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Joined 2 years ago
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Cake day: October 19th, 2023

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  • Your maths is not right. Inflation, in absolute terms, is a larger benefit to people with higher interest rates.

    Let’s consider the scenario where inflation is 10% for simplicity, and two borrowers who each borrow $100, but Borrower A at 5% annual simple interest and Borrower B at 25% annual simple interest. Both borrowers borrow the money at the beginning of Year 0.

    Borrower A owes $105 in Year 1 dollars at the beginning of Year 1. This is equivalent to $95.45 in Year 0 dollars.

    Borrower B owes $125 in Year 1 dollars at the beginning of Year 1. This is equivalent to $113.64 in Year 0 dollars.

    Compared to a 0% inflation rate, Borrower A saved 9.55 Year 0 dollars and Borrower B saved 11.36 Year 0 dollars. Borrower B saved 1.81 more Year 0 dollars than Borrower B due to inflation (but paid 17.55 Year 0 dollars more overall because of interest).