Greece should leave the Eurozone

January 28, 2015 in Uncategorized

Greece should leave the Eurozone

Greece will stay an austerrorized economy while it remains in the Eurozone. The Eurozone does not have a process to implement monetary policies to overcome the current Greek tragedy.

Greece is not a 100% sovereign state. It does not have the sovereign power to create its own currency. Greece is “dollarized” in terms of the Euro (Deutsche Mark). Eurozone quantitative easing will not fix the Greek economy while it would if Greece were to implement it using its own currency.

Greece thus cannot use monetary policy to get back to being a strong economy again. It currently has no independent monetary policy.

Nicolaas Smith

Copyright (c) 2005-2015 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Price stability requires daily indexation

January 26, 2015 in Uncategorized

Price stability requires daily indexation

Price stability is an important concept in economics. It is defined in a slightly different way by each and every central bank. Each central bank defines price stability in terms of its own inflation target. When a central bank has a two percent inflation target then any inflation (which is NOT price stability) up to and including the inflation target is simply stated to be “price stability.” For example: SA, US, EU, etc.

The South African Reserve Bank has a three to six percent inflation target. Thus, when the general price lievel changes by three percent per annum, then the SARB proudly states that “price stability” has been achieved and when it changes by six percent per annum, then the SARB again very proudly states that “price stability” has been achieved. The same is true for all other central banks with all their other non-zero inflation targets.

Monetary price stability has one and only one definition, namely, zero monetary inflation which is the same as zero monetary deflation.

 

 

However, price stability requires, in fact, at least daily indexation since sustainable zero monetary inflation (/deflation) has never been achieved to date.

There are three economic items in the economy:

1. Monetary items

2. Variable real value non-monetary items

3. Constant real value non-monetary items

Variable real value non-monetary items are by definition not generally expected to be stable in price in free and open markets. For example: the price of oil, gold, foreign currencies, listed and unlisted shares, smart phones, TVs, computers, cars, planes, ships, horses, cows, sheep, clothing, food, houses, etc are not generally perfectly stable in free and open markets.

Constant real value non-monetary items´ prices (constant real values or constant purchasing power) are kept perfectly stable (constant) in real value (purchasing power) under the IFRS and US GAAP authorized Capital Maintenance in Units of Constant Purchasing in terms of the Daily CPI accounting model by means of at least daily indexing.

Examples of constant real value non-monetary items are salaries, wages, fees, employee benefits, pensions, trade debtors, trade creditors, all other non-monetary payables, all other non-monetary receivables, issued share capital, profits, losses, all other items in shareholders´ equity, provisions, taxes, interest received, interest paid, etc.

Monetary items constitute the money supply.

Monetary items´ (excluding fixed nominal value bank notes and coins) prices are also kept perfectly stable (constant) in real value (purchasing power) under CMUCPP in terms of at least the Daily CPI when the entire money supply is indexed at least daily.

Examples of monetary items are monetary loans receivable and payable, the capital amounts of bonds, the capital amounts of mortgages, the capital amounts of student loans, the capital amounts of consumer loans, etc. Nominal value bank notes and coins are also monetary items but it is currently not possible to daily index a nominal bank note or coin.

Thus: price stability requires at least daily indexation during inflation or deflation.

In short: price stability requires daily indexation.

All changes in the general price level have to be followed by monetary item and constant real value non-monetary prices if price stability (constant real value/purchasing power) were to be achieved in these items. The general price level changes daily (see the Daily CPI in countries issuing daily inflation-indexed government bonds) during low and high inflation and deflation, but it can change more than once a day during hyperinflation.

Nicolaas Smith

Copyright (c) 2005-2015 Nicolaas J Smith. All rights reserved. No reproduction without permission.

 

Completely ignorant IASB and FASB members mean perpetual bad luck for Venezuela

January 21, 2015 in Uncategorized

Completely ignorant IASB and FASB members mean perpetual bad luck for Venezuela

Arepa (a Venezuelan national delicacy) prices are following the (daily) US Dollar black market rate in Caracas:Comment from BoludoTejano on the Devil´s Excrement blog: “Looks like the Arepa prices reflect the black market rate, not any of the official rates.”Which is very good for the VZ economy. The only problem is salaries and wages are not adjusted likewise: the normal set-up in an un-indexed hyperinflationary economy.

Brazil had no such problems during their 30 years of daily indexing almost all items in their economy during high and hyperinflation. Unfortunately it is too far back (1964 to 1994). No-one can remember Brazil indexed their entire economy for 30 years.

Or rather, it was called monetary correction or “correção monetária” not indexation. Everybody expects the Central Bank to do it. If the Central Bank does not do it, then it will not be done – while in fact it is actually an accounting policy. No-one believes (understands) that.

Obviously, if the International Accounting Standards Board members as well as the US Financial Accounting Standards Board members do not understand that, it is logical that ordinary people and accountants won´t understand it either.

And that is exactly what is happening. Completely (daily indexing) ignorant international and US accounting standard setters mean perpetual bad luck for Venezuela.

Sorry Venezuela, but that is how the cookie crumbled: IASB and FASB members are as stupid regarding economics (the effect of daily indexing in a hyperinflationary economy) as your President is regarding most other aspects of economics too.

Nicolaas Smith

Copyright (c) 2005-2015 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Effect of deflation eliminated by daily deflation-indexing of entire money supply

January 7, 2015 in Uncategorized

Effect of deflation eliminated by daily deflation-indexing of entire money supply

Only the effect of deflation would be eliminated from all un-adjusted monetary items when the entire un-adjusted money supply is deflation-adjusted on a daily basis in terms of the Daily CPI during deflation. This would do nothing to actual deflation in the short term. It would, however, immediately be as if there were no deflation in these monetary items (as qualified) during deflation.

This would only remove the effect of deflation from only un-adjusted monetary items. Some (not all) government inflation-indexed bonds provide for deflation-indexing.

Implementing Capital Maintenance in Units of Constant Purchasing Power in terms of the Daily CPI (instead of Historical Cost Accounting) during deflation would maintain the constant purchasing power (real value) of  all constant real value non-monetary items constant during deflation.

The two measures together would, ceteris paribus, remove the distortions caused by the implementation of the stable measuring unit assumption under Historical Cost Accounting from the economy during deflation.

Nicolaas Smith

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

$89 Billion Christmas present to Putin

December 18, 2014 in Uncategorized

$89 Billion Christmas present to Putin

Apparently Putin wants to use $89 billion in a Russian sovereign wealth fund to “fight” inflation that almost certainly will be increased by the Russian Central Bank during (not by) the Ruble plunge.

Daily updating all Ruble monetary items within the Russian economy in terms of the Russian Daily CPI would remove only the effect of inflation in Russia at no cost. It would do nothing to actual inflation in Russia. It would, however, be as if there were no inflation in Russia.

If he, consequently, so wishes, Putin can stabilize the Russian constant real value non-monetary item economy (wages, salaries, profits, taxes, trade debtors, trade creditors, issued share capital, all other items in shareholders´ equity, rents, etc., etc.) by abandoning Historical Cost Accounting and adopting Capital Maintenance in Units of Constant Purchasing Power in terms of the Daily CPI.

The two measures together would reverse the Ruble plunge.

This is nothing new. Brazil did it for 30 years from 1964 to 1994. They had a relatively stable non-monetary economy during very high and hyperinflation by daily indexing all their non-monetary items and a significant percentage (not yet 100%) of their monetary items.

Chile daily indexes more than 25% of its money supply for a number of years already. If Putin were to order 100% daily indexing of all Ruble monetary items, he would remove only the real effect of high inflation from the Russian economy. That would not stop actual high inflation which would stay high while the Russian Central Bank increases the money supply at an excessive rate, but there would be no effect of high inflation in the Russian economy.

There is no effect of inflation in the $3 trillion plus being daily indexed in terms of country specific Daily CPIs in government inflation indexed bonds worldwide. It is as if there is no inflation in these countries for these sovereign inflation linked bondholders while actual inflation still reigns in these countries.

If Putin were to do this for the entire money supply in Russia there would be no effect of high inflation in Russia.

This is totally free to any country with an inflationary or deflationary economy – including Russia.

Nicolaas Smith

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

Don´t be fooled by Swiss negative interest rate

December 18, 2014 in Uncategorized

Don´t be fooled by Swiss negative interest rate

Swiss National Bank introduces NOMINAL negative interest rate of -0.25% during deflation of 0.10% which is a POSITIVE REAL interest rate of +0.15% under such an economic environment.

During deflation EVERYTHING financial is the opposite in order to get back to real from nominal.

Nicolaas Smith

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

Stop inflation with an IFRS

November 20, 2014 in Uncategorized

Stop inflation with an IFRS

That was the headline that got Iran interested in Capital Maintenance in Units of Constant Purchasing Power in terms of a Daily CPI some months ago. Accountants there are already familiar with IFRS. That you could use it to stop their high inflation at the time was really interesting to them. I responded enthusiastically to the request to explain how that can be done.

 

Yes, it is possible. But, and there is always a but, you have to go all the way as well as accept economic concepts/reality/facts.

First of all: what would normally stop inflation? Various possible actions: an increase in the money supplyexactly equal to the required level to guarantee zero inflation. Is that known at the time of the money supply increase? No. Etc, etc, etc.

However, there is an interesting additional fact: daily indexing the entire money supply to all (at least daily) changes in the general price level would remove only the effect of inflation: it does nothing to actual inflation.

This is quite interesting and worth looking into. Imagine: removing the entire effect of inflation. Well, it is being done – in part – right now in Chile, Colombia and the majority of countries in the world economy in government inflation-linked bonds.

How can the entire effect of inflation be removed from the entire money supply?

You have to start off with abandoning traditional Historical Cost Accounting (by the way, that would be the best thing you could ever do for your company or country) and implement the alternative authorized in IFRS, namely Capital Maintenance in Units of Constant Purchasing Power in terms of the Daily CPI. The IASB´s Conceptual Framework (2010), Par. 4.59 (a) states: “Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power.” So, it is authorized in IFRS (since 1989). It is also authorized in US GAAP and individual country national accounting standards.

Changing over to CMUCPP in its generally accepted form only solves two of the three problems (there are three fundamentally different economic items: monetary items, variable real value non-monetary items and constant real value non-monetary items): (1) it would maintain the constant purchasing power of all constant real valuenon-monetary items constant in all entities that at least break even in real value, ceteris paribus, and (2) it would in only keep all historical  non-monetary items – variable and constant items – updated till the current (today´s) real value in terms of all (at least daily) changes in the general price level. The stable measuring unit assumption would still be implemented in the case of nominal monetary items during the current financial period. Thus the effect of inflation would still result in the erosion of the real value of these monetary items over time.

It is generally accepted ( a Generally Accepted Accounting Principle) that selecting IFRS-authorized CMUCPP only does what is stated in (1) and (2) above. It is not yet generally accepted that the rejection of the stable measuring unit assumption includes updating all monetary items (the entire money supply) in terms of all (at least) daily changes in the general price level, i.e., in terms of the Daily CPI.

So, implementing CMUCPP – in its generally accepted form – is the same as never implementing the stable measuring unit assumption in any form in the valuation of only variable and constant real value non-monetary items. That does not stop the effect of inflation at all because the stable measuring unit assumption would still be implemented for the valuation of nominal monetary items under CMUCPP in its generally accepted form.

So, to actually stop only the effect of inflation (it would be as if there is no inflation) you have to daily inflation-index all monetary items (the entire money supply) in terms of all (at least daily) changes in the general price level, i.e., in terms of the Daily CPI. This would do nothing to actual inflation. There would, however, be no effect of inflation in the economy.

Implementing CMUCPP is part of GAAP. However, it only solves the valuation problems (created by the implementation of the stable measuring unit assumption under HCA) related to non-monetary items (variable and constant real value non-monetary items).

Actual daily inflation-adjustment of the entire money supply is not yet a GAAP. However, the principle is. The principle of rejecting the stable measuring unit assumption (abandoning HCA) applies to monetary items too, in princle, not yet generally in practice. Although, a 2% inflation target can be seen as 98% inflation-indexing the entire money supply.

Chile has been daily inflation-indexing more than 25% of its entire money supply for a number of years. Colombia daily inflation-adjusts all mortgage bonds, also for a number of years already. The majority of countries in the world economy daily inflation-index their respective sovereign inflation-linked bonds to the global total of more than USD 3 trillion (US TIPS included).

So, you can actually use an IFRS to stop the entire effect of inflation (or deflation) in the entire economy. It is authorized in IFRS, in principle. The above application of IFRS is generally accepted  in Chile, Colombia and most countries in the world economy that daily inflation-index government inflation-linked bonds in terms of the Daily CPI.

Consequently, the question can be asked: is the IASB potentially more powerful than the Fed? Has the IASB the power to require daily inflation-indexing of all monetary items? That would stop the effect of inflation and deflation worldwide.

Don´t worry. The IASB would never do that. They are too incompetent/inefficient/hard headed/ stubborn /resistant to new ideas/clueless about CMUCPP/openly hostile to CMUCPP and the units of constant purchasing power in terms of the Daily CPI measurement basis/stuck in HCA, to even discuss publicly the possibility of requiring daily indexing in IAS 29 Financial Reporting in Hyperinflationary Economies – a requirement that would assure the stabilization of at least the non-monetary economy over a short period of time in any hyperinflationary economy.

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

 

Inflation and deflation would have no effect on the economy …

November 16, 2014 in Uncategorized

Inflation and deflation would have no effect on the economy …

Inflation (low, high and hyperinflation) and deflation would have no effect on the economy when all items expressed in terms of money are indexed in terms of all (at least daily) changes in the general price level in terms of the Daily Consumer Price Index. There would still be inflation or deflation, but there would be no effect of inflation or deflation. It would be as if there were no inflation or deflation.

 

Every economic item is expressed in terms of a fiat monetary unit of measure in a non-dollarized economy: a salary, a wage, capital, interest, a tax, rent, money, a debt, a loan, property, plant, equipment, inventory, shares and every other item: all expressed in terms of local currency fiat money. In a dollarized economy all items within the economy are expressed in terms of a foreign currency which is a relatively stable variable real value non-monetary item; in the vast majority of cases, the US Dollar.

The Daily CPI is based on the monthly published CPI. When the monthly published CPI is not available, for example, when a government refuses to publish it during hyperinflation, then the daily US Dollar parallel rate would be used as the Daily Index, i.e., all items would be Dollar-indexed daily.

Chile daily indexes more than 25% of its money supply in terms of their Unidad de Fomentodaily index. All mortgages are indexed daily in Colombia. More than three trillion US Dollars in government inflation-indexed bonds are daily indexed world wide. Inflation has no effect on the real value of the capital amounts of these daily inflation-adjusted items.

The Brazilian economy was indexed from 1964 to 1994. The most successful daily index was their Unidade Real de Valor Daily Index used in 1994 as part of their Real Plan to stop hyperinflation overnight at no cost.

The IFRS authorized Capital Maintenance in Units of Constant Purchasing Power accounting model requires the use of the Daily CPI during all levels of inflation (low, high and hyperinflation) and deflation.

Nicolaas Smith

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

 

Three measurement bases in IFRS

November 9, 2014 in Uncategorized

 

Three measurement bases in IFRS

Very interestingly the same three measurement bases are used under both Historical Cost Accounting and its alternative authorized in IFRS, namely, Capital Maintenance in Units of Constant Purchasing Power.

1. Historical Cost
2. Fair Value
3. Units of Constant Purchasing Power

Click below for the application of these three measurement bases under

Historical Cost Accounting 

II Capital Maintenance in Units of Constant Purchasing Power

The implementation of one of the accounting models results in a paradigm completely different from the other.

There is only one reason for that. The stable measuring unit assumption: the assumption accountants make that money was, is and always will be perfectly stable in real value; that there never were, are or ever will be inflation and deflation.

The stable measuring unit assumption is always implemented under HCA:

(i) net monetary gains or losses up to hyperinflation and during deflation were/are never calculated and accounted

plus

(ii) nominal equity is assumed to be equal to net assets in nominal value. No entity ever knew or now knows whether it kept or keeps or will keep the real value of all contributions to equity constant over the lifetime of the entity.

The stable measuring unit assumption is never implemented under CMUCPP:

(a) net monetary gains or losses are always calculated and accounted

plus

(b) all historical (for example, yesterday´s) economic values (all items) are always updated till the current (today´s) real value in terms of the Daily CPI because the general price level changes at least daily resulting in the constant purchasing power (real value) of equity being maintained constant in all entities that at least break even in real value over time .

Nicolaas Smith

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

Measurement Bases under the IFRS Units of Constant Purchasing Power Paradigm

November 8, 2014 in Uncategorized

Measurement Bases under the IFRS Units of Constant Purchasing Power Paradigm

MEASUREMENT BASES

There are three economic items in the economy.
1. MONETARY ITEMS

 

Definition: Monetary items are all items in the money supply.

Examples: Money (local fiat currency, cash, bank notes, bank coins), capital amount of money loans, capital amount of bonds, capital amount of bunds, capital amount of bank deposits, capital amount of money and capital market instruments, etc.

MEASUREMENT BASIS

(a) Nominal Historical Cost

i.e., in nominal monetary units only during current financial year for monetary items not inflation-indexed daily in terms of the Daily CPI. These items exist in terms of Historical Cost contracts still being used under the Units of Constant Purchasing Power paradigm.

(b) Daily Updated Historical Cost

for prior year monetary items in current year financial reports and all other historical monetary items not part of current year financial reports:  

always and everywhere updated till the current (today´s) real value in terms of all (at least daily) changes in the general price level – generally in terms of the Daily CPI. There is no such thing as a nominal historical cost monetary item except for current year monetary items that are not inflation-adjusted daily.

NON-MONETARY ITEMS

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

They are divided in two sub-groups:

2. VARIABLE REAL VALUE NON-MONETARY ITEMS

Definition: Variable items are non-monetary items with variable real values over time.

Examples: Property, plant, equipment, foreign exchange (foreign currencies), inventories, raw materials, work-in-progress, finished goods, listed and unlisted shares, trademarks, patents, bitcoins, etc

MEASUREMENT BASIS

Fair value always and everywhere updated at least daily till the current (today´s) real value. There is no such thing as a nominal historical variable real value non-monetary item.

3. CONSTANT REAL VALUE NON-MONETARY ITEMS

Definition: Constant items are non-monetary items with constant real values over time.

Examples: Salaries, wages, rents, bank charges, interest paid, interest received, interest payable, interest receivable, issued share capital, retained earnings, capital reserves, all other items in shareholders´equity, all items in the profit and loss account, all items in the comprehensive income statement, provisions, trade debtors, trade creditors, taxes payable, taxes receivable, all other non-monetary receivables, all other non-monetary payables, etc.

MEASUREMENT BASIS

Units of constant  purchasing power always and everywhere updated at least daily till the current (today´s) real value in terms of all (at least daily) changes in the general price level, generally in terms of the Daily CPI. There is no such thing as a nominal historical constant real value non-monetary item.

The Units of Constant Purchasing Power Measurement Basis: in terms of all – at least daily – changes in the general price level under all levels of inflation (low, high and hyperinflation) and deflation always and everywhere updated till the current (today´s) real value. In terms of the US Dollar daily parallel rate when the Daily CPI is not available during hyperinflation.

Summary

MEASUREMENT BASES

1. Units of constant  purchasing power*
2. Fair value*
3. Updated Historical Cost*
4. Nominal Historical Cost

*Always and everywhere updated in terms of all (at least daily) changes in the general price level – generally in terms of the Daily CPI – up to the current (today´s) real value under all levels of inflation (low, high and hyperinflation) and deflation. In terms of the US Dollar daily parallel rate when the Daily CPI is not available during hyperinflation.

The above measurement bases are used in general purpose accounting / financial reporting under the IFRS authorized UCPP paradigm.

General Price Level

The general price level (indicated by the Daily CPI) changes at least daily. It can change more than once a day during hyperinflation. The only place this is understood (not the Daily CPI part) by every adult member (as well as all child street vendors) of the general public, is in a hyperinflationary economy. Consequently, all items, except current year monetary items (in “live” bank accounts, nominal HC monetary contracts, etc.) have to be updated daily in terms of all (at least daily) changes in the general price level, updated to the current (today´s) real value (in terms of today´s Daily CPI value).

Real value of all historical values change at least daily

The real value of all historical (for example, all yesterday´s) economic values expressed in terms of a monetary unit of measure (i.e., the real value of all historical items), generally change in terms of all (at least daily) changes in the general price level. Simply stated: the real value of all historical (yesterday´s) items change at least on a daily basis.

The net monetary gain or loss in nominal monetary items – as qualified above – is calculated and accounted only during the current financial period only under IFRS authorized Capital Maintenance in Units of Constant Purchasing Power in terms of a Daily CPI, i.e., only under the IFRS authorized Units of Constant Purchasing Power paradigm.

UCPP paradigm authorized in IFRS 25 years ago

Capital Maintenance in Units of Constant Purchasing Power was authorized in IFRS in the original Framework (1989), Par. 104 (a) which stated: “Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power”.  This paragraph appears unaltered in the current Conceptual Framework (2010), Par. 4.59 (a).

Irresponsible IASB

CMUCPP is required in IFRS in IAS 29 Financial Reporting in Hyperinflationary Economies. The guidance for CMUCPP given in IAS 29 unfortunately does not result in the achievement of actual CMUCPP in a hyperinflationary economy as a result of the use of the monthly published CPI. Only the use of the Daily CPI can result in actual CMUCPP. The IASB very irresponsibly refuses to change IAS 29 to require the use of the Daily CPI.

The IASB very irresponsibly also refuses to deal with the Units of Constant Purchasing Power measurement basis as it has always been used under HCA in its current discussions regarding Measurement in the Conceptual Framework although all HC entities (almost all entities) used it over the last 100 years, all HC entities (almost all entities) use it today and all HC entities (almost all entities) will use it in the future. This is a very good example of the fact that all members of the current IASB and IASB staff have very little knowledge and almost no understanding of the effect of Capital Maintenance in Units of Constant Purchasing Power in terms of the Daily CPI authorized in IFRS 25 years ago. This continues to result in the issuance of low quality IFRSs by a very stubborn and boldly disrespectful IASB, mainly almost completely ignorant of the economic effects of financial capital maintenance 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.