Subject: Re: Inflation & The Time Value of Money

Comments:
: To whom it may concern; : My name is James Cobbe. I am the Department Chair of the Florida State University Department of Economics. : I was notified last week of a debate on some message boards regarding Inflation, and the Time Value of Money. : the person whom I spoke with asked me to add my input regarding the debate. (This persons has a family member here at the University). I said that I would see what I could do. After reading the posts (which took up far too much of my time), and speaking with my collegues (David W. Rasmussen, and Eric R. Young, both faculty here at FSU) we have a few comments. : First, let us comment that we have no personal stake in this, and quite frankly did not want to get involved. However, when there is a person obviously posing as a credible member of the academic community, and posting false information, we decided it was imperative to share our findings. : The first issue of Dr. Loenard. We know of no Dr. Leonard, but that does not mean there isn't one. What we need to impart here is his obvious lack of knowledge in the area of economics and finance. His grammar is very poor, as was his assesment of the debate. : We looked at the entire debate from start to finish, and this is what we determined. : Mr Young made his initial statement regarding a 127k salary in 1990 would be like a 250k salary today. Eric was 100% correct in his interpretation of his statement that it would be approk 176k. When not using specific examples, one must use hisorical inflation, or the CPI in order to calculate time value of money. : Next, Mr. Young says he used the rule of thumb of 6%. Unfortunately, there is no rule of thumb at 6%. We have seen rule's of thumb at either 3% or 4% depending on the current interest rate environment. : Mr. Young then gives 10 specific examples as to illustrate why he uses his "personal experience" rule of thumb. There is a flaw in this logic. In order to calculate the actual inflation rate, one must have actual records for all goods/services purchased in the specified time period (12 years in this example), and we know that this is highly unlikely. Also, Mr. Young uses only 10 examples. This is far too small a sample to use when figuring inflation on all of the goods and services used by an individual or family. That is why we use the CPI, which uses over 80,000 goods and services to calculate Inflation. We also find that Mr. Young's examples show an average inflation rate of over 7.8%, and none were for the specified time period. Therefore, we can see nothing in Mr. Young's posts that will support his extrapolation from the examples to the 6% figure for inflation. : We also see Mr. Young using certain terms like: : -The average increase of salaries. (This has no bearing on this matter, and Eric never used it in his posts.) : -The rule of 72 (This is a shortcut for compounding interest. It shows doubling periods at specified interest rates, It has no bearing here). : We find that Eric was 100% correct, not only in his calculations, but also in his interpretation. This is a very simlple economic principle. It is very cut and dry, there is no other way to interpret, or calculate it. When using a time period in the past, and without all data available (records for all purchases in the specified time period) one must use the CPI. Only when calculating the time value of money into the future can one use a rule of thumb; a 3% to 4% is acceptable, but 6% is unacceptable. : We do not wish this to be a response with a personal undertone. We are simply stating facts. This has no bearing on any one individual, with the exception of Dr. Leonard, who is a disgace to our profession (if indeed he is a professor at all) : What we also cant understand is why this debate has gone on for so long. Eric posted many wesite references that perfectly illustrated his point. We can only assume Mr. Young did not view these sites. : As a final note, the person who called, mentioned that Mr. Young may not accept our identity. As I am posting from home, anyone interested may reply to my home email. However, my University email and phone is available as well, but should be used for University business only. : I would request that we keep the discussion on this board, as my time for matters like this is very limited. I have also posted contact info for my collegues. Unless it is a matter of extreme urgency please do not respond to our University numbers, please respond here on this forum. : James Cobbe, Department Chair, School of Economics : jcobbe@mailer.fsu.edu : jamescobbe@yahoo.com : (850)644-7091 : David W. Rasmussen drasmuss@coss.fsu.edu (805)644-7649 Bel 150D : Eric R. Young : eyoung@garnet.acns.fsu.edu : (805) 644-7088 Bel 255 : Thank You for your time. : Sincerely, : Jim Cobbes

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