Practice Good Theory

This post is about the Consumer Price Index (CPI). Many criticize the CPI for understating price-increases prices, but this post is not meant to critique it. I want to address two questions: How has the CPI been doing? What are the market-expectations for CPI, over the next few years? Short term history:  Over the last 9-years, this is what we see... ... CPI risen about 3% a year in the early part of this period. ... the housing-bust caused CPI to drift lower ... now, it seems headed back to 3% a year Long-term history:  See the chart below. Looking back 50 years, the first thing that pops out is that the range of rates (even rates averaged across 5-year periods) is very large .CPI rose 2%-3% in the 1950's and for most of the 1960's. Then, starting in the late 1960's, it rose  inexorably to 12% It began to drop again in the mid-1980's and early 1990s. Since then, CPI rises have averaged around 3% per year. So, what happens in the future? ...

I once thought computers were useless in elementary and middle school: costly page-turners at best, and inducements to passivity at worst; but, watching my own child, I've changed my mind. Some computer-based educational software may be mediocre, but the potential is huge. I think computers should be introduced as early as possible in elementary school. Ties to Reality : During the elementary years, it is particularly important for kids to deal with "real and physical stuff". This reinforces the connection between concepts and reality. Consider, for example, an elementary-school child learning Pythagoras' theorem. In some traditional cultures, the child will see a diagram of a triangle in a book;  he'll be told "the formula"; and, he will work out many examples. In contrast, a child in a Montessori school will be given a "toy" which he can manipulate in certain ways to "see" the theorem at work. A more creative teacher might fin...

In the early 1300's the Duke of Athens wanted to become prince of Florence. The "signory" of the city wrote to him about the nature of freedom and warned him that even a benevolent dictatorship was incompatible with freedom. They would not confront him by force, but they were warning him that he would have to hold power primarily by force. "... You are endeavoring to reduce to slavery a city that has always existed in freedom; for the authority which we have at times conceded to the kings of Naples was companionship and not servitude. "Have you considered the mighty things which the name of liberty implies to such a city as this, and how delightful it is to those who hear it? It has a power which nothing can subdue, time cannot wear away, nor can any degree of merit in a prince countervail the loss of it. "Consider, my lord, how great the force must be that can keep a city like this in subjection, no foreign aid would enable you to do it; neit...

Businessman Warren Buffet recently suggested that U.S. "single family homes" were a good buy. Prices have fallen and mortgage interest rates are low.  Here's the Case-Schiller index of home-prices. (For original versions of the graphs shown below, see the excellent Calculated Risk graph gallery .) Nominal prices: This graph shows the 10-city average and the 20-city average. The index dropped from its peak and has remained steady over the last 3 years. However, if we look to the left portion of the graph, we'd ask: could prices fall further, closer to the flat level of the 1990's? Real Prices:  To get a better historical comparison, we should look at a "real" version. One way is to use the CPI to normalize the index. This gives us the next graph. Since the CPI is significantly up since the 1990's we see that prices are very close to 1990 levels. A 10% drop would take us back to those levels. [Note: Increasing house sizes are already...