BMW R18

[Stichill]

Teacher, I think I need a case study to understand your argument, please.

I'm not a finance guy, but I'll give it a try. Let's say you borrow $10k at 3% for 5 years with monthly payments:


If the real rate of inflation is 0%, then the lender makes a gross profit of $781.21 on the transaction. If the real rate of inflation is 3%, the lender breaks even, because the value of the $781.21 in interest evaporates at the end of the 5-year period because the currency has been losing value at the rate of 3% per year.

Now, if the real rate of inflation is 6%, the break-even payment plan for the lender would look like this:


But, if the lender was unwise enough (or artificially propped up enough with fiat currency) to lend you the money at 3% while inflation moves ahead at 6%, the lender actually loses roughly the difference: $1599.68 - $781.21 = $818.47. To get precise figures, you'd need to do a net present value calculation on the 60 payments for the future cash flows. If you run the 3% cash flow with a 6% discount rate, you see the negative impact on net present value.