Why if I have $100 right now, 10 years later that same $100 will have less purchasing power? Why can’t our money retain its value over time, I’ve earned it but why does the value of my time and effort go down over time?
In: 5591
ELI5 disclaimer!
Because the number of dollars out there does not perfectly match the GDP at all times.
As the economy increases, if the number of dollars did not increase the dollars would actually start to be worth more. This is deflation, which we have learned is actually really bad for the economy, because if your money is worth more tomorrow or next year, you are much less likely to spend it today. Keep repeating that forever and you have a problem.
So this is why the government has policies in place to keep the dollar growth slightly (but not too much) inflationary. So that you are not penalized for spending your money. Which is what they want, as they get to tax money as it changes hands.
As for your grandparents savings, had they put it into an investment, that had a nominal interest rate, then the value would have stayed relatively the same (or maybe even better) as the years went on. I am sorry they didn’t know to do this. Bank accounts are terrible places to store money long term.
Latest Answers