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What backs the US Dollar?

April 11, 2014 in Uncategorized

What backs the US Dollar?

The US Dollar is backed by all the underlying value systems in the US economy.
Some of the underlying values systems in the US economy include but are not limited to::

 

Sound governance

Sound economic policies

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

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

Nicolaas Smith

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

Quantitative easing

April 4, 2014 in Uncategorized

Quantitative easing

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

Nicolaas Smith

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

Bitcoin is not money like your local currency

April 2, 2014 in Uncategorized

Bitcoin is not money like your local currency

There are three basic economic items in the economy:1. Monetary items, e.g., bank notes and coins, money loans and all other items in the money supply.2. Variable real value non-monetary items, e.g., property, plant, equipment, inventory, stocks, shares, patents, stamps, gold, etc.

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

Where do bitcoins fit in?

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

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

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

a) Medium of exchange.

b) Store of value.

c) Unit of account.

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

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

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

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

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


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

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

Nicolaas Smith

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

Capital Maintenance feedback summary by the IASB

April 1, 2014 in Uncategorized

Capital Maintenance feedback summary by the IASB

Purpose of paper 1. This paper summarises the feedback received on:

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

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

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

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

Capital Maintenance

Background

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

Summary of feedback

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

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

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

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

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

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

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

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

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

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

CPA Australia and The Institute of Chartered Accountants Australia

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

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

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

(a) capital maintenance; and

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

IASB Agenda ref 10G 

Copyright (c) 2014 IFRS Foundation

 

ECB introduces the Real Euro

March 31, 2014 in Uncategorized

ECB introduces the Real Euro

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

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

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

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

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

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

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

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

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

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Difference between monetary values and monetary items

March 30, 2014 in Uncategorized

Difference between monetary values and monetary items

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

Definition: Monetary items constitute the money supply.

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

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

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

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

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Daily CPI formula used by France

March 27, 2014 in Uncategorized

Daily CPI formula used by France

The formula for calculating the French and Eurozone Daily CPIs is available HERE.The following Daily CPI´s have been added to the Daily CPI / Monetized Daily Indexed Unit of Account list on the right hand side of this BLOG:

Eurozone Daily CPI

French Daily CPI

Mexican Monetized Daily Indexed Unit of Account

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

Argentinian and Uruguayan Daily CPIs

March 25, 2014 in Uncategorized

Argentinian and Uruguayan Daily CPIs

The Argentinian Daily CPI and the Uruguayan Daily CPI are new additions to the Daily CPI / Daily Monetized Unit of Account links on the right hand side of this BLOG.

The Daily CPI links now include:

1. Chile

2. Colombia

3. Iceland

4. Serbia

5. Turkey

6. UK

7. Uruguay

8. US

9. US unofficial Daily CPI

10. Other unofficial Daily CPIs

The above official Daily CPIs and all others not yet linked on this blog are used in these countries to value/price their specific government inflation-indexed bonds on a DAILY basis in the global USD 3 trillion (2014) market for these sovereign bonds.

Countries that calculate their Daily CPIs in the form of a Daily Monetized Unit of Account and express them in terms of either 1 or 100 units of local currency at the base date, use these DMUAs also to value/price other items besides their government inflation-indexed bonds in their economies. This is of great advantage in these specific DMUA economies.

Chile inflation-index a number of monetary items and non-monetary items in their economy on a DAILY basis besides their sovereign inflation-indexed bonds. So much so that they inflation-adjust more than 25% of their money supply on a DAILY basis. There is thus NO EFFECT of inflation in 25% of Chile´s money supply. If they were to increase that to 100% of their money supply they would have NO EFFECT of inflation in 100% if their money supply at whatever rate of low, high or hyperinflation and deflation.

Colombia use their Real Value Unit DMUA to inflation-index all mortgage bonds in the country on a DAILY basis.

Uruguay use their Unidad Indexada to inflation-adjust some monetary items besides their sovereign inflation-indexed bonds on a DAILY BASIS

Nicolaas Smith

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

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DAILY INDEXING will stop your tears forever, Argentina

March 14, 2014 in Uncategorized

 

Daily indexing will stop your tears forever, Argentina

The Argentinian Accounting Federation sent a proposal to the IASB in 2010 regarding financial reporting in high inflationary economies (available in IFRS ‘X’). I amended their proposal in 2012 with IFRS ‘X’ CAPITAL MAINTENANCE IN UNITS OF CONSTANT PURCHASING POWER. I suggested capital maintenance in units of constant purchasing power in terms of a DAILY INDEX similar to what stabilized the Brazilian economy during high and hyperinflation from 1964 to 1994. Brazilian accountants called it ´correcção monetária`.

My amendment was ignored by both the Argentinian Accounting Federation and the IASB. The IASB at one stage even wanted to throw my amendments in the rubbish bin. Maybe that is where IFRS ´X´is now at the IASB – despite Hans Hoogervorst´s assurances to the contrary.

When I first read, a year or two ago, that the Argentinian government was faking inflation, I knew that they would land up in an economic disaster.

Now we have this:

Soaring Prices Fuel Frustrations Among Weary Argentines

IFRS ‘X’ is still valid today. It will always be valid while there is inflation and deflation. DAILY INDEXING would give Argentina economic stability over a very short period of time. The IASB could REQUIRE it in IAS 29. The Board could encourage it immediately while correcting IAS 29 in a very short time.

Unfortunately the IASB is still in love with historical cost accounting. “The cheque amount is what represents cost” is currently still very forcefully stated by a top IASB member in public when discussing accounting during high inflation which could reach up to 25% per annum. What a joke.

Watch Argentina and Venezuela to see historical cost accountants destroying two big economies – aided and abetted by the IASB.

Nicolaas Smith

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

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Ukraine and Venezuela can achieve economic stability in the very short run with help from the IASB

February 27, 2014 in Uncategorized

Ukraine and Venezuela can achieve economic stability in the very short run with help from the IASB

The implementation of capital maintenance in units of constant purchasing power in terms of a DAILY index which follows all – at least DAILY – changes in the general price level would GUARANTEE stability in the REAL VALUE  (constant purchasing power) of

salaries

wages

rents

taxes

trade debtors

trade creditors

all non-monetary payables

all non-monetary receivables

all items in the income statement

all profits

all losses

issued share capital

retained earnings

capital reserves

all other items in shareholders´equity

provisions

etc.

at any level of high or hyperinflation in Ukraine and Venezuela in the very short run. This requires the calculation and accounting of net monetary losses and gains.

This would stabilize the constant real value non-monetary economies in Ukraine and Venezuela in the very short run.

This was done very successfully in Brazil from 1964 to 1994 with “correcção monetária” or DAILY indexing which is CMUCPP in terms of a DAILY INDEX.

Extending DAILY INDEXING or “correcção monetária” or CMUCPP in terms of a DAILY INDEX to include the daily inflation-adjustment of all monetary items with all cash in the banking system (obviously not 100% possible) and it would GUARANTEE the stability of the REAL VALUE of these inflation-indexed monetary items at all levels of high and hyperinflation in Ukraine and Venezuela in the very short run. There would still be high or hyperinflation in Ukraine and Venezuela but there would be no EFFECT OF high or hyperinflation just like the effect of low inflation is eliminated in the global USD 3 trillion in government capital inflation-indexed bonds (e.g. TIPS) currently inflation-adjusted DAILY during low and high inflation in terms of the DAILY CPI in a great number of countries in the world economy.

Chile already inflation-indexes 25% + of all monetary items in its economy on a DAILY basis during low inflation since 2012. Chile started indexing in 1967 in its economy. They adopted DAILY INDEXING since 1990.

Robert Shiller decried governments´ lack of interest in DAILY INDEXING years ago.

The IASB can achieve that today in a very short time by requiring DAILY INDEXING in IAS 29 Financial Reporting in Hyperinflationary Economies by means of the short turn-around process for correcting an issued IFRS.

Venezuela is implementing IAS 29 since 2009. Ukraine is or would soon be in high inflation. IAS 29 in terms of the monthly published CPI does not achieve the above monetary and non-monetary stability as well proven during the 6 years IAS 29 was implemented at the end of Zimbabwe´s hyperinflation.

Nothing stops the IASB from requiring DAILY INDEXING in IAS 29 and nothing stops the IASB from encouraging it immediately and changing IAS 29 to require it over the very short term.

The above would also stabilize the foreign currency exchange rates of Ukraine and Venezuela with the rest of the world economy – obviously only with all else being equal. DAILY INDEXING would always guarantee internal economic stability no matter what happens with the external exchange rate. Internal economic stability generally always has a stabilizing effect on the external exchange rate – all else being equal.

What a difference DAILY INDEXING of all monetary items and all constant real value non-monetary items would make in Ukraine and Venezuela. Ask Robert Shiller and Gustavo Franco. Franco was one of the architects of the Real Plan in Brazil in 1994.

All of the above also hold true for Argentina and all other countries in high and hyperinflation. The constant purchasing power of constant real value non-monetary items and inflation-indexed monetary items is not only to be maintained constant in real value with the onset of high inflation or only during hyperinflation. CMUCPP in terms of a DAILY INDEX is required at all levels of inflation and deflation: during low inflation and deflation too.

Nicolaas Smith

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