Inflation is a term which you may be familiar with, but it’s crucial that you make sure you fully understand what it is.
Inflation is about the buying power of your cash. When inflation goes up, the buying power of your money goes down. It reduces the ‘value’ of your money.
The government publishes figures for inflation, but the problem is that they take some ‘artistic license’ with the accuracy. For a government with massive debts, it’s in their interest to reduce the value of those debts by decreasing the value of currency.
Say you owe $100, and inflation one year goes up 100%, it effectively means there is twice as much money around as the year before. This means you would need twice as much money to buy the same thing. A loaf of bread which cost $1 a year ago, would now cost $2. Assuming wages also went up at rate of inflation then you might think this shouldn’t pose too much of a problem. But what of the $100 debt you had? It’s only going to cost you half as much to repay. Great! you might think, but then what happens to your savings? Those are only worth half as much as they were before! The actual number is the same, but the buying power has reduced, so the ‘value’ of the savings has gone down.
So, do you think the government want you to be fully aware of how much the value of your cash is going down by? Of course not. That disappearing value is contributing greatly to the national debt reduction thank you very much. It’s basically a hidden tax.
So how does the government make this happen? Ever heard of the term ‘quantitative easing’? What it means is, the government prints lots of new cash, reducing the value of the money in your pocket. Increasing the supply of money also reduces interest rates and encourages banks to lend money, stimulating the economy.
All this means that holding on to cash is perhaps not such a good idea. If the value of the money is going down, and interest rates are low, then you are not likely to make back in interest what you lose from inflation.