The Inflation Math

Here’s a number worth sitting with: in 1971, the weekly grocery shop that costs $800 today would have cost you $100. Prices are roughly 8x higher now.

So if your grandparents saved $100,000 in cash in 1971 and buried it in the backyard, every note is still there. But what $100,000 buys today is only what $12,500 would have bought back then. They kept every dollar. Inflation quietly spent the other $87,500.

Now run that forward. Assume inflation averages just 4% per year — below the peaks of recent years, above the official targets of most central banks. At that rate, the rule of 72 tells you that purchasing power halves every 18 years. Someone born today who retires at 65 will see their cash savings lose roughly 87% of its purchasing power over their lifetime — if they simply hold it.

This is why financial advisors tell you to invest. Not because investing is thrilling, but because holding cash is guaranteed slow loss.

But here’s what they rarely say plainly: the reason you need to invest just to stand still is because the monetary system is designed to erode your savings. Inflation isn’t a bug. For governments carrying large debts, mild inflation is extremely useful — it makes those debts smaller in real terms over time. Governments borrow in today’s dollars. They repay in tomorrow’s cheaper ones.

Your savings erosion is someone else’s debt relief.

The system isn’t broken. It’s working exactly as intended — just not in your favour.

Tomorrow: who specifically benefits when new money enters the economy — and why they benefit before you even know anything has changed.

— The Daily Bit