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Money, money, money - Interest rates/inflation/exchange rates

It grows…it’s interesting Wonga. Dosh. You earn it through your chosen profession (unless you’re a bank robber! We’ll find you!) and you secure it in your bank account. In your mind, you may visualise a huge lump of paper money sitting in a mammoth pile from floor to ceiling, but that’s not totally correct. There isn’t enough paper money in the world compared to the amount of money in the world. The vast, vast majority of money is held digitally as a number on a computer or server (a group of computers where data is stored). This makes it incredibly secure because it’s highly problematic to steal it if it only exists within the context of code! Woohoo! If you put it in your bank account or savings account (more interest), the bank will use the money to invest in other businesses, trade goods, and all kinds of other things.

Usually, this means the bank makes more money and your money gains interest. If you put $100 in your account and the interest rate is 1%, you will gain $1 every year (more or less) in your account. Sometimes, when the world economy is doing wonderfully, your interest rate can go up and up. When everyone is concerned about the economy, your interest rate might come down quite drastically. Money GROWS! Wondrous news.

It shrinks… Money also shrinks. It doesn’t become smaller per say, but it shrinks in value. Every year, the prices of goods and stuff increases. That’s called inflation. Usually, governments aim to keep inflation at about 2.5%, as consequently, companies can raise salaries by 2.5% annually and everyone remains quite content. You get slightly more money each year because everything costs slightly more each year. 100 years ago, everything seemed comparatively and shockingly cheap by today’s standards, but the salaries were also much tinier. The catastrophe arises when you put your money in the bank and leave it. It sits there and might increase in value by 1% every year if your bank has a 1% interest rate. HOWEVER, if inflation is 2.5%, your DOSH loses 1.5% of value as it sits there. If you stick paper money in a sock, and stick the sock in a hole in the garden, and cover the garden with a statue of a Dollar bill, that money will lose 2.5% value over a year (more or less).

The money is worth less every day that it sits. We often feel very comfortable saving money, but money that doesn’t make more money, LOSES money.

All money is different

History has meant that certain money has more value and power than other currencies. The European powers used to hold sway over grand and massive empires, which means that they still hold a lot of power. Therefore, their currencies tend to be more valuable. A lot of Europe uses Euros as their currency and those economies, like Germany and France, are powerful enough to make the currency very valuable. However, those nations, being affluent, are expensive compared to less well-off nations.

This means that €1000 in Germany isn’t much at all (it might be rent for your house for 1 month), but if you exchange that money into Thai Baht, you can buy a LOT more in Thailand because the cost of goods and stuff there is far, far cheaper than in Germany. The most powerful currency in the world is the U.S $ (Dollar). Whenever there is a financial or economic crisis, lots of people buy dollars because the U.S economy is the biggest and most reliable economy in the world. More companies that make more money make an economy that is larger and a currency that is more valuable.

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