When I
was leaving accounting school the director of the program imparted some
sagical advice. He jokingly told us that when a potential employer
asked what 2+2 is to respond ‘Whatever you want it to be.’
One of my favorite law professors told us a similar joke. He
asked, ‘Do you know what the difference between medical school and law
school is?’ In medical school you learn and memorize all 23 parts
of the hand. In law school you learn to ask is that even a hand.’
To summarize, 2+2=(47) and what is 2? Perhaps I should work on
derivative valuations.
Being
formally trained in both Accounting and Law I think this is a critical
question to answer: whether
the US$ is in hyperinflation? If yes then how can the
average person be protected from hyperinflation?
A key
element of financial statements is comparability. The International
Accounting Standards (IAS) provide the accounting rules and are
comparable to GAAP.
Standard
1 requires a presentation currency. Standard 21 provides for
translation between functional and presentation currencies. The Bank
for International Settlements under Footnote 14 of their Annual Report treat
Gold as a financial instrument. For this analysis I will use gold as
the presentation currency and the US$ as a functional currency and apply the
relevant Standards.
Standard
29 provides “The objective of IAS 29 is to establish specific standards
for enterprises reporting in the currency of a hyperinflationary economy, so
that the financial information provided is meaningful. …The basic
principle in IAS 29 is that the financial statements of an entity that reports
in the currency of a hyperinflationary economy should be stated in terms of
the measuring unit current at the balance sheet date.”
What
are the elements and factors for hyperinflation?
Under IAS 29.3 the four factors are (1) the general population flees the
local currency, (2) dual currency pricing is practiced, (3) prices for
purchases on credit incorporate the loss of purchasing power and (4) the
cumulative inflation rate over three years approaches, or exceeds, 100%.
First,
under IAS 29.3 “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.” Under 31 U.S.C. 5112 the Mint is required to provide
‘in
quantities
sufficient to meet public demand’ gold and silver
coins. Due to exceptional demand and contrary to federal law the United States
Mint has suspended
both gold and silver coin sales. It appears a significant amount of the
United States general population is demanding the inflation hedge currencies,
gold and silver, in large amounts. Therefore, it appears this first
factor is met.
Second,
under IAS 29.3 “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.” In New York
some merchants have begun pricing in and accepting other currencies. An
article in February 2008 reported that “We had decided that money is money
and we’ll take it and just do the exchange whenever we can with our
bank, … We didn’t realize we would take so much in and
there were that many people traveling or having euros to bring in. But some
days, you’d be surprised at how many euros you get.” Robert Chu,
owner of East Village Wines, told Reuters television. Gas station owner
Gary Mallicoat accepts silver quarters. While the practice of
pricing and accepting alternative currencies does not appear widespread among
the general population the trend is starting.
Third,
under IAS 29.3 “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.” One of the easiest ways for
businesses to compensate for the loss of purchasing power through the use of
credit is to stop
extending credit and require cash.
This
steep decline in the rate of growth of M3 has likely resulted from lines of
credit being tapped out when the credit crisis began, lines of credit being
revoked and an unwillingness or inability to borrow or extend credit.
Therefore, it appears that, indirectly, the price of both sales and purchases
are being modified to compensate for the expected loss of purchasing power of
the US$.
Fourth,
under IAS 29.3 “the cumulative inflation rate over three years
approaches, or exceeds, 100%.” Because central banks have a
conflict of interest and often shroud their operations in secrecy the use of
their official numbers are unreliable. The only reliable currency is
gold. It is subject to only exchange-rate risk and there are large
amounts of above ground stockpiles indicating its primary use as money.
Therefore, the relative price of national currencies and gold, absent central
bank manipulation to the downside, should be a reliable indicator of the
national currency’s inflation rate because of the purchasing power
difference.
The
average price of gold in:
2004
– $409.72
2005
– $444.74
2006
– $603.46
2007
– $695.39
2008
– $912.90 (Jan-Aug)
Thus
the ‘inflation rate’ of the US$, relative to gold, is:
2005
– 8.5%
2006
– 35.7%
2007
– 15.2%
2008
– 31.3% (Jan-Aug 2008)
The
cumulative inflation rate from the 2005 average price of $444.74 to the 2008
average price of $912.90 equates to a rate of 105.3%. Because 105.3%
approaches and exceeds the 100% required by IAS 29 therefore the inflation
rate of the US$ relative to the stable and reliable currency of gold
indicates hyperinflation. Additionally, the general commodity index has
had similar triple digit changes.
CONCLUSION
Because
of the flight from the US$ by a large segment of the population of the United
States, the pricing of goods and services in foreign and metal currencies,
changes in credit terms to account for purchasing power differences and a
cumulative three year inflation rate of 105.3% therefore with gold as the
base currency the US$ appears to be in a hyperflationary environment when
applying IAS 29.
If you
are a CEO or CFO of a publicly traded company subject to SOX you may want to
consult your general counsel and auditors concerning this issue. I
doubt I need to remind you that ‘penalties for violations of to up to
$25 million dollars and up to 20 years in prison.’ Better to be
safe than sorry.
As
evidenced with the Weimar experience the rate of inflation rapidly
accelerates. Like a jet engine the faster it goes the faster it goes.
In a
Deflationary Winter the last layer of credit to evaporate is the national
currency through hyperinflation. It appears the evaporation through
hyperinflation is heating up up.
PROTECT
YOURSELF FROM HYPERINFLATION
Inflation
leads to shortages and shortages lead to rationing. When considering
physical preparation I think the best insurance is a three month supply of food and
a 72 hour kit. For food storage I recommend storing
what you eat and eating what you store.
Regarding
protecting one’s wealth against hyperinflation there is obviously gold
and silver. Learning where and how to buy gold or silver is extremely
important and you will want to avoid shady characters.
Trace Mayer
RuntoGold.com
Trace Mayer,
J.D., holds a degree in Accounting from Brigham Young University, a law
degree from California Western School of Law and studies the Austrian school
of economics. He works as an entrepreneur, investor, journalist and monetary
scientist. He is a strong advocate of the freedom of speech, a member of the
Society of Professional Journalists and the San Diego County Bar Association.
He has appeared on ABC, NBC, BNN, many radio shows and presented at many
investment conferences throughout the world.
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