Two of the three parts of the post-HC economy would be stable in real value

September 2, 2014 in Uncategorized

Two of the three parts of the post-HC economy would be stable in real value


The economy consists of economic entities and economic items. There are three fundamentally different economic items in the economy:

1. Monetary items
2. Variable real value non-monetary items
3. Constant real value non-monetary items

1. MONETARY ITEMS

DEFINITION   Monetary items constitute the money supply.

Only when an item is part of the money supply in a non-dollarized economy is it a monetary item within the economy where the units of money are created. Otherwise it is a non-monetary item.

Money, i.e., any item that is

(i) a medium of exchange (which eliminates the double coincidence of wants),

(ii) a relatively stable store of real value,

(iii) a relatively stable real value unit of measure (for accounting purposes) and

(iv) legal tender (for the settlements of debts)

is an essential component of a modern economy.

NON-MONETARY ITEMS

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

Non-monetary items are subdivided in:

(a) Variable real value non-monetary items
(b) Constant real value non-monetary items

2. VARIABLE REAL VALUE NON-MONETARY ITEMS

Examples include property, plant, equipment, inventories, listed and unlisted shares, foreign exchange, raw materials, finished goods, patents, bitcoins, other crypto-currencies, etc. are generally not perfectly stable in real value in an open and free economy.

Measurement
Their variable non-monetary real values are generally determined by supply and demand in free and open markets in terms of fair value.

3. CONSTANT REAL VALUE NON-MONETARY ITEMS

Examples include issued share capital, all other items in shareholders´ equity, all items in the profit and loss account, provisions, salaries, wages, rents, taxes, pensions, interest received/paid, bank charges, trade debtors, trade creditors, all other non-monetary debtors, all other non-monetary creditors, etc.

Measurement
Constant real value non-monetary items are measured in units of constant purchasing power in terms of the Daily CPI under the Capital Maintenance in Units of Constant Purchasing Power accounting model.

TWO STABLE PARTS OF THE POST-HC ECONOMY

I. Constant real value non-monetary item economy

The constant real value non-monetary item economy is the first part of the economy that would be maintained stable in real value via measurement in units of constant purchasing power (under the UCPP paradigm) under CMUCPP in terms of the Daily CPI.

See examples above.

II. Monetary item economy

The second and final step is the daily inflation-indexing of all monetary items in terms of the Daily CPI with complete coordination. That would stabilize the real value of all monetary items thus inflation-indexed daily in terms of the Daily CPI.

This would do nothing to actual inflation or deflation. That depends on the actions of the central bank. Daily inflation- or deflation-indexing only eliminates the effect of inflation or deflation.

Current examples of perfectly stable in real value monetary item markets/areas

1. The global USD 3 Trillion plus market in government and commercial inflation-indexed bonds. Examples are US Treasury Inflation-Protected Securities (TIPS).

2. 25% plus of Chile´s money supply is inflation-indexed daily.

3. All mortgages in Colombia are inflation-indexed daily.

ONE UNSTABLE PART OF THE ECONOMY

Only the variable real value non-monetary item part of the economy would not be (is not) stable in real value because these values change and would normally change minute by minute in their respective markets, e.g., forex markets, stock exchanges, money markets, capital markets, commodity markets, etc. See examples above of variable real value non-monetary items.

Sine qua non

The above orchestrated/implemented stability in real value (purchasing power) is only possible with the implementation of daily updating (daily inflation-indexing in the case of monetary items) in terms of the Daily CPI: actually, in terms of all changes in the general price level which can change more than once per day during severe hyperinflation.

The CPI was institutionalized by the International Labour Organization in 1927.

In summary: The above stability in real value requires the rejection of the stable measuring unit assumption, i.e., the rejection of Historical Cost Accounting.

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

The post-Historical Cost economy

August 31, 2014 in Uncategorized

The post-Historical Cost economy


The post-HC economy would be an economy in which the stable measuring unit assumption would be replaced with the Units of Constant Purchasing Power (UCPP) paradigm. The HC paradigm would be abandoned and no-one would ever assume money is perfectly stable during low and high inflation and deflation for the purpose of valuing some (not all) items in the economy as all economists, accountants and business people do during non-hyperinflationary periods in the current HC era.

HCA would be replaced with the Capital Maintenance in Units of Constant Purchasing Power (CMUCPP) in terms of the Daily CPI model in the post-HC economy.

CMUCPP was authorized in IFRS as an alternative to HCA during all levels of inflation and deflation 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.”

The above wording is maintained intact in International Financial Reporting Standards in the current Conceptual Framework (2010), Par. 4.59 (a).

The accounting model for the post-HC economy was thus authorized in 1989 in IFRS. It was also authorized in US GAAP and other national accounting standards during that time.

The following is unbelievable, but true:

The South African Institute of Chartered Accountants (SAICA) suggested in January 2014 to the International Accounting Standards Board that it should remove the capital maintenance paragraphs from the Conceptual Framework (2010). SAICA mistakenly believes that capital maintenance is only of importance during high and hyperinflation and thus made that silly and unbelievable suggestion to the IASB. I fell off my chair when I read SAICA´s suggestion to the IASB. I emailed SAICA about it to express my horror at their suggestion, but they had no real answer for me. They repeated to me what they had suggested to the IASB, but they omitted in their repetition to me the actual suggestion to remove the capital maintenance paragraphs from the Framework thus silently admitting their terrible mistake.

SAICA is clueless about the benefits of CMUCPP in terms of the Daily CPI. CMUCPP would stabilise the SA constant real value non-monetary economy over a short period of time. SAICA has no clue what this means.

SAICA is clueless about capital maintenance in units of constant purchasing power as stated in IFRS in the Framework. They don´t have the foggiest idea what it means or what it´s effect on the SA economy would be if it were to be implemented in terms of the Daily CPI: not the foggiest!!

But, they were quick to state in public on their website for everyone to read that I would insult users of financial reports prepared during low inflation (you) if I were to suggest that they inflation-index, in terms of the Daily CPI, constant real value non-monetary items like issued share capital, all other items in shareholders´ equity, provisions, all items in the profit and loss account, salaries, wages, rents, pensions, taxes, trade debtors, trade creditors, all other non-monetary debtors, all other non-monetary creditors, etc. although it was authorized in IFRS and US GAAP in 1989.

Everything on this blog is thus an insult to users of financial reports prepared during low inflation (you) as far as SAICA is concerned. You have to believe SAICA: they are the highest authority and the most respected on accounting matters in SA.

 

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

Hayek: Stability in value would prove to be the decisive factor

August 26, 2014 in Uncategorized

Hayek: Stability in value would prove to be the decisive factor

On 11 August I blogged: Is Bitcoin fatally flawed? in which I stated:

The fact that bitcoin has a fixed supply limit – 21 million – may mean it may be fatally flawed in its attempt to be money (a monetary item possessing the three attributes of money) because the limit in supply may result in it never being able to be relatively stable in real value: an essential requirement for money.”

Friedrich Hayek had the same view regarding the fact that a relatively stable real value is essential for an item to be accepted as money.

“Hayek stated that “Stability in Value” would prove to be the decisive factor in assessing the level of acceptance” (of a currency).

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

Ecuador´s (possibly [hyper]inflationary?) virtual IOU´s

August 25, 2014 in Uncategorized

Ecuador´s (possibly [hyper]inflationary?) virtual IOU´s

Ecuador was reported to be studying the creation of its own virtual currency. 

See: Ecuador Cryptocurrency

Now the Wall Street Journal states: 

“Implying that this is a “virtual” currency is an attempt to lend Bitcoin-like cachet to what will essentially be IOUs issued by a country with a rather dodgy credit history.”Ecuador´s phony bitcoin ploy – Wall Street Journal

The value of money

August 24, 2014 in Uncategorized

The value of money

Growth

Credit

If money is a means for growth and not the end, a lack of money is not sufficient a reason for the augmentation of money to fail to happen. With the availability of credit money, banks and fractional reserve banking it is evident that this is the case. Just because some company did not earn enough money yet to invest in a new plant, that does not mean it cannot – it would apply for a loan from a bank. That bank in the last instance may have borrowed that money from the central bank which created it ‘out of thin air’. However, assume, for the sake of argument, that these things did not exist. Even then, at any given moment, companies (or parts thereof) are necessarily in different stages of their accumulation cycles: some are just starting to sell a large stock of goods while others are looking to buy machines and hire workers. Some companies have money which they cannot spend yet while other companies need money to spend now. Hence, both the need and means for credit appear. If some company A expects to make, say, 110 BTC from a 100 BTC investment but only has 70 BTC in its accounts, it could take a loan of 30 BTC from some company B with 10% interest rate and still make 10 – 3 = 7 BTC of profit. For the company B which lends A 30 BTC, this business – if successful – is also better than just sitting on those 30 BTC which earn exactly nothing. If growth is demanded, having money sitting idly in one’s vaults while someone else could invest and augment it is a poor business decision.29 This simple form of credit hence develops spontaneously under free market conditions.30 The consequences of this fact are not lost on Bitcoin adherents. As of writing, there are several attempts to form credit unions: attempts to bundle up the money people have in their wallets in order to lend it out to others – for interest, of course.

Growth guarantees money

Central banks

The full article is available following any link above.

Is Bitcoin fatally flawed?

August 11, 2014 in Uncategorized

Is Bitcoin fatally flawed?

The fact that bitcoin has a fixed supply limit – 21 million – may mean it may be fatally flawed in its attempt to be money (a monetary item possessing the three attributes of money) because the limit in supply may result in it never being able to be relatively stable in real value: an essential requirement for money.

Bitcoin may thus never be able to be used as a relatively stable unit of measure for accounting purposes. Bitcoin may thus never be able to replace fiat money.

However, bitcoin may come to dominate the market for a cheap, digital medium of exchange if its exchange technology could be improved to make it a very cheap, instantaneous, peer-to-peer, digital medium of exchange.

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

Is bitcoin closing in on usurping the sovereign power of creating money?

August 10, 2014 in Uncategorized

Is bitcoin closing in on usurping the sovereign power of creating money?

Bitcoin is a very exciting and innovative technology.
Bitcoin has for the first time ever made all of us realize that anyone – not just sovereign states – can invent a monetized money-like crypto-medium-of-exchange that could become very popular very quickly and may result in improving the world in a very positive way.
The power to create money is a sovereign power. Sovereign powers (for example, to be a state, with a constitution, print fiat money, etc.) are the second highest level of power. Only judicial power is higher: the supreme court judges can remove the president.
The fact that bitcoin is almost (not actually yet) usurping a sovereign power – the power to create money to be used on a national and global scale (private money was created on a national scale in the past) – is an historic event. At the moment bitcoin is still not yet money: it is a monetized money-like crypto payment platform with a relatively unstable non-monetary real value , but it is getting close to being money.
If bitcoin were ever to actually become money, i.e., a monetary item with a relatively stable real value that accountants can assume to be perfectly stable like they assume all fiat currencies are perfectly stable in real value during low and high inflation and deflation under the historical cost paradigm when they implement the traditional Historical Cost Accounting model, then it would create a legal storm because I think all countries´ legal systems state that only the sovereign state can create fiat money: a fiat monetary item subject to inflation and deflation.
The reason bitcoin is not banned outright globally is the fact that it is not money: it is a property (as ruled by the US, China and other countries): a variable real value non-monetary item. Sovereign states generally have no problems with newly invented assets/properties. Sovereign states, however, guard their unique power to create money very jealously.

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

Money can be a monetary or a non-monetary item

August 7, 2014 in Uncategorized

Money can be a monetary or a non-monetary item

Fiat money can be either a nominal monetary item or a variable real value non-monetary item depending on where it is being used: inside the economy where it was created or outside.

Fiat money is a monetary item only within the economy where it is created. In this case, fiat money´s real value is eroded by inflation (low, high and hyperinflation) and increased by deflation within the local economy.

The net monetary loss or gain in the real value of monetary items is not calculated and accounted under the historical cost paradigm during low and high inflation and deflation. It is calculated and accounted under the constant purchasing power paradigm required under IFRS inIAS 29 Financial Reporting in Hyperinflationary Economies during hyperinflation.

Fiat money as a monetary item is generally never perfectly stable in real value over time during inflation and deflation. However, fiat money as a monetary item within the economy where it is created is assumed to be perfectly stable in real value by accountants, economists, business people and people in general for the measurement of many (not all) economic items under the historical cost paradigm, i.e., implementing the Historical Cost Accounting model during low and high inflation and deflation.

When a country´s currency is used outside the economy where it was created, i.e., when it is used as a foreign currency in another economy, then it is a variable real value non-monetary item. The real value of fiat money used as foreign currency is determined in terms of other currencies in the multitude of foreign exchange markets around the world. A foreign currency´s real value in terms of other currencies is not determined just by the inflation rate in the economy where it was created, although this is an important factor taken into account by buyers and sellers in the forex market. Many other factors besides inflation or deflation are taken into account by buyers and sellers of currencies in foreign exchange markets when they determine the exchange rate of a foreign currency in terms of their own currency.

An entity with its head-office in a particular economy values the local fiat currency as monetary items under the historical cost paradigm during low and high inflation and deflation. Local currencies are always assumed to be perfectly stable in real value over time under the historical cost paradigm.

An entity generally values foreign fiat currencies it holds as variable real value non-monetary items in terms of the constantly changing forex rates in the forex market.

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

All digital fiat currencies (92% of the global money supply) are created in decentralized commercial banks

August 3, 2014 in Uncategorized

All digital fiat currencies (92% of the global money supply) are created in decentralized commercial banks

Ecuador will be the last (latest), not the first, country to create its own digital currency. Ecuador does not currently have its own digital currency because it currently does not have its own currency. It is a dollarized economy. Ecuador uses the mainly digital US Dollar as digital medium of exchange in the country. 92% of the US Dollar money supply inside the Ecuadorian economy is exchanged in a digital USD format daily. All countries issuing fiat money have digital currencies for a long time already. 92% of the world´s money supply is in the form of digital fiat currencies. These digital fiat currencies were/are created in decentralized commercial banks via decentralized fractional reserve banking.Sweden´s central bank does not require Swedish commercial banks to keep reserves with the Riksbank. It is the oldest central bank in the world.

Fiat digital currencies (all currencies in the world) are not centrally created. They are digitally created in a decentralized way in the various national commercial banks via digital decentralized fractional reserve banking.

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

Ecuador cryptocurrency

August 1, 2014 in Uncategorized

Ecuador cryptocurrency

 

Ecuador has banned bitcoin and announced that it is going to create its own cryptocurrency to be used alongside the US Dollar in the country.

Ecuador and all other countries have virtual fiat currencies. All countries transact their fiat currencies 24/7, 365 days a year via the 70-year-old (or older) global fiat virtual currency very secure fiat banking system. 92% of all the fiat money in the world is only transacted virtually. I think it most probably is done with values being sent encrypted. Thus 92% of all real money is transacted virtually and encrypted. The virtual fiat currencies are not crypto virtual commodities (like bitcoin) created via blockchain technology: they are virtual representations of physical fiat currency banknotes and coins.
For Ecuador to create its own cryptocurrency it has to create a virtual currency fundamentally very different from the virtual crypto commodity called bitcoin.
Ecuador does not have its own national fiat currency. It is a dollarized economy. It uses the US Dollar as its national currency for the sake of relative monetary stability. Thus, Ecuador is subject to inflation (erosion of the real value) in the USD as experienced in the US.
Ecuador is attempting something very unique. It has to create a cryptocurrency that is actually a monetary item or real money like the USD inside the US economy. Monetary items are all items in a country´s money supply. If an item appears on the list of items (cash, notes, coins, loans, bonds, etc.) in the central bank´s list of items that make up the money supply, then it is a monetary item. If not, it is a non-monetary item, like bitcoin. Monetary items are fiat money and subject to inflation and deflation. Money, i.e., a monetary item, is relatively stable in real value like the USD, Euro, Yuan, etc. Accountants actually assume money (all fiat currencies) is perfectly stable in real value for the valuation of many items in a business under the traditional Historical Cost Accounting model during low and high inflation and deflation. The items that accountants value in nominal assumed-to-be perfectly stable fiat value, include, but are not limited to capital, retained income, all profits, all losses, salaries, wages, rent, taxes, all expenses, trade debtors, trade creditors, all revenue, all income, all items in the income statement, cash, bank balances, money loan balances, etc.
Ecuador thus has to create a cryptocurrency with an assumed to be perfectly stable in real value per unit of cryptocurrency. That is not the case with bitcoin. Accountants in Ecuador are going to assume this new cryptocurrency (if they actually manage to create it) is perfectly stable in real value for the valuing/measurement of the above stated items in balance sheets and income statements of businesses in Ecuador. That is not the case with the crypto commodity bitcoin which is a variable real value non-monetary item, the real value of which changes minute by minute on the various bitcoin exchanges around the world. That is also the case with fiat currency when the fiat currency is transacted as foreign exchange, that is, outside the economy where the fiat currency is created. Inside the economy where the fiat currency is created, the fiat currency notes and coins maintain their nominal values fixed, but their real value is determined by the rate of inflation or deflation.
Bitcoin will never be assumed to be perfectly stable in real value (like all fiat currencies) for accounting purposes because it is not a monetary item.
Thus Ecuador is really trying something very special. Ecuador is going to try and do what bitcoin should have been, i.e., a monetary item or money. Bitcoin is a virtual cryptocommodity with a constantly changing real value.
I wish Ecuador good luck. If they succeed it will be something very special and may be a fundamental breakthrough that will have a fundamental impact on the bitcoin phenomenon.

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