deflation, respectively, and to correctly implement financial capital maintenance in units of constant purchasing power without the CPI during inflation and deflation. The CPI is calculated during hyperinflation, but, it is impossible to maintain the constant purchasing power of constant items constant in terms of the CPI that becomes available a month or more after a transaction or event during hyperinflation of hundreds of millions or more per cent per annum. The daily change in the parallel or index rate is used for that purpose during hyperinflation. See Brazil´s use of daily indexing during very high and hyperinflation from 1964 to 1994.
Financial capital maintenance in units of constant purchasing power in terms of the CPI makes it relatively easy to fix the problem and to stop the erosion of hundreds of billions of US Dollars in real value in the world´s constant item economy each and every year during low inflation.
Nicolaas Smith
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Tuesday, 19 July 2011
Valuing / accounting variable items
Valuing / accounting variable items
Variable items are valued in terms of IFRS under CIPPA. They are accounted in terms of the CPI at the date of the valuation during inflation and deflation. They are valued / accounted in terms of the daily parallel rate or the daily index rate during hyperinflation.
Under CIPPA and CPPA all valuations (accounting entries) contain four elements:
1. An indication whether the item valued / accounted is
a. A monetary item (m),
b. A constant item (c) or
c. A variable item (v).
2. The value of the item expressed in terms of the functional currency.
3. The date of the valuation.
4. The CPI at the date of the valuation / accounting during inflation and deflation or the daily parallel or index rate during hyperinflation.
Variable items valued in terms of IFRS at Historical Cost as well as all other historical variable item IFRS valuations are updated in ledger accounts and in financial reports and publications in whatever format in terms of the CPI (monthly) till the next valuation in terms of IFRS because there is no stable measuring unit assumption under CIPPA during inflation and deflation. This is done in order to always reflect the IFRS valuation in terms of the current depreciated or appreciated real value of money over time. Variable items are always updated – per se – in terms of the current daily parallel or index rate during hyperinflation.
The fact that specific variable items are valued at Historical Cost in terms of IFRS, e.g. stock valued at the lower of cost or net realizable value, does not mean that the HCA model is being implemented because there is no stable measuring unit assumption under CIPPA and CPPA.
The Framework states that the concept of capital maintenance plus the measuring basis chosen determines the accounting model implemented. Under CIPPA financial capital maintenance is measured in units of constant purchasing power: there is no stable measuring unit assumption under CIPPA. Historical Cost is one of the various measurement bases used under CIPPA. HC valuations are thus always updated under CIPPA; i.e. the stable measuring unit is never applied.
Under CIPPA monetary items in ledger accounts and in current period financial reports published during the current accounting period are valued / accounted in nominal monetary units, but, the net monetary loss or gain is always calculated and accounted: i.e. there is no stable measuring unit assumption as implemented under Historical Cost Accounting. The net monetary loss or gain is not calculated and accounted under HCA because the stable measuring unit assumption is implemented.
Specific variable items are valued at HC in terms of IFRS, but, then they are continuously updated during inflation, deflation and hyperinflation under financial capital maintenance in units of constant purchasing power because there is no stable measuring unit assumption under CIPPA and CPPA.
When all variable items are always valued during whatever period or in whatever financial report or ledger account, in terms of IFRS, e.g. fair value, then they will never be required to be updated during inflation and deflation.
Variable items are always updated in principle (per se) during hyperinflation in terms of the daily parallel rate of daily index rate.
Nicolaas Smith
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Monday, 18 July 2011
4 Reasons why CIPPA automatically maintains capital constant forever
4 Reasons why CIPPA automatically maintains capital constant forever
CIPPA automatically maintains the constant purchasing power of capital constant forever in all entities that at least break even during inflation and deflation – ceteris paribus – as a result of:
1. Financial capital maintenance in units of constant purchasing power during inflation and deflation: the rejection of the stable measuring unit assumption;
2. Double entry accounting: For every credit (e.g. capital) there is an equivalent debit (e.g. fixed assets, stock, trade debtors, cash, etc.);
3. The fact that the constant real non-monetary value of capital is equal to the real value of net assets, and
4. The fact that a company, in principle, has an unlimited lifetime.
Nicolaas Smith
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
CIPPA automatically maintains the constant purchasing power of capital constant forever in all entities that at least break even during inflation and deflation – ceteris paribus – as a result of:
1. Financial capital maintenance in units of constant purchasing power during inflation and deflation: the rejection of the stable measuring unit assumption;
2. Double entry accounting: For every credit (e.g. capital) there is an equivalent debit (e.g. fixed assets, stock, trade debtors, cash, etc.);
3. The fact that the constant real non-monetary value of capital is equal to the real value of net assets, and
4. The fact that a company, in principle, has an unlimited lifetime.
Nicolaas Smith
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Valuing / accounting constant items
Valuing / accounting constant items
A new as in original constant real value non-monetary item is valued today for the first time at its nominal value. For example: a company is formed today with issued share capital, issued today, at e.g. USD 1 million. The issued share capital is valued today at USD 1 million. The original constant item is accounted at today´s date with the CPI, e.g. at 100, at its nominal value of USD 1 million.
When the CPI changes to 102 tomorrow, the constant item, published in whatever format, is measured in units of constant purchasing power at USD 1 020 000: its nominal value increases, but, its real value stays the same over time. Constant items are continuously measured in units of constant purchasing power (not inflation-adjusted: inflation has no effect on the real value of non-monetary items) in all ledger accounts and in all possible forms of publication at all future values of the CPI in order to reflect / show / state / present their constant real non-monetary values (always higher nominal values) at the current (always lower or depreciated) real value of the national currency (which is also the monetary unit of account) during continuous inflation: over time. During hyperinflation constant items are measured in units of constant purchasing power as stated above in terms of the current daily parallel or daily index rate.
When the economy changes over from an inflationary mode to a deflationary mode, all constant items´ nominal values (e.g. issued share capital, salaries, wages, rentals, etc.) are decreased at the rate of deflation on a monthly basis in order to maintain the constant real non-monetary values of these constant items constant and maintain economic stability in the constant item economy at the new higher or appreciated real value of the national currency within the national economy during deflation.
Nicolaas Smith
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
A new as in original constant real value non-monetary item is valued today for the first time at its nominal value. For example: a company is formed today with issued share capital, issued today, at e.g. USD 1 million. The issued share capital is valued today at USD 1 million. The original constant item is accounted at today´s date with the CPI, e.g. at 100, at its nominal value of USD 1 million.
When the CPI changes to 102 tomorrow, the constant item, published in whatever format, is measured in units of constant purchasing power at USD 1 020 000: its nominal value increases, but, its real value stays the same over time. Constant items are continuously measured in units of constant purchasing power (not inflation-adjusted: inflation has no effect on the real value of non-monetary items) in all ledger accounts and in all possible forms of publication at all future values of the CPI in order to reflect / show / state / present their constant real non-monetary values (always higher nominal values) at the current (always lower or depreciated) real value of the national currency (which is also the monetary unit of account) during continuous inflation: over time. During hyperinflation constant items are measured in units of constant purchasing power as stated above in terms of the current daily parallel or daily index rate.
When the economy changes over from an inflationary mode to a deflationary mode, all constant items´ nominal values (e.g. issued share capital, salaries, wages, rentals, etc.) are decreased at the rate of deflation on a monthly basis in order to maintain the constant real non-monetary values of these constant items constant and maintain economic stability in the constant item economy at the new higher or appreciated real value of the national currency within the national economy during deflation.
Nicolaas Smith
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Saturday, 16 July 2011
Valuing / accounting monetary items
Valuing / accounting monetary items
A monetary item is valued and accounted in a ledger account over time at its nominal value, e.g. the nominal value of a bank coin, bank note, cheque, bond, Treasury bill, the capital value of a loan or financial instrument with an underlying monetary nature, etc. A monetary item is accounted at today´s date with today´s CPI, for example, at 100, at its nominal value of, e.g., USD 100. When the CPI changes to 102 tomorrow, the monetary item in a ledger account and in a current period financial report published during the current accounting period is always valued at its original nominal value. A monetary item is not inflation-adjusted in a ledger account or in current period financial reports published during the current accounting period. It stays at USD 100. The monetary item in a ledger account remains at its original nominal value at all future values of the CPI during inflation and deflation and at all future values of the daily parallel rate or daily index rate during hyperinflation. A current period monetary item is never inflation-adjusted in financial statements published during the current accounting period.
Historical monetary items (excluding monetary items in ledger accounts) in whatever published format are inflation-adjusted in order to state the real value of the monetary item at the historical date in terms of today´s CPI during inflation and deflation and in terms of the today´s daily parallel rate or today´s daily index rate during hyperinflation. There is no stable measuring unit assumption under CIPPA and CPPA.
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.Nicolaas Smith
A monetary item is valued and accounted in a ledger account over time at its nominal value, e.g. the nominal value of a bank coin, bank note, cheque, bond, Treasury bill, the capital value of a loan or financial instrument with an underlying monetary nature, etc. A monetary item is accounted at today´s date with today´s CPI, for example, at 100, at its nominal value of, e.g., USD 100. When the CPI changes to 102 tomorrow, the monetary item in a ledger account and in a current period financial report published during the current accounting period is always valued at its original nominal value. A monetary item is not inflation-adjusted in a ledger account or in current period financial reports published during the current accounting period. It stays at USD 100. The monetary item in a ledger account remains at its original nominal value at all future values of the CPI during inflation and deflation and at all future values of the daily parallel rate or daily index rate during hyperinflation. A current period monetary item is never inflation-adjusted in financial statements published during the current accounting period.
Historical monetary items (excluding monetary items in ledger accounts) in whatever published format are inflation-adjusted in order to state the real value of the monetary item at the historical date in terms of today´s CPI during inflation and deflation and in terms of the today´s daily parallel rate or today´s daily index rate during hyperinflation. There is no stable measuring unit assumption under CIPPA and CPPA.
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.Nicolaas Smith
Friday, 15 July 2011
Consumer Price Index - Part 1 of 2
Consumer Price Index - Part 1 of 2
Updated on 20-7-11
“The consumer price index was first used in 1707. In 1925 it became institutionalized when the Second International Conference of Labour Statisticians, convened by the International Labour Organization, promulgated the first international standards of measurement.”
Agrekon, Vol 43, No 2 (June 2004), Vink, Kirsten and Woermann.
The CPI is a non–monetary index value measuring changes in the weighted average of prices quoted in the unstable monetary unit of a typical basket of consumer goods and services. The annual per cent change in the CPI is used to measure inflation. It is a price index determined by measuring the price of a standard group of goods and services representing a typical market basket of a typical urban consumer. It measures the change in average price for a constant market basket of goods and services from one period to the next within the same area (city, region, or nation). It can be used to measure changes in the cost of living. It is a measure estimating the average price of consumer goods and services purchased by a typical urban household.
We use the annual change in the CPI as a measure to calculate and account the erosion of real value caused by inflation in only monetary items (which cannot be inflation-adjusted in ledger accounts and current period financial reports published during the current accounting period) under CIPPA. The net monetary loss or gain resulting from holding either a net weighted average excess of monetary item assets or a net weighted average excess of monetary items liabilities during a specific period is not accounted under the traditional HCA model used by most entities worldwide. It is calculated and accounted when financial capital maintenance is measured in units of constant purchasing power under CIPPA as authorized in IFRS in the original Framework (1989) Par 104 (a) during inflation and deflation and under Constant Purchasing Power Accounting (CPPA) during hyperinflation as required by IAS 29.
The annual change in the CPI is also used to calculate the erosion of real value caused by the stable measuring unit assumption – i.e. by the HCA model – (not inflation) in constant real value non–monetary items never maintained constant (thus being treated as monetary items) over time in an inflationary economy only under the Historical Cost paradigm. This cost of the stable measuring unit assumption is – like the cost of inflation – not accounted under HCA. Most people mistakenly believe this erosion in, for example, companies´ capital and profits never covered by sufficient revaluable fixed assets, is caused by inflation. This cost of the stable measuring unit assumption only incurred under the HCA model is mistakenly believed by most people to be the same as the cost of inflation. They are taught and thus mistakenly believe that it is caused by inflation. Since the cost of inflation (the net monetary loss from holding a net weighted average excess of monetary item assets over net weighted average monetary item liabilities during inflation) is not calculated and accounted under the HCA model, entities – mistakenly believing that the cost of the stable measuring unit assumption is the same as the cost of inflation – are satisfied to do nothing about it because net monetary losses and gains are not calculated and accounted under HCA. They are taught and thus mistakenly believe that both are caused by inflation and that it is not their but the central bank´s duty to lower inflation and lower this erosion.
Nicolaas Smith
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Updated on 20-7-11
“The consumer price index was first used in 1707. In 1925 it became institutionalized when the Second International Conference of Labour Statisticians, convened by the International Labour Organization, promulgated the first international standards of measurement.”
Agrekon, Vol 43, No 2 (June 2004), Vink, Kirsten and Woermann.
The CPI is a non–monetary index value measuring changes in the weighted average of prices quoted in the unstable monetary unit of a typical basket of consumer goods and services. The annual per cent change in the CPI is used to measure inflation. It is a price index determined by measuring the price of a standard group of goods and services representing a typical market basket of a typical urban consumer. It measures the change in average price for a constant market basket of goods and services from one period to the next within the same area (city, region, or nation). It can be used to measure changes in the cost of living. It is a measure estimating the average price of consumer goods and services purchased by a typical urban household.
We use the annual change in the CPI as a measure to calculate and account the erosion of real value caused by inflation in only monetary items (which cannot be inflation-adjusted in ledger accounts and current period financial reports published during the current accounting period) under CIPPA. The net monetary loss or gain resulting from holding either a net weighted average excess of monetary item assets or a net weighted average excess of monetary items liabilities during a specific period is not accounted under the traditional HCA model used by most entities worldwide. It is calculated and accounted when financial capital maintenance is measured in units of constant purchasing power under CIPPA as authorized in IFRS in the original Framework (1989) Par 104 (a) during inflation and deflation and under Constant Purchasing Power Accounting (CPPA) during hyperinflation as required by IAS 29.
The annual change in the CPI is also used to calculate the erosion of real value caused by the stable measuring unit assumption – i.e. by the HCA model – (not inflation) in constant real value non–monetary items never maintained constant (thus being treated as monetary items) over time in an inflationary economy only under the Historical Cost paradigm. This cost of the stable measuring unit assumption is – like the cost of inflation – not accounted under HCA. Most people mistakenly believe this erosion in, for example, companies´ capital and profits never covered by sufficient revaluable fixed assets, is caused by inflation. This cost of the stable measuring unit assumption only incurred under the HCA model is mistakenly believed by most people to be the same as the cost of inflation. They are taught and thus mistakenly believe that it is caused by inflation. Since the cost of inflation (the net monetary loss from holding a net weighted average excess of monetary item assets over net weighted average monetary item liabilities during inflation) is not calculated and accounted under the HCA model, entities – mistakenly believing that the cost of the stable measuring unit assumption is the same as the cost of inflation – are satisfied to do nothing about it because net monetary losses and gains are not calculated and accounted under HCA. They are taught and thus mistakenly believe that both are caused by inflation and that it is not their but the central bank´s duty to lower inflation and lower this erosion.
Nicolaas Smith
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Thursday, 14 July 2011
Fiat money has real value
Fiat money has real value
The actual material our money is made of today has, for practical purposes, no intrinsic value in itself. Our monetary unit is fiat money that is created by government fiat or decree. The government declares fiat money to be legal tender. In the past monetary coins were made of, for example, silver or gold which were valuable in themselves. The actual metal of which the coin was made had a real or intrinsic value supposedly equivalent to the nominal value inscribed on the coin. Today fiat money is a government decreed and legally recognized unstable medium of exchange, unstable unit of account and unstable store of value in the economy.
The actual material today´s fiat money is made of has no intrinsic value as fiat money is the natural product of the development of the concept of money through time. In the beginning a monetary unit was a (supposedly) full value metal coin. Later it was not a full value metal coin but it was the next best thing as far as economic agents were concerned: it was 100 per cent backed by gold. Today the material fiat money is made of has no intrinsic value and the monetary unit is not backed by gold but is backed by the combined macroeconomic real value of all the underlying value systems in a particular economy or monetary union. These underlying value systems include, but, are not limited to sound governance, a sound economic system, a sound manufacturing system, a sound industrial system, a sound monetary system, a sound political system, a sound social system, a sound educational system, a sound defence system, a sound health system, a sound security system, a sound legal system, a sound accounting system and so on, to name but a few.
Changes in the real value of unstable money – which is also the unstable accounting monetary unit of account – are determined by inflation and deflation over time. The real value of money and thus the monetary unit of account are not stable. The real value of money and other monetary items are currently not updated or inflation-adjusted over time in ledger and bank accounts.
Fortunately, (1) the generally accepted accounting principle of financial capital maintenance in units of constant purchasing power, (2) double entry accounting, (3) the fact that the constant real non-monetary value of capital is equal to the real value of net assets and (4) the fact that companies have unlimited lifetimes, make it possible to automatically maintain the real value of constant items constant forever in entities that at least break even – ceteris paribus – when they implement Constant Item Purchasing Power Accounting during low inflation and deflation as authorized in IFRS – whether they own any fixed assets or not.
The bank notes and coins that make up about 7% of the fiat money supply can almost be stated to be created out of nothing - out of thin air – as a result of the fact that the actual materials used to create physical bank notes and coins have – in principle – almost no intrinsic value. The unstable real value of the total fiat money supply is, however, backed by all – the sum total of – the underlying value systems in an economy, namely sound governance, sound economic policies, sound monetary policies, sound industrial policies, sound commercial policies, etc. Positive annual inflation indicates the excess of fiat money created in the banking system.
Fiat money is used every day by almost 7 billion people to buy anything and everything in the world economy. Fiat money has real value. All monetary units in the world are fiat money. Every person knows exactly what he or she can buy with 1 or 10 or 100 or 1000 units of fiat money in his or her economy – today. Many people also know that the real value of fiat money is eroded over time in an inflationary economy and increases over time in a deflationary economy.
Yes, the special bank paper that fiat bank notes is made of and the metals that fiat bank coins are made of have almost no intrinsic value as compared to the real value of the actual gold or actual silver in gold and silver coins of commodity money in the past. That is not a logical reason to state that fiat money has no value. Every fiat monetary unit´s real value is determined by what it can buy today in an average consumer basket of goods and services. That generally changes every month.
Fiat money is money which generally has a monthly changing real value. Only the actual bank notes and coins have insignificant intrinsic values. Bank notes and coins constitute only about 7% of the US money supply.
All fiat monetary units – whether notes and coins or simply electronically represented virtual values – are legal tender in their respective economies.
All fiat functional currencies within economies have international exchange rates with the fiat functional currencies of other economies.
The fact that fiat money is not legally convertible into gold on demand as it was done in the days of the gold standard, is made irrelevant by the indisputable fact that fiat money is legal tender. Fiat money is used to buy gold. The fact that fiat money is not legally convertible into gold – an administrative process – is true: it is a fact. That does not negate the fact that fiat money has real value, the change of which is indicated monthly in the change in the Consumer Price Index.
The fact that fiat money has real value is so mainstream – almost 7 billion people know it and confirm it daily – 365 days a year – by using fiat money to buy and sell everything in all economies. The fact that fiat money has real value is confirmed once a month by about all economies world–wide when monthly inflation indexes are published indicating the change in the real value of fiat money. It is thus misleading to imply that because it is a fact that fiat money cannot administratively be converted at the central bank or any other bank into gold, that fiat money has no value.
It is an indisputable mainstream fact that fiat money has real value despite the fact that it is not legally convertible into gold on demand and that the bank paper bank notes and metals bank coins are made of have no intrinsic value whereas historically gold and silver coins had intrinsic values equal to the real value of the gold and silver they were made of.
The numerous publications of CPI values world–wide are the creditable references to the fact that fiat money has real value. Statistics authorities are generally creditable sources.
Nicolaas Smith
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
The actual material our money is made of today has, for practical purposes, no intrinsic value in itself. Our monetary unit is fiat money that is created by government fiat or decree. The government declares fiat money to be legal tender. In the past monetary coins were made of, for example, silver or gold which were valuable in themselves. The actual metal of which the coin was made had a real or intrinsic value supposedly equivalent to the nominal value inscribed on the coin. Today fiat money is a government decreed and legally recognized unstable medium of exchange, unstable unit of account and unstable store of value in the economy.
The actual material today´s fiat money is made of has no intrinsic value as fiat money is the natural product of the development of the concept of money through time. In the beginning a monetary unit was a (supposedly) full value metal coin. Later it was not a full value metal coin but it was the next best thing as far as economic agents were concerned: it was 100 per cent backed by gold. Today the material fiat money is made of has no intrinsic value and the monetary unit is not backed by gold but is backed by the combined macroeconomic real value of all the underlying value systems in a particular economy or monetary union. These underlying value systems include, but, are not limited to sound governance, a sound economic system, a sound manufacturing system, a sound industrial system, a sound monetary system, a sound political system, a sound social system, a sound educational system, a sound defence system, a sound health system, a sound security system, a sound legal system, a sound accounting system and so on, to name but a few.
Changes in the real value of unstable money – which is also the unstable accounting monetary unit of account – are determined by inflation and deflation over time. The real value of money and thus the monetary unit of account are not stable. The real value of money and other monetary items are currently not updated or inflation-adjusted over time in ledger and bank accounts.
Fortunately, (1) the generally accepted accounting principle of financial capital maintenance in units of constant purchasing power, (2) double entry accounting, (3) the fact that the constant real non-monetary value of capital is equal to the real value of net assets and (4) the fact that companies have unlimited lifetimes, make it possible to automatically maintain the real value of constant items constant forever in entities that at least break even – ceteris paribus – when they implement Constant Item Purchasing Power Accounting during low inflation and deflation as authorized in IFRS – whether they own any fixed assets or not.
The bank notes and coins that make up about 7% of the fiat money supply can almost be stated to be created out of nothing - out of thin air – as a result of the fact that the actual materials used to create physical bank notes and coins have – in principle – almost no intrinsic value. The unstable real value of the total fiat money supply is, however, backed by all – the sum total of – the underlying value systems in an economy, namely sound governance, sound economic policies, sound monetary policies, sound industrial policies, sound commercial policies, etc. Positive annual inflation indicates the excess of fiat money created in the banking system.
Fiat money is used every day by almost 7 billion people to buy anything and everything in the world economy. Fiat money has real value. All monetary units in the world are fiat money. Every person knows exactly what he or she can buy with 1 or 10 or 100 or 1000 units of fiat money in his or her economy – today. Many people also know that the real value of fiat money is eroded over time in an inflationary economy and increases over time in a deflationary economy.
Yes, the special bank paper that fiat bank notes is made of and the metals that fiat bank coins are made of have almost no intrinsic value as compared to the real value of the actual gold or actual silver in gold and silver coins of commodity money in the past. That is not a logical reason to state that fiat money has no value. Every fiat monetary unit´s real value is determined by what it can buy today in an average consumer basket of goods and services. That generally changes every month.
Fiat money is money which generally has a monthly changing real value. Only the actual bank notes and coins have insignificant intrinsic values. Bank notes and coins constitute only about 7% of the US money supply.
All fiat monetary units – whether notes and coins or simply electronically represented virtual values – are legal tender in their respective economies.
All fiat functional currencies within economies have international exchange rates with the fiat functional currencies of other economies.
The fact that fiat money is not legally convertible into gold on demand as it was done in the days of the gold standard, is made irrelevant by the indisputable fact that fiat money is legal tender. Fiat money is used to buy gold. The fact that fiat money is not legally convertible into gold – an administrative process – is true: it is a fact. That does not negate the fact that fiat money has real value, the change of which is indicated monthly in the change in the Consumer Price Index.
The fact that fiat money has real value is so mainstream – almost 7 billion people know it and confirm it daily – 365 days a year – by using fiat money to buy and sell everything in all economies. The fact that fiat money has real value is confirmed once a month by about all economies world–wide when monthly inflation indexes are published indicating the change in the real value of fiat money. It is thus misleading to imply that because it is a fact that fiat money cannot administratively be converted at the central bank or any other bank into gold, that fiat money has no value.
It is an indisputable mainstream fact that fiat money has real value despite the fact that it is not legally convertible into gold on demand and that the bank paper bank notes and metals bank coins are made of have no intrinsic value whereas historically gold and silver coins had intrinsic values equal to the real value of the gold and silver they were made of.
The numerous publications of CPI values world–wide are the creditable references to the fact that fiat money has real value. Statistics authorities are generally creditable sources.
Nicolaas Smith
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Wednesday, 13 July 2011
Money versus real value
Money versus real value
In practice, money has a specific real value for a month at a time in an internal economy or monetary union during low inflation and deflation. It changes every time the CPI changes. A monetary note or monetary coin has its nominal value permanently printed on it. Its nominal value does not and now cannot change.
Today national monetary units are mostly created in economies subject to inflation. The Japanese economy is regularly in a state of deflation. The Japanese Yen increases in real value inside the Japanese economy during deflation.
Money refers to a monetary unit used within the economy or monetary union in which it is created. This does not refer to the foreign exchange value of a monetary unit which is not the subject of this book. The foreign exchange value of a monetary unit refers to its exchange value in relation to another monetary unit normally the monetary unit of another country or monetary union.
The real value of money would remain the same over time only at sustainable zero per cent annual inflation. Money would thus have an absolutely stable real value only at sustainable zero per cent annual inflation. This has never happened on a permanent basis in any economy in the past. Now and then countries achieve zero annual inflation for a month or two at a time. But never for a sustainable period of a year or more.
Real value is the most important fundamental economic concept although it is the lesser studied and understood compared to the study of money. Money and real value are, unfortunately, not one and the same thing during inflation and deflation. Money and other monetary items always have lower real values during inflation and higher real values during deflation under any accounting model.
Money is an invention. Its existence can be terminated while real value is a fundamental economic concept, which exists, while we exist. The Zimbabwe Dollar´s existence was terminated in November 2008 when Gideon Gono, the Governor of the Reserve Bank of Zimbabwe issued instructions to shut down the activities of the Zimbabwe Stock Exchange which resulted in the end of trading in Old Mutual shares on the ZSE. This stopped the last exchangeability of the ZimDollar with the British Pound since the Old Mutual Implied Rate (OMIR) was being used as an implied exchange rate between the two currencies. That stopped the existence of the ZimDollar. No exchangeability means no value for a monetary unit.
Economies have already functioned without money. Barter economies operated without a medium of exchange. Cuba in the past bought oil from Venezuela and paid part in money and part by the provision of the services of sports coaches and medical doctors. Corn farmers in Argentina stored their corn in silos and paid for new pick–up trucks and other expensive mechanized farm implements with quantities of corn – the unit of real value Adam Smith described more than 230 years ago as a very stable unit of real value.
There will always be real value while the human race exists. The need for a medium of exchange, which is money’s first and basic function, is equally true. Money is one of the greatest human inventions of all time. It ranks on par with the invention of the wheel and the Gutenberg press in terms of importance to human development. Without money modern human development would have been very slow indeed.
Non–monetary items are all items that are not monetary items.
Nicolaas Smith
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
In practice, money has a specific real value for a month at a time in an internal economy or monetary union during low inflation and deflation. It changes every time the CPI changes. A monetary note or monetary coin has its nominal value permanently printed on it. Its nominal value does not and now cannot change.
Today national monetary units are mostly created in economies subject to inflation. The Japanese economy is regularly in a state of deflation. The Japanese Yen increases in real value inside the Japanese economy during deflation.
Money refers to a monetary unit used within the economy or monetary union in which it is created. This does not refer to the foreign exchange value of a monetary unit which is not the subject of this book. The foreign exchange value of a monetary unit refers to its exchange value in relation to another monetary unit normally the monetary unit of another country or monetary union.
The real value of money would remain the same over time only at sustainable zero per cent annual inflation. Money would thus have an absolutely stable real value only at sustainable zero per cent annual inflation. This has never happened on a permanent basis in any economy in the past. Now and then countries achieve zero annual inflation for a month or two at a time. But never for a sustainable period of a year or more.
Real value is the most important fundamental economic concept although it is the lesser studied and understood compared to the study of money. Money and real value are, unfortunately, not one and the same thing during inflation and deflation. Money and other monetary items always have lower real values during inflation and higher real values during deflation under any accounting model.
Money is an invention. Its existence can be terminated while real value is a fundamental economic concept, which exists, while we exist. The Zimbabwe Dollar´s existence was terminated in November 2008 when Gideon Gono, the Governor of the Reserve Bank of Zimbabwe issued instructions to shut down the activities of the Zimbabwe Stock Exchange which resulted in the end of trading in Old Mutual shares on the ZSE. This stopped the last exchangeability of the ZimDollar with the British Pound since the Old Mutual Implied Rate (OMIR) was being used as an implied exchange rate between the two currencies. That stopped the existence of the ZimDollar. No exchangeability means no value for a monetary unit.
Economies have already functioned without money. Barter economies operated without a medium of exchange. Cuba in the past bought oil from Venezuela and paid part in money and part by the provision of the services of sports coaches and medical doctors. Corn farmers in Argentina stored their corn in silos and paid for new pick–up trucks and other expensive mechanized farm implements with quantities of corn – the unit of real value Adam Smith described more than 230 years ago as a very stable unit of real value.
There will always be real value while the human race exists. The need for a medium of exchange, which is money’s first and basic function, is equally true. Money is one of the greatest human inventions of all time. It ranks on par with the invention of the wheel and the Gutenberg press in terms of importance to human development. Without money modern human development would have been very slow indeed.
Non–monetary items are all items that are not monetary items.
Nicolaas Smith
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Tuesday, 12 July 2011
Real value erosion under Historical Cost Accounting
Table 2 Real value erosion under Historical Cost Accounting
It is evident from the above why Alan Greenspan stated that low inflation is what sustainable economic growth is built on.
Nicolaas Smith
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Table 2 above is an estimate of the state of real value erosion in the SA economy in Aug 2009: In the 12 month period-ending in August, 2009, inflation actually eroded R1 952.799 billion x 0.064 = R124.9 billion in the real value of the Rand in the SA monetary economy. At the same time the stable measuring unit assumption unnecessarily eroded about R200 billion in the real value of constant real value non–monetary items never maintained constant which are treated as monetary items in the SA constant item economy. About R324 billion in real value was thus eroded in the SA economy in the 12 months to August, 2009 by inflation and unknowingly, unintentionally unnecessarily by the implementation of the very erosive stable measuring unit assumption as it forms part of the traditional Historical Cost Accounting model.
If inflation stays at 6.4% for the next five years and the implementation of the HCA model keeps on unknowingly eroding the real values of constant real value non–monetary items never maintained constant which are treated as monetary items with the very erosive stable measuring unit assumption then a cumulative total of R1 620 billion in real value would be eroded in the SA economy – all else being equal. The cumulative totals of real value erosion under these circumstances for 10, 20 and 30 years would be R3 240 billion, R6 480 billion and R9 720 billion respectively. These are huge values of real value erosion in the SA economy. The part which the HCA model unknowingly, unnecessarily and unintentionally erodes can easily be eliminated completely.
We can see from Table 3 what the difference would be when it is freely decided to measure financial capital maintenance in units of constant purchasing power as authorized in IFRS in the original Framework (1989), Par 104 (a).
The erosion of real value in constant items never maintained constant which are treated as monetary items under the HCA model would stop completely. There would only be real value erosion in the value of the Rand because of inflation. At 6.4% annual inflation only R124 billion in real value would be eroded in the economy as a whole instead of the about R324 billion over a period of 12 months (Aug 2009 values). Over five years the cumulative total of real value erosion would drop from R1 620 billion to R 624 billion, over 10 years from R3 240 billion to R1 249 billion, over 20 years from R6 480 billion to R2 498 billion and over 30 years from R9 720 billion to R3 747 billion.
The HCA model unknowingly erodes existing real values in existing constant real value non–monetary items never maintained constant with the very erosive stable measuring unit assumption. When the stable measuring unit assumption is rejected about R200 billion in existing constant item real values would automatically be maintained constant in all entities that at least break even – ceteris paribus - during every period of 12 months in the SA constant item economy amounting to R1 000 billion over 5 years, R 2 000 billion over 10 years, R4 000 over 20 years and R6 000 billion over 30 years. Boosting the SA real economy with these real values would make a significant difference to growth and employment in the economy over those periods.
Obviously a further reduction of inflation to an annual average of 4% would improve the SA monetary economy even more. Over 30 years it would maintain a further R1 140 billion in the monetary economy on top of the R6 000 to be gained when entities freely switch over to financial capital maintenance in units of constant purchasing power (CIPPA).
There would never more be any erosion of real value in constant real value non–monetary items never maintained constant because of a fundamentally flawed basic model of accounting under which entities simply assume there is no such thing as inflation and never has been, only for the valuation of constant real value non–monetary items when they measure financial capital maintenance in units of constant purchasing power during low inflation (implementing CIPPA). This is exactly the same as stating that there would never more be erosion of the real value of the Rand in the monetary economy at the level of R228 billion per annum (12 x 19 billion) as long as average annual inflation never again reaches 12%. There would be automatic zero per cent real value erosion in constant real value non–monetary items in all entities that at least break even – all else being equal – with financial capital maintenance in units of constant purchasing power (CIPPA) at all levels of inflation and deflation.
Stating that the SARB is responsible for limiting the erosion of the real value of the Rand and other monetary items by inflation to a maximum of 6 per cent or R117 billion per annum is the same as stating that the SARB is responsible for maintaining 94 percent or R1 808 billion of the R1 925 billion total per annum of the real value of the Rand and other monetary items in the SA monetary economy.
It is also the same as stating that the HCA model only maintains 94 % or R3 133 billion per annum of the about R3 333 billion of the existing constant real value of constant real value non–monetary items never maintained constant being treated as monetary items in the SA constant item economy under the Historical Cost paradigm since the remaining 6% or R200 billion per annum of the real value of constant items never maintained constant is unnecessarily being eroded by the implementation of the stable monetary unit assumption. Implementing CIPPA automatically maintains the real value of the R3 333 billion in existing constant items constant forever in all SA companies at least breaking even – all else being equal – at all levels of inflation and deflation whether these companies own revaluable fixed assets or not.
It is evident from the above why Alan Greenspan stated that low inflation is what sustainable economic growth is built on.
Nicolaas Smith
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Monday, 11 July 2011
The second enemy
The second enemy
There are two processes of systemic real value erosion in the economy, although everybody thinks there is only one economic enemy. The one enemy is very well known. It is inflation. Inflation manifests itself in money´s store of value function and only erodes the real value of money and other monetary items in the monetary economy (the money supply). Inflation is the enemy only in the monetary economy and the Governor of the Reserve Bank is the enemy of inflation.
Inflation has no effect on the real value of non–monetary items.
“Purchasing power of non monetary items does not change in spite of variation in national currency value.”
Prof Dr. Ümit GUCENME, Dr. Aylin Poroy ARSOY, Changes in financial reporting in Turkey, Historical Development of Inflation Accounting 1960 – 2005, Page 9.
Inflation cannot erode the real value of variable real value non–monetary items or constant real value non–monetary items. It is impossible. Inflation is always and everywhere a monetary phenomenon per Milton Friedman. Inflation is eroding the real value of money and other monetary items only in the SA monetary economy at the rate of 4.6 % per annum (value date: May, 2011). The actual amount of value eroded in the real value of Rand notes and coins and other monetary items (bank loans, other monetary loans and deposits, etc.) over the twelve months to May, 2011 amounted to about R100 billion.
The second process of systemic real value erosion – the second enemy – is a generally accepted accounting principle, namely the stable measuring unit assumption: the unknowing, unintentional and unnecessary erosion by the stable measuring unit assumption (the HCA model) of the existing constant real value of only constant items never maintained constant only in the constant item economy.
“The Measuring Unit principle: The unit of measure in accounting shall be the base money unit of the most relevant currency. This principle also assumes the unit of measure is stable; that is, changes in its general purchasing power are not considered sufficiently important to require adjustments to the basic financial statements.”
Paul H. Walgenbach, Norman E. Dittrich and Ernest I. Hanson, (1973), Financial Accounting, New York: Harcourt Brace Javonovich, Inc. Page 429.
Increases in the general price level (inflation) erode the real value of money and other monetary items with an underlying monetary nature (e.g. loans and bonds) only in the internal monetary economy. Inflation has no effect on the real value of variable items (e.g. land, buildings, goods, commodities, cars, gold, real estate, inventories, finished goods, foreign exchange, etc.) and constant items (e.g. issued share capital, retained profits, capital reserves, other shareholder equity items, salaries, wages, rentals, pensions, trade debtors, trade creditors, taxes payable, taxes receivable, deferred tax assets, deferred tax liabilities, etc.).
Entities generally choose then traditional HCA model which includes the stable measuring unit assumption during low inflation and deflation. They value constant items never maintained constant, e.g. that portion of companies´ shareholders´ equity never covered by sufficient revaluable fixed assets (revalued or not), in nominal monetary units; i.e. they choose to measure financial capital maintenance in nominal monetary units which is a popular accounting fallacy authorized in IFRS: in fact, it is impossible to maintain the real value of financial capital constant with financial capital maintenance in nominal monetary units per se during inflation and deflation. Entities´ choice of implementing financial capital maintenance in nominal monetary units instead of measuring constant items´ real values in units of constant purchasing power also authorized in IFRS results in the real values of these constant items never maintained constant being eroded by the stable measuring unit assumption at a rate equal to the annual rate of inflation.
It is not inflation doing the eroding as the IASB, the FASB, economists and most people mistakenly believe. It is entities´ free choice of the very erosive stable measuring unit assumption during low inflation as it forms part of financial capital maintenance in nominal monetary units – the Historical Cost Accounting model – authorized in IFRS in the original Framework (1989), Par 104 (a).
For example: SA companies would knowingly maintain the real value of all constant items constant forever (amounting to about R200 billion per year while inflation stays at about 4.6% per annum) in all entities that at least break even – ceteris paribus – no matter what the level of inflation when they reject the stable measuring unit assumption and implement financial capital maintenance in units of constant purchasing power during inflation (CIPPA). This is done without requiring extra money or extra retained profits simply to maintain the existing constant real value of existing constant real value non–monetary items (e.g. shareholders´ equity) constant. This is also possible in an entity with no fixed assets at all.
Constant items never maintained constant are treated like monetary items when their nominal values are never updated as a result of the implementation of the stable measuring unit assumption during low inflation and deflation.
The second enemy operating only in the constant item economy is the implementation of the stable measuring unit assumption during inflation. In principle, it is assumed that the unit of measure (money) is perfectly stable during low inflation and deflation; that is, it is assumed that changes in money´s general purchasing power are not sufficiently important to require the updating of the nominal values of all constant items in the constant item economy in order to maintain their real values constant. In so doing, the implementation of the HCA model unknowingly, unintentionally and unnecessarily erodes the real values of constant items never maintained constant during low inflation to the amount of about R200 billion in the SA constant item economy and hundreds of billions of US Dollars in the rest of the world´s constant item economy each and every year while the stable measuring unit assumption is being implemented as part of the traditional HCA model.
The stable measuring unit assumption is a stealth enemy very effectively camouflaged by GAAP, IASB authorization which makes it IFRS compliant and the generally accepted accounting fallacy that the erosion of companies´ capital and profits is caused by inflation: hardly anyone knows or understands that when the very erosive stable measuring unit assumption is implemented, the HCA model is unknowingly, unintentionally and unnecessarily eroding the real values of constant items never maintained constant at a rate equal to the annual rate of inflation during low inflation. The fact that the stable measuring unit assumption erodes about R200 billion per annum in the SA real economy and hundreds of billions of US Dollars in the rest of the world´s constant item economy year after year, does make a difference.
There are thus two enemies eroding real value systematically in the economy. The first enemy, inflation, is an economic process. The second enemy, the stable measuring units assumption, is a generally accepted accounting practice under the current Historical Cost paradigm.
The second economic enemy is the very erosive stable measuring unit assumption. This generally accepted accounting practice of systemic real value erosion operates only in the constant item part of the non–monetary or real economy when it is freely chosen to measure financial capital maintenance in nominal monetary units when entities implement the traditional HCA model during inflation as approved in IFRS in the original Framework (1989), Par 104 (a).
Everyone makes the mistake of blaming the erosion of companies´ profits and capital by the stable measuring unit assumption on inflation.
The problem is known and identified; namely, the real value of companies´ profits and capital is being eroded over time when implementing the HCA model during inflation. The mistake is made of blaming inflation instead of the free choice of the stable measuring unit assumption. It is impossible for inflation to erode the real value of any non-monetary item. Companies´ issued share capital and retained profits (as well as all other items in shareholders´ equity) are constant real value non-monetary items. This is very effectively camouflaged by IFRS approval in the original Framework (1989), Par 104 (a) which states “Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power”. The stable measuring unit assumption: the stealth enemy in the economy wreaking more havoc than inflation, its convenient cover.
The US Financial Accounting Standards Board also blames inflation:
“Conventional accounting measurements fail to capture the erosion of business profits and invested capital caused by inflation.”
Statement of Financial Accounting Standard No. 33, P. 24
Everyone only sees one enemy being responsible for all of the invisible and untouchable systemic real value erosion in the economy. It is mistakenly thought that inflation is responsible for all real value erosion in the economy. It is mistakenly thought that the cost of the stable measuring unit assumption (the erosion by the stable measuring unit assumption of the real value of constant items never maintained constant) is the same as the net monetary loss from holding an excess of monetary items assets over monetary item liabilities, i.e., the cost of the inflation (the erosion of the real value of money and other monetary items by inflation).
It is not inflation eroding the real value of companies´ profits and capital. It is the choice of traditional HCA which includes the very erosive stable measuring unit assumption. This second enemy is a stealth enemy camouflaged by IFRS approval since the way it operates is not realized. If it were realized, it would have been stopped by now with financial capital maintenance in units of constant purchasing power (CIPPA) as authorized in IFRS.
Nicolaas Smith
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
There are two processes of systemic real value erosion in the economy, although everybody thinks there is only one economic enemy. The one enemy is very well known. It is inflation. Inflation manifests itself in money´s store of value function and only erodes the real value of money and other monetary items in the monetary economy (the money supply). Inflation is the enemy only in the monetary economy and the Governor of the Reserve Bank is the enemy of inflation.
Inflation has no effect on the real value of non–monetary items.
“Purchasing power of non monetary items does not change in spite of variation in national currency value.”
Prof Dr. Ümit GUCENME, Dr. Aylin Poroy ARSOY, Changes in financial reporting in Turkey, Historical Development of Inflation Accounting 1960 – 2005, Page 9.
Inflation cannot erode the real value of variable real value non–monetary items or constant real value non–monetary items. It is impossible. Inflation is always and everywhere a monetary phenomenon per Milton Friedman. Inflation is eroding the real value of money and other monetary items only in the SA monetary economy at the rate of 4.6 % per annum (value date: May, 2011). The actual amount of value eroded in the real value of Rand notes and coins and other monetary items (bank loans, other monetary loans and deposits, etc.) over the twelve months to May, 2011 amounted to about R100 billion.
The second process of systemic real value erosion – the second enemy – is a generally accepted accounting principle, namely the stable measuring unit assumption: the unknowing, unintentional and unnecessary erosion by the stable measuring unit assumption (the HCA model) of the existing constant real value of only constant items never maintained constant only in the constant item economy.
“The Measuring Unit principle: The unit of measure in accounting shall be the base money unit of the most relevant currency. This principle also assumes the unit of measure is stable; that is, changes in its general purchasing power are not considered sufficiently important to require adjustments to the basic financial statements.”
Paul H. Walgenbach, Norman E. Dittrich and Ernest I. Hanson, (1973), Financial Accounting, New York: Harcourt Brace Javonovich, Inc. Page 429.
Increases in the general price level (inflation) erode the real value of money and other monetary items with an underlying monetary nature (e.g. loans and bonds) only in the internal monetary economy. Inflation has no effect on the real value of variable items (e.g. land, buildings, goods, commodities, cars, gold, real estate, inventories, finished goods, foreign exchange, etc.) and constant items (e.g. issued share capital, retained profits, capital reserves, other shareholder equity items, salaries, wages, rentals, pensions, trade debtors, trade creditors, taxes payable, taxes receivable, deferred tax assets, deferred tax liabilities, etc.).
Entities generally choose then traditional HCA model which includes the stable measuring unit assumption during low inflation and deflation. They value constant items never maintained constant, e.g. that portion of companies´ shareholders´ equity never covered by sufficient revaluable fixed assets (revalued or not), in nominal monetary units; i.e. they choose to measure financial capital maintenance in nominal monetary units which is a popular accounting fallacy authorized in IFRS: in fact, it is impossible to maintain the real value of financial capital constant with financial capital maintenance in nominal monetary units per se during inflation and deflation. Entities´ choice of implementing financial capital maintenance in nominal monetary units instead of measuring constant items´ real values in units of constant purchasing power also authorized in IFRS results in the real values of these constant items never maintained constant being eroded by the stable measuring unit assumption at a rate equal to the annual rate of inflation.
It is not inflation doing the eroding as the IASB, the FASB, economists and most people mistakenly believe. It is entities´ free choice of the very erosive stable measuring unit assumption during low inflation as it forms part of financial capital maintenance in nominal monetary units – the Historical Cost Accounting model – authorized in IFRS in the original Framework (1989), Par 104 (a).
For example: SA companies would knowingly maintain the real value of all constant items constant forever (amounting to about R200 billion per year while inflation stays at about 4.6% per annum) in all entities that at least break even – ceteris paribus – no matter what the level of inflation when they reject the stable measuring unit assumption and implement financial capital maintenance in units of constant purchasing power during inflation (CIPPA). This is done without requiring extra money or extra retained profits simply to maintain the existing constant real value of existing constant real value non–monetary items (e.g. shareholders´ equity) constant. This is also possible in an entity with no fixed assets at all.
Constant items never maintained constant are treated like monetary items when their nominal values are never updated as a result of the implementation of the stable measuring unit assumption during low inflation and deflation.
The second enemy operating only in the constant item economy is the implementation of the stable measuring unit assumption during inflation. In principle, it is assumed that the unit of measure (money) is perfectly stable during low inflation and deflation; that is, it is assumed that changes in money´s general purchasing power are not sufficiently important to require the updating of the nominal values of all constant items in the constant item economy in order to maintain their real values constant. In so doing, the implementation of the HCA model unknowingly, unintentionally and unnecessarily erodes the real values of constant items never maintained constant during low inflation to the amount of about R200 billion in the SA constant item economy and hundreds of billions of US Dollars in the rest of the world´s constant item economy each and every year while the stable measuring unit assumption is being implemented as part of the traditional HCA model.
The stable measuring unit assumption is a stealth enemy very effectively camouflaged by GAAP, IASB authorization which makes it IFRS compliant and the generally accepted accounting fallacy that the erosion of companies´ capital and profits is caused by inflation: hardly anyone knows or understands that when the very erosive stable measuring unit assumption is implemented, the HCA model is unknowingly, unintentionally and unnecessarily eroding the real values of constant items never maintained constant at a rate equal to the annual rate of inflation during low inflation. The fact that the stable measuring unit assumption erodes about R200 billion per annum in the SA real economy and hundreds of billions of US Dollars in the rest of the world´s constant item economy year after year, does make a difference.
There are thus two enemies eroding real value systematically in the economy. The first enemy, inflation, is an economic process. The second enemy, the stable measuring units assumption, is a generally accepted accounting practice under the current Historical Cost paradigm.
The second economic enemy is the very erosive stable measuring unit assumption. This generally accepted accounting practice of systemic real value erosion operates only in the constant item part of the non–monetary or real economy when it is freely chosen to measure financial capital maintenance in nominal monetary units when entities implement the traditional HCA model during inflation as approved in IFRS in the original Framework (1989), Par 104 (a).
Everyone makes the mistake of blaming the erosion of companies´ profits and capital by the stable measuring unit assumption on inflation.
The problem is known and identified; namely, the real value of companies´ profits and capital is being eroded over time when implementing the HCA model during inflation. The mistake is made of blaming inflation instead of the free choice of the stable measuring unit assumption. It is impossible for inflation to erode the real value of any non-monetary item. Companies´ issued share capital and retained profits (as well as all other items in shareholders´ equity) are constant real value non-monetary items. This is very effectively camouflaged by IFRS approval in the original Framework (1989), Par 104 (a) which states “Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power”. The stable measuring unit assumption: the stealth enemy in the economy wreaking more havoc than inflation, its convenient cover.
The US Financial Accounting Standards Board also blames inflation:
“Conventional accounting measurements fail to capture the erosion of business profits and invested capital caused by inflation.”
Statement of Financial Accounting Standard No. 33, P. 24
Everyone only sees one enemy being responsible for all of the invisible and untouchable systemic real value erosion in the economy. It is mistakenly thought that inflation is responsible for all real value erosion in the economy. It is mistakenly thought that the cost of the stable measuring unit assumption (the erosion by the stable measuring unit assumption of the real value of constant items never maintained constant) is the same as the net monetary loss from holding an excess of monetary items assets over monetary item liabilities, i.e., the cost of the inflation (the erosion of the real value of money and other monetary items by inflation).
It is not inflation eroding the real value of companies´ profits and capital. It is the choice of traditional HCA which includes the very erosive stable measuring unit assumption. This second enemy is a stealth enemy camouflaged by IFRS approval since the way it operates is not realized. If it were realized, it would have been stopped by now with financial capital maintenance in units of constant purchasing power (CIPPA) as authorized in IFRS.
Nicolaas Smith
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Friday, 8 July 2011
Price stability
Price stability
When we discuss, write about, talk about or analyse this monetary item described above, we call it money and describe it using the term money with the implicit assumption that this money we are dealing with is stable – as in fixed – in real economic value in our low inflationary economies. We thus assume at the same time that prices are more or less stable in low inflationary economies too.
The term stable is normally accepted by the public at large to indicate a permanently fixed situation or position or state or price or value. A stable – as in fixed – price over time would be drawn as a horizontal line on a chart. A slowly increasing price over time would be drawn as a slightly rising line on a chart. A slowly decreasing value over time would be drawn as a slightly declining line on a chart. When we say production of a commodity is stable we accept that the absolute number of items being produced is not fluctuating but is at the same level all the time.
The term stable as used by economists, however, does not mean a fixed price or level, even though that is what the public in general thinks it means. The term stable in economics today means slowly increasing or slowly decreasing – depending on what it is being applied to. The term price stability as used by economists today does not mean that prices in general stay the same, but that prices in general are rising slowly – which is, as we are all taught, the popular definition of inflation.
The term stable money as used by economists equally does not mean that the real value of national monetary units they are talking about stays the same in the internal economy – even though that is what the public in general thinks it means. What they mean with stable money is that the real value of a national monetary unit is slowly being eroded by inflation over time in the internal economy.
When a central bank governor says that the central bank’s primary task or objective is price stability what she or he means is that the central bank would be fulfilling its primary task, in an economy with low levels of inflation, when prices in general are slowly rising over time (that well known definition of inflation again). The flip side of that statement is that the real value of national monetary units is slowly being eroded by inflation over time.
A central bank’s primary task being price stability is the same as saying a central bank’s main responsibility is ensuring that inflation is maintained at a very low level. This low level was generally accepted in first world economies to be 2 per cent per annum. The latest sub–prime crisis raised doubts about the 2% level being sufficient in the event of large shocks to the economy.
“In a world of small shocks, 2 per cent inflation seemed to provide a sufficient cushion to make the zero lower bound unimportant.” P4
“Should policymakers therefore aim for a higher target inflation rate in normal times,
in order to increase the room for monetary policy to react to such shocks? To be concrete, are the net costs of inflation much higher at, say, 4 per cent than at 2 per cent, the current target range?” P11
Rethinking Monetary Policy, IMF Staff Position Note, Olivier Blanchard, Giovanni Dell´Ariccia and Paulo Mauro, Feb, 2010.
We know that inflation is always and everywhere the erosion of the real value of money and other monetary items over time. We also know that inflation has no effect on the real value of non–monetary items over time.
The maintenance of a high degree of price stability (still) means that the primary task of a central bank in a first world economy is to limit the erosion of real value in money and other monetary items by inflation to a maximum of 2 per cent per annum within an economy or monetary union. Continuous two per cent annual inflation erodes 2% of the real value of money and other monetary items per annum and 51% over 35 years. Under the current Historical Cost paradigm it also means that the implementation of the very erosive stable measuring unit assumption as it forms part of the traditional HCA model unknowingly, unintentionally and unnecessarily erodes 2% of the real value of constant real value non–monetary items never maintained constant, e.g. that portion of companies´ shareholders´ equity (their capital) never maintained constant with sufficient revaluable fixed assets, per annum and 51% over 35 years´ time. This unknowing, unintentional and unnecessary erosion by the HCA model is eliminated completely when it is freely chosen to measure financial capital maintenance in units of constant purchasing power during low inflation (freely choosing CIPPA) as it has been authorized in IFRS in the original Framework (1989), Par 104 (a).
Nicolaas Smith
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
When we discuss, write about, talk about or analyse this monetary item described above, we call it money and describe it using the term money with the implicit assumption that this money we are dealing with is stable – as in fixed – in real economic value in our low inflationary economies. We thus assume at the same time that prices are more or less stable in low inflationary economies too.
The term stable is normally accepted by the public at large to indicate a permanently fixed situation or position or state or price or value. A stable – as in fixed – price over time would be drawn as a horizontal line on a chart. A slowly increasing price over time would be drawn as a slightly rising line on a chart. A slowly decreasing value over time would be drawn as a slightly declining line on a chart. When we say production of a commodity is stable we accept that the absolute number of items being produced is not fluctuating but is at the same level all the time.
The term stable as used by economists, however, does not mean a fixed price or level, even though that is what the public in general thinks it means. The term stable in economics today means slowly increasing or slowly decreasing – depending on what it is being applied to. The term price stability as used by economists today does not mean that prices in general stay the same, but that prices in general are rising slowly – which is, as we are all taught, the popular definition of inflation.
The term stable money as used by economists equally does not mean that the real value of national monetary units they are talking about stays the same in the internal economy – even though that is what the public in general thinks it means. What they mean with stable money is that the real value of a national monetary unit is slowly being eroded by inflation over time in the internal economy.
When a central bank governor says that the central bank’s primary task or objective is price stability what she or he means is that the central bank would be fulfilling its primary task, in an economy with low levels of inflation, when prices in general are slowly rising over time (that well known definition of inflation again). The flip side of that statement is that the real value of national monetary units is slowly being eroded by inflation over time.
A central bank’s primary task being price stability is the same as saying a central bank’s main responsibility is ensuring that inflation is maintained at a very low level. This low level was generally accepted in first world economies to be 2 per cent per annum. The latest sub–prime crisis raised doubts about the 2% level being sufficient in the event of large shocks to the economy.
“In a world of small shocks, 2 per cent inflation seemed to provide a sufficient cushion to make the zero lower bound unimportant.” P4
“Should policymakers therefore aim for a higher target inflation rate in normal times,
in order to increase the room for monetary policy to react to such shocks? To be concrete, are the net costs of inflation much higher at, say, 4 per cent than at 2 per cent, the current target range?” P11
Rethinking Monetary Policy, IMF Staff Position Note, Olivier Blanchard, Giovanni Dell´Ariccia and Paulo Mauro, Feb, 2010.
We know that inflation is always and everywhere the erosion of the real value of money and other monetary items over time. We also know that inflation has no effect on the real value of non–monetary items over time.
The maintenance of a high degree of price stability (still) means that the primary task of a central bank in a first world economy is to limit the erosion of real value in money and other monetary items by inflation to a maximum of 2 per cent per annum within an economy or monetary union. Continuous two per cent annual inflation erodes 2% of the real value of money and other monetary items per annum and 51% over 35 years. Under the current Historical Cost paradigm it also means that the implementation of the very erosive stable measuring unit assumption as it forms part of the traditional HCA model unknowingly, unintentionally and unnecessarily erodes 2% of the real value of constant real value non–monetary items never maintained constant, e.g. that portion of companies´ shareholders´ equity (their capital) never maintained constant with sufficient revaluable fixed assets, per annum and 51% over 35 years´ time. This unknowing, unintentional and unnecessary erosion by the HCA model is eliminated completely when it is freely chosen to measure financial capital maintenance in units of constant purchasing power during low inflation (freely choosing CIPPA) as it has been authorized in IFRS in the original Framework (1989), Par 104 (a).
Nicolaas Smith
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
CIPPA equals automatic zero erosion in constant item economy
CIPPA equals automatic zero erosion in constant item economy
We do not have stable – as in fixed real value – money. The real value of money is generally accepted by the public at large to be stable – as in fixed – in low inflation economies, but this is not true. The belief that we have stable – as in fixed real value – money is an illusion, namely the notorious money illusion.
Central banks and monetary authorities have monetary policies that often create the impression that money is stable in real economic value. They implement monetary policies that include the tolerance of low inflation limits of up to two per cent per annum. Then they assure everybody that “price stability” is guaranteed and assured. The public at large mistakenly assume that this means stable – as in fixed – prices. We regularly read in inflation reports that low inflation targets have been met and that “price stability” is assured.
In a low inflationary economy this appears to be true. But in reality it is not true. Yes, money illusion makes us believe that our depreciating money maintains its real value stable, while it actually halves in real value over 35 years with constant two per cent per annum inflation – the generally accepted level of “price stability.” All currently existing bank notes and coins will eventually arrive at a point of being almost completely worthless in real value during indefinite inflation. How quickly depends on the level of inflation.
In Zimbabwe hyperinflation reached such high levels that the real value of the country’s entire money supply was wiped out when the ZimDollar had no exchangeability with any foreign currency in November 2008. Towards the end of the hyperinflationary spiral the real value of the ZimDollar halved every 24.7 hours according to Steve Hanke from Cato Institute.
There is no money illusion in hyperinflationary economies. People know that hyperinflation erodes the real value of their money very quickly.
Central bank governors aid and abet money illusion by regularly stating in their monetary policy statements that they are “achieving and maintaining price stability.”
“The MPC remains fully committed to its mandate of achieving and maintaining price stability.”
TT Mboweni, Governor. 2009–06–25: Statement of the Monetary Policy Committee, SARB.
It is not always pointed out by governors of central banks that the “price stability” they mention, refers to their definition of “price stability”. Jean–Claude Trichet, the President of the European Central Bank, is a central bank governor who regularly mentions that 2% inflation is their definition of price stability. Absolute price stability is a year–on–year increase in the Consumer Price Index of zero per cent. The SARB´s definition of “price stability” “is for CPI inflation to be within the target range of 3 to 6 per cent on a continuous basis.”
The SARB would aid in reducing money illusion in the SA economy by stating:
The MPC remains fully committed to its mandate of achieving and maintaining the SARB´s chosen level of price stability which is for CPI inflation to be within the target range of 3 to 6 per cent on a continuous basis. Absolute price stability is a year–on–year increase in the CPI of zero per cent. Current 4.6 % annual inflation eroded about R100 billion of the real value of the Rand over the past 12 months to the end of May, 2011. The stable measuring unit assumption as applied as part of the traditional Historical Cost Accounting model used by SA companies unnecessarily eroded about R200 billion of the real value of constant real value non-monetary items never maintained constant in SA companies at a rate equal to the current 4.6% annual inflation rate.
A one per cent decrease in inflation (disinflation) maintains about R20 billion per annum of real value only in the SA monetary economy as a result of the decrease in the level of inflation. At the same time, about R33 billion is maintained in the non–monetary economy as a result of the reduction in the level of unknowing, unintentional and unnecessary erosion by the traditional HCA model in the real value of constant real value non–monetary items never maintained constant in consequence of the implementation of the very erosive stable measuring unit assumption; i.e. financial capital maintenance in nominal monetary units during low inflation as authorized in IFRS in the original Framework (1989), Par 104 (a).
All that has to be done is to freely change over to IFRS compliant IASB–approved financial capital maintenance in units of constant purchasing power during low inflation (CIPPA) and the SA real economy will automatically be boosted by about R200 billion per annum forever in all entities that at least break even - ceteris paribus as long as the SARB maintains its chosen level of “price stability” between 3 and 6% inflation per annum.
As the Deutsche Bundesbank stated:
“The benefits of price stability, on the other hand, can scarcely be overestimated, especially as these are, in principle, unlimited in duration and accrue year after year.”
Deutsche Bundesbank, 1996 Annual Report, P 83.
All SA companies changing over to CIPPA means automatic zero erosion of constant items´ real values forever in the SA economy in all entities that at least break even during inflation and deflation – ceteris paribus. The same principle applies to all other economies.
Gill Marcus, the current governor of the SARB, will have to bring inflation down to zero per cent per annum on a permanent basis to have the same effect in the real economy. CIPPA does this automatically at any level of inflation or deflation. Zero per cent inflation is not currently advisable in the monetary economy because governments and central banks still do not know how to run an economy at sustainable zero per cent annual inflation. It is very easy to automatically run the constant item economy in any country or monetary union at sustainable zero percent erosion in constant items forever: just choose the other option: real value maintaining CIPPA. It is compliant with IFRS and has been authorized by the IASB in 1989.
CIPPA is a basic accounting model approved in 1989 that results in the automatic maintenance – without additional capital contributions or extra retained profits – of the real value of constant real value non–monetary items in the constant item economy for an unlimited period of time in all companies that at least break even during inflation and deflation – ceteris paribus. The principle applies when any economy - currently implementing the very erosive stable measuring unit assumption as part of the traditional HCA model – changes over to CIPPA.
Nicolaas Smith
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
We do not have stable – as in fixed real value – money. The real value of money is generally accepted by the public at large to be stable – as in fixed – in low inflation economies, but this is not true. The belief that we have stable – as in fixed real value – money is an illusion, namely the notorious money illusion.
Central banks and monetary authorities have monetary policies that often create the impression that money is stable in real economic value. They implement monetary policies that include the tolerance of low inflation limits of up to two per cent per annum. Then they assure everybody that “price stability” is guaranteed and assured. The public at large mistakenly assume that this means stable – as in fixed – prices. We regularly read in inflation reports that low inflation targets have been met and that “price stability” is assured.
In a low inflationary economy this appears to be true. But in reality it is not true. Yes, money illusion makes us believe that our depreciating money maintains its real value stable, while it actually halves in real value over 35 years with constant two per cent per annum inflation – the generally accepted level of “price stability.” All currently existing bank notes and coins will eventually arrive at a point of being almost completely worthless in real value during indefinite inflation. How quickly depends on the level of inflation.
In Zimbabwe hyperinflation reached such high levels that the real value of the country’s entire money supply was wiped out when the ZimDollar had no exchangeability with any foreign currency in November 2008. Towards the end of the hyperinflationary spiral the real value of the ZimDollar halved every 24.7 hours according to Steve Hanke from Cato Institute.
There is no money illusion in hyperinflationary economies. People know that hyperinflation erodes the real value of their money very quickly.
Central bank governors aid and abet money illusion by regularly stating in their monetary policy statements that they are “achieving and maintaining price stability.”
“The MPC remains fully committed to its mandate of achieving and maintaining price stability.”
TT Mboweni, Governor. 2009–06–25: Statement of the Monetary Policy Committee, SARB.
It is not always pointed out by governors of central banks that the “price stability” they mention, refers to their definition of “price stability”. Jean–Claude Trichet, the President of the European Central Bank, is a central bank governor who regularly mentions that 2% inflation is their definition of price stability. Absolute price stability is a year–on–year increase in the Consumer Price Index of zero per cent. The SARB´s definition of “price stability” “is for CPI inflation to be within the target range of 3 to 6 per cent on a continuous basis.”
The SARB would aid in reducing money illusion in the SA economy by stating:
The MPC remains fully committed to its mandate of achieving and maintaining the SARB´s chosen level of price stability which is for CPI inflation to be within the target range of 3 to 6 per cent on a continuous basis. Absolute price stability is a year–on–year increase in the CPI of zero per cent. Current 4.6 % annual inflation eroded about R100 billion of the real value of the Rand over the past 12 months to the end of May, 2011. The stable measuring unit assumption as applied as part of the traditional Historical Cost Accounting model used by SA companies unnecessarily eroded about R200 billion of the real value of constant real value non-monetary items never maintained constant in SA companies at a rate equal to the current 4.6% annual inflation rate.
A one per cent decrease in inflation (disinflation) maintains about R20 billion per annum of real value only in the SA monetary economy as a result of the decrease in the level of inflation. At the same time, about R33 billion is maintained in the non–monetary economy as a result of the reduction in the level of unknowing, unintentional and unnecessary erosion by the traditional HCA model in the real value of constant real value non–monetary items never maintained constant in consequence of the implementation of the very erosive stable measuring unit assumption; i.e. financial capital maintenance in nominal monetary units during low inflation as authorized in IFRS in the original Framework (1989), Par 104 (a).
All that has to be done is to freely change over to IFRS compliant IASB–approved financial capital maintenance in units of constant purchasing power during low inflation (CIPPA) and the SA real economy will automatically be boosted by about R200 billion per annum forever in all entities that at least break even - ceteris paribus as long as the SARB maintains its chosen level of “price stability” between 3 and 6% inflation per annum.
As the Deutsche Bundesbank stated:
“The benefits of price stability, on the other hand, can scarcely be overestimated, especially as these are, in principle, unlimited in duration and accrue year after year.”
Deutsche Bundesbank, 1996 Annual Report, P 83.
All SA companies changing over to CIPPA means automatic zero erosion of constant items´ real values forever in the SA economy in all entities that at least break even during inflation and deflation – ceteris paribus. The same principle applies to all other economies.
Gill Marcus, the current governor of the SARB, will have to bring inflation down to zero per cent per annum on a permanent basis to have the same effect in the real economy. CIPPA does this automatically at any level of inflation or deflation. Zero per cent inflation is not currently advisable in the monetary economy because governments and central banks still do not know how to run an economy at sustainable zero per cent annual inflation. It is very easy to automatically run the constant item economy in any country or monetary union at sustainable zero percent erosion in constant items forever: just choose the other option: real value maintaining CIPPA. It is compliant with IFRS and has been authorized by the IASB in 1989.
CIPPA is a basic accounting model approved in 1989 that results in the automatic maintenance – without additional capital contributions or extra retained profits – of the real value of constant real value non–monetary items in the constant item economy for an unlimited period of time in all companies that at least break even during inflation and deflation – ceteris paribus. The principle applies when any economy - currently implementing the very erosive stable measuring unit assumption as part of the traditional HCA model – changes over to CIPPA.
Nicolaas Smith
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Thursday, 7 July 2011
Items with an underlying monetary nature
Items with an underlying monetary nature
Houses, cars, mobile phones, raw materials, etc. have monetary values, but they are not monetary items. They are variable real value non–monetary items whose real values are expressed in terms of depreciating or appreciating money depending on whether the economy is in a state of inflation or deflation.
Likewise salaries, wages, rentals, pensions, interest, taxes, retained earnings, issued share capital, capital reserves, all other shareholder equity items, trade debtors, trade creditors, deferred tax assets and liabilities, taxes payable and receivable, etc. have depreciating or appreciating monetary values, but they are not monetary items. They are constant real value non–monetary items whose constant real non–monetary values are expressed in terms of depreciating or appreciating money. Constant real value non–monetary items´ real values are maintained constant with financial capital maintenance in units of purchasing power during inflation and deflation, i.e., with Constant Item Purchasing Power Accounting.
Government Bonds
Commercial Bonds
Treasury Bills
Consumer loans
Bank loans
Car loans
Student loans
Credit card loans
Notes Payable
Notes Receivable
Nicolaas Smith
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Utility, scarcity and exchangeability are the three basic attributes of an economic item which, in combination, give it economic value. All economic items are exchangeable and money is generally the medium of exchange. All economic items thus have monetary values in an economy using money as the monetary unit of account. Both monetary items and non–monetary items are expressed in monetary terms; i.e. in terms of the monetary unit. The monetary unit is used as the medium of exchange, unit of account and store of value. Variable real value non–monetary items, constant real value non–monetary items and monetary items are all expressed in terms of money and have monetary values.
There is, however, a difference between having a monetary value and being a monetary item. All economic items have monetary values, but, only money and items with an underlying monetary nature are monetary items. Non–monetary items have monetary values: they have their values expressed in terms of money, but, they are not monetary items.
Houses, cars, mobile phones, raw materials, etc. have monetary values, but they are not monetary items. They are variable real value non–monetary items whose real values are expressed in terms of depreciating or appreciating money depending on whether the economy is in a state of inflation or deflation.
Likewise salaries, wages, rentals, pensions, interest, taxes, retained earnings, issued share capital, capital reserves, all other shareholder equity items, trade debtors, trade creditors, deferred tax assets and liabilities, taxes payable and receivable, etc. have depreciating or appreciating monetary values, but they are not monetary items. They are constant real value non–monetary items whose constant real non–monetary values are expressed in terms of depreciating or appreciating money. Constant real value non–monetary items´ real values are maintained constant with financial capital maintenance in units of purchasing power during inflation and deflation, i.e., with Constant Item Purchasing Power Accounting.
Examples of items with an underlying monetary nature
Money loans
Mortgage bondsGovernment Bonds
Commercial Bonds
Treasury Bills
Consumer loans
Bank loans
Car loans
Student loans
Credit card loans
Notes Payable
Notes Receivable
They are accounted monetary items of money lent or borrowed, payable or receivable in money. Only monetary items to be paid or received in money are monetary items. Variable real value non–monetary items and constant real value non–monetary items to be paid or received in money remain variable real value non–monetary items and constant real value non–monetary items. Money is simply the monetary medium of exchange used to transfer the ownership of a variable real value non–monetary item or constant real value non–monetary item from one entity to another.
Items with an underlying monetary nature have exactly the same attributes as money held with the exception that they are not 100% liquid.
Nicolaas Smith
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Wednesday, 6 July 2011
The definitive proof that trade debtors / creditors are non-monetary items
The definitive proof that trade debtors / creditors are non-monetary items
Monetary items are money held and items with an underlying monetary nature.
Money is the monetary unit.
Trade debtors and trade creditors are defined incorrectly in IFRS, by the FASB and by PricewaterhouseCoopers to be monetary items. They are constant real value non–monetary items. All street vendors in hyperinflationary economies know by experience - even when some of them have never been to school - that paying for a non–monetary item on credit means the value at the date of the sale has to be updated (measured in units of constant purchasing power) over time. The IASB, the FASB and PricewaterhouseCoopers still get this wrong.
Trade debtors and trade creditors are constant real value non-monetary items but are treated like monetary items under the current Historical Cost paradigm. If they were, in fact, monetary items they would behave like monetary items under inflation and deflation. They would always lose real value under inflation: however, Brazil measured trade debtors and trade creditors in units of constant purchasing power by updating them in terms of a daily index value during 30 years of very high inflation and hyperinflation. That is complete proof that trade debtors, trade creditors, all non-monetary payables and all non-monetary receivables are not monetary items, but, constant real value non-monetary items; namely, the fact that they can be updated (measured in units of constant purchasing power) during the current financial period because monetary items cannot be updated under any accounting or economic model during the current accounting period.
I updated all trade debtors in terms of the daily US Dollar parallel rate in Auto-Sueco (Angola) during 1996. All our trade debtors accepted that and paid the updated amount in Angolan Kwanzas. That is complete proof that trade debtors and trade creditors are constant item real value non-monetary items. If they were monetary items I would not have been able to update them and our trade debtors would not have accepted it.
Trade debtors and trade creditors are incorrectly treated as monetary items in terms of IAS 29 Financial Reporting in Hyperinflationary Economies. All calculations done since 1989 in terms of IAS 29 of monetary losses and gains as well as profit calculations are thus wrong.
Money is a monetary item that is generally accepted as a medium of exchange, store of value and unit of account within an economy or monetary union. Only an economic item that fulfils all three functions of money at the same time can be the monetary unit in a specific economy or monetary union. Fulfilling only two of the three functions does not qualify an item as the monetary unit. See Foreign Exchange.
A foreign currency is not the monetary unit in a non–dollarized economy since it is not the monetary unit of account.
Money held are bank notes and coins on hand and demand deposits in banks and financial institutions.
Nicolaas Smith
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Monetary items are money held and items with an underlying monetary nature.
Money is the monetary unit.
Trade debtors and trade creditors are defined incorrectly in IFRS, by the FASB and by PricewaterhouseCoopers to be monetary items. They are constant real value non–monetary items. All street vendors in hyperinflationary economies know by experience - even when some of them have never been to school - that paying for a non–monetary item on credit means the value at the date of the sale has to be updated (measured in units of constant purchasing power) over time. The IASB, the FASB and PricewaterhouseCoopers still get this wrong.
Trade debtors and trade creditors are constant real value non-monetary items but are treated like monetary items under the current Historical Cost paradigm. If they were, in fact, monetary items they would behave like monetary items under inflation and deflation. They would always lose real value under inflation: however, Brazil measured trade debtors and trade creditors in units of constant purchasing power by updating them in terms of a daily index value during 30 years of very high inflation and hyperinflation. That is complete proof that trade debtors, trade creditors, all non-monetary payables and all non-monetary receivables are not monetary items, but, constant real value non-monetary items; namely, the fact that they can be updated (measured in units of constant purchasing power) during the current financial period because monetary items cannot be updated under any accounting or economic model during the current accounting period.
I updated all trade debtors in terms of the daily US Dollar parallel rate in Auto-Sueco (Angola) during 1996. All our trade debtors accepted that and paid the updated amount in Angolan Kwanzas. That is complete proof that trade debtors and trade creditors are constant item real value non-monetary items. If they were monetary items I would not have been able to update them and our trade debtors would not have accepted it.
Trade debtors and trade creditors are incorrectly treated as monetary items in terms of IAS 29 Financial Reporting in Hyperinflationary Economies. All calculations done since 1989 in terms of IAS 29 of monetary losses and gains as well as profit calculations are thus wrong.
Money is a monetary item that is generally accepted as a medium of exchange, store of value and unit of account within an economy or monetary union. Only an economic item that fulfils all three functions of money at the same time can be the monetary unit in a specific economy or monetary union. Fulfilling only two of the three functions does not qualify an item as the monetary unit. See Foreign Exchange.
A foreign currency is not the monetary unit in a non–dollarized economy since it is not the monetary unit of account.
Money held are bank notes and coins on hand and demand deposits in banks and financial institutions.
Nicolaas Smith
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Tuesday, 5 July 2011
Legal tender
Legal tender
Money derives its nominal value from being declared by government to be legal tender. It does not mean economic entities will accept it as money. Zimbabwe declared 100 trillion Zimbabwe Dollar notes as legal tender, but the population in Zimbabwe refused to accept it as legal tender after a very short time because hyperinflation in the millions of per cent per annum made the notes almost worthless. The Zimbabwe Government withdrew the ZimDollar from circulation when they dollarized their economy with multi–currencies after the Reserve Bank of Zimbabwe wiped out all the real value represented by the Zimbabwe Dollar in their economy by printing excessive amounts of extremely high nominal value bank notes till the currency had no exchangeability with any other foreign currency.
Fiat money’s real value is determined by all the underlying value systems in the economy. Changes in money’s real value over time are indicated by the rate of annual inflation or deflation. Money has the legal backing of being legal tender. Legal tender is an offered payment that, by law, cannot be refused in settlement of a debt. Credit cards, personal cheques and similar non–cash methods of payment are not usually legal tender. The law does not relieve the debt until payment is accepted which explains the practice in some economies of making out receipts for most payments. Bank notes and coins are usually defined as legal tender.
Monetary items are defined incorrectly in IAS 21 The Effects of Changes in Foreign Exchange Rates, Par 8:
Monetary items are units of currency held and assets and liabilities to be received or paid in a fixed or determinable number of units of currency.
Not all assets and liabilities to be received or paid in a fixed or determinable number of units of currency are monetary items – per se. Non–monetary items are often paid in a fixed or determinable number of units of currency. Fixed salary, wage and rental payments do not transform these constant real value non–monetary items into monetary items. Salaries, wages, rentals, etc are constant real value non–monetary items. They are not monetary items. They are simply paid in money as the medium of exchange. They are sometimes paid in a fixed or determinable number of units of currency because they are measured in nominal monetary units under the current Historical Cost paradigm during low inflation and not in units of constant purchasing power. This does not transform them into monetary items simply because they are paid in fixed historical cost values. They remain constant real value non–monetary items.
Nicolaas Smith
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Money derives its nominal value from being declared by government to be legal tender. It does not mean economic entities will accept it as money. Zimbabwe declared 100 trillion Zimbabwe Dollar notes as legal tender, but the population in Zimbabwe refused to accept it as legal tender after a very short time because hyperinflation in the millions of per cent per annum made the notes almost worthless. The Zimbabwe Government withdrew the ZimDollar from circulation when they dollarized their economy with multi–currencies after the Reserve Bank of Zimbabwe wiped out all the real value represented by the Zimbabwe Dollar in their economy by printing excessive amounts of extremely high nominal value bank notes till the currency had no exchangeability with any other foreign currency.
Fiat money’s real value is determined by all the underlying value systems in the economy. Changes in money’s real value over time are indicated by the rate of annual inflation or deflation. Money has the legal backing of being legal tender. Legal tender is an offered payment that, by law, cannot be refused in settlement of a debt. Credit cards, personal cheques and similar non–cash methods of payment are not usually legal tender. The law does not relieve the debt until payment is accepted which explains the practice in some economies of making out receipts for most payments. Bank notes and coins are usually defined as legal tender.
Monetary items are defined incorrectly in IAS 21 The Effects of Changes in Foreign Exchange Rates, Par 8:
Monetary items are units of currency held and assets and liabilities to be received or paid in a fixed or determinable number of units of currency.
Not all assets and liabilities to be received or paid in a fixed or determinable number of units of currency are monetary items – per se. Non–monetary items are often paid in a fixed or determinable number of units of currency. Fixed salary, wage and rental payments do not transform these constant real value non–monetary items into monetary items. Salaries, wages, rentals, etc are constant real value non–monetary items. They are not monetary items. They are simply paid in money as the medium of exchange. They are sometimes paid in a fixed or determinable number of units of currency because they are measured in nominal monetary units under the current Historical Cost paradigm during low inflation and not in units of constant purchasing power. This does not transform them into monetary items simply because they are paid in fixed historical cost values. They remain constant real value non–monetary items.
Nicolaas Smith
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
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