erest that you are paid if you invest a $1000 dollars at 5% interest at the end of the year you will have $1050; that $50 dollars is your reward for saving, for making those funds available for productive purposes. What if the inflation rate is also 5%? If the inflation rate is 5%; then, at the end of that year you will need $1050 to buy what you could have of bought at the beginning of the year with a $1000. So the 5% interest return in real terms is 0% you need a $1050 to purchase the same amount you could buy with a $1000 at the beginning of the year. If the interest rate and the savings rate are the same percentage you are making no interest. Without real interest your money is just retaining its value. What happens if the inflation rate goes above the interest rate? You’ll end up having negative interest, therefore the value of your savings are shrinking over time-you can buy less. Suppose inflation rate is 7% is, and the interest return on your savings is 5%. That means at the end of the year you need $1070 to buy the same things you could have bought with a $1000 at the beginning of the year, but the with the interest return you have $1050 your $20 dollars short you can buy less with the additional money. This is depressing. From roughly 1978 to 1981 when the inflation rate was the highest in this country there was three years of almost continuous negative interest where everybody’s saving became less and less valuable over time. According to Buechner this lead to a near permanent decline in the savings rate in the United States before that period the saving rate in the United States was around 7 or 8% which, is half of what it was in Japan, but at the end of the period around 1982 the saving rate was around 3%. (Recording) It takes people a while to learn but eventually they get the idea you know this is not a good deal. Now it’s crept up since then very slowly according to Angel were up around 5%, which is sti...
