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Monday, 11 August 2014

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.

Sunday, 10 August 2014

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 closer 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 money: a monetary item which is subject to inflation and deflation when a central bank is involved. 

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. The status quo may come under attack in the future depending on whether bitcoin - or maybe its successor - can actually be real money, i.e., a medium of exchange, a relatively stable store of real value and consequently a relatively stable unit of measure for accounting purposes.

I very much doubt that sovereign states would let the money supply be controlled by unknown people in a decentralized manner.  The money supply is a matter of national importance for every nation. 

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

Thursday, 7 August 2014

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 in IAS 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.

Sunday, 3 August 2014

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

Ecuador will be the last (latest), not the first, country to create its own digital national currency. Ecuador does not currently have its own digital national currency because it currently does not have its own national currency. It is a dollarized economy. Ecuador uses the mainly digital US Dollar as mainly 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 digital 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 decentralized digital fractional reserve banking.

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

Friday, 1 August 2014

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 fiat virtual currencies. All countries transact their fiat virtual currencies 24/7, 365 days a year via the 70-year-old (or older) global fiat virtual currency very secure fiat virtual 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 fiat virtual currencies are not virtual cryptocommodities (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 cryptocommodity 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.

Tuesday, 22 July 2014

Distinguishing the Unit of Account from the Unit of Measure

"Distinguishing the Unit of Account from the Unit of Measure

The term “unit of account” does not appear in the conceptual framework, although the term “unit of measure” does, and both terms appear in accounting standards. 

However, because unit of measure and unit of account are sometimes treated as synonyms, we discuss the distinction between the two terms next. 

The Unit of Measure in the FASB’s Conceptual Framework

 The FASB Discussion Memorandum, An Analysis of Issues Related to Conceptual Framework for Financial Accounting and Reporting: Elements of Financial Statements and Their Measurement (1976), a publication that preceded the FASB’s Concepts Statements, describes the unit of measure in terms of the monetary unit to be used; that is, whether it should be nominal units of money as opposed to units that are adjusted for changes in purchasing power over time (paragraphs 384-7). FASB Concepts Statement No. 1, Objectives of Financial Reporting by Business Enterprises (1978), and Concepts Statement 6, mention unit of measure but do not define or describe it. FASB Concepts Statement 2, Qualitative Characteristics of Accounting Information (1980), uses the term without defining it but discusses it in the context of making comparisons based on units of money or units of invariant purchasing power (paragraph 114). 

FASB Concepts Statement No. 5, Recognition and Measurement in Financial Statements of Business Enterprises (1984), describes the unit of measure in terms of nominal units of money or units of constant purchasing power, and then further describes it in terms of artificial monetary units 3 or units of a commodity, such as ounces of gold (paragraph 71). 

In the FASB’s conceptual framework, therefore, unit of measure refers to the numerals used in accounting measurement, in conjunction with recognition in financial statements or with disclosure in the notes to the financial statements. More specifically, it refers to the measurement unit (such as nominal dollars or price-level adjusted dollars), as opposed to the measurement attribute (such as historical cost or fair value). 

In contrast to the numerals that are used to measure an item, the unit of account refers to the words that are used to describe the item. That is, it relates to the specific assets and liabilities that are reported in financial statements rather than the units used to measure them. That is, unit of account refers to the object of recognition or display whereas unit of measure refers to the tool for measuring it.

The Unit of Measure in Accounting Standards 

 Unit of measure appears in several accounting standards. Those standards generally use the term in a manner that is consistent with its use in the Concepts Statements. 

For example, FASB Statement No. 19, Financial Accounting and Reporting by Oil and Gas Producing Companies (1977), discusses converting oil and gas reserves and oil and gas produced to a common unit of measure based on their relative energy content (paragraph 38). FASB Statement No. 52, Foreign Currency Translation (1981), uses the term in its Basis for Conclusions and defines the term in its glossary as “the currency in which assets, liabilities, revenues, expenses, gains, and losses are measured.” These uses of the term are consistent with the general meaning of the term in the Concepts Statements."

Copyright (c) Johnson, L.T., The Unit of Account Issue, Financial Accounting Standards Research Initiative

________________________________________________________________________________

Unit of account and unit of measure are very often used as synonyms in economics and accounting. However, unit of account has a very specific definition in accounting in International Financial Reporting  Standards and US GAAP that is not a nominal monetary unit of measure; not fiat money or a fiat currency. In IFRS and US GAAP, a unit of account are the words used to describe an asset unit or liability unit for accounting purposes.

Nicolaas Smith

Tuesday, 15 July 2014

With Bitcoin, generally accepted terms trump economic science

With Bitcoin, generally accepted terms trump economic science

An American federal judge stated that bitcoin is a unit of account, meaning monetary unit of measure. Bitcoin is a very unstable variable real value non-monetary item, not a monetary unit of measure. Bitcoin can never be a monetary unit of measure because it is not a monetary item. All monetary units of measure are assumed to be perfectly stable in real value for accounting purposes during low and high inflation and deflation. Bitcoins are not perfectly stable in real value and will never be assumed to be perfectly stable in real value because a bitcoin is a variable real value non-monetary item. Monetary unit of measure only refers to a fiat currency unit of measure. 

Bitcoin is universally referred to as a currency. It can never be a currency. It is not a monetary item. It is a variable real value non-monetary item similar to rare digital stamps. All fiat currencies are assumed to be perfectly stable in real value during low and high inflation and deflation for accounting purposes. Bitcoin will never be assumed to be perfectly stable in real value. 

Everyone is 100% sure that bitcoin is a decentralized payment platform. In fact, all bitcoins only exist in the single, centralized Bitcoin Public Ledger or single bitcoin repository. All bitcoins are deposited in this single repository. However, everyone is 100% sure it is a decentralized system. 

Mining, the creation of bitcoins, is assumed or supposed to be decentralized, but all bitcoins are then deposited in the single central repository called the Bitcoin Public Ledger where they stay centralized in one place forever. Currently the company GHash controls 51% of mining which is a very dangerous situation for the Bitcoin system. 

Public opinion and public practice will always override science in matters like these. 

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

Wednesday, 9 July 2014

Bitcoin is not a monetary unit of measure or unit of account

Bitcoin is not a monetary unit of measure or unit of account

A monetary unit of measure is often mistakenly called a unit of account by the man in the street and even by a US federal judge. See 

Distinguishing the Unit of Account from the Unit of Measure


Money is always a monetary unit of measure. The best known monetary units of measure are the best known fiat currencies in use today: US Dollar, Euro, Pound, Peso, Rouble, Yuan, Yen, Shilling, etc. All fiat currencies are monetary units of measure.

They are all monetary items when used inside the economy where they are created. They are variable real value non-monetary items when used as foreign exchange outside the economy where they are created.

Money (any fiat currency) as the monetary unit of measure is the only unit of measure that is not based on a constant value. It is thus assumed for accounting purposes only under Historical Cost Accounting and Current Cost Accounting (which implement the stable measuring unit assumption) that all monetary units of measure are perfectly stable in real value for the purpose of measuring monetary items not inflation-indexed and constant real value non-monetary items only during low and high inflation and deflation.

All other units of measure are based on constant values, e.g., inch, foot, yard, mile, kilometer, meter, pound, gram, ounce, watt, etc.

A monetary unit of measure is an assumed to be perfectly stable in real value, monetary item (fiat currency) - in the economy where it is created - used to account economic activity in terms of the double entry accounting model.

The best known double entry accounting model is the traditional, generally accepted, globally implemented Historical Cost Accounting model.

Other double entry accounting models are:

Capital Maintenance in Units of Constant Purchasing Power in terms of the Daily CPI.

Current Cost Accounting 

Thus, bitcoin, the digital unit of the Bitcoin digital payment platform, is not a monetary unit of measure,  because all units of measure are either based on a perfectly constant base unit (e.g., inch, centimeter, gallon, pint, watt, ohm, etc.) or - only in the case of monetary items - assumed to be perfectly stable in real value only during low and high inflation and deflation and only under the Historical Cost Accounting and Current Cost Accounting models. 

A bitcoin is not a monetary unit of measure because economic items are not generally priced or measured in bitcoins. No financial reports are prepared in bitcoins. No set of accounts is prepared in bitcoins.

Monetary units of measure are all monetary items (currencies) assumed to be perfectly stable in real value only during low and high inflation and deflation only under HCA and CCA.

Bitcoins are not perfectly stable in real value and are not and cannot be assumed to be perfectly stable in real value because they are not monetary items.

Bitcoin is always a variable real value non-monetary item similar to a limited issue rare stamp in digital form.

Thus, bitcoin is not and cannot be a monetary unit of measure for accounting purposes. Bitcoin is not a monetary unit of measure because it is not perfectly stable in real value and it is not and it cannot be assumed to be perfectly stable in real value because a bitcoin is not a monetary item.

Bitcoin is a digital variable real value non-monetary item. The bitcoin digital units are numbered in terms of the normal numbering system: 1, 2, 3, ..... 

The fact that a US federal judge referred to bitcoin as a unit of account (mistakenly meaning monetary unit of measure) does not constitute a binding definition or description since it was made under US common law. Any other US common law judge can have a different opinion.

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

Sunday, 29 June 2014

Definition of hyperinflation


The generally accepted definition of hyperinflation in the world economy is 100% cumulative inflation over three years. It comes to 26% annual or 1.95% monthly inflation for three years in a row.

The above definition is currently being used by the 147 countries that implement International Financial Reporting Standards as issued by the International Accounting Standards Board. This definition has been used since April 1989 by the millions of accountants, business people, economists and all governments who implement IFRS. 

This definition of hyperinflation is contained in IAS 29 Financial Reporting in Hyperinflationary Economies that was authorized by the IASB in April 1989. 

"Par 3. This Standard does not establish an absolute rate at which hyperinflation is deemed to arise. It is a matter of judgement when restatement of financial statements in accordance with this Standard becomes necessary. Hyperinflation is indicated by characteristics of the economic environment of a country which include, but are not limited to, the following:

(a) the general population prefers to keep its wealth in non-monetary assets
or in a relatively stable foreign currency. Amounts of local currency held
are immediately invested to maintain purchasing power;

(b) the general population regards monetary amounts not in terms of the
local currency but in terms of a relatively stable foreign currency. Prices
may be quoted in that currency;

(c) sales and purchases on credit take place at prices that compensate for
the expected loss of purchasing power during the credit period, even if
the period is short;

(d) interest rates, wages and prices are linked to a price index; and

(e) the cumulative inflation rate over three years is approaching, or exceeds, 100%."

There is today not one government in the world economy that uses any other definition of hyperinflation. 

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

Saturday, 21 June 2014

High Frequency Traders make technology profits

High Frequency Traders make technology profits.

They make almost no profit per trade over almost no time with almost no risk millions of times.

Nicolaas Smith 


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

Tuesday, 10 June 2014

Daily inflation-indexing of the entire money supply would remove the effect of inflation or deflation (not actual inflation or deflation)

Daily inflation-indexing of the entire money supply would remove the effect of inflation - low, high and hyperinflation - or deflation (not actual inflation or deflation).

This happens daily with the USD 3 trillion plus in global government inflation-indexed bonds.

Chile today inflation-indexes more than 25% of its entire money supply on a daily basis. 

Why not 100%? What is wrong with doing away with the effect of inflation - low, high and hyperinflation - or deflation completely?

Nicolaas Smith

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

Friday, 6 June 2014

Capital Maintenance in Units of Constant Purchasing Power stops destruction of real value under HCA

IFRS and US GAAP authorised Capital Maintenance in Units of Constant Purchasing Power™ (CMUCPP) maintains the constant purchasing power of constant real value non-monetary items (salaries, wages, pensions, taxes, trade debtors/creditors, equity) only in terms of a Daily CPI in entities that break even in real value in inflation and deflation - ceteris paribus

It would stop the global destruction by the stable measuring unit assumption in constant items of hundreds of billions of USD p.a. now taking place under traditional Historical Cost Accounting.

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

Monday, 2 June 2014

Difference between local currency and foreign currency


Foreign currency
  
Foreign currency is always created in a foreign economy. Foreign currency is always a variable real value non-monetary item like, for example, property, plant, equipment, listed and unlisted shares, etc. A foreign currency with a floating exchange rate´s continuously changing daily value is determined in foreign currency markets. Foreign currency gains or losses are recorded in the financial reports under all accounting models including traditional Historical Cost Accounting. Foreign currency is traded daily on many foreign currency exchange markets. A foreign currency with a floating exchange rate has a continuously changing price or real value. A foreign currency with a floating exchange rate can increase and decrease in price daily (minute by minute). 

Local currency

Local currency is always fiat money created in the local economy. A local currency is always a monetary item with an assumed to be perfectly stable real value over time whereas a foreign currency is always a variable real value non-monetary item. However, a local currency´s daily changing real value is determined by the rate of inflation or deflation in the local economy as indicated by the Daily CPI during low inflation, high inflation and deflation and by the Daily US Dollar parallel rate during hyperinflation. Although a local currency is generally not stable in real value, it is assumed that the local currency is perfectly stable in real value over time for the purpose of being used as the "assumed-to-be" perfectly stable monetary unit of account in the local economy for accounting purposes under the Historical Cost and Current Cost Accounting models. Under the Capital Maintenance in Units of Constant Purchasing Power (CMUCPP) accounting model monetary items are generally inflation-adjusted on a daily basis and constant real value non-monetary items are measured daily in units of constant purchasing power generally in terms of the Daily CPI.

Local currency net monetary gains and losses as a result of inflation and deflation are not recorded in the financial reports under HCA and CCA during low inflation, high inflation and deflation. They are calculated and accounted under Capital Maintenance in Units of Constant Purchasing Power during hyperinflation as required under IAS 29 Financial Reporting in Hyperinflationary Economies. During low inflation and deflation local currency is not traded in the local market because local currency is assumed to be perfectly stable in real value over time. Local currency´s real value is indicated by inflation and deflation. However, during high inflation and hyperinflation, local currency is traded in the local market. This market is called the parallel or black market as opposed to the normal foreign exchange market. 

Local currency´s real value is determined by all the underlying value systems in the local economy, e.g., good or bad national governance, a good or bad economy, good or bad monetary policies, a good or bad legal system, a good or bad health system, a good or bad educational system, a good or bad police force, etc, etc. The daily change in local currency´s real value is indicated by the daily change in the Daily CPI during low and high inflation and deflation and by the daily US Dollar parallel rate during hyperinflation.

The total of local currency held locally plus held outside the local economy (as foreign currency by other countries) make up the money supply.  Daily inflation-indexing the local money supply, i.e., all monetary items in the local economy, would eliminate only the effect of inflation or deflation in the local economy: it would leave local inflation or deflation intact. However, it would be as if there is no inflation or deflation in the local economy.

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

Sunday, 1 June 2014

Generally accepted definition of hyperinflation


The generally accepted definition of hyperinflation in the world economy is 100% cumulative inflation over three years. It comes to 26% annual or 1.95% monthly inflation for three years in a row.

The above definition is currently being used by the 147 countries that implement International Financial Reporting Standards as issued by the International Accounting Standards Board. This definition has been used since April 1989 by the millions of accountants, business people, economists and all governments who implement IFRS. 

This definition of hyperinflation is contained in IAS 29 Financial Reporting in Hyperinflationary Economies that was authorized by the IASB in April 1989. 

"Par 3. This Standard does not establish an absolute rate at which hyperinflation is deemed to arise. It is a matter of judgement when restatement of financial statements in accordance with this Standard becomes necessary. Hyperinflation is indicated by characteristics of the economic environment of a country which include, but are not limited to, the following:

(a) the general population prefers to keep its wealth in non-monetary assets
or in a relatively stable foreign currency. Amounts of local currency held
are immediately invested to maintain purchasing power;

(b) the general population regards monetary amounts not in terms of the
local currency but in terms of a relatively stable foreign currency. Prices
may be quoted in that currency;

(c) sales and purchases on credit take place at prices that compensate for
the expected loss of purchasing power during the credit period, even if
the period is short;

(d) interest rates, wages and prices are linked to a price index; and

(e) the cumulative inflation rate over three years is approaching, or exceeds, 100%."

There is today not one government in the world economy that uses any other definition of hyperinflation. 

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

Saturday, 31 May 2014

IFRS / US GAAP authorized solution to the Historical Cost Mistake

IFRS / US GAAP authorized solution to the Historical Cost Mistake

Financial capital maintenance in units of constant purchasing power is authorized in both IFRS and US GAAP as the alternative to Historical Cost Accounting, i.e., financial capital maintenance in nominal monetary units (or the Historical Cost Mistake).

The Historical Cost Mistake is, obviously, fixed with Daily Indexing: Capital Maintenance in Units of  Constant Purchasing Power in terms of the Daily CPI during low inflation and high inflation and deflation and in terms of the US Dollar parallel rate during hyperinflation. 

Daily Indexing 

1. Accounting Daily Indexing
2. Comprehensive Daily Indexing

1. Accounting Daily Indexing is implementing CMUCPP in terms of the Daily CPI instead of HCA. That only eliminates the destruction of the real value of constant real value non-monetary items never or not fully maintained constant in real value by HCA. Accounting Daily Indexing keeps the constant real value non-monetary economy perfectly stable by stopping the stable measuring unit assumption in accounting, i.e. stopping HCA. 

2. Under Comprehensive Daily Indexing, Accounting Daily Indexing is combined with daily inflation-indexing of the entire money supply in terms of the Daily CPI. Daily inflation-indexing of all monetary items additionally eliminates the effect of inflation and deflation from only monetary items. However, daily inflation-indexing of all monetary items does not stop inflation or deflation. Daily inflation-indexing of all monetary items stops the destruction of the real value of monetary items over time by inflation and it stops the increase in the real value of monetary items over time during deflation. It only eliminates the effect of inflation and deflation on only monetary items. It would be as if there is no inflation or deflation - while actual inflation or deflation continues.

For example, Daily Inflation-indexing the $3 trillion in global government inflation-indexed bonds maintains the real value of this USD 3 trillion perfectly stable over time on a daily basis, but it does not stop the inflation or deflation in the countries concerned. The inflation or deflation continues, but it is as if there is no inflation or deflation for the holders of the $3 trillion sovereign capital inflation-adjusted bonds inflation-indexed daily in all the different countries where the actual inflation and deflation continue while these monetary conditions are created by the specific central banks. 

Daily inflation-indexing only removes the effect of inflation and deflation. It does not stop inflation or deflation. It is as if there is no inflation or deflation.  
Accounting and Comprehensive Daily Indexing are free, authorized under IFRs and US GAAP and available to all countries and economies. 

Daily Indexing is free. It kills the need for very costly Dollarization or a currency board at no cost while the countries'  central banks maintain their full monetary creation and monetary policy powers (what they lose under Dollarization and a currency board).

Nicolaas Smith Copyright © 2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Friday, 30 May 2014

Bitcoin can never be a monetary item

Bitcoin is a decentralized digital peer-to-peer payment protocol with a spontaneously monetized unit of account. The Bitcoin System's unit of account, bitcoin, is used as a digital medium of exchange on the Bitcoin payment platform. The monetized bitcoin is a very unstable store of value.

bitcoin is the unit of account of the Bitcoin block chain system. bitcoin will never be used as the official monetary unit of account or monetary unit of measure in any accounting model.

Spontaneous monetization of bitcoin

Bitcoin is an open decentralized system. Anyone can participate. Monetization also had to be spontaneous.

On 22 May, 2010 "laszlo" spontaneously monetized bitcoin at $0.0025 for 1BTC. He paid 10 000 BTC for 2 pizzas costing about $25.

Money is supposed to be perfectly stable in real value. Money never was or is or ever will be perfectly stable in real value on a sustainable basis over time. A Consumer Price Index is thus required to calculate a unit of constant purchasing power. Implementing Capital Maintenance in Units of Constant Purchasing Power (CMUCPP) in terms of the Daily CPI (during low and high inflation and deflation) and the USD parallel rate during hyperinflation, including daily inflation-indexing of the entire money supply stabilizes the real value of the money supply as well as the real value of all constant real value non-monetary items in an economy. 

The fact that bitcoin was spontaneously monetized and thereafter evolved to increase in real value - it has a limit of 22 million bitcoins in 100 years' time - means bitcoin was never intended to have a perfectly stable real value over time or even a relatively stable real value that can be assumed to be perfectly stable like in the case of all fiat currencies (all national monetary units). 
Bitcoin can thus never be real money. Bitcoin can never be a monetary item. It is not money or a monetary item. It is a variable real value non-monetary item similar to rare stamps. 

Monetary items constitute the money supply. Bitcoins will never be part of any country's money supply. Bitcoin can thus also never be subject to monetary inflation and monetary deflation because it is not assumed to be perfectly stable in real value. 

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

Friday, 16 May 2014

It is misleading to state that bitcoin is subject to monetary inflation and deflation

A Consumer Price Index can only be calculated in the case of the currency in which the consumer items is priced being a fiat currency, i.e., it is assumed to be perfectly stable in real value under the traditional Historical Cost paradigm. No fiat currency is, in fact, generally perfectly stable in real value. All fiat currencies are thus assumed to be perfectly stable, i.e., the stable measuring unit assumption is applied. 

The CPI is then used to, e.g., inflation-adjust government indexed bonds (TIPS) on a daily basis, measure financial capital maintenance in units of constant purchasing power as in IAS 29 Financial Reporting in Hyperinflationary Economies, etc.

Bitcoin is not assumed to be perfectly stable in real value. It is not a fiat currency. It is a property as per the US IRS. It is, in fact, a variable real value non-monetary item just like any other property, plant or equipment. 

Since bitcoin is not assumed to be perfectly stable in real value (heaven forbid!), it is thus not subject to the economic concept of monetary item inflation, being a sustained increase - not in a specific price, but, in the general price level, or deflation, being a sustained decrease - not in a specific price, but, the general price level. 

It is thus a complete mistake to associate bitcoin with monetary inflation and deflation as indicated by the change in a CPI. 

On the other hand:

It is true that any single price increase is also described as inflation of that specific price. However, it is clearly understood in economics that it is not the same as monetary inflation being a sustained increase in the general price level which normally includes simultaneous decreases (also described as deflation) in various specific prices. This, nonetheless, confuses most people. 

In the same way a decrease in a specific price is described as deflation in that specific price. It is also clearly understood in economics that it is not the same as monetary deflation being a sustained decrease in the general price level which normally includes simultaneous increases (also described as inflation) in various specific prices. However, this also confuses most people.

It is thus misleading to state that bitcoin is subject to monetary inflation and deflation. It is not.

Nicolaas Smith

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

Despite what Bloomberg states: Monetary deflation or inflation is impossible in bitcoin

Both the economic science concept of monetary item inflation and the economic science concept of monetary item deflation are impossible with bitcoin because bitcoin is a variable real value non-monetary item (a property, not a currency - not money or a monetary item - as the US IRS stated - or "fundamentally not a currency" as the People's Bank of China (Central Bank of China) stated).
The economic science concept of inflation, unfortunately, has not only one, but, two meanings (which is sadly, but unavoidably and very humanly, rather confusing):
(1) Inflation is sometimes used to simply  mean a price increase in any single price, for example, the Bank of England sometimes states "house price inflation" when it actually means the increase in house prices in the UK: a single sector price increase in the UK, not a sustained increase in the general price level in terms of the Pound as measured in terms of the UK CPI measured in terms of the monetary item, the UK Pound - the undoubtedly main definition of inflation for people in the UK. Inflation used in this sense of simply any single price increase (not a general price level increase resulting in the decrease of the real value of the monetary item, the UK Pound) thus has as its opposite that deflation is simply any price decrease (not a general price level decrease resulting in the increase in the real value of the monetary item, the UK Pound). 
(2) Secondly, inflation is almost always (luckily and scientifically) correctly used to mean "a sustained increase in the general price level" when the general price level is taken to be indicated by the Consumer Price Index, which is calculated in terms of a fiat local currency which is assumed to be perfectly stable - when in fact the fiat currency, generally, is almost never perfectly stable (maybe perfectly stable - zero inflation - for only one or a maximum of two months in a row).
Deflation is thus impossible in bitcoin for simply the same reason: bitcoin is not a fiat currency with a real value assumed to be perfectly stable over time.
Fiat money is always a monetary item. That is: it forms part of a country's money supply. There is not one bitcoin included in any country's money supply: thus, another clear proof that bitcoin is not a monetary item (not money) although everyone calls it a virtual or digital or cryptocurrency. There is no problem with calling bitcoin a digital currency: that is how the man and woman in the street speak about bitcoin. The man or woman in the street regards any widely used medium of exchange as "money". In economic science, however, bitcoin is not a monetary item: its is a variable real value non-monetary item as very correctly indicated by the US IRS which ruled it is a property (part of Property, Plant and Equipment) and not a currency: not a monetary item or "fundamentally not a currency" as the Chinese PBOC correctly ruled.
Bitcoin has been classified as property (a variable real value non-monetary item - not a monetary item) in the US. Bitcoin has not been classified as a monetary item in any country although everybody calls it a digital currency.
Bitcoin can never be a monetary item. To become a monetary item, bitcoin has to be perfectly stable in real value or assumed to be perfectly stable in real value, like all fiat currencies are under Historical Cost Accounting, the traditional accounting model used to account almost all economic activity in the world economy.
Bitcoin speculators (the WinkleVoss Twins, et al), who are 99.9% responsible for the bitcoin phenomenon would be totally mortified if anyone would be so absolutely silly to succeed in making bitcoin perfectly stable in real value. They would die on the spot. They and the WinkleVoss Twins are betting their life´s savings on the view that bitcoin would skyrocket in price because it is limited to a total of 22 million bitcoins in about 100 year's time. So be it. Good luck to them.
However, if the bitcoin price were to take off exponentially in 100 year's time when the 22 millionth (last) bitcoin is mined with increased massive demand for bitcoin in the world economy, then it would not be because of deflation (the increase in the real value of a nominal value fiat currency - which bitcoin is not - because of a sustained decrease in the general price level indicated by the CPI which is measured in terms of that "assumed-to-be-perfectly-stable fiat currency".)
It would simply be because of a hopefully (by the WinkleVosses and other speculators) massive increase in demand for a stopped-in-supply bitcoin. It would have absolutely nothing to do with deflation or a sustained decrease in the general price level of a fiat currency that is assumed to be perfectly stable in real value - which bitcoin is not.
Anyone (for example - with all due respect for a great publication - Bloomberg) stating that bitcoin is subject to inflation (not the price increase definition) or deflation, does not understand the economic concept of monetary inflation and deflation with reference to a fiat currency that is assumed to be perfectly stable in real value.
There are a lot of things I do not understand.
To construct a CPI measured in Bitcoin is thus very silly since there are generally no consumer prices stated in bitcoin and most probably never will be.

Nicolaas Smith 

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

Sunday, 4 May 2014

What is money?

I) AS DEFINED IN ECONOMICS

In terms of economics, an item has to fulfil all the following requirements, at the same time, to be considered "money" and thus a monetary item:


1. a widely used medium of exchange which overcomes the double coincidence of wants problem,

2. a relatively stable store of real value, 

3. a relatively stable real value unit of account

and

4. legal tender.

This money is a monetary item. Monetary items constitute the money supply.

Money´s real value is eroded by inflation and increased by deflation. 

Prices are widely quoted in this money.

The Daily CPI reflects the general price level. Items in the consumer basket used to calculate the Daily CPI are priced in terms of this money.

This money is used to calculate a unit of constant purchasing power in terms of the Daily CPI in order to

(a) eliminate the effect of inflation and deflation from monetary items and 

(b) eliminate the effect of the stable measuring unit assumption from constant real value non-monetary items.

II) AS SEEN BY THE MAN IN THE STREET

Money is anything that is a widely used medium of exchange.

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

Sunday, 27 April 2014

If Bitcoins were money their creation would immediately be banned by monetary authorities

If Bitcoins were money their creation would immediately be banned by  monetary authorities

For a cryptocurrency (for example, bitcoin)  - or any other item - to be money, i.e., a monetary item, it has to be 

1. a widely accepted medium of exchange

2. a perfectly stable real value store of value

and

3. a perfectly stable real value unit of account

besides also being legal tender in the economy where the money is created.

Monetary items constitute the money supply in the economy where the money is created. 

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

Non-monetary items are sub-divided in 

(a) variable real value non-monetary items, e.g., property, plant, equipment, foreign exchange, listed and unlisted shares, inventory, raw material stock, bitcoins, etc. 

and 

(b) constant real value non-monetary items, e.g., all items in sharehoders´ equity, trade debtors, trade creditors, all items in the profit and loss account, provisions, salaries, wages, pensions, taxes, rents, interest, etc.

More specifically, a monetary item has to be a perfectly stable store of real value which makes it a perfectly stable real value unit of account. 

Fiat money, e.g., the US Dollar, Euro, Yen, Yuan, Ruble, etc., is generally not a perfectly stable store of real value and thus also not a perfectly stable real value unit of account. The US Dollar and the Euro, for example, have an inflation target of 2 percent per annum. That is regarded (another assumption) as "monetary stability" by the monetary authorities.

Mankind over the ages has overcome the problem of money having to be perfectly stable in real value by simply assuming that it is perfectly stable in real value over time by applying the stable measuring unit assumption under the traditional, generally accepted, globally implemented Historical Cost Accounting model to account all economic activity. 

The Measuring Unit principle: The unit of measure in accounting shall be the base money unit of the most relevant currency. This principle also assumes the unit of measure is stable; that is, changes in its general purchasing power are not considered sufficiently important to require adjustments to the basic financial statements.’

Walgenbach, Dittrich and Hanson 1973: 429

Problem solved. Money is generally never perfectly stable, so, we solve the problem by simply assuming it is perfectly stable in real value. Ask any accountant or economist and he or she will confirm this. 

Cryptocurrencies, by being variable real value non-monetary items, can thus never be money or monetary items. 

If a cryptocurrency were perfectly stable in real value over time, it would be a monetary item and could be used as a perfectly stable unit of account. However, their creation would immediately be banned by monetary authorities because only a country's central bank has the authority to issue money in an economy. 

Bitcoins are a medium of exchange because many people and companies accept them as such. They are also a variable store of value similar to fiat money. However, bitcoins are not assumed to be perfectly stable in real value and used as such as a unit of account with a perfectly stable real value whereas all fiat currencies (money within those economies) are. Bitcoins are thus not money. Bitcoins can thus never be money or a monetary item.

If bitcoins were money, their creation would immediately be banned by  monetary authorities. This is true for any cryptocurrency.

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

Tuesday, 22 April 2014

Completely wrong Bitcoin statements

Completely wrong Bitcoin statements

It is completely wrong for The Economist to state that Chronic deflation may keep Bitcoin from displacing its fiat rivals.


Deflation is impossible in Bitcoin. It is impossible in a non-monetary item. A bitcoin is a variable real value non-monetary item. 


Deflation is a sustained decrease in the general price level over time.


Deflation means the real value of a monetary item increases while its nominal value stays the same over time as  a result of a fall in the general price level. 


A monetary item can only be affected by inflation when its real value decreases as a result of a sustained increase in the general price level over time. The nominal value of the monetary item (US Dollar, Euro, Yuan, Yen, etc.) stays the same over time.


All statements linking Bitcoin to inflation or deflation are completely wrong.


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