Cost of inflation and hyperinflation caused by Historical Cost
Accounting
It is possible to have inflation and
hyperinflation with no erosion in the real value of monetary items: simply inflation-adjust
all monetary items daily: do not implement the stable measuring unit
assumption: i.e., do not implement Historical Cost Accounting: implement its
alternative authorised in IFRS: Capital Maintenance in Units of Constant Purchasing
Power: i.e. never implementing the stable measuring unit assumption.
The same is true for constant real value
non-monetary items.
Erosion of the real value of monetary and
constant items over time during inflation and hyperinflation is caused by HCA:
i.e., the implementation of the stable measuring unit assumption.
Inflation and hyperinflation only necessitate
the updating - in terms of a changing nominal monetary unit of account - of the
nominal value of the same real value because (1) the real value of money is
determined by the change in the CPI in the case of monetary items´ real value during
low inflation (USD parallel rate during hyperinflation) and (2) because money
is the monetary unit of account in the measurement of constant real value
non-monetary items.
Inflation and hyperinflation only have a cost in the economy under
Historical Cost Accounting: HCA causes the
cost of inflation and hyperinflation: i.e., when the stable measuring
unit is implemented: when it is assumed (for practical or lack of the necessary
instantaneous update technology) that money is perfectly stable over time.
When the stable measuring unit assumption
is never implemented during inflation, there is no cost of inflation.
Historical
Cost Accounting is the cause of the erosion of real value in monetary
and constant items in the economy.
Inflation and hyperinflation are harmless
without Historical Cost Accounting. Inflation and hyperinflation are toothless
without the stable measuring unit assumption implemented under Historical Cost
Accounting.
The cost
of inflation and the cost of
hyperinflation are caused by
Historical Cost Accounting: by the implementation of the stable measuring unit
assumption.
Actual inflation and hyperinflation are
caused by an increase in the general price level. An increase in the general
price level is caused by various economic factors, an important one being an
excessive increase in the money supply.
Inflation and hyperinflation are an
increase in the nominal value of the same real value over time.
Stop Historical Cost Accounting (implement
Capital Maintenance in Units of Constant Purchasing Power as authorised in IFRS
twenty three years ago) and there are:
- no stable measuring unit assumption,
- no cost of inflation – no erosion of the real value of monetary
items during inflation,
- no cost of hyperinflation – no erosion of the real value of
monetary items during hyperinflation,
- no erosion of constant real value non-monetary items (e.g.,
capital, non-monetary receivables, non-monetary payables, etc.) during
inflation and hyperinflation,
- no creation of real value in monetary items during deflation
and
- no creation of real value in constant real value non-monetary
items (capital, non-monetary receivables, non-monetary payables, etc.)
treated as monetary items during deflation.
Stop HCA and you fix erosion caused by the
stable measuring unit assumption in the world economy during inflation and
hyperinflation.
There will be no erosion of real value caused
by the stable measuring unit assumption in the world economy when there is no
HCA - when HCA is replaced by CMUCPP as authorised in IFRS twenty three years
ago.
The
stable measuring unit assumptiom is a much bigger enemy than inflation and
hyperinflation. Inflation is toothless without HCA. HCA causes the cost of
inflation. Without HCA there is no cost of inflation.
Without
HCA there is no cost of inflation PLUS
no cost of the erosion of constant items by the stable measuring unit
assumption.
Historical
Cost Accounting causes the cost of inflation and the cost of hyperinflation in
the monetary economy.
The cost of the stable measuring unit
assumption is made up as follows:
- The cost
of stable measuring unit assumption in constant real value non-monetary
items never maintained constant under HCA during inflation and
hyperinflation and
- The cost
of inflation and the cost of hyperinflation.
The stable measuring unit assumption is the
real enemy in the economy: double the size of the cost of inflation or
hyperinflation. The cost of inflation or hyperinflation in the monetary economy
is only half the problem.
Accounting always recognized the total cost
of the stable measuring unit assumption: accounting confused it as all (100%) being caused by inflation and hyperinflation.
It is 100% caused by the stable measuring unit assumption: by HCA.
The cost
of inflation / hyperinflation is caused by the implementation of the HCA
model. The cost of inflation
/ hyperinflation is caused by the implementation of the stable measuring unit
assumption under the HCA model.
Stop the stable measuring unit assumption (implement
Capital Maintenance in Units of Constant Purchasing Power as authorised in IFRS
twenty three years ago) and you stop the cost
of inflation / hyperinflation – not actual inflation or hyperinflation.
An increase in the general price level (inflation / hyperinflation) is the
result of a combination of various economic factors: a very important one being
an increase in the money supply.
The stable measuring unit assumption is a
Generally Accepted Accounting Practice – also a US GAAP and UK GAAP -
implemented by all accountants worldwide as authorised in IFRS and US GAAP.
Not implementing the stable measuring unit
assumption stops the cost of
inflation / hyperinflation at all levels of inflation and hyperinflation as
proven by the daily inflation-indexing of government capital inflation-indexed
bonds in low inflationary economies (e.g., USD 835 billion TIPS in the
US – Jan 2013) and hyperinflationary economies: Venezuelan government
capital inflation-indexed bonds. USD 3.5 trillion + of sovereign capital
inflation-indexed bonds are currently inflation-indexed daily in the world
economy (Jan 2013).
Inflation-index the entire money supply on
a daily basis in an economy (Chile currently inflation-indexes 25% of its broad
M3 money supply and Colombia inflation-indexes all mortgage bonds daily) and
there would be inflation or hyperinflation in an economy, but no cost of
inflation or hyperinflation; i.e., no erosion of the real value of monetary
items excluding bank notes and coins with their nominal values permanently
printed on them.
CMUCPP would stop the erosion of real value
in monetary items (as qualified above) as
well as in constant real value non-monetary items, but it would not necessarily
stop inflation or hyperinflation. CMUCPP stops erosion – not inflation or
hyperinflation – in the economy at all levels of inflation and hyperinflation.
It would be as if there is no inflation or hyperinflation with actual inflation
or hyperinflation.
The cost
of inflation / hyperinflation (not inflation / hyperinflation) is
caused by the HCA model. No HCA equals no cost of inflation / hyperinflation.
The HCA model is an inappropriate
accounting model at all levels of inflation and deflation.
Nicolaas Smith
Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.