Every week, I give my daughter £20 pocket money. She uses it to buy things like a ticket to the movies with her mates, some sweeties, popcorn, or a drink while she’s there.
Last week, she went to the movies, but she also wanted to put £10 credit on her phone. So she borrowed £10 from her little brother.
This week, after I give her £20, she has to pay back her brother. And, of course, he wants a £1 lollipop for lending her the money. (smart guy!)
After paying him back and buying the lollipop, she only has £9 left and that’s not enough to go to the movies this week.
I explained to her that this is what grown-ups mean when they talk about debt. Even though she paid her brother what she owed, it was already making her life harder.
I told her there are a couple of tricks she might use to get around this.
“Go into the back garden and pick some notes off the money tree,” I said. “You magically get extra money to pay your brother and still get to go to the movies. Or, you can turn on Daddy’s magic printer and make some new money to cover what you owe.”
She looked at me sideways.
“This works really well,” I said, “but there is a cost. Grown-ups call it inflation.”
She asked, “What’s infayshon?”
“Imagine you go to the corner shop to buy your brother his lollipop,” I explained. “There are 10 lollipops in the jar on the counter, and each one costs £1. If you have £10, you can buy all 10.”
She was listening now, so I carried on. “But because you took extra from the money tree, you now have £20 instead of £10. And all your friends have taken money from the money tree too. But the shop still has only 10 lollipops. The shopkeeper sees that everyone now has more money. If she keeps the price at £1, the lollipops would sell out in seconds, and then she wouldn’t have enough to sell for next week. So she puts the price up to £2.”
Satisfied with my description, I concluded, “This is inflation. Prices go up because there’s more money to spend, but only the same amount of stuff available to buy. You could keep printing money to pay what you owe, even when it’s already hurting you, but your money doesn’t go as far. You have less stuff, and less fun, even though you still have some money. If you keep doing it, next week and next month will be even harder.”
“This is exactly what governments do with money. They keep borrowing, printing, and causing prices to rise. In America, the magic printer is called The Federal Reserve. In England, it is called the Bank of England. The money tree is called the IMF.”
She wandered off into the back garden with an excited look on her face.