Why cash loses
This is my understanding, for education. Not personal financial advice.
A dollar from 1913 buys about 3 cents of stuff today.
Your paycheck went up. So why does it feel like you're falling behind? Inflation.
What inflation is
Inflation is the general rise in prices. It's measured by the Consumer Price Index (CPI), a basket of what households buy: rent, food, gas, healthcare and so on (BLS). If CPI rises 3% this year, a dollar buys 3% less.
Over a long time, it adds up. Something that cost $1 in 1913, when the Fed was created, costs over $30 today (BLS CPI calculator). That's a loss of about 97% of the dollar's buying power.
Why it happens
Chapter 1 explained that money is created by lending and government borrowing. When the amount of money grows faster than the amount of stuff the economy makes, prices rise. Supply shocks (a pandemic, a war, an oil spike) can push prices up too. 2021–2022 had both: about 25% M2 growth in 2020 plus broken supply chains, and US inflation hit 9.1% in June 2022, a 40-year high (BLS).
The rule of 72
Divide 72 by the inflation rate to get how many years until prices double:
| Inflation | Prices double in |
|---|---|
| 2% (Fed target) | ~36 years |
| 3% | ~24 years |
| 4% | ~18 years |
| 6% | ~12 years |
If you're 25, at 3% inflation, prices will roughly double before you're 50 and double again before you're 75.
The savings account trap
Say your bank pays 0.5% while inflation runs 3%. Your real return is about −2.5% a year. Even a high-yield account at 4% often barely beats inflation after you pay income tax on the interest. Cash is great at one thing, being there when you need it. It's bad at growing.
Who wins from inflation
- Borrowers with fixed rates. A 30-year mortgage at 3% gets cheaper every year in real terms. The biggest borrower of all is the US government.
- Businesses with pricing power. If a company can raise prices without losing customers, its profits can grow with inflation. That's why owning great businesses is the main way regular people keep up (Chapter 5).
- Real assets. Property and productive things tend to reprice over time.
Who loses
- People holding lots of cash for years.
- People on fixed incomes.
- Lenders locked into low fixed rates.
What I take from it
Inflation isn't a bug in the system. A little of it is the Fed's stated goal. So the job isn't to complain about it, it's to stop holding long-term money in the one thing designed to shrink. Keep an emergency fund (3–6 months of expenses is a common rule), pay off expensive debt, and put long-term money into businesses you understand.
Common questions
Are gold and Bitcoin inflation hedges? Sometimes, over some periods. Neither pays cash flow, so their price depends on what the next buyer will pay. The old Gold and Crypto chapters move to the Library for that reason.
Is deflation better? Falling prices sound nice, but they usually come with recessions and job losses, because people delay spending and debts get heavier.
Cash is for spending and emergencies. To keep up with inflation, you need to own things.
Sources
- BLS CPI: https://www.bls.gov/cpi/ · CPI calculator: https://www.bls.gov/data/inflation_calculator.htm
- June 2022 9.1%: https://www.bls.gov/opub/ted/2022/consumer-prices-up-9-1-percent-over-the-year-ended-june-2022-largest-increase-in-40-years.htm
- M2: https://fred.stlouisfed.org/series/M2SL
