How to stop hyperinflation in Iran overnight at no cost

November 9, 2012 in Uncategorized

How to stop hyperinflation in Iran overnight at no cost

Step 1

Implement capital maintenance in units of constant purchasing power as authorized in IFRS in terms of the US Dollar parallel rate as the Daily Index in Iran. This would stop the cost of the stable measuring unit assumption – not the cost of hyperinflation– in Iran. This would maintain the constant purchasing power (real value) of capital constant for an indefinite period of time in all Iranian companies that at least break even in real value– all else being equal – at all levels of inflation or hyperinflation. This would maintain the capital investment base in Iran constant in real value for an indefinite period of time – as qualified above.

The Iranian Accounting Standards Authority has to authorize an Iranian Accounting Standard requiring (not optional) this from all companies in Iran.

This would be required (not optional) from all countries in the world implementing IFRS with annual inflation equal to or greater than 10 percent per annum or cumulative inflation equal to or greater than 26 percent over three years – in 6 to 8 years´ time.

This would end the 3000-year-old, globally implemented, generally accepted, traditional Historical Cost Accounting model in these countries. It would be the start of the end of the Historical Cost paradigm – the only accounting paradigm the world has ever known.

This would result in all salaries, wages, rents, royalties, fees, taxes, capital, retained profits, all other items in equity, etc. being maintained constant in real value in these companies in Iran on a permanent basis – as qualified above.

Step 2

Inflation-index the entire rial money supply on a daily basis in terms of the US Dollar parallel rate. This would end the cost of hyperinflation – not actual hyperinflation – in Iran. It would be as if there is no hyperinflation in Iran in all monetary items except in rial bank notes and coins.

The Central Bank of Iran has to pass regulations requiring this in Iran.

This would transform all monetary items (excluding rial bank notes and coins – they have their nominal values permanently printed on them) into constant real value monetary items in Iran.

Both measures require complete co-ordination (everyone doing it).

When Step 1 and Step 2 are functioning correctly in Iran:

Step 3

The Central Bank of Iran has to create a new currency and float it in the foreign exchange market or simply float the existing rial. This would end the US Dollar parallel rate in Iran. The local economy would be stable by then.

Excluding deliberate creation of excessive monetary items in Iran, this would result in stopping actual hyperinflation in rial bank notes and coins over a very short period like it was done in Brazil in 1994 with the Real Plan. The cost of hyperinflation, on the other hand, would automatically be eliminated permanently by daily inflation-indexing of the money supply in terms of the US Dollar free-market rate.

The above Daily Index Plan includes capital maintenance in units of constant purchasing power in terms of a Daily Index as authorized in IFRS which the BrazilianReal Plan did not have in 1994.

The above steps would end the cost of hyperinflation and the cost of the stable measuring unit assumption in Iran. The Iranian economy would stabilize in the very short term: the Iranian monetary and constant item economies would operate in constant real values at whatever rate of inflation or hyperinflation.

The above Daily Index Plan can be implemented by any country to stop the cost of and gain from any level of inflaton or deflation and the cost of the stable measuring unit assumption at no cost.

Low inflationary, high inflationary and deflationary countries would not need to introduce new currencies and would use their Daily Consumer Price Index (not the US Dollar rate) as the Daily Index.

This no cost Daily Index Plan eliminates Dollarization and a currency board as solutions to hyperinflation.

What is required is the first country implementing complete inflation-indexing of the entire money supply. Chile inflation-indexes 25 percent of its broad M3 for some years already. The accounting part of the Daily Index Plan would be required (not optional) in IFRS in the near future.

Nicolaas Smith

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.

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