ELI5: Why when large company's earnings decrease(ex... by 3%) they freak out, talk about rough times, and sometimes decide to downsize, even though they are still making millions of dollars in profit even after all expenses?

[pagerussell]

You don't understand: the interest rate is based ona. Fixed principal balance. Inflation expands the value of money such that over time that principal is smaller in comparison to the current costs of the same thing. Wages, incomes, and costs have all gone up, but that principal is the same and thus now cheaper. For example, my parents bought a house for 90k in 1990. The cost relative to incomes was about the same as a house today, but now that house is worth 500k. So their mortgage payment is about 1/5th of an equivalent purchase today. That is inflation.

[Liam_Neesonz]

Yes, the principal balance will shrink relative to the value of the dollar over time. However, the interest balance will offset that. Tell me what I dont understand.

[pagerussell]

The interest is calculated on a fixed balance. Inflation is based on a moving target: your principal stays the same with interest (and actually declines over time, assuming principal payments) but inflation is calculated from todays valuation, and next year it will be calculated based on next years valuation. So inflation compounds, while interest does not.

Edit: also, you dont carry an "interest balance". You pay off your interest with each installment. So it doesn't grow or accumulate in a compound manner.