Why Savings Lose Value Every Year — Even at 2% Inflation

Euro-area inflation in 2024 was 2.4%. In the US, 2.9%. Right on target.

That is not a scandal, and it is not a failure. It is the system doing exactly what it was built to do — and understanding why is the difference between fighting inflation and building around it.

Because a savings account, sitting quietly inside this system, loses you ground every single year. By design.

Here is how the design works, in three steps: how money is actually created, why it has to keep growing, and what that does to your money over a working life.

Step one: money is not what you think it is

Money in a modern economy exists in two layers.

The first layer is central bank money: notes, coins, and the reserves commercial banks hold at the central bank.

The second layer is commercial bank money: the numbers in your current account, your savings balance — bank deposits.

And here is the fact that reorganises everything: in the euro area, over 90% of all money is the second layer. Not notes. Not coins. Database entries at commercial banks.

So where does that 90% come from?

The textbook story, and why it is wrong

The version you were taught goes like this: a saver deposits money, the bank lends most of it to a borrower, the borrower spends it, someone receives and re-deposits it, and so on.

Clean. Intuitive.

Wrong.

The Bank of England settled this in 2014, in its own Quarterly Bulletin, in a paper by three of its economists. One sentence:

“Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.”

— McLeay, Radia & Thomas, Money Creation in the Modern Economy, Bank of England

Read it twice. The bank does not lend out existing money. It creates the deposit at the moment it makes the loan.

Watch it happen on a balance sheet

You apply for a €200,000 mortgage. The bank checks your income, your credit, the property. It approves.

It does not move €200,000 from somewhere else to your account. It does this:

Assets (left)	Liabilities (right)
Your loan: +€200,000	Your deposit: +€200,000

Both entries appear at the same accounting moment. Before that moment, those euros did not exist as money. After it, they do.

The bank did not shift existing money. It created new money — with two accounting entries.

Economists call this “fountain pen money” — money created at the stroke of a banker’s pen, a phrase from James Tobin. It is not a metaphor. It is double-entry bookkeeping.

This is not a fringe claim

If it sounds radical, that is a measure of how deeply the textbook version stuck — not of how contested the real one is.

The Bank of England published it openly. So did the Deutsche Bundesbank, in its April 2017 Monthly Report:

“A bank’s ability to grant loans and create money has nothing to do with whether it already has excess reserves or deposits at its disposal.”

— Deutsche Bundesbank, Monthly Report, April 2017

Two of the most conservative central banks on earth. The same statement. The same mechanism.

And the money multiplier you may have learned — central bank prints reserves, banks multiply them into loans — the same Bank of England paper called “not an accurate description of how money is created in reality.” The causation runs the other way: banks decide how much to lend first. The reserves follow.

Money in an economy is like water in a reservoir. The central bank controls the dam. The commercial banks control the pipes. Most of the water was added by the pipes.

Step two: why the supply has to keep growing

Now the bigger question. Why does the system create money continuously, instead of settling at one level?

Because the system we actually live in requires growth — not as a preference, but as an operating requirement. Three reasons.

Debt. Every loan carries interest. To repay it, the borrower needs more next year than this year. Across millions of loans, the economy itself must produce more each year, or interest payments collapse and the system breaks.

Investment. Capital flows where it earns a return. A non-growing economy offers no new markets, so investment dries up and innovation stops.

The social contract. Pensions, healthcare, public services — funded by taxes that scale with the economy. A shrinking economy cannot fund a growing pension system. And when real incomes stagnate, political stability goes with them: look at any developed democracy where incomes have stalled, and watch the protest parties rise on both the left and the right.

Growth is not optional in this architecture. Remove it and the whole structure cracks.

And why money must grow with it

So the economy must produce more real output. But here is the catch.

If the euro area produces 2% more goods next year while the money supply stays flat, people cannot afford to buy the new output at last year’s prices. Prices have to fall.

And once people expect prices to keep falling, they stop buying. They wait. The economy chokes.

That is deflation — and it is far more dangerous than mild inflation.

The Japan warning

Japan spent roughly two decades showing the world what deflation does.

Growth averaged around 1.2% in the 1990s, down from roughly 4% the decade before. Inflation across the decades that followed ran near zero.

That is not a peaceful equilibrium. It is a system stuck in neutral — for a generation.

This is why every central bank on earth targets positive inflation. They are not greedy. They are terrified of deflation. The ECB says so directly:

“An inflation target of two per cent underlines the ECB’s commitment to providing an adequate safety margin to guard against the risk of deflation.”

— European Central Bank, monetary policy strategy

So: the economy must grow, real output must grow, and the money supply must grow alongside it plus a small cushion. Over the past 20 years, euro-area broad money — M3 — has grown around 4% a year. That is not an error. That is the design.

Step three: what it does to your money

Now the part that hits closest to home. The one number to remember.

2% sounds small. But money compounds.

Over the past 20 years, euro-area inflation has averaged around 2.4% a year. On official Eurostat figures:

A basket of goods that cost €100 in 2005 cost about €157 by 2025.

Nearly 57% more, for exactly the same things, over twenty perfectly normal years.

Flip it: one euro from 2005 buys about 63 cents’ worth of goods today. Not in a hyperinflation. Not in a crisis. In a normal, on-target, ECB-approved two decades.

Now run it forward — a working life

Not 20 years. 40 — roughly the span you spend earning, saving, and deciding your retirement.

At a steady 2% per year — exactly the ECB’s target — over 40 years, your euro ends up buying about 45 cents.

You lose 55% of your purchasing power across one working life. While doing nothing wrong.

That is not a worst case. It is the design case, with everything going exactly to plan.

What it does to a savings account, concretely

Euro-area households save a lot — Germans around 10% of income, among the highest in the developed world. And most of it sits in savings accounts, earning what people call interest.

The average euro-area savings rate today is around 1%. Inflation runs around 2.4%.

Put €50,000 in that account:

Interest at 1%	+ €500
Lost purchasing power at 2.4%	− €1,200
Net, per year	≈ − €700

Minus €700 a year. Every year. While doing nothing wrong.

You are not making a mistake. You are simply sitting outside the part of the system that benefits from money-supply growth — instead of inside it.

The reframe

This is the shift worth taking from the whole thing:

Once you understand that inflation isn’t accidental but structural, you stop fighting it — and start building around it.

Fighting it is holding cash and hoping. Building around it is keeping enough cash for safety and short-term needs, and putting the rest where it can at least keep pace with the money supply that is, by design, expanding past it every year.

How much, and in what, depends entirely on you, and nothing here is a recommendation to do anything specific. The only claim this article makes is the one the central banks make themselves: the erosion is structural, predictable, and built in.

Which means, unlike most risks, it is one you can actually plan for.

This is the fourth of five in How Money Really Moves. You can also see the arithmetic on your own numbers — the calculator does exactly the compounding described here. Educational content only, not investment advice, and not a personal recommendation.