Lesson 08 · 4 min · 6 things to do
Who gains and who pays
When money weakens, it does not weaken for everyone equally. For some people it is a quiet loss, and for others a quiet gift.
- What £10,000 buys at the start100 basketsWhat £10,000 buys at repayment50 baskets
You borrowed £10,000 and must repay exactly £10,000 in ten years, no interest. Prices double over those ten years. Repaying is…
- Yes.The debt is fixed in pounds and the pounds halved. Whoever lent the money gets back half the shopping they gave up.
- Not quite.Same pounds, half the buying. The debt is written in a unit that shrank, and so did the burden of it.
- Not quite.Everything you buy costs more, and everything you sell or earn pays more. The one thing that did not move is the debt, which is why it got lighter.
Money weakens by 8% in a year. Who gains, who pays, who is roughly even?
Someone with £20,000 in cash under the mattress
Someone repaying a mortgage fixed at the same monthly amount for years
A pensioner on a pension fixed in pounds
A worker whose pay is raised each year in line with prices
A government that owes a huge debt fixed in pounds
A landlord who re-sets the rent every year
Yes.The test is not rich or poor. It is whether what you hold, or what you owe, is written in pounds that cannot move. Fixed pounds held lose; fixed pounds owed lighten; anything that re-sets rides along.One saver holds £10,000 in cash. One borrower owes £10,000, fixed, no interest. Ten years pass. Change the inflation rate.
What the saver's £10,000 buys, after ten years£10,000What the borrower's £10,000 debt really costs, after ten years£10,000Measured in today's shopping. 0% a yearNothing moved. £10,000 buys what it did, for the one who holds it and the one who owes it.
What the saver's £10,000 buys, after ten years£7,441What the borrower's £10,000 debt really costs, after ten years£7,441Measured in today's shopping. 3% a yearBoth are worth £7,441 of today's shopping. The saver lost £2,559 of buying power, and the borrower was let off exactly the same.
What the saver's £10,000 buys, after ten years£5,584What the borrower's £10,000 debt really costs, after ten years£5,584Measured in today's shopping. 6% a yearBoth are worth £5,584 of today's shopping. The saver lost £4,416 of buying power, and the borrower was let off exactly the same.
What the saver's £10,000 buys, after ten years£3,855What the borrower's £10,000 debt really costs, after ten years£3,855Measured in today's shopping. 10% a yearBoth are worth £3,855 of today's shopping. The saver lost £6,145 of buying power, and the borrower was let off exactly the same.
The two bars are always the same height. Why?
- Not quite.There is no bank here and no interest. The only thing moving either bar is what a pound buys, and that is the same for everyone.
- Not quite.Try every rate. They match at all of them, because a debt and a deposit are the same pounds with the names swapped.
- Yes.One person's £10,000 is another person's £10,000. When the pounds weaken, the holder loses exactly what the ower is spared. Nothing is destroyed; it moves.
Move the control to see what changes.
A decade of 6% inflation. Tap the person who LOSES most from it.
Tap the part of the figure that answers it.
Retired teacher, pension fixed in pounds90%Shop owner: stock, premises, a little cash15%Saver with everything in a cash account100%Homeowner with a fixed-rate mortgage and no savings0%Share of what each person has that is fixed in pounds. Saver with everything in a cash account
Yes.Everything they have is in the thing that weakens, and none of it re-sets. Ten years at 6% and it buys a bit over half.Retired teacher, pension fixed in pounds
Not quite.Nearly as exposed, and worse in one way: they cannot move it. Almost everything they live on is fixed pounds.Shop owner: stock, premises, a little cash
Not quite.The stock and the premises re-price with everything else. Only the little cash loses, and it is a small share.Homeowner with a fixed-rate mortgage and no savings
Not quite.Nothing held in fixed pounds and a debt written in them. This is the mirror image of the saver: the decade that halves the saver's cash halves this person's debt.- The debt, in pounds, at the start£1,000bnThe debt, in pounds, five years on£1,000bn
The number owed never moves. A government owes £1,000bn, fixed in pounds. Prices rise 25% over five years. In start-of-period pounds, what is the debt now worth?
£bnDivide by 1.25.
Yes.£800bn of the old money. Nobody voted for a £200bn cut in what the debt is worth, and nobody had to. This is why a government with big debts is rarely the first to panic about rising prices. Weak money moves wealth from whoever holds fixed pounds to whoever owes them. Nobody decides it. The prices do.
- What a fixed £100 owed is worth after the doubling£50What £100 held in cash is worth after the doubling£50
A country's prices double in three years. A friend says the winners are the rich. Using this lesson's rule, who actually gains?
- Not quite.Everyone's prices doubled, and not everyone's pounds did. Whoever held them lost half; whoever owed them was spared half.
- Yes.Rich and poor are the wrong sort. The line runs between owing and holding, and it cuts through both. A rich saver loses; an indebted family gains.
- Not quite.Owning things that re-price is protection, not profit: the shop, the house, the shares keep their value. The gain goes to whoever OWES pounds that did not move.
Lesson complete
Weak money moves wealth from whoever holds fixed pounds to whoever owes them.
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