Governments promise to repay their debts. They cannot promise that the money returned will buy what it once did.
By Matthew Jones | Britannia Bullion
Imagine lending someone £100,000.
They agree to pay you interest and return your money in ten years. Every payment arrives on time. At maturity, the full £100,000 lands in your account.
Promise kept. Debt settled.
Except that the money now buys considerably less than it did when you handed it over.
You have been paid back. Whether you have preserved your wealth is another question entirely.
That distinction sits at the heart of an uncomfortable relationship between government borrowing, inflation and the savings people spend a lifetime building.
When governments borrow through conventional fixed-rate bonds, they promise specified payments in their own currency.
Those promises concern amounts of money. They do not generally guarantee what that money will buy.
For a British saver, this matters far more than the apparent reassurance of getting the original sum back. Retirement costs are paid at tomorrow’s prices. So are home repairs, family holidays and the help you hope to give your children.
Your bank statement counts pounds. Your life depends on their purchasing power.
The Bank of England recognises the distinction: the real return on savings depends on inflation as well as the interest received. A positive interest rate can still leave the saver with less spending power. the UK's central bank
Government debt is often discussed as though the entire balance must eventually be cleared.
In practice, governments routinely refinance maturing debt. One obligation is repaid using the proceeds of another. The crucial questions become whether lenders remain willing to provide funding, at what cost, and whether the debt burden is manageable relative to the economy supporting it.
That last point matters.
If an economy’s cash value grows faster than its debt, the debt-to-GDP ratio can fall even while the amount owed continues rising.
There are two broad contributors to growth in the cash value of economic output: producing more, and charging higher prices for what is produced.
The first can reflect a country becoming more prosperous. The second can make the figures look bigger without delivering the same improvement in living standards.
Both can affect the arithmetic of debt.
Inflation can reduce the real burden of existing fixed nominal debt. The amount owed stays the same, while the purchasing power represented by that amount falls.
For the person holding the corresponding claim, that erosion works in the opposite direction.
Consider a deliberately simple illustration. If inflation averaged 4% a year for ten years, £100,000 returned at the end would have purchasing power equivalent to roughly £67,600 today.
That calculation concerns the principal alone. Interest payments could offset some or all of the erosion, depending on the return received, tax and how the income is used. It is an illustration, not an inflation forecast.
But the underlying point survives: repayment of the original capital does not, by itself, establish that wealth has been preserved.
The debt can be honoured in full while its real value diminishes.
There is a complication, particularly for Britain.
Inflation can also increase government expenditure. Index-linked gilts respond to inflation, public spending comes under pressure, and lenders may demand higher yields when existing debt needs refinancing.
The Office for Budget Responsibility explicitly identifies inflation and interest rates as important drivers of the government’s debt-servicing costs. Office for Budget Responsibility
So this is no painless trick that allows a government to inflate away every obligation. Nor does it require a secret agreement to impoverish savers.
It does mean that the interests of a heavily indebted state and those of someone holding fixed cash claims are not always aligned.
A policy outcome that makes an old debt less burdensome in real terms can make the money received by its holder less valuable too.
Physical gold introduces a different form of ownership.
A gold coin is not a promise to return a specified number of pounds at a future date. Its value does not depend on an issuer meeting a repayment schedule.
It pays no interest. But the absence of interest needs to be considered alongside the absence of an issuer’s debt obligation.
For someone concerned about the long-term purchasing power of currency, that distinction is a reason to consider holding part of their wealth in physical gold.
Gold has risks. Its sterling price can fall, sometimes sharply, and dealing spreads, storage and insurance can affect the result. It is no guaranteed short-term inflation hedge.
Its appeal rests on a different proposition: owning a tangible asset whose supply cannot be increased simply by issuing more currency or government debt.
Cash remains essential for spending and emergencies. Interest-bearing assets can provide useful income. Gold offers another way to hold part of the wealth those pounds represent.
For savers, the question deserves to move beyond: “Will I get my money back?”
Ask what that money will buy when it returns.
Will it fund the retirement you planned? Provide the same support for your children? Preserve the choices your savings were meant to give you?
Those are questions about wealth, rather than the number printed on a statement.
Governments can keep borrowing. Debts can be refinanced. Every contractual payment can arrive exactly as promised.
And a saver can still discover that the security they thought they had purchased was measured in pounds, while the life they wanted to protect was priced in purchasing power.
Paid back. Worth less.
About the author
Matthew Jones is Co-founder and Precious Metals Analyst at Britannia Bullion. He writes about gold, monetary policy and the economic forces shaping wealth preservation, with a focus on UK savers and investors.
This article expresses the author’s opinion and is for information only. It is not personal investment advice. Britannia Bullion sells physical precious metals and has a commercial interest in the gold market. Precious-metal prices can fall as well as rise, and you may receive less than you paid.