Hi all.
I was watching a movie called “Zeitgeist” ( http://www.zeitgeistmovie.com/). In there, it talked about the Federal Reserve System, which it says has various problems having to do witth the origin of it.
The fact is, the Federal Reserve is a private corporation which is making a profit EVERY SINGLE DAY from its primary customer, the US government. The profit is accomplished through interest added to each and every single US dollar. In about 10 years, the US government may be bankrupt.
But I will show you, from YOUR perspective, the problem with the system by analogy.
OK, let’s get started.
Say that the Federal Reserve was your bank. Let’s name your bank “Money Reserve” for fun.
Now say you want to get a loan for a new house from the “Money Reserve” bank. You find one costing $200,000. You ask the bank for the loan, and they buy the house, and give you their bank loan terms and conditions.
Somewhere in the pages of the terms and conditions, you find that you are required to pay 1/12 of 10 percent of the mortgage cost each month, with 5 percent interest compounded monthly. Next year, you will do the same, with the new cost subtracted from 10 percent.
Let’s do some calculations:
10 percent of $200,000 = $20,000
Each month, you have to pay: $20,000 / 12 = $1,666.66
That doesn’t include the interest though. Let’s do the interest:
A = P(1 + i)^n
P = $1,666.66
i = 0.05/12
n = 12
A = 1666.66(1 + 0.05/12)^12
A = 1666.66(1.0041666666666666666666666666667)^12
A = 1666.66(1.0511618978817331898048738909608)
A = 1751.9294887235694381201911191087
Which, when rounded up, is: $1,751.93
OK. So, for this first month, you have to pay $1,751.93. (That’s $85.27 of interest!)
But what about next month? And the month after that?
Now, lets subtract 10 percent from $200,000.
$200,000 – 10 percent ($20,000) = $180,000
Now we have to do the same thing over and over for each year. Or do we?
Let’s just look at the remaining amount and do some extrapolating.
Other than the previous year, there are 9 more years in this mortgage. For each year in this mortgage, you must pay 1/12 of 10 percent PLUS interest.
How many compounding periods do we have? 12 months * 9 years = 108 compounding periods
Now, we knw the present value: $180,000
So:
A = P(1 + i)^n
P = $180,000
i = 0.05/12
n = 12 * 9
A = 180000(1 + 0.05/12)^180
A = 180000(1.0041666666666666666666666666667)^180
A = 180000 * 2.1137039324385362491334373097549
A = 380466.70783893652484401871575589
Which, when rounded up, is $380,466.71.
So far, that is the principal AND interest over 9 years.
But we need to get the monthly payment:
$380,466.71 – $180,000 = $200,466,71 (principal)
Now we need to divide by 9 years and 12 months.
$200,466.71 / 9 years / 12 months = $1,856.17
That is very close to the monthly payment for the first month, which was $1,751.93.
In order to make the monthly payment, you would have to earn at least $50,000/year for a comfortable living standard.
