Someone borrows £10,000 from a friend. The deal is simple: pay back exactly £10,000 in ten years, with no interest. Over those ten years prices double. The number owed does not move. It is still £10,000.
What £10,000 buys at the start100 baskets
What £10,000 buys at repayment50 baskets
At the start, £10,000 bought 100 baskets of shopping. After prices double, £10,000 buys 50. The borrower hands back the same pounds and half the shopping. The friend who lent the money gets back half of what they gave up.
What £10,000 buys at the start100 baskets
What £10,000 buys at repayment50 baskets
Prices doubled over the ten years. For the borrower, paying back the £10,000 is…
Easier. The £10,000 they hand back buys half what it did.
Right. The debt stayed at £10,000 and each pound buys half. Whoever lent the money gets back half the shopping they gave up.
Harder. Everything costs more.
Not yet. 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.
The same. It is the same £10,000.
Not yet. Same pounds, half the shopping. The debt is written in pounds, and pounds are what got weaker. So the debt got lighter with them.
Prices rise→Each fixed pound buys less→Whoever holds them loses→Whoever owes them is let off
A number that cannot change is called fixed. That debt was fixed. So is cash in a drawer, and a pension paid at the same amount for life. When money weakens, whoever holds fixed pounds loses. Whoever owes fixed pounds is let off part of the debt. Pay that goes up with prices neither loses nor gains.
Money weakens by 8% in a year. Who gains, who pays, who is roughly even?
One card at a time. Tap the pile it belongs to.
Card 1 of 6
Someone with £20,000 in cash hidden at home
Someone repaying a mortgage, a loan to buy a home, at the same fixed 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, someone who rents out a home, who re-sets the rent every year
Someone with £20,000 in cash hidden at home → Pays
Not yet. This person pays. The £20,000 is fixed, and by the end of the year it buys 8% less shopping.
Someone repaying a mortgage, a loan to buy a home, at the same fixed monthly amount for years → Gains
Not yet. This person gains. The monthly payment is fixed, and fixed pounds get easier to find as pay and prices rise.
A pensioner on a pension fixed in pounds → Pays
Not yet. This person pays. The pension is a fixed number of pounds, and each pound buys 8% less than it did.
A worker whose pay is raised each year in line with prices → Roughly even
Not yet. This person is roughly even. Their pay is re-set with prices, so the shopping it buys stays about the same.
A government that owes a huge debt fixed in pounds → Gains
Not yet. The government gains. It owes fixed pounds, and the pounds it pays back are worth 8% less than the ones it borrowed.
A landlord, someone who rents out a home, who re-sets the rent every year → Roughly even
Not yet. This person is roughly even. The rent moves with prices each year, so the landlord neither wins nor loses from the 8%.
Holds fixed poundspays
vsvs
Owes fixed poundsgains
vsvs
Pay re-set with pricesabout even
Right. Whoever holds fixed pounds loses. Whoever owes fixed pounds gets a lighter debt. Pay or rent that is re-set each year moves with prices, so those people come out about even.
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£10,000
What the borrower's £10,000 debt really costs£10,000
After ten years, measured in today's shopping.
Inflation rate: 0% a year
Nothing 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£7,441
What the borrower's £10,000 debt really costs£7,441
After ten years, measured in today's shopping.
Inflation rate: 3% a year
Both are worth £7,441 of today's shopping. The saver lost £2,559 of shopping, and the borrower was let off exactly the same.
What the saver's £10,000 buys£5,584
What the borrower's £10,000 debt really costs£5,584
After ten years, measured in today's shopping.
Inflation rate: 6% a year
Both are worth £5,584 of today's shopping. The saver lost £4,416 of shopping, and the borrower was let off exactly the same.
What the saver's £10,000 buys£3,855
What the borrower's £10,000 debt really costs£3,855
After ten years, measured in today's shopping.
Inflation rate: 10% a year
Both are worth £3,855 of today's shopping. The saver lost £6,145 of shopping, and the borrower was let off exactly the same.
The two bars are always the same height. Why?
Because the bank sets both rates.
Not yet. 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.
A coincidence of this example.
Not yet. Try every rate. They match at all of them, because £10,000 owed and £10,000 held are the same number of pounds, and a pound buys the same for both people.
Both are £10,000, and a pound buys the same for everyone. What the saver lost, the borrower was let off.
Right. £10,000 held and £10,000 owed are the same number of pounds. When a pound buys less, the holder gets less and the borrower hands back less. The loss and the let-off are the same size.
Move the control.
Cash in a savings account100%
A pension paid at the same amount for life100%
A house0%
The goods on a shop's shelves0%
How much of its value is fixed in pounds.
So the loss and the let-off are always the same size. Nothing is destroyed. What the holder loses, the borrower gets. How much a person loses depends on how much of what they have is fixed. Cash is all fixed. A house is not, because its price moves with everything else.
Ten years of 6% inflation. Tap the person who LOSES most from it.
Tap the part of the picture that answers it.
Retired teacher, pension fixed in pounds90%
Shop owner: goods on the shelves, the building, 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
Right. Everything they have is cash, and cash is all fixed. Ten years at 6% and it buys a bit over half of what it did.
Retired teacher, pension fixed in pounds
Not yet. Nearly as badly hit: nine tenths of what they live on is fixed. Only the saver has more of their money fixed, and the question asked for the most.
Shop owner: goods on the shelves, the building, a little cash
Not yet. The goods and the building are not fixed. Their prices move with everything else. Only the little cash loses, and it is a small share.
Homeowner with a fixed-rate mortgage and no savings
Not yet. They hold nothing fixed and they owe fixed pounds. Ten years at 6% cuts what their debt is really worth by almost half. They are the one who gains most.
£1,000bn: a thousand billion poundsOwes, written down years ago
↓→
£1,000bnFive years of rising prices later, still owes
A made-up government. The number owed never moves.
The biggest borrower in most countries is the government. Its debt is a number of pounds written down years ago, and most of it is fixed. When prices rise, that number does not. So what the government really owes shrinks, just as the borrower's £10,000 did.
The debt, in pounds, at the start£1,000bn
The 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. Measured in the pounds of five years ago, what is the debt now worth?
£bn
Divide by 1.25.
Right. £800bn, measured in the pounds of five years ago. The debt is worth £200bn less, and nobody decided that. Rising prices did it on their own. This is why a government with big debts is rarely the first to panic about rising prices.
What a fixed £100 owed is worth after the doubling£50
What £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?
Nobody. Everyone's prices doubled.
Not yet. Everyone's prices doubled. Not everyone holds the same thing. Whoever held cash lost half of what it buys. Whoever owed fixed pounds was let off half.
Whoever owes fixed pounds, including a government with big debts and a family with a fixed mortgage.
Right. Rich and poor is the wrong split. A rich person with a big pile of cash loses half of what it buys. A family that owes a fixed mortgage is let off half of it. Owing or holding decides it, not how much you have.
The rich, because they own things.
Not yet. Owning things whose prices move with everything else is protection, not profit: the shop, the house, the land keep their value. The gain goes to whoever OWES pounds that did not move.
Lesson complete
Weak money takes from whoever holds fixed pounds and gives to whoever owes them.