In July 2007, the Spanish striker Fernando Torres moved from Atletico Madrid to Liverpool. He received a multi-million-pound salary in England, and must have felt pleased with himself. But within a year, that huge salary was worth a lot less than the day he signed his contract.First of all, the British pound – the currency in which Torres was paid – plummeted. In the two years after he moved to England, it lost about a fifth of its value against the euro.
That would have hurt Torres, because the richest footballers tend to send most of their income back to their home country, to spend on family, on real estate, or to save for retirement. Torres’s pounds would have lost a fifth of their purchasing power in his native Spain.
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Worse: after the financial crisis of 2008, inflation struck. Britain’s inflation rate briefly jumped over 5%, reducing Torres’s income by a similar amount. Inflation is a particular problem for footballers, because few of them receive an annual cost-of-living raise. They typically sign a multi-year contract, and then have no protection against price rises or currency swings. There’s a lesson here for the rest of us: don’t fixate on the face value of a sum of money.
Think about what that sum actually buys today, and what it might buy next year. As explained by eZonomics, economists have identified the so-called “money illusion”: people’s habit of thinking of the face value of money, rather than what it actually buys. For instance, many people may like the sound of a two percent pay rise. But with average inflation in the European Union running at 2.6% at the time of writing, an annual pay rise of two percent is really a small pay cut.
A footballer like Torres probably earns enough not to have to worry much about inflation. Some of us aren’t so lucky.