Difference between local currency and foreign currency

Foreign currency
  
Foreign currency is always created in a foreign economy. Foreign currency is always a variable real value non-monetary item like, for example, property, plant, equipment, listed and unlisted shares, etc. A foreign currency with a floating exchange rate´s continuously changing daily value is determined in foreign currency markets. Foreign currency gains or losses are recorded in the financial reports under all accounting models including traditional Historical Cost Accounting. Foreign currency is traded daily on many foreign currency exchange markets. A foreign currency with a floating exchange rate has a continuously changing price or real value. A foreign currency with a floating exchange rate can increase and decrease in price daily (minute by minute). 

Local currency

Local currency is always fiat money created in the local economy. A local currency is always a monetary item with an assumed to be perfectly stable real value over time whereas a foreign currency is always a variable real value non-monetary item. However, a local currency´s daily changing real value is determined by the rate of inflation or deflation in the local economy as indicated by the Daily CPI during low inflation, high inflation and deflation and by the Daily US Dollar parallel rate during hyperinflation. Although a local currency is generally not stable in real value, it is assumed that the local currency is perfectly stable in real value over time for the purpose of being used as the "assumed-to-be" perfectly stable monetary unit of account in the local economy for accounting purposes under the Historical Cost and Current Cost Accounting models. Under the Capital Maintenance in Units of Constant Purchasing Power (CMUCPP) accounting model monetary items are generally inflation-adjusted on a daily basis and constant real value non-monetary items are measured daily in units of constant purchasing power generally in terms of the Daily CPI.

Local currency net monetary gains and losses as a result of inflation and deflation are not recorded in the financial reports under HCA and CCA during low inflation, high inflation and deflation. They are calculated and accounted under Capital Maintenance in Units of Constant Purchasing Power during hyperinflation as required under IAS 29 Financial Reporting in Hyperinflationary Economies. During low inflation and deflation local currency is not traded in the local market because local currency is assumed to be perfectly stable in real value over time. Local currency´s real value is indicated by inflation and deflation. However, during high inflation and hyperinflation, local currency is traded in the local market. This market is called the parallel or black market as opposed to the normal foreign exchange market. 

Local currency´s real value is determined by all the underlying value systems in the local economy, e.g., good or bad national governance, a good or bad economy, good or bad monetary policies, a good or bad legal system, a good or bad health system, a good or bad educational system, a good or bad police force, etc, etc. The daily change in local currency´s real value is indicated by the daily change in the Daily CPI during low and high inflation and deflation and by the daily US Dollar parallel rate during hyperinflation.

The total of local currency held locally plus held outside the local economy (as foreign currency by other countries) make up the money supply.  Daily inflation-indexing the local money supply, i.e., all monetary items in the local economy, would eliminate only the effect of inflation or deflation in the local economy: it would leave local inflation or deflation intact. However, it would be as if there is no inflation or deflation in the local economy.

Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Generally accepted definition of hyperinflation

The generally accepted definition of hyperinflation in the world economy is 100% cumulative inflation over three years. It comes to 26% annual or 1.95% monthly inflation for three years in a row.

The above definition is currently being used by the 147 countries that implement International Financial Reporting Standards as issued by the International Accounting Standards Board. This definition has been used since April 1989 by the millions of accountants, business people, economists and all governments who implement IFRS. 

This definition of hyperinflation is contained in IAS 29 Financial Reporting in Hyperinflationary Economies that was authorized by the IASB in April 1989. 

"Par 3. This Standard does not establish an absolute rate at which hyperinflation is deemed to arise. It is a matter of judgement when restatement of financial statements in accordance with this Standard becomes necessary. Hyperinflation is indicated by characteristics of the economic environment of a country which include, but are not limited to, the following:

(a) the general population prefers to keep its wealth in non-monetary assets
or in a relatively stable foreign currency. Amounts of local currency held
are immediately invested to maintain purchasing power;

(b) the general population regards monetary amounts not in terms of the
local currency but in terms of a relatively stable foreign currency. Prices
may be quoted in that currency;

(c) sales and purchases on credit take place at prices that compensate for
the expected loss of purchasing power during the credit period, even if
the period is short;

(d) interest rates, wages and prices are linked to a price index; and

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

There is today not one government in the world economy that uses any other definition of hyperinflation. 

Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

IFRS / US GAAP authorized solution to the Historical Cost Mistake

IFRS / US GAAP authorized solution to the Historical Cost Mistake

Financial capital maintenance in units of constant purchasing power is authorized in both IFRS and US GAAP as the alternative to Historical Cost Accounting, i.e., financial capital maintenance in nominal monetary units (or the Historical Cost Mistake).

The Historical Cost Mistake is, obviously, fixed with Daily Indexing: Capital Maintenance in Units of  Constant Purchasing Power in terms of the Daily CPI during low inflation and high inflation and deflation and in terms of the US Dollar parallel rate during hyperinflation. 

Daily Indexing 

1. Accounting Daily Indexing
2. Comprehensive Daily Indexing

1. Accounting Daily Indexing is implementing CMUCPP in terms of the Daily CPI instead of HCA. That only eliminates the destruction of the real value of constant real value non-monetary items never or not fully maintained constant in real value by HCA. Accounting Daily Indexing keeps the constant real value non-monetary economy perfectly stable by stopping the stable measuring unit assumption in accounting, i.e. stopping HCA. 

2. Under Comprehensive Daily Indexing, Accounting Daily Indexing is combined with daily inflation-indexing of the entire money supply in terms of the Daily CPI. Daily inflation-indexing of all monetary items additionally eliminates the effect of inflation and deflation from only monetary items. However, daily inflation-indexing of all monetary items does not stop inflation or deflation. Daily inflation-indexing of all monetary items stops the destruction of the real value of monetary items over time by inflation and it stops the increase in the real value of monetary items over time during deflation. It only eliminates the effect of inflation and deflation on only monetary items. It would be as if there is no inflation or deflation - while actual inflation or deflation continues.

For example, Daily Inflation-indexing the $3 trillion in global government inflation-indexed bonds maintains the real value of this USD 3 trillion perfectly stable over time on a daily basis, but it does not stop the inflation or deflation in the countries concerned. The inflation or deflation continues, but it is as if there is no inflation or deflation for the holders of the $3 trillion sovereign capital inflation-adjusted bonds inflation-indexed daily in all the different countries where the actual inflation and deflation continue while these monetary conditions are created by the specific central banks. 

Daily inflation-indexing only removes the effect of inflation and deflation. It does not stop inflation or deflation. It is as if there is no inflation or deflation.  
Accounting and Comprehensive Daily Indexing are free, authorized under IFRs and US GAAP and available to all countries and economies. 

Daily Indexing is free. It kills the need for very costly Dollarization or a currency board at no cost while the countries'  central banks maintain their full monetary creation and monetary policy powers (what they lose under Dollarization and a currency board).

Nicolaas Smith Copyright © 2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Bitcoin can never be a monetary item

Bitcoin is a decentralized digital peer-to-peer payment protocol with a spontaneously monetized unit of account. The Bitcoin System's unit of account, bitcoin, is used as a digital medium of exchange on the Bitcoin payment platform. The monetized bitcoin is a very unstable store of value.

bitcoin is the unit of account of the Bitcoin block chain system. bitcoin will never be used as the official monetary unit of account or monetary unit of measure in any accounting model.

Spontaneous monetization of bitcoin

Bitcoin is an open decentralized system. Anyone can participate. Monetization also had to be spontaneous.

On 22 May, 2010 "laszlo" spontaneously monetized bitcoin at $0.0025 for 1BTC. He paid 10 000 BTC for 2 pizzas costing about $25.

Money is supposed to be perfectly stable in real value. Money never was or is or ever will be perfectly stable in real value on a sustainable basis over time. A Consumer Price Index is thus required to calculate a unit of constant purchasing power. Implementing Capital Maintenance in Units of Constant Purchasing Power (CMUCPP) in terms of the Daily CPI (during low and high inflation and deflation) and the USD parallel rate during hyperinflation, including daily inflation-indexing of the entire money supply stabilizes the real value of the money supply as well as the real value of all constant real value non-monetary items in an economy. 

The fact that bitcoin was spontaneously monetized and thereafter evolved to increase in real value - it has a limit of 22 million bitcoins in 100 years' time - means bitcoin was never intended to have a perfectly stable real value over time or even a relatively stable real value that can be assumed to be perfectly stable like in the case of all fiat currencies (all national monetary units). 
Bitcoin can thus never be real money. Bitcoin can never be a monetary item. It is not money or a monetary item. It is a variable real value non-monetary item similar to rare stamps. 

Monetary items constitute the money supply. Bitcoins will never be part of any country's money supply. Bitcoin can thus also never be subject to monetary inflation and monetary deflation because it is not assumed to be perfectly stable in real value. 

Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

It is misleading to state that bitcoin is subject to monetary inflation and deflation

A Consumer Price Index can only be calculated in the case of the currency in which the consumer items is priced being a fiat currency, i.e., it is assumed to be perfectly stable in real value under the traditional Historical Cost paradigm. No fiat currency is, in fact, generally perfectly stable in real value. All fiat currencies are thus assumed to be perfectly stable, i.e., the stable measuring unit assumption is applied. 

The CPI is then used to, e.g., inflation-adjust government indexed bonds (TIPS) on a daily basis, measure financial capital maintenance in units of constant purchasing power as in IAS 29 Financial Reporting in Hyperinflationary Economies, etc.

Bitcoin is not assumed to be perfectly stable in real value. It is not a fiat currency. It is a property as per the US IRS. It is, in fact, a variable real value non-monetary item just like any other property, plant or equipment. 

Since bitcoin is not assumed to be perfectly stable in real value (heaven forbid!), it is thus not subject to the economic concept of monetary item inflation, being a sustained increase - not in a specific price, but, in the general price level, or deflation, being a sustained decrease - not in a specific price, but, the general price level. 

It is thus a complete mistake to associate bitcoin with monetary inflation and deflation as indicated by the change in a CPI. 

On the other hand:

It is true that any single price increase is also described as inflation of that specific price. However, it is clearly understood in economics that it is not the same as monetary inflation being a sustained increase in the general price level which normally includes simultaneous decreases (also described as deflation) in various specific prices. This, nonetheless, confuses most people. 

In the same way a decrease in a specific price is described as deflation in that specific price. It is also clearly understood in economics that it is not the same as monetary deflation being a sustained decrease in the general price level which normally includes simultaneous increases (also described as inflation) in various specific prices. However, this also confuses most people.

It is thus misleading to state that bitcoin is subject to monetary inflation and deflation. It is not.

Nicolaas Smith

Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Despite what Bloomberg states: Monetary deflation or inflation is impossible in bitcoin

Both the economic science concept of monetary item inflation and the economic science concept of monetary item deflation are impossible with bitcoin because bitcoin is a variable real value non-monetary item (a property, not a currency - not money or a monetary item - as the US IRS stated - or "fundamentally not a currency" as the People's Bank of China (Central Bank of China) stated).

The economic science concept of inflation, unfortunately, has not only one, but, two meanings (which is sadly, but unavoidably and very humanly, rather confusing):

(1) Inflation is sometimes used to simply  mean a price increase in any single price, for example, the Bank of England sometimes states "house price inflation" when it actually means the increase in house prices in the UK: a single sector price increase in the UK, not a sustained increase in the general price level in terms of the Pound as measured in terms of the UK CPI measured in terms of the monetary item, the UK Pound - the undoubtedly main definition of inflation for people in the UK. Inflation used in this sense of simply any single price increase (not a general price level increase resulting in the decrease of the real value of the monetary item, the UK Pound) thus has as its opposite that deflation is simply any price decrease (not a general price level decrease resulting in the increase in the real value of the monetary item, the UK Pound). 

(2) Secondly, inflation is almost always (luckily and scientifically) correctly used to mean "a sustained increase in the general price level" when the general price level is taken to be indicated by the Consumer Price Index, which is calculated in terms of a fiat local currency which is assumed to be perfectly stable - when in fact the fiat currency, generally, is almost never perfectly stable (maybe perfectly stable - zero inflation - for only one or a maximum of two months in a row).

Deflation is thus impossible in bitcoin for simply the same reason: bitcoin is not a fiat currency with a real value assumed to be perfectly stable over time.

Fiat money is always a monetary item. That is: it forms part of a country's money supply. There is not one bitcoin included in any country's money supply: thus, another clear proof that bitcoin is not a monetary item (not money) although everyone calls it a virtual or digital or cryptocurrency. There is no problem with calling bitcoin a digital currency: that is how the man and woman in the street speak about bitcoin. The man or woman in the street regards any widely used medium of exchange as "money". In economic science, however, bitcoin is not a monetary item: its is a variable real value non-monetary item as very correctly indicated by the US IRS which ruled it is a property (part of Property, Plant and Equipment) and not a currency: not a monetary item or "fundamentally not a currency" as the Chinese PBOC correctly ruled.

Bitcoin has been classified as property (a variable real value non-monetary item - not a monetary item) in the US. Bitcoin has not been classified as a monetary item in any country although everybody calls it a digital currency.

Bitcoin can never be a monetary item. To become a monetary item, bitcoin has to be perfectly stable in real value or assumed to be perfectly stable in real value, like all fiat currencies are under Historical Cost Accounting, the traditional accounting model used to account almost all economic activity in the world economy.

Bitcoin speculators (the WinkleVoss Twins, et al), who are 99.9% responsible for the bitcoin phenomenon would be totally mortified if anyone would be so absolutely silly to succeed in making bitcoin perfectly stable in real value. They would die on the spot. They and the WinkleVoss Twins are betting their life´s savings on the view that bitcoin would skyrocket in price because it is limited to a total of 22 million bitcoins in about 100 year's time. So be it. Good luck to them.

However, if the bitcoin price were to take off exponentially in 100 year's time when the 22 millionth (last) bitcoin is mined with increased massive demand for bitcoin in the world economy, then it would not be because of deflation (the increase in the real value of a nominal value fiat currency - which bitcoin is not - because of a sustained decrease in the general price level indicated by the CPI which is measured in terms of that "assumed-to-be-perfectly-stable fiat currency".)

It would simply be because of a hopefully (by the WinkleVosses and other speculators) massive increase in demand for a stopped-in-supply bitcoin. It would have absolutely nothing to do with deflation or a sustained decrease in the general price level of a fiat currency that is assumed to be perfectly stable in real value - which bitcoin is not.

Anyone (for example - with all due respect for a great publication - Bloomberg) stating that bitcoin is subject to inflation (not the price increase definition) or deflation, does not understand the economic concept of monetary inflation and deflation with reference to a fiat currency that is assumed to be perfectly stable in real value.

There are a lot of things I do not understand.

To construct a CPI measured in Bitcoin is thus very silly since there are generally no consumer prices stated in bitcoin and most probably never will be.

Nicolaas Smith 

Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

What is money?

I) AS DEFINED IN ECONOMICS

In terms of economics, an item has to fulfil all the following requirements, at the same time, to be considered "money" and thus a monetary item:

1. a widely used medium of exchange which overcomes the double coincidence of wants problem,

2. a relatively stable store of real value, 

3. a relatively stable real value unit of account

and

4. legal tender.

This money is a monetary item. Monetary items constitute the money supply.

Money´s real value is eroded by inflation and increased by deflation. 

Prices are widely quoted in this money.

The Daily CPI reflects the general price level. Items in the consumer basket used to calculate the Daily CPI are priced in terms of this money.

This money is used to calculate a unit of constant purchasing power in terms of the Daily CPI in order to

(a) eliminate the effect of inflation and deflation from monetary items and 

(b) eliminate the effect of the stable measuring unit assumption from constant real value non-monetary items.

II) AS SEEN BY THE MAN IN THE STREET

Money is anything that is a widely used medium of exchange.

Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

If Bitcoins were money their creation would immediately be banned by monetary authorities

If Bitcoins were money their creation would immediately be banned by  monetary authorities

For a cryptocurrency (for example, bitcoin)  - or any other item - to be money, i.e., a monetary item, it has to be 

1. a widely accepted medium of exchange

2. a perfectly stable real value store of value

and

3. a perfectly stable real value unit of account

besides also being legal tender in the economy where the money is created.

Monetary items constitute the money supply in the economy where the money is created. 

Non-monetary items are all items that are not monetary items. 

Non-monetary items are sub-divided in 

(a) variable real value non-monetary items, e.g., property, plant, equipment, foreign exchange, listed and unlisted shares, inventory, raw material stock, bitcoins, etc. 

and 

(b) constant real value non-monetary items, e.g., all items in sharehoders´ equity, trade debtors, trade creditors, all items in the profit and loss account, provisions, salaries, wages, pensions, taxes, rents, interest, etc.

More specifically, a monetary item has to be a perfectly stable store of real value which makes it a perfectly stable real value unit of account. 

Fiat money, e.g., the US Dollar, Euro, Yen, Yuan, Ruble, etc., is generally not a perfectly stable store of real value and thus also not a perfectly stable real value unit of account. The US Dollar and the Euro, for example, have an inflation target of 2 percent per annum. That is regarded (another assumption) as "monetary stability" by the monetary authorities.

Mankind over the ages has overcome the problem of money having to be perfectly stable in real value by simply assuming that it is perfectly stable in real value over time by applying the stable measuring unit assumption under the traditional, generally accepted, globally implemented Historical Cost Accounting model to account all economic activity. 

‘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.’

Walgenbach, Dittrich and Hanson 1973: 429

Problem solved. Money is generally never perfectly stable, so, we solve the problem by simply assuming it is perfectly stable in real value. Ask any accountant or economist and he or she will confirm this. 

Cryptocurrencies, by being variable real value non-monetary items, can thus never be money or monetary items. 

If a cryptocurrency were perfectly stable in real value over time, it would be a monetary item and could be used as a perfectly stable unit of account. However, their creation would immediately be banned by monetary authorities because only a country's central bank has the authority to issue money in an economy. 

Bitcoins are a medium of exchange because many people and companies accept them as such. They are also a variable store of value similar to fiat money. However, bitcoins are not assumed to be perfectly stable in real value and used as such as a unit of account with a perfectly stable real value whereas all fiat currencies (money within those economies) are. Bitcoins are thus not money. Bitcoins can thus never be money or a monetary item.

If bitcoins were money, their creation would immediately be banned by  monetary authorities. This is true for any cryptocurrency.

Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Completely wrong Bitcoin statements

Completely wrong Bitcoin statements

It is completely wrong for The Economist to state that Chronic deflation may keep Bitcoin from displacing its fiat rivals.

Deflation is impossible in Bitcoin. It is impossible in a non-monetary item. A bitcoin is a variable real value non-monetary item. 

Deflation is a sustained decrease in the general price level over time.

Deflation means the real value of a monetary item increases while its nominal value stays the same over time as  a result of a fall in the general price level. 

A monetary item can only be affected by inflation when its real value decreases as a result of a sustained increase in the general price level over time. The nominal value of the monetary item (US Dollar, Euro, Yuan, Yen, etc.) stays the same over time.

All statements linking Bitcoin to inflation or deflation are completely wrong.

Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

IASB agrees with silly idea that capital maintenance is only required during high inflation

IASB still clueless about capital maintenance

The IASB now officially agrees with the silly idea that capital maintenance is only required with the onset of high inflation.

After an analysis of the replies to the Discussion Paper: A Review of the Conceptual Framework, the IASB now officially agrees with the silly idea that capital maintenance is only required with the onset of high inflation. 

15 (c) Capital maintenance – Most respondents agreed with the proposal in the Discussion Paper to leave the existing descriptions and the discussion of capital maintenance concepts in the Conceptual Framework largely unchanged until such time as work on accounting for high inflation indicates a need for a change. Consequently, we do not propose to discuss capital maintenance with you unless work on the measurement section of the Exposure Draft highlights a need to discuss the issue further. 

The IASB simply ignores the statement by the Australian accounting authorities that there is a lack of understanding at the IASB regarding the importance of capital maintenance in the accounting framework. 

The IASB also ignores the statement by The European Accounting Association that "Capital maintenance is a competing objective of financial reporting" in their comment to the above Discussion Paper. 

The ignorance of the functioning of capital maintenance in units of constant purchasing power in terms of a DAILY INDEX at the IASB is shocking especially when it is taken into account that by simply making a very small change to IAS 29 Financial Reporting in Hyperinflationary Economies and requiring DAILY indexing instead of applying the monthly published CPI would stabilize the non-monetary economies in hyerinflationary economies in Venezuela and Belarus over a very short time. 

The IASB has absolutely no understanding of what is written in the previous paragraph although I have been trying to explain it to them since January 2012 in IFRS ´X` CAPITAL MAINTENANCE IN UNITS OF CONSTANT PURCHASING POWER.

The IASB is absolutely clueless about the effects of daily indexing on capital maintenance.

I can see why the US Securities and Exchange Commission refuses to agree to the adoption of IFRS in the US economy. The IASB is very intransigent to the detriment of the world economy.

Nicolaas Smith 

Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Difference between inflation and the stable measuring unit assumption

Difference between inflation and the stable measuring unit assumption

Almost no-one understands the difference between the inflation and the stable measuring unit assumption.

DEFINITION

Inflation is a sustained increase in the general price level over time.  

Inflation results in a decrease in the real value of ONLY money and other monetary items over time. Inflation has NO effect on the real value of non-monetary items over time. Inflation can only affect the real value of monetary items - nothing else. 

DEFINITION

Monetary items constitute the money supply.

DEFINITION

Non-monetary items are all items that are not monetary items.

DEFINITION

The stable measuring unit assumption is the ASSUMPTION made by ONLY historical cost accountants that changes in the purchasing power of money are not sufficiently important to require: 

(i) inflation-indexing all monetary items in terms of all changes in the general price level, that is to say, at least daily and 

(2) the measurement of all constant real value non-monetary items in units of constant purchasing power in terms of all changes in the general price level, that is to say, at least daily.  

SUMMARY

Under the stable measuring unit assumption it is ASSUMED  that money is
PERFECTLY STABLE over time at ALL levels of inflation and deflation.

The ASSUMPTION that money is PERFECTLY STABLE over time at ALL levels of inflation and deflation is obviously completely wrong.

So, what is the difference between inflation and the stable measuring unit assumption? 

The difference is that inflation only erodes the real value of monetary items over time and that the constant purchasing power (real value) of constant real value non-monetary items is eroded, not by inflation, but by the stable monetary unit assumption over time during inflation.

Thus, the real value of monetary items is eroded by inflation while the real value of constant real value non-monetary items is eroded by the stable measuring unit assumption, i.e., by the use of the traditional Historical Cost Accounting model. 

Most accountants and economists (as well as people in general) mistakenly believe that inflation erodes the real value of companies´ capital and retained profits while it is actually an impossibility: inflation can only affect the real value of monetary items - nothing else. Inflation has no effect on the real value of non-monetary items. The real value of constant real value non-monetary items is eroded by the use of the stable measuring unit assumption, i.e., by the use of the traditional Historical Cost Accounting model. 

Nicolaas Smith 

Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

HCA is like shooting yourself in both feet

HCA is like shooting yourself in both feet

Under Historical Cost Accounting you apply the stable measuring unit assumption. That´s a double whammy to the maintenance of real value: (a) you do not maintain the real value of monetary items and (b) you do not maintain the real value of constant real value non-monetary items during inflation and deflation as follows:

1. With monetary items you assume money is perfectly stable and you DO NOT inflation-index all monetary items daily 

and

2. With constant real value non-monetary items you apply the stable measuring unit assumption and you DO NOT measure constant real value non-monetary items in units of constant purchasing power in terms of all changes in the general price level, that is: at least daily. 

There´s you double whammy to real value under HCA.

Under Capital Maintenance in Units of Constant Purchasing Power (CMUCPP) in terms of the Daily CPI you would:

A Maintain the real value of all monetary items by inflation-indexing them daily 

and 

B Maintain the constant purchasing power (real value) of all constant real value non-monetary items constant by measuring them in units of constant purchasing power in terms of the Daily CPI. 

Nicolaas Smith 

Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

What backs the US Dollar?

The US Dollar is backed by all the underlying value systems in the US economy.

The underlying values systems in the US economy include, but are not limited to:

Sound governance
Sound economic policies
Sound education system
Sound justice system
Sound health system
Sound defense system
Sound police system
Sound commerce and industry
Sound infra-structure system
Sound monetary policies
Sound accounting principles
Etc, etc.

The same is true for every other fiat currency. They are backed by all the specific underlying values systems in each economy.

Nicolaas Smith 

Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Quantitative easing

Quantitative easing is the creation of new money by the central bank in the form of loans to commercial banks that does not result in an increase in inflation. A central bank increases commercial banks´ reserves with the central bank by means of valid loans that have to be paid back by the commercial banks. The commercial banks, having more reserves with the central bank, then increase loans to businesses and consumers which boost economic activity in a non-inflationary way.

Nicolaas Smith 

 Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Bitcoin is not money like your local currency

Bitcoin is not money like your local currency

There are three basic economic items in the economy:

1. Monetary items, e.g., bank notes and coins, money loans and all other items in the money supply.

2. Variable real value non-monetary items, e.g., property, plant, equipment, inventory, stocks, shares, patents, stamps, gold, etc. 

3. Constant real value non-monetary items, e.g., salaries, wages, rents, interest, capital, profits, losses, all items in shareholders equity, all items in the profit and loss account, accounts receivable, accounts payable, etc. 

Where do bitcoins fit in?

They are not constant real value non-monetary items. Their real values change daily. 

Are they monetary items? Let´s see: are they the same as money?

For any item to be money it has to have all three of the functions of money:

a) Medium of exchange.

b) Store of value.

c) Unit of account.

Bitcoins are certainly a medium of exchange. Somebody bought a Tesla with bitcoins. They are accepted in some stores. 

Bitcoins are certainly a store of value, albeit an unstable store of value. They started off in 2009 at a few US Dollars each. A few months ago they shot up to over USD 1200 each. Today they are down to USD 480 I see on Google search.

Are bitcoins a unit of account? I know they are accepted as such in Germany for the purpose of making bitcoin transactions taxable, but it is specifically then immediately stated in Germany that bitcoins are far from being a currency or even e-money the same as the pound or dollar or euro. They are not generally accepted as a unit of account. Financial reports are not widely prepared in bitcoins. 

Thus, bitcoins generally only fulfil two of the three functions of money, namely medium of exchange and store of value. Bitcoins are thus not money or monetary items. 

However, in 2013 a federal judge in the US stated they are the same as money. That still does not mean that they are widely being used as a unit of account with companies doing their books in terms of bitcoins. 

It is certainly a fact that bitcoins are generally described as bitcoin money, a currency, virtual currency, digital currency, virtual money or cryptocurrency. There is no doubt about that. These are the popular terms in the news, on the internet, in research papers, etc. However, bitcoins are not generally used as a unit of account. Thus they are not money or a monetary item or a local currency in terms of the economic definition of money or a monetary item.

Bitcoins are variable real value non-monetary items. The US IRS ruled that they are properties. They are similar to (not the same as) gold or silver coins, stamps or any other variable real value non-monetary item being used as a medium of exchange and store of value. Cigarettes are often used as a medium and exchange and store of value (over the very short term) in prisons. 

Bloomberg's report regarding the People's Bank of China: "The central bank will keep watching risks from Bitcoin, which is fundamentally not a currency but an investment target, Sheng Songcheng, head of the monetary authority’s statistics department, told reporters in Beijing on Jan. 15."


Nicolaas Smith 

Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Capital Maintenance feedback summary by the IASB

Purpose of paper 

1. This paper summarises the feedback received on: 

(a) the measurement section of the Discussion Paper A Review of the Conceptual Framework for Financial Reporting. 

(b) Capital Maintenance, discussed in paragraphs 9.45–9.54 of the Discussion Paper. 

2. This paper provides a high level summary of the comments received. 

Where appropriate, we will provide more detailed breakdown of the comments for future meetings. 

Capital Maintenance

Background

58. The Discussion Paper stated that the IASB plans to include the existing descriptions and the discussion of capital maintenance concepts in the revised Conceptual Framework largely unchanged until such time as a new or revised Standard on accounting for high inflation indicates a need for change.

Summary of feedback

59. Most respondents either agreed with this approach or did not comment on it. Those who explicitly agreed with the approach stated that they had encountered few problems either with the capital maintenance concepts in the existing Conceptual Framework or with high inflation. Consequently, they argued that revising or updating the capital maintenance concepts in the Conceptual Framework should not be a priority.

60. A few respondents broadly agreed with the suggested approach to capital maintenance but suggested some changes to the existing guidance including:

(a) stating in the Conceptual Framework a preference for one of the concepts
of capital maintenance;

(b) removing reference to the physical capital maintenance concept because it
is not used in IFRS;

(c) shortening and focusing the discussion of capital maintenance;

(d) removing all discussion of capital maintenance because it was viewed as
irrelevant to most entities.

61. Some respondents disagreed with the suggested approach. They argued that the concept of capital maintenance is of fundamental importance to financial reporting.

"…the Conceptual Framework should articulate an ideal concept of capital maintenance and its relationship to the ideal measurement base. Accordingly, we do not support the proposal that leaves the existing descriptions and discussion of this issue largely unchanged until such time as any project on accounting for high inflation indicates a need for change.

We think this approach suggests a lack of understanding about the fundamental role a capital maintenance concept has within the accounting framework. 

We also consider that our current difficulties with profit measurement and OCI, which have issues of capital maintenance at their root clearly indicate a pressing need to resolve these issues."

CPA Australia and The Institute of Chartered Accountants Australia

62. A few respondents also noted that many jurisdictions are affected by high inflation. Consequently, the IASB should consider capital maintenance concepts when revising the Conceptual Framework. 

One respondent argued for greater use of capital maintenance as defined in terms of units of constant purchasing power.

63. A few respondents expressed the view that the IASB’s suggested approach to capital maintenance confuses two concepts:

(a) capital maintenance; and

(b) the measurement unit (nominal vs constant purchasing power), which is the subject of IAS 29 Financial Reporting in Hyperinflationary Economies. 


IASB Agenda ref 10G 

Copyright (c) 2014 IFRS Foundation

ECB introduces the Real Euro

The European Central Bank today introduces Real Euros for the first time in countries in the European Monetary Union. Real Euros are new Euro notes with an embedded chip that reduces the nominal value of the notes in terms of inflation. During deflation the nominal values appearing on the notes will automatically increase in line with deflation.

This is a way to stabilize the Euro monetary economy in the European Monetary Union. It does away with the real effect of inflation and deflation in the EMU.

For example, during inflation of 2% per annum, the nominal value appearing on a new 100 Real Euro note automatically decreases to 98 Euros.

During deflation of 2% per annum the nominal value appearing on a 100 Real Euro note automatically increases to 102 Euros.

The President of the ECB, Mario Draghi, states that this will keep the value of the Euro money supply stable in real terms in the EMU.

He says that all nominal Euros can be exchanged at banks in Europe as from today for Real Euros.

Economists warn that this will make the effect of deflation even worse in the EMU. People will actually see their money increase in real value and will hang on to the notes even longer (see Japan during deflation) before spending them thus worsening the economy.

On the other hand this will stimulate spending during inflation since people will spend their money sooner - before the Real Euros lose more real value in front of their eyes.

Copyright (c) 2014  Primeiro de Abril All rights reserved. No reproduction without permission.

Difference between monetary values and monetary items

All economic/accounting/financial values expressed in terms of the monetary unit of account - whether they refer to non-monetary or monetary items - are stated as monetary values: the unit of account is a monetary unit of account.

Definition: Monetary items constitute the money supply. 

When an item is part of a country´s money supply, then it is a monetary item. It is expressed as a monetary value since it is expressed in terms of the monetary unit of account.

All non-monetary items - variable and constant real value non-monetary items - expressed in terms of the monetary unit of account are stated as monetary values, but they are not monetary items.

All monetary items are monetary values but not all monetary values are monetary items.

Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Daily CPI formula used by France

The formula for calculating the French and Eurozone Daily CPIs is available HERE.

The following Daily CPI´s have been added to the Daily CPI / Monetized Daily Indexed Unit of Account list on the right hand side of this blog: 

Eurozone Daily CPI

French Daily CPI 

Mexican Monetized Daily Indexed Unit of Account

Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.