kidmercury

monday night kookonomics is my contribution to MBA Mondays, in which i take fred's original post and interpret it through a conspiratorial, paranoid, distrustful lens. for previous editions of MNK, check the comments section in fred's MBA Mondays posts.

today for MNK i'd like to talk about accounting in a hyperinflationary environment. a great book on this subject that i recommend to anyone with an insatiable appetite for bad news is the hyperinflation survival guide. while it remains true that hyperinflation is a long shot and outlier scenario, it remains equally true that all fiat currencies have historically ended in hyperinflation, and that the US is on the path to currency self-destruction, as it has been for the past ten years, and as imperial nations driven by a fiat currency coupled with a domestic population characterized by hubris ("we are the greatest nation in the world!") and ignorance ("we don't have to pay attention to reality because we are the greatest nation in the world!") often are (historical examples include the roman empire and nazi germany). for an in-depth look at where we stand on the path to hyperinflation, i recommend john williams 2010 hyperinflation report, as well as the premium writings of venture capitalist turned economist eric janszen.

what happens to accounting in a hyperinflationary environment is something the aforementioned book, the hyperinflation survival guide, does a good job of discussing in fairly simple terms. a few take home points:

1. accounting records are often kept in multiple currencies to gain a better idea of value
2. the value of accounts receivables will depreciate and often quickly. this is hard to account for and predict, and thus there is a huge bias towards collecting cash early in a hyperinflationary environment. put another way, hyperinflation destroys credit markets. your accountant should understand this on a conceptual level and thus should be able to have a game plan for how accounting protocols will operate in such an environment.
3. businesses with lots of inventories run the risk of having those inventories depreciate quickly. something to talk about with your accountant if hyperinflation arises.
4. idle cash generally regarded as the big no-no in hyperinflation, as many south american businesses that have dealt with hyperinflation can attest. there is no safe haven, cash must always be working for you. as such, your accountant should be aware of this and should have protocols in place to manage this environment.

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