I just wish people would realize that presidents, whether republican or democrat, really DO NOT have control of the economy. They're not like pilots in a plane. At most they're just stewardesses, with no real control over things like unemployment, markets, etc. The Fed and Congress have way more sway in it, but presidents always take credit for when economy improved (Clinton taking credit for Internet and globalization), or get blamed when the economy tanks (Bush and Obama being blamed for things caused by Congress and banks)

EDIT: Using Tables for formulas butchered them due to text reflow, so converted formulas to images

Could someone with the financial and algebraic know-how please check my numbers? I don't know if I'm getting rounding errors, or if I'm not calculating this correctly:

The payment of annuity formula is:



Where:
Pmt  = payment amount
Prin = Initial borrowed ammount
i = interest rate
n = number of terms in the loan.

So for those who need an example read below. If you're familiar with this, skip to the My Proposal section below.

Explanation/Example
Let's say it's a $10,000 loan, 5% rate, 10 year term, payable once a year. Formula would look like:



Meaning that to pay off a $10,000, 5% loan over 10 pay periods (years), if you pay $1,295.05 every pay period, your loan balance will be $0 after the 10th payment (plus or minus rounding errors).
A VERY important aspect of this loan is that in an inflationary economy, the 10th payment of $1,295.05 is actually worth a lot less than the 1st payment. If we assume a 3% annual inflation, the 1st $1,295.05 payment at the end of the year is actually worth $1,295.05*(1+3%)^-1 = $1,257.33 in today's dollars, and the 10th payment is actually worth $1,295.05*(1+3%)^-10 = $963.64 in today's dollars (meaning at year 10, paying that $1,295.05 will feel like paying only $963.64 today). The idea is that the loan becomes easier to pay off as time goes on.
The big problem arises when the loan is given out in an deflationary currency, such as (future) Bitcoin. If we use that same level-payment annuity formula from above, but assume that instead of a 3% INflation, we have a 3% DEflation (i.e. -3% instead of +3%), the 1st payment will feel like $1,295.05*(1-3%)^-1 = $1,335.10, and the 10th payment will feel like $1,295.05*(1-3%)^-10 = $1,756.18. That's a bit worse than $1,295.05, and MUCH WORSE than $963.64. Now imagine stretching this out to 30 years, instead of 10, and the problem will be even worse! Now, sure, this will discourage borrowing, but from a lender's point of view, this will also SIGNIFICANTLY increase risks of default as time goes by, since people will have a much harder time making loan payments as their loan matures.

My Proposal/Calculations

I propose that the formula be augmented as such:



Where:
t = period at which the payment is calculated (t is 1 to n)
n = number of terms in the loan
Pmt_t = payment amount for term t
Prin_t = Outstanding principal at term t
i = interest rate of the loan
d = deflation rate

The first part is the annuity formula, the second part (after the *) is time value adjustment to present value using the 3% deflation rate.

So, as an example, using the loan above and assuming a 3% deflation, the calculation for the 1st payment will look like this:



After this payment, the outstanding principle is now $10,000*(1+5%)*(1+3%) - $1,740.43 = $9,074.57

Calculation for the 2nd payment will look like:



This will continue until the very last 10th payment, which will look like:



which will pay off the remaining outstanding principal, bringing the loan to $0

The excel table for this looks like this:

.   Outstanding      Int         Prin            Pmt            Remain
1    $10,815.00    $800.00     $940.43     $1,740.43    $9,074.57
2    $9,814.14     $725.97     $939.84     $1,665.81     $8,148.34
3    $8,812.43     $651.87     $945.18     $1,597.05     $7,215.38
4    $7,803.43     $577.23     $956.37     $1,533.60     $6,269.83
5    $6,780.82     $501.59     $973.39     $1,474.97     $5,305.85
6    $5,738.27     $424.47     $996.24     $1,420.71     $4,317.56
7    $4,669.44     $345.41     $1,025.02   $1,370.42     $3,299.02
8    $3,567.89     $263.92     $1,059.84   $1,323.76     $2,244.13
9    $2,427.03     $179.53     $1,100.87   $1,280.40     $1,146.62
10   $1,240.07     $91.73     $1,148.34   $1,240.07     $-  

Where Outstanding is previous Remain*(1+5%)*(1+3%),  Pmt is my formula, and Remain = Outstanding - Pmt

Problems/Issues/Things I need help with

As you can see, this will calculate the payment structure that will front-load the first payment, and possibly make the last payment a lot more bearable (though still more difficult than in an inflationary system). If you run separate calculations, you'll also see that the lender is able to get both, the interest, and the deflation effect, from the lent money (i.e. the return is the same whether the lender lends the money, or sits on it and has it "magically" collect 5% interest).

These are the problems I still see with this, or need help with:

1) This system calculates the accumulated interest on each outstanding principle as Prin * (1+i) * (1+d). Intuitively, I would think that 5% + 3% = 8%, and so I should just use Prin*(1+i+d), but when I do that, the last payment ends up overpaying, with the remaining outstanding balance at year 10 being -$1.69. Is my formula wrong somewhere, or is this a rounding error? I think either my formula is wrong, or the Prin*(1+i+d) assumption is wrong.

2) Having a recursive formula that depends on each previous calculation to work is annoying, to say the least. The original annuity formula is much cleaner and nicer by comparison. If anyone out there is good with algebraic simplifications and such, maybe you can help fixing/simplifying this thing?

3) The final payment, although lower, is still a tad higher than it would be in an inflationary system with level payments using today's dollars, though not by much. If anyone has a better suggestion than this formula/system, please share!

We pretty much know for a fact that the USD is inflationary, with a long-term inflation rate of 3%. So, why isn't USD worth 0 now? (answer is because we don't calculate the value of money to infinity; only to the time we actually need to use it/invest is/repay it)


Their costs are likely discounted as well, since if they're not, then the seller of their raw materials will also go out of business. This discounting is distributed throughout the entire economy. As for next year, the $100 IS a discount on the $120 from the following year. This is how the time value of money works. In inflationary system, money now is worth more than money next year. Businesses, investors, and everyone else who deals with finances uses http://en.wikipedia.org/wiki/Time_value_of_money formulas to calculate the worth of their money, and use that to base the price of their investments, the future price of their products, the cost of their borrowed money, etc. In a deflationary economy those calculations won't change, other than the interest rate being inverted. Only actual issue that I see is that the minimum return on investments/loan rates will have to be at least as high as the deflation rate.

Used to believe this too. Only issue with this that I realized after formal education is that, although all that knowledge is free, knowing WHAT to learn isn't out there. You can't Google search terms and concepts you don't know the names of.
Also, knowing you're paying a lot for a class kinda helps keeping you grinding through it, instead of getting lost in endless Wikipedia links

So, what you're saying is that in 500 years, America will become the country with the best pizza and ice cream?

You're getting it backwards. It's not "using real money to get bitcoin," it's using bitcoin to get real money or real goods/services. ATMs will allow you to pull your bitcoin savings out in "real money" cash form, so you can use your bitcoin with fiat-based retailers. As for the POS (point of sale) systems, we need those to have a "widely used currency." They're the systems that you would approach with your bitcoin wallet and pay the retailer in bitcoin. It'll be up to the seller whether to hold the money in bitcoin form or convert, but POS is needed to at least be able to PAY in bitcoin.

Not quite what my liberal state university taught us in our economics classes. Mostly it was formulas for effect of taxes on interest and economy (they're bad), import tariffs (bad), and regulation of price and output (bad). Though the teachers did mention that in some cases, monopolies born out of economies of scale (like power companies) should be allowed to remain monopolies, since it would be cheaper for them to service each person, but in exchange for receiving help for that their price should be regulated and kept just above their costs. That's arguably a bad idea, though there are arguments on both sides. So, it wasn't ALL "bad economic theory." Just some.
The biggest irony was that those in the economics field understood and could defend free-market economic principles way better than the college republicans could. Which is pretty much what I've seen on political forums, too: far-right republicans railing against the government are really uninformed when it comes to what it is they have a problem with :p

Were those allinvain's 25,000 Bitcoin???

I ESPECIALLY loved that line above ^^^^^^     

Why do you hoard your $100 bitcoin if you know that it will be worth $120 in a year? Likely answer is so you can buy something in a year when your money is worth $120, meaning your money will have 20% buying power 1 year from now. What's to stop you from buying now if the merchant simply took the 20% deflation into account, and gave you a 20% discount on the item today? You'll have a choice of buying something for $80-equivalent today and have $20 left over, or $100-equivalent a year from now and have $20 left over a year from now.

From what I've been reading regarding recent explosive growth in BRIC, Brasil is an example of what you're saying, where the high inequality is mainly due to high regulation, with lower income people just not having the connections, resources, or will to deal with the bureaucracy to move up. China, despite being communist, seems to have a cultural reason, where people are just used to doing what they have been doing (like farming), so they are left behind while others keep going up. And Russia is just pretty much corruption-based... And sure, there are people who are ingenious, and they'll end up wealthy, but not everyone will move up the wealth ladder with them. That's kind of the point.
As for the last sentence, even free market entrepreneur types prefer to partner up with people who have the paperwork to prove that they know what the heck they are talking about. Brilliant inventor types do happen, but they're very rare, and once they do invent, they usually look for people with good VCs to implement their ideas

Sorry, I tried reading that, but it's rather convoluted. It sounds like it's "interest" that the lender charges only because they expect the borrower's product prices to grow, so the lender wants a chunk of that profit, too? Can you maybe give a simpler example of this interest?
From my perspective (and I guess biased business college training), I charge interest for taking on risk and for selling my money's time (money worth more in my hands now than later), and I'm competing with others based on their level of risk tolerance and worth of money. So... I am just having a really hard time wrapping my head around this.

In those cases it actually is due to growth, simply because the growth is not due to politics repressing people, but certain people really outgrowing others in a "free" market. There are kids getting education and experience, starting up businesses and starting to earn a lot of money, while their parents are still basically middle-age farmers or random stuff (leather, kitch, etc) makers. I think the only "political" effect here is the distance: the new technology and business practices these wealthy people are learning and taking advantage of were just too far and unknown to them.
Even in a US economy, though, entrepreneurs who seized on the Internet opportunities are millionaires, and compared to their income, the rest of us are dirt poor Though the level of inequality is just not as blatantly obvious here as it is in BRIC countries.

I knew what you meant. Just saying if someone claims that, then they'll be claiming the world's university systems are somewhat fraudulent.

fixed!

Yeah, wishfull thinking 

You're right. I guess in my example, you would call the "unskilled" people "skilled in use of telephones technology," similarly to how a manager of an engineering firm may actually earn less than the highly skilled engineers. The German problem is also somewhat evident in India and Russia, where they have a lot of idle high-degree types, or people with master's degrees running middle-management of call centers. The scary thing about that is that due to their volume their wages are way lower than ones in USA/Europe, and all they really need is someone with business and entrepreneurial sense to put them to work producing some REALLY high level products for very little money, which would result in educated Europe being underpriced, and very under-uneducated USA being just wiped out...

Can you elaborate on this a bit? In my understanding, interest is a return on productive business, and money can only return interest if invested in a productive business. It can't return interest just by itself, and banks/owners of money won't loan it to anyone unless they expect that someone to be productive, and thus provide the "money interest" through their own work.



The other side of the equation is the risk involved, with some companies being more risky, and some investors being more averse to risk, but in a large economy, the $ per extra "unit" of risk tends to trend to a preset equilibrium, too, so, overall, every company's interest rate is basically based on the amount of risk they have. i.e. what you're saying is true, and works in an efficient economy, but there is A LOT of noise there (Google may offer 20% and be very low risk, but if I think it's too good to be true without doing my research, I still won't invest).
Though if you just want to simplify the model with the assumption that efficient markets will correctly price interest, you can ignore all this


Only example I can think of with this is, again, the risk factor. People may hoard more, reducing the supply, if they think the economy is at risk and they'll need more money soon, or they may spend and invest more if they fear that their money may be at risk, and is best invested elsewhere.

How do you know if the trends reverse? I was thinking of doing it, but chickened out and held instead, only to find out that I was glad I did, since holding turned out to be better (like, for instance, it was a prevalent assumptions that prices rise on Monday and drop over the weekend because banks close on weekends, but that didn't happen this past weekend)

Thing is, what he is saying is basically how our finance world and business already operates. NPV (Net Present Value) and annuity formulas are used to figure these types of things out all the time when making business, lending, or investing decisions. He's just pointing out that the same thing will pretty much continue to happen, but from a different angle.

God I hope not, otherwise the S in my B.S. degree is a fraud