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Tuesday, 27 November 2012

Zero Erosion Economy


Zero Erosion Economy

 

The Daily Index Plan would result in zero erosion of real value in:

 

1. Constant items in the constant item economy, e.g. salaries, wages, rentals, capital, trade debtors, trade creditors, taxes payable, etc. since all these items would be indexed daily in terms of the Daily CPI or USD daily parallel rate. They would automatically always have constant real values over time since the stable measuring unit assumption is never implemented under capital maintenance in units of constant purchasing power.

 

2. Real price increases and decreases in the variable item economy (e.g. property, plant, equipment, inventories, foreign exchange, etc.) generally determined in free markets with these prices updated daily in terms of the Daily CPI or daily USD parallel rate when they are not determined in the free market on a daily basis in terms of IFRS excluding the stable measuring unit assumption under capital maintenance in units of constant purchasing power.

 

3. Zero erosion in monetary items in the monetary economy - excluding bank notes and coins outside the banking system - since all monetary items, as qualified, would be inflation-indexed on a daily basis in terms of the Daily CPI or daily USD parallel rate. All monetary items in the banking system would be inflation-indexed on a daily basis resulting in zero erosion of real value in monetary items in the banking system.

 

Definition

 

Monetary items are local currency units held and items with an underlying monetary nature being substitutes of the former.

 

Examples of monetary items that are not local currency units held are money loans, consumer loans, home loans, car loans, student loans, the capital amounts of bonds, the capital amounts of money market and capital market instruments, notes payable, notes receivable, etc. when these items are not in the form of local currency units held.

 

The Daily Index Plan constitutes

 

(A) capital maintenance in units of constant purchasing power as authorized in IFRS and

 

(B) daily inflation-indexing of the entire money supply, both in terms of the Daily CPI or daily USD parallel rate.

 

The Daily Index Plan would result in zero erosion of real value in (1) constant items as a result of measuring all constant items in units of constant purchasing power and (2) constant real value monetary items as a result of daily inflation-indexing the entire money supply excluding bank notes and coins outside the banking system with both (1) and (2) in terms of a Daily CPI or daily USD parallel rate.

 

In practice it would result in a Zero Erosion Economy (ZEE) at whatever rate of inflation or deflation. Inflation would generally fall to very low levels under the Daily Index Plan since the monetary effect (nature) of money is completely compensated for in a fully inflation-indexed money supply economy under IFRS-authorized capital maintenance in units of constant purchasing power in terms of a Daily Index with complete co-ordination.
 
 


Nicolaas Smith

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