Daily Indexing is free, 2% better than Dollarization and autonomous monetary policy control is maintained

Reply to Francisco Toro on The Devil´s Excrement

See Inflation ceases to be a concern for wage earners under Daily Indexing

Francisco Toro,

Thank you for your kind reply.

I wish to express my respect for your direct, honest and good faith analysis of my very technical accounting replies. You already have an excellent understanding of recently identified accounting concepts that are currently not even understood at the International Accounting Standards Board (IASB) which is of course a great disadvantage for Venezuela which has been in hyperinflation since 2009. Daily Indexing or daily monetary correction has only very recently been identified as actually being financial capital maintenance in units of constant purchasing power in terms of a Daily Index as authorized at all levels of inflation and deflation in International Financial Reporting Standards (IFRS) since 1989 and authorised in US GAAP since 1985.

You write about the simplicity of Daily Indexing. It is a very straightforward process: there is no stable measuring unit assumption - implemented via an IFRS: the government has nothing to do with the process. That´s it. So, EVERYTHING has to be indexed DAILY. In fact, not only daily, but every time the price level changes. When Venezuela gets to about 3000% inflation per annum you will have some days during the year when the price level would change more than once a day.

Daily Indexing is simply (1) measuring non-monetary items in units of constant purchasing power in terms of a Daily Index (you cannot inflation-adjust them because they are not monetary items) and (2) inflation-adjusting monetary items in terms of a Daily Index - both (1) and (2)  during whatever rate of inflation or hyperinflation in Venezuela. There would still be hyperinflation as long as your Central Bank prints too many Bolivars, but there would be no REAL VALUE erosion in non-monetary items measured in units of constant purchasing power in terms of a Daily Index and there would be no inflation effect (REAL VALUE erosion) in monetary items inflation-indexed Daily.

The REAL EFFECT would be the same as zero inflation, but there would still be hyperinflation. It would be AS IF there were no hyperinflation - the same as in Brazil in the past.

The real effect of perfect Daily Indexing would be 2% better than dollarization (the US Dollar has a 2% inflation target), except you would still have full monetary policy control over your local currency which you would lose under actual Dollarization. Daily Indexation is the same as “dollarization” in a constant purchasing power Bolivar unit of account while you would maintain full autonomous monetary control.

Daily Indexing is free. Official or unofficial Dollarization requires US Dollars to the value of whatever is required to replace Venezuela´s money supply. Spontaneous dollarization (Zimbabwe´s case) sorts out the money supply problem spontaneously.

Daily Indexing is simply a totally different paradigm: the constant item constant purchasing power paradigm (no stable measuring unit assumption) instead of the traditional, 3000-year-old nominal Historical Cost paradigm (implementing the stable measuring unit assumption).

Your statement:

“From the perspective of wage earners, this proposal would adjust their income daily such that inflation ceases to be a concern of theirs, at least as far as their income’s value”

echos Alan Greenspan´s definition of price stability:

"Price stability obtains when economic agents no longer take account of the prospective change in the general price level in their economic decision-making."

The real value (constant purchasing power) of their wages would remain constant over time at whatever rate of hyperinflation. The nominal values would be indexed daily - similar to all taxes, profits, losses, reserves, capital, rents, debtors, creditors and all other non-monetary items as well as normally a substantial part of the monetary economy. No-one would ever assume money were perfectly stable for any item under Daily Indexation: it is a totally different paradigm.

You stated:

“From the perspective of non earners, earners of the informal economy, and anyone whose income is not processed through an accounting system, the price of everything around them increases more quickly and in a worse manner than before.”

Once the whole economy adopts Daily Indexing it would be used in the informal economy too. Their wages would be increased at the exact same rate as the price of everything around them too.

‘By the way, I have to bring up again the salaries going down issue. Yes, they “would maintain their constant purchasing power (real value) over time”, but their numerical value would go down if the currency starts becoming stronger with respect to the dollar.’

The official US Dollar exchange rate in terms of the local currency and the daily US Dollar parallel rates normally unify at the parallel rate over time. Under Daily Indexing the nominal value of their salaries would increase during all that time with the real value staying constant. Yes, after unification of the two rates at the parallel rate, IF (ONLY a theoretical IF) Venezuela were to get so lucky that the Bolivar (Venezuelan economy) would become STRONGER than the US Dollar (the US economy), then the nominal value of their salaries would go down, but the real value would always remain constant under Daily Indexing. Workers would be happy under any scenario with Daily Indexing.

While the Bolivar official rate for the US Dollar is below the parallel rate and it is getting closer and closer to the parallel rate, the Bolivar would NEVER during that time be STRONGER THAN the US Dollar: the rate by which its real value would be eroded (it would ALWAYS be in a state of erosion compared to the USD till it gets to the parallel rate) would be LOWER till there is no erosion when it maintains its par value with the USD. Disinflation is simply LOWER - but still positive - inflation. Disinflation is STILL inflation (erosion of real value), but at a LOWER rate than before.

Disinflation (lower INCREASE in the CPI - lower inflation) is to be expected as the economy stabilises under Daily Indexing. The Bolivar actually getting “stronger than” the USD is a different story altogether: I think it is only a theoretical case. I think the Venezuelan economy - like the Portuguese economy - would never be stronger than the US economy under currently foreseeable circumstances.

You stated:

“There is no such thing as a free lunch.”

I totally disagree with you with reference to what has been happening and is happening in Venezuela. See Miguel Octavio´s latest article. I think I would call Venezuela The Free Lunch Self-Destructing Economy.

First of all: seigniorage is a free lunch to the state normally applied to the benefit of the population in countries with good governance. The new banknotes have to be put into circulation. Another example: The US has a free lunch from increasing the USD money supply to accommodate countries that dollarize using the USD. This is not orchestrated by the US. Countries decide to dollarize (officially or unofficially) or dollarize spontaneously.

The Venezuelan economy is being destroyed by the free lunches obtained by Venezuelans who illegally arbitrage between the official and parallel rate: Miguel´s article. The Venezuelan economy is being destroyed by the unnecessary extra free lunch the state gets from creating hyperinflation when they do not apply it in sustainable development, for example via Daily Indexing.

You stated:

“The greater the sum of differences in income from daily indexation, the greater the loss for those profiting from seigniorage, unless they make up for it with greater printing, which only worsens the situation for the poor.”

Unless they make up for it with greater printing: that is classical increase in hyperinflation. Zimbabwe was the perfect example. That was how they got to 89 700 000 000 000 000 000 000 percent (Hanke 2008) hyperinflation in 2008.

“which only worsens the situation for the poor”: not under Daily Indexing. The poor would see their wages, pensions, social subsidies, etc. indexed daily. DI implements a daily measurement in units of constant purchasing paradigm applied to all items.

You stated:

“Without an accompanying belt tightening by the government (e.g., reducing government expenses, attracting foreign investment, increasing reserves), this idea worsens inequality. Would you agree with this, or am I missing something?”

That is a very broad political statement (out of the blue) now bringing in “inequality”. Daily Indexing, i.e., financial capital maintenance in units of constant purchasing power in terms of a Daily Index, would simply be a technical accounting matter that CAN be implemented via IAS 29 without the involvement of the Venezuelan government which would stabilise the Venezuelan non-monetary economy over a short period of time.

Yes, “an accompanying belt tightening by the government (e.g., reducing government expenses, attracting foreign investment, increasing reserves)” is part of the broad macroeconomic solution.

Daily Indexing “worsens inequality” between the rich and the poor?

Common sense would indicate that Daily Indexing would reduce inequality at the time of its adoption since the poor are normally abused at all levels (as currently required/supported by the IASB under IAS 29 in terms of the monthly published CPI), e.g., with fixed nominal salaries and benefits during hyperinflation. Daily Indexation would stop that. Daily Indexing can be expected to reduce inequality over the medium and long term as first a stable non-monetary economy and then a relatively stable monetary economy (with low inflation) would play a great part in normalising the economy which would increase the rate of the poor moving up to middle class via education and higher constant wages. This happened and is happening very successfully in post-apartheid South Africa with an inflation target of 3 to 6 percent even under Historical Cost Accounting. Six percent inflation under HCA is not EXACTLY, but "almost like", 94% Daily Indexing.

Your criteria:

“1) high chance of winning votes over from the chavista side;”

Daily Indexing is a technical accounting standards matter dealing with the basic measurement paradigm in the economy outside government control: everyone will have to do it and everyone will gain and see and experience that they are gaining, both chavistas and opposition.

You stated:

“It would be difficult to explain to those who would benefit from it.”

In Angola street vendors, some of whom had never been to school, understood daily indexing in terms of the US Dollar parallel rate instinctively. Street traders in all hyperinflationary economies are one of the first groups to understand it. Normally the local population understands the concept very quickly. Foreigners from low inflation countries who did not get used to it slowly over time, but suddenly encounters it, take longer to understand the concept.

160 Million Brazilians used it for 30 years from 1964 till 1994. Millions of other Latin Americans too, for many years.

The Argentinian Accounting Federation in their 2010 proposal to the IASB regarding Financial Reporting in High Inflationary Economies also pointed out to the IASB that South American countries have a long experience of indexation.

I think you may be wrong in this case. The invisible hand of self-interest would normally ensure quick acceptance.

“and difficult to swallow for those who would suffer worse for it, which makes it easy for chavismo to counter through misiones adjustment promises, economic stabilization be damned.”

Daily Indexation would be implemented via an IFRS. It would be a technical accounting matter outside political control.

Everyone agrees that dollarization in the US Dollar would stabilise the monetary and non-monetary economies with loss of autonomous monetary policy control. Daily Indexing is “dollarization” of the non-monetary economy and inflation-indexed monetary economy in terms of an indexed local currency unit AND you would still have full control over local monetary policy.

You stated:

“As opposed to Daily Indexing (DI), UCT reduces inequality.”

I explained above that Daily Indexing would reduce inequality.

You stated:

“it seems that DI could in fact make citizens more supplicants than ever.”

Instead of suppliantly enduring the tyranny of the implementation of the stable measuring unit assumption during hyperinflation, citizens would be able to avail themselves of the unfailing availability of the Daily Indexing of all items under the Constant Item Constant Purchasing Power paradigm.

You stated:

‘I disagree with stating that UCT “does not guarantee the sustainable development of the economy” since DI does not either’

Maintaining the constant purchasing power of constant items constant in a stabilised non-monetary economy implementing Daily Indexing would be the cornerstone of the sustainable development of the economy.

You stated:

“UCT at least forces the government to have the incentive of increasing its taxation income,”

Daily Indexing of all taxes, taxes payable and taxes receivable (they are all constant real value non-monetary items under Daily Indexing) would always increase the real value of the above items during inflation/hyperinflation compared to treating them as traditional fixed nominal monetary items.

Nicolaas Smith

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

Inflation ceases to be a concern for wage earners under Daily Indexing

Inflation ceases to be a concern for wage earners under Daily Indexing

Francisco Toro´s reply on The Devil´s Excrement to Implementing Daily Indexing in Venezuela - Part 2 

"extorres Says:

September 20, 2013 at 9:42 am

Nicolaas Smith,

Let me start by framing my response with a statement of respect for your proposal. It seems soundly powerful despite its impressive simplicity. I am again forced to readjust my understanding of it by your reply, which was top notch. Thanks to you, and Gustavo Franco.

It seems clearer now that this proposal is highly focused in method as in purpose, and perhaps I was expecting irrelevant ramifications. If I understand correctly, the Daily Indexing proposal does not seek to correct hyperinflation, only some of its economic effects, until other steps are taken to correct the hyperinflation, itself. This takes me down three different paths of discussion.

1) From the perspective of wage earners, this proposal would adjust their income daily such that inflation ceases to be a concern of theirs, at least as far as their income’s value. This would also be true for most businesses and I dare say anyone whose income is processed through an accounting system. From the perspective of non earners, earners of the informal economy, and anyone whose income is not processed through an accounting system, the price of everything around them increases more quickly and in a worse manner than before. My comment regarding non earners made reference to these folk. If they are receiving income from social programs, clearly their income is indexed by the accounting systems running the social programs.

By the way, I have to bring up again the salaries going down issue. Yes, they “would maintain their constant purchasing power (real value) over time”, but their numerical value would go down if the currency starts becoming stronger with respect to the dollar.

Also by the way, I am not convinced with the reply regarding seigniorage. There is no such thing as a free lunch. The amount of profit from seigniorage would be arithmetically reduced at the end of the day by the amount of adjustment resulting from the daily indexation. The greater the sum of differences in income from daily indexation, the greater the loss for those profiting from seigniorage, unless they make up for it with greater printing, which only worsens the situation for the poor. I think the cause and effect is incorrect: it’s not seigniorage’s profits that are reduced when hyperinflation is lowered; it’s hyperinflation that is lowered when seigniorage is reduced.

Back to the main argument, it seems to me that, without an accompanying belt tightening by the government (e.g., reducing government expenses, attracting foreign investment, increasing reserves), this idea worsens inequality. Would you agree with this, or am I missing something?

2) Given our political reality and the urgency and importance of an election process coming up, I am filtering proposals by those meeting two criteria, leaving all others for later: 1) high chance of winning votes over from the chavista side; 2) low chance of being countered by the chavista side. This proposal seems to be weak on both counts. It would be difficult to explain to those who would benefit from it and difficult to swallow for those who would suffer worse for it, which makes it easy for chavismo to counter through misiones adjustment promises, economic stabilization be damned.

3) Personally, I don’t merely analize whether a proposal is a good or bad action to take, but whether it is a better or worse action to take than another. For this reason, I reiterate the comparison with the proposal of Unconditional Cash Transfer (UCT). As opposed to Daily Indexing (DI), UCT reduces inequality. The way I envision it, UCT is also indexed to the dollar, or as was put in your reply “the NON-MONETARY economy would be stabilised AS IF it is dollarized”. Not only is UCT more likely to flip the citizen:government relationship, making citizens go from supplicants to citizens (see:http://caracaschronicles.com/2007/07/17/torres-in-bethlehem/ ), it seems that DI could in fact make citzens more supplicants than ever.

I disagree with stating that UCT “does not guarantee the sustainable development of the economy” since DI does not either, so no difference there. Also, the statement that “State of the art education, equal opportunity, free competition and abundant availability of investment capital (e.g., via quantitative easing) in the above model I described do a good job of generating sustainable developement in an economy” applies just as much to the UCT model as it does to the DI model, even more so. As per the article in the link, UCT at least forces the government to have the incentive of increasing its taxation income, whereas the DI model continues the petrostate model of the government’s incentive to increase oil income, not citizen success."

________________________________________________________________________________

See my reply: Daily Indexing is free, 2% better than Dollarization and maintains autonomous monetary policy control

Nicolaas Smith

1000th blogpost

Implementing daily indexing in Venezuela - Part 2

Implementing daily indexing in Venezuela - Part 2

(First read) Comment from extorres

“You seem to imply that no one loses, but those who are currently taking advantage of the seigniorage would stop reaping its benefits, which is tantamount to their losing.”

Daily indexing results in the items being indexed daily being maintained constant in real value over time at whatever rate of low inflation, high inflation or hyperinflation. It does nothing to hyperinflation - over the short term. Brazil had daily indexing for 30 years during 30 years of high and hyperinflation. They had a relatively stable non-monetary economy as well as many monetary items inflation-indexed daily, but they continued to have an unstable monetary economy with high and hyperinflation of up to 2000 percent per annum from 1964 till 1994. They only stopped hyperinflation with their Real Plan in 1994.

Gustavo Franco, the Governor of the Central Bank of Brazil and one of the architects of the Real Plan explained it - in very short terms - to me as follows in an email message:

“It was essential, in the Brazilian case, and this may be a general case, that the URV was defined as part of the monetary system. It has a lot to do with jurisprudence regarding monetary correction; URV denominated obligation had to be treated as if they were obligations subject to monetary correction. In the URV law it was defined that the URV would be issued, in the form of notes, and when this would happen, the URV would have its name changed to Real, and the other currency, the old, the Cruzeiro, was demonetised.”

That was the Real Plan. I am not proposing a Real Plan for Venezuela. Only the Venezuelan government together with the Central Bank of Venezuela can do that. The Real Plan was used after daily indexing had already been used in Brazil for 30 years and specifically the last daily index, the URV which was a monetised daily indexed unit of account. The Brazilian NON-MONETARY economy was already stabilised before the Real Plan with the use of different daily indices formulated by different governments over those 30 years. The Real Plan simply stopped hyperinflation overnight with the introduction of the new currency as explained by Dr. Franco. It stopped hyperinflation in an already stabilised non-monetary economy.

I am only proposing the use of the Venezuelan Daily CPI to stabilise the Venezuelan non-monetary economy via an update in IAS 29 Financial Reporting in Hyperinflationary Economies to REQUIRE DAILY INDEXATION in terms of the DAILY CPI. The URV or Unidade Real de Valor was a daily index supplied by the Brazilian goverment based almost entirely on the official - not parallel - daily US Dollar exchange rate with the Brazilian currency. As you can see above it was defined as part of the monetary system. It was a monetised daily indexed unit of account. I am not suggesting the equivalent for Venezuela. I am suggesting a daily index being the Daily CPI since a URV-based daily index would not currently be possible in Venezuela because the US Dollar exchange rate is not an official exchange rate: it is currently still a parallel or black market rate.

Seignoirage is the profit the Venezuelan government makes on increasing the Bolivar money supply. The Venezuelan government would still make large seignoirage profits under daily indexation if they were to continue creating hyperinflation with an excessive increase in the money supply. However, the real value of that profit will decrease as the governemnt´s payees would demand more nominal Bolivars to get paid the correct real value.

Daily inflation is known in advance with the Daily CPI. There are no surprises for anyone. The Daily CPI is a lagged, daily interpolation of the monthly published CPI.

Only when hyperinflation is reduced to low inflation, would the profit from seignoirage be drastically reduced.

“What actions do you think they could take to counter this loss?”

If they were to keep hyperinflation at the current level they would thus receive less seignoirage, but not drastically less.

People in power will always be in a good position to exploit whatever possibilities the new model provides: while they control the money supply increases, they will make seignoirage profits, but at a lower real value level.

In Zimbabwe the same people who destroyed Zimbabwe´s MONETARY economy with hyperinflation are still there after spontaneous Dollarization. The Zimbabwean NON-MONETAR ECONOMY was destroyed by the implementation of IAS 29 in terms of the MONTHLY CPI. IAS 29 had absolutely no positive effect in Zimbabwe. The Zimbabwean economy would never have imploded on 20 November 2008 if IAS 29 were REQUIRED to be implemented in terms of a DAILY INDEX - more correctly an index that recognises ALL changes in the general price level because it can change more than once a day from about 3000% inflation per annum. That was what happened in Angola and obviously much more often in Zimbabwe´s case.

“Even if these people decided not to fight it and instead help stabilize the system, the economy then effectively becomes dollarized which brings a whole branch of other ramifications,”

No, that is not correct. An economy is ony dollarized when the local currency is demonitised and a relatively stable foreign currency - normally the US Dollar - is used in the economy as the functional currency. Implementing daily indexing in Venezuela would be done with the Bolivar continuing being the functional fiat currency.

I think what you mean is that the NON-MONETARY economy would be stabilised AS IF it is dollarized. That is correct.

Real dollarization does have severe ramifications: (1) you have no autonomous monetary policy: your central bank cannot stimulate your economy with quantitative easing like the US Fed is currently doing in the US. Portugal and 15 other European Monetary Union countries are dollarized in terms of the Euro. (2) The US gains the seignoirage from the increase in US Dollar money supply to accomodate the Venezuelan economy. This is not orchastrated by the US: countries decide on their own to dollarize or dollarize spontaneously. The US has nothing to do - directly - with the reasons for dollarization.

“ramifications, including salaries going down…”

That is not correct. Salaries, wages, rents, taxes, trade debtors, trade creditors, etc. would maintain their constant purchasing power (real value) over time.

“I hear what you are saying about Brazil, but that is not the only way to bring down inflation”

As I stated before: daily indexation of NON-MONETARY items is not about bringing down inflation in the MONETARY ECONOMY. Daily indexation of NON-MONETARY ITEMS implements financial capital maintenance in units of constant purchasing power in terms of the Daily CPI.

“Contrast your suggestion against distributing all income from oil directly, daily, and equally to all citizens.”

The wealth of a country can be in many forms: oil, minerals as well as the general wealth created by the population in a diversified economy. The government taxes this wealth and uses these taxes to provide education, health services, security, infrastructure, etc. to the population on a daily basis. Daily indexation of the non-monetary economy greatly improves the above model at any level of inflation and deflation.

The oil wealth of a country would play its proper role in the above model.

Distributing all income from oil directly, daily, and equally to all citizens per se does not guarantee the sustainable development of the economy. State of the art education, equal opportunity, free competition and abundant availability of investment capital (e.g., via quantitative easing) in the above model I described do a good job of generating sustainable developement in an economy.

“while not excluding the non earners, as your suggestion seems to do”

The non earner part of you comments is the most difficult part for me to grasp. Please explain how you see that daily indexing resulting in a stable non-monetary economy including constant purchasing power social grants to non earners as well as the taxes on which they are based being maintained constant in real value, exclude non earners.

Thank you very much for your comments. I really appreciate them. Please ask me any question regarding the subject.



Nicolaas Smith

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

How to implement Daily Indexing in Venezuela - Part 1

How to implement Daily Indexing in Venezuela - Part 1

extorres Says:

From The Devil´s Excrement in response to 

(First read) Daily indexing is a measurement paradigm

September 18, 2013 at 11:19 pm

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

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

My response to the above comment.

Nicolaas Smith

Daily indexation is a measurement paradigm

Daily indexation is a measurement paradigm

From The Devil´s Excrement

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

It would be the same in Venezuela.

Nicolaas Smith 

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

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