February 03, 2004
Interest Rates and Inflation
We discussed a couple of graphs (handouts) showing the history of interest rates and inflation. This included a stimulating review of the savings and loan crisis.
Progress Report 3 (another handout) is now out. It is due asap.
Should you go to college?
Investing in college is similar to investing in physical capital. It takes some time for the proceeds to starting coming in and the costs are born in the early years.
For our first pass at this question, we discounted everything at 10%. Going to college did not look like a very good idea because the present value of the benefits fell far short of the present value of the costs.
Our view of investing in college improved considerably when we took into account increases in income. Assuming that incomes (and income differentials) increase at a rate two percentage points less than the interest rate allowed us to discount everything at a real interest rate of 2%.
We were pleased to find out that the decision to go to college was a wise one.