Back in the days when gold was used as a medium of exchange, inflation virtually does not exist. If you own a treasure chest full of gold, bury it and leave it for 100 years then come back to dig it up, it would still be that treasure chest with the same amount of gold in it. But change it to paper bills and what we get after 100 years? – a pile of devalued or maybe worthless chunks of paper.
In today’s society, money isn’t backed up by gold anymore. The money we get from our paychecks or income from our businesses comes from the government printed by our Central Bank, the Banco Central ng Pilipinas, basically out of nothing.
So why do governments print money?
When a government takes on excessive debt, one solution is to print more money to pay off the debt. When it prints money, you increase the supply of available money through coins and bills. Remember the lessons you learned way back in college about supply and demand? When supply increases, demand decreases. So when the money supply increases, its value drops. When the value of your money drops, prices increases resulting to what we call inflation.
So why does “saving” money is in fact actually “losing” money?
Imagine you owe Pedro 100.00 pesos today and you promise to pay him next week; and with today’s inflation rate, a 100.00 peso bill can buy you 2 boxes of apples. The next day, inflation rose so high that a 100.00 peso bill can now only buy a box of apples instead of two. Inflation continued until the next week and you pay Pedro your 100.00 debt. Now Pedro goes to buy 2 boxes of apples with his 100.00 pesos and realizes that he can’t because the value of his money today can only afford him to buy 1 box whereas last week, it can afford 2.
In this scenario, we can clearly see that those with debts actually are the real winners and those that save their money are the losers. So when we save money, we effectively give inflation the right to steal the “value” of our money. So in reality, saving money is actually losing money.
Inflation is something we can’t escape. An economy that grows on inflation makes savers losers.
How do we beat inflation?
Growing your money through investing is one sure way to beat inflation. By yielding interests higher than the current inflation, you increase the purchasing power of your money. Investing in the stock market is one way of beating it.
Happy investing!