No, I'm serious.

Why is it that I have to pay 5% interest when I could simply rent the money for a flat fee. Yeah, it's interest, but it doesn't -compound-. It's the compounding that makes it a bitch.

Because the risk to the owner of the capital goes up significantly the longer you have it out.

Don't some bonds work this way?

Perpetuals, AKA "consols" work that way, unfortunately you never get your money back. They used to be big in the UK, but they've bought most of them back. Note that the UK government also reduced the interest rate on outstanding bonds by fiat a long time ago.

Ahh but a Unicorn can poop Marshmallows!

"Moniteyes
Get it right it was a THREE martini lunch and it was tax deductible. Damn I miss the good old days."

Sunriser,

I didnt want to show my age - remember real trade shows and real stewardeses? Fly out monday, come back thurs and do the expense report on fri?
Good God, business used to be fun back then - and everything was deductible.

Gen:

You keep saying that the longer we wait, the worse it's going to be.

Nothing will change until it is forced upon them. Why? "Changes" would involve alienating the major party's base. x100.

No amount of calling, letter writing or pleading is going to change Nancy, Harry or Barack's mind. Not when the entitlement seekers turned out en masse to elect Democrats to office this last election.

I really hope I'm wrong and I'll still write letters to the editor and to my pols, but if you really think that the Democrat leadership is going to cut off the entitlement *****s, you're mistaken.

John

The entitlement *****s lose MORE if they don't fix this now.

Quote:

After all, we can all be skinny, beautiful and have an erection any time we like, just so long as we send $19.95 to the address on our TV screen.

HAHAHAHAHA

if there are two things that the average person really has trouble understanding, it's the exponential function and percentages. therefore the average person really has trouble understanding compounding, a concept that combines both the exponential function and percentages. if they took 5 seconds to actually think about it, they would understand about earning interest on interest.

you'll be amazed at how many people think that if you buy a stock at $50 and it goes to $25, you lost 50%, but if the stock goes back up 50% from there, then you will get all your money back.

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Socialism's gotta be better than taking all our money and giving it to the piggies.

you are right about this. if we were full-blown socialist, at least we would have shared in the "profits" of all these banks during the boom in addition to covering their losses and not just the latter.

BTW, i am by no means advocating socialism :)

Quote:

Because the risk to the owner of the capital goes up significantly the longer you have it out.

Another way to look at it: suppose I can only loan $100 for a flat X% per year, no compounding. Why would I ever want to lend for more than one year if there is no compounding? The incremental return goes to zero as we increase the loan duration.

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The incremental return goes to zero as we increase the loan duration.

Why?

10% "once and forever" is 10%.
For one year, its 10% a year.

What is it annually over 10 years?

I'm not saying you should charge it once. I mean, a flat fee every period. Just don't add it to the principal.

Maybe that's just compound interest in disguise, but if you were -forced- to pay the rent every time period, or you have to return the principal, I don't see how it would compound. At worst, it immeadiately defaults (you can't pay the rent, and you can't return the principal). No exponential growth.

That's what short-term debt is.

It still compounds (think about it.)

It is easier to understand if you ask yourself why would you loan out 100 dollars for ten years at a flat 5% (5 dollars per year) when you could loan it out ten times in a row to different people for one year at 5 percent? At then end of ten years you would have 1.05^10 dollars versus 150 dollars. No one would lend for more than the minimum duration, which allows you to approximate compounding even though it supposedly doesn't exist.

Another way to look at it is what happens with price inflation if you only get a flat non-compounding return? You lose money.

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what happens with price inflation if you only get a flat non-compounding return?

First, If I loaned out 100 dollars for ten years under my scheme, I'd have 10 * rent at the end of it, assuming yearly rent. Scalar, no exponent.

And while this says nothing about price inflation, why couldn't it work like apartment rent. At the end of the lease, I either get my principal back, or we negotiate a higher / lower rent for my money.

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It still compounds (think about it.)

Additional money is required to pay the rent? Which means additional money has to enter the system from somewhere.

Venk, no.

At the end of the first year I have $110 (10% "rent")

You want to borrow the $100 for a second year. Fine. But I have an additional $10 I can loan to someone else, also at 10%.

It still compounds.

As I said - think about it.

Trying. Thanks for the help guys.

First post here...I rely on KD and Mish for the vast majority of my economic porno and greatly appreciate everyone's contributions here, especially KD of course.

I understand debt equals money and I think I have a pretty good understand of exponential functions etc., but I had one quick question on one of the potential "solutions" that are thrown around, that of printing money to solve the problem. How does printing exasperate the exponential problem. I mean even though money is debt, printed money is basically a 0% debt obligation predicated on the future tax obligations of the US. So since its 0%, at least there is no compounding problem with printed money?

Hopefully I'm not missing anything too obvious, thanks in advance for any replies.

Genesis, you are incorrect on this one. In fact, the New York Fed is actually breeding Skittle producing unicorns as part of a secret government project.

http://news.nabou.com/cgi-bin/newsframe/....

The problem they are having is that all the "candy" is coming out in a blue pill shape with an "E" on it. Of course, $500 billion is a lot in blue "E" pills.

Green, the principal still has to be paid back and reduces consumption income.

A "99%'er" here who doesn't, rather...didn't, comprehend the exponential function. The video links for Chris Martenson and Dr. Albert Bartlett were eye opening, if not somewhat unsettling.

The divide into 70 for a "math on the fly" tool to calculate the time PV will double w/variable % is a fantastic tool! Investments can double in ten years on 7%. Or by way of contrast, CC companies charging 33+% interest can double their $ in a little over two years if someone pays the minimum and incurs late fees here and there. Bastards.

Makes me wonder, "Why I wasn't taught this earlier?

Assuming the minds behind such schemes can calculate these same numbers and extrapolate the results, it's hard not to conclude that J6P is educated just enough to earn a living to harvest cash from, but kept dumb enough not to revolt.

EDIT:
Looked at "Innumeracy" as linked in this thread and will check the book out at school library. Looks perfect for me.

"the principal still has to be paid back and reduces consumption income. "

Or I would just roll that over to the next debt.

unicorns that **** skittles
are so 2008..
we need musk oxen
that poop...
chocolate eclairs
exponentially..