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September 10th, 2008

Some Other Mother was having her (homebirth) baby and therefore the midwife was Busy. Rescheduled to tomorrow afternoon (the prenatal, not the baby!). R. will be swapping his Friday-off for a Thursday-off so he can listen to a presentation by the CEO (!!) on Friday. Should be interesting. In the meantime, he's available for the prenatal, and the morning trek down to Groton for acupuncture. Because I am Impatient, I left a message for the midwife asking about acupuncture and evening primrose oil and got the A-OK on both.

Perhaps I'll post TMI dosing on the EPO friends only. Or maybe I'll just leave that to those who feel up to googling. ;-)
$102.58 at close.

In presumably unrelated news, sex and corruption in the Department of the Interior:

http://www.washingtonpost.com/wp-dyn/content/story/2008/09/10/ST2008091002738.html

_Richistan_, Robert Frank (kindle)

Having read the entire book at this point, I still am not entirely certain what to make of it.

First, there are at least a couple substantial problems with it, obvious in the comparatively brief period of time which has passed since Frank wrote it and briefer period of time since it was published. First, the inclination of the US public to support a more progressive tax structure is growing very rapidly. This next election will go a long ways to answering the important question, which is can voters in this country as a group recognize that the tax cuts promised by one side will NOT help them and the tax changes proposed by the other side might. Second, the "river of money" and trend towards globalization etc. which Frank argues created Richistan are rapidly disappearing -- and they weren't the relevant factors in the creation of Richistan anyway. Exhibit A in the creation of Richistan would be the Reagan tax code changes, last and arguably most significant in a series that made it possible to remunerate executives at a very high level (no point if the top tax bracket is 90%) and to "flip" companies. Company flipping is a huge problem, in that one of the major necessary skills for entrepreneurs is hucksterism -- charisma, being able to con someone, make the deal, etc. It's not too bad if the entrepreneur is then stuck with the Next Big Thing he or she cooked up and keeps plowing the profits back in to make it bigger, better, more productive etc. If the entrepreneur can cash out in a few years and keep the rewards, there's a massive perverse incentive to rape the company (if it was ever real) or fake the company (and hope you can find a sucker to buy you out). Exhibit B in the creation of Richistan was the serial bubbliciousness presided over (if not actually the responsibility of) Greenspan. Now that we're out of bubbles and deleveraging, I expect to see an impact on Richistan. _Particularly_ since, as is made abundantly clear throughout this book, Richistanis carry a heavy load of debt in one form or another.

Frank argues that the upper levels of Richistan will be less affected than the Lower Richistanis, who will be wiped out by their consumption getting ahead of their assets. Well, that was going to happen regardless. A big chunk of the fun of this book is reading about people who have more money than sense (you have (a) mortgage(s)? and you're complaining that 5-6% return on your investments is inadequate to keep up on your run rate? There's an obvious answer here. _Really_ obvious.). The whole _idea_ of having one household (much less more than one), the staffing and maintenance and so forth of which runs you millions of dollars a year should, to anyone even the least bit numerate, seem only possible to billionaires. And yet, Frank presents this as a frivolity engaged in by lots of people with hundreds, or at times even only tens of millions of dollars. I would suggest that the current deleveraging should make _abundantly_ clear the following proposition:

(1) There is _no_ amount of money that cannot be blown through in less than one lifetime. Poor investments, too many staff, you name it. You can waste it.

(2) Billionaires, at least according to Frank, are not keeping their cash under the mattress -- the money is invested. It may be overseas. It may be in weird financial instruments that mere mortals can never understand. But anything that deflates markets in general _will_ deflate all invested Richistanis. Period. There is no safe haven (altho there are less safe havens, witness today's action on WaMu and the woes over at the GSEs, not to mention Bear Stearns, IndyMac, blah, blah, blah.

Frank's commentary on what happens when billionaires lose some of their money (and when lesser Richistanis likewise) is interesting. Obviously, if you're on the bottom rung, you can fall right out of the Country of the Rich. But he also notes that it can affect the inclination to spend. He sort of presents this as an, it just doesn't feel right, or not in the mood to spend, or whatever (somewhat in this book; more in his Wealth Report blog over at the WSJ). Frank's analysis, to my mind, misses several key aspects to how significant paper losses impact a Richistani, even if they do not cause the Richistani to be deported by to the plain old US of A. First, when you've grown accustomed to always having more, and that changes, it modifies your thinking. What always went up, having once gone down, can now always go down (at least in your head). You have to allow for it, unless you are Really Too Stupid Too Live (which some of the case studies indicate does happen). Second, once you've started thinking in terms of Losing It All and Being Really Normal Again, it can cause you to rethink your rationalizations in terms of, well, everyone (I know) is getting richer, so the fact that I'm Crazy Ass Richer is not really a big deal. Now you see that you are way freaking richer, and while everyone else is Hurtin' Bad, you are mildly inconvenienced (if that). And then, assuming, again, you are NOT too stupid to live, this is the point at which you realize there are hella lot more of them than there are of you, and you'd better come up with a plan to keep them from taking all your toys away from you and putting you first against the wall come the revolution.

Which is how we got the New Deal in the first place. Those people had seen what had happened in 1917, and when it didn't all immediately and permanently fall apart/return to "normal", they got seriously concerned.

Which brings us back to progressive taxation.

In any event, Frank's conclusion is so weak it is suspicious. What, the practically nonexistent and largely ineffective philanthropy of the superrich is going to save us all? Are you fucking kidding me?

Please.

There are some seriously entertaining anecdotes in here. It is unclear to me whether getting the book is any kind of particular win over just reading the Wealth Report over at the WSJ (free).

Okay, one more comment. There's a chapter on classes for the young adult scions of Richistanis in which the pupils are asked what they would do if they won $10 million in a lottery. While I do believe asking whether it is pretax or aftertax winnings is a reasonable question, I think the fact the kiddies (or the author) didn't get into the one-time-payment vs. annuity issue is kinda weak. Actually, way more than kinda weak, but whatever. But no substantive answers are described by Frank, which is weird. This is a question that, in the $100K form, was asked incessantly (usually as some windfall other than the lottery, since we were JWs and playing the lottery was Against the Rules), and had a well defined answer: buy a house, buy a car, save the rest. At the time, we assumed no pre-existing debt (student loans being rare and small Back in the Day, and none of the people asking each other this question had a mortgage yet). Eventually, when I was putting in a frighteningly brief period of time at a startup, some of us batted this question around, but with a million dollar amount. It eventually morphed into the question I think is really interesting, which is, how much money do you think you'd need to have to retire. But the answer, to my mind, has never changed: pay off debt, stabilize your housing and transportation costs, invest the rest -- in other words, buy yourself a nice, middle class life without having to work for it and then carefully live within those parameters.

While the authors of _The Millionaire Next Door_ clearly found people who think this way, if we are to believe Frank, few people in Richistan do. Now we know the real reason wealth doesn't survive more than a generation or two, no matter how large. Either the rest of the society rises up and takes it away forcibly, or laughs their butt off when the children and grandchildren piss it all away.
Robert Frank commits this particular bit of nonsense in more than one spot (he also asserts we have a national health care system, which does not include concierge doctors -- I can't make that work no matter _how_ I define the terms). On top of that, in his stories of group for the rich (Tiger 21 and so forth), he depicts members of the group going after the 50ish guy whose portfolio was 60/40 bonds/equity(like) investments. (I have no problem with the consensus on he should have had more in stocks and less in bonds. I thought his investment returns were pretty pitiful myself. But I thought his _real_ problem lay on the spend side.)

It's _possible_ Frank has in mind that the equities should be generating enough dividend income that, in conjunction with a bond(like) component of the portfolio, would indeed meaningfully segregate "principal" from "income" or "interest". However, this kind of portfolio structure is going to have similar problems in terms of limited quarterly returns (altho structured correctly, it may have substantially less volatility over longer periods of time, so "risk adjusted" return may be higher or lower).

In any event, it's quite clear that Frank doesn't have a good way to present (and that's assuming, which is optimistic, he understands) the really interesting question of sustainable run rate for net assets, much less the more esoteric, but even more important problem of portfolio structure and how much cash you need to have so when you pull money out for day-to-day, you don't have to sell assets you expect to recover which might have undesirable tax consequences -- or might not be currently liquid at all. I suppose it would be asking a lot for Frank to cover endowment theory as part of _Richistan_, when _clearly_ talking about 400+ foot yachts is way more fun.

Oh, well.