Thursday, April 10, 2008

A Little Standard Accounting

International Accounting Standard 29 describes four signs that an economy may be in hyperinflation:
1. 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.

2. 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 foreign currency.

3. 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.

4. Interest rates, wages and prices are linked to a price index and the cumulative inflation rate over
three years approaches, or exceeds, 100%.

Now, if I'm reading that last one right, and if my calculator ain't broke, that 100% spread out over 3 years gives you 33%/year, or 2.8%/Month. Gut-feeling: We are living those numbers right now.

As for item 1, how many of us keep a lot of cash in the bank?

Item 2: The US Dollar is at the top of the economic food chain. We don't have a real alternative, like Mexico, Argentina, or Zimbabwe. We think in dollars, not pesos. We may have to think in something else here soon, like gold or silver.

Item 3: This is an interesting notion. Perhaps we should start using our credit cards to buy gas, hm?


Sources:

http://www.iasplus.com/standard/ias29.htm

2 comments:

Jim said...

33% over three years actually gives you more than 100% inflation, because of compounding.

Price of Item X is $100 in Year 0.
at 33% it would be $133 in Year 1.
33% of $133 is about $44, for a Year 2 total of $177.
33% of $177 is $58 for a Year 3 total of $235 or 135% inflation.

We only need an annual inflation rate of 26% to hit 100% over three years.

ZenDraken said...

Really rough math on my part. Thanks for the correction.

Here's an alternate source of statistics that shows almost 12% inflation: Shadow Government Statistics

Whatever the real rate is, I think most people would agree it's not the official rate.