The American Dilemma and How We Can Fix It

Archive for the ‘finance’ Category

THE TRUTH ABOUT “INCOME INEQUALITY”

Once upon a time my father received a notice that his tax return was being audited.  At the time he was a salesman and travelled the country extensively being on the road for forty or more weeks per year.  All of this was done by automobile – and one of the deductions which he correctly took was for expenses related to these trips.  Fortunately, my father was also a meticulous record keeper as well as being scrupulously honest.

Notwithstanding that he felt that unless he had made a mathematical error, which he thought was unlikely, he was confident that his return would survive anyone’s scrutiny, he was still nervous when he arrived at the IRS”s office for his audit.  But several hours later the auditor agreed that my father’s return had been honestly and accurately prepared and issued a “no change” determination.

But the next year he got another such audit demand and one the following year.  As was the case with his first experience these two audits resulted in the auditors’ accepting the original returns as filed.  But other than experiencing a nervous stomach and perhaps a little heart burn, my father learned and taught me a valuable lesson which Chief Justice John Marshall stated in writing a majority opinion in a tax case, “The power to tax is the power to destroy”.

There are several threats to achieving financial independence and even wealth.  They are inflation; lack of financial knowledge; bad management; and most importantly, taxes.  With the exception of taxes, the other three can be handled.  There are assets that increase in value even if inflation becomes rampant; a person can educate himself on how to invest his savings; if a manager who has been hired by an investor is not meeting expectations he or she can be replaced.  But no individual can control the amount of taxes that government extracts from his earnings.  That is a matter of policy and law, enacted by the Congress and signed by the President.

The left’s theory – or at least their major talking points – are that income inequality makes it impossible for people to compete on a level playing field and that in particular, women and minorities are disenfranchised from the same level of opportunity that, for example, white males, (and whites in general) enjoy.  Hence they push for a higher minimum Federal hourly wage – as though a person who has no financial knowledge will somehow break into the middle class and realize the American dream by earning a couple of extra dollars an hour.  People do not get wealthy or break the shackles of poverty by making ten, twelve or even fifteen dollars an hour.  People get wealthy because they have a unique talent or because they start their own business which grows and prospers – or, for the lucky few – because they inherited their money.

But one of the lessons that my father taught me is that, “It isn’t what you make – it’s what you keep” that determines a person’s financial situation.  No matter how much you make if you spend more than that amount, the conclusion will be financial disaster.  Just look at the Federal government’s balance sheet if you doubt that.  Or look at Curtis James Jackson III (better known as 50 Cent) who made several hundred million dollars and just declared bankruptcy.

But the left persists in making these arguments that we need to level the playing field so that everyone has equal opportunity to succeed and if they really believed in the hogwash with which they bombard us, it seems only logical that rather than a fifteen dollar per hour minimum wage we should simply decree it to be one hundred or one thousand dollars per hour.  Now that would have an impact.

So why stop at fifteen bucks when a higher number would be better?  The answer is that everyone realizes that having the skill set to be a burger flipper is simply not worth that amount of money in a free and open job marketplace.  And the reason that being a burger flipper makes the current minimum wage is that there are a lot of potential burger flippers out there who will take that job and do it in an equally competent manner as the present employee should he or she decide that his employer is engaged in “oppressing him”.

My first summer job was working for a company that wholesaled shirts.  I earned two dollars fifty cents per hour and worked a forty hour week.  Of my gross income I had to commit one dollar fifty cents for carfare to get to the job and get home.  And even then, Social Security and Federal and New York state taxes were deducted from my check.  (The City of New York had not yet implemented their own additional income tax on its residents).

Since I took my lunches to work with me, (provided courtesy of my parents) I was able to save most of my check for my college tuition.  And when I realized that it was only a three mile walk one way, I started getting up extra early to walk to my job rather than spend the fifteen cents on the subway.  Once a week on Wednesday I would, rather than bring lunch, treat myself to a slice of cheese pizza at the cost of fifty cents (sixty if I really splurged and ordered pepperoni on it).  I admit to feeling a little bit of guilt about indulging in the luxury of that hot and bubbly slice of pie – but, darn it was good.

The theory that those on the left (and those like Ms. Clinton who appear to be on the left to attract primary voters to her cause) espouse is that we can have the money to institute their social programs by merely getting it from those who have either a special talent or ability, have started a small business which might have grown and prospered or those who were fortunate enough to inherit their substantial wealth.

If we lived in a country in which the government, not the citizen, runs programs and determines who should have so much but not more than that, even confiscating all the accumulated wealth of those who have it in their possession currently and redistributing it to those who would like to have it, would “even the playing field” for a second – and then the same inequities would once again start reappearing.

Whether we like it or not, some people are more motivated, more talented, more intelligent and more creative than others.  And like the classic cream rising to the top, those whose wealth had been appropriated by the government would start over and within a short time would again become wealthy whereas those who had been the recipients of their former wealth would again sink back into poverty.

Well, that’s the scenario with a one time confiscation of the assets of the wealthy.  But even proposing that would take more brass than the left has in their admitted operational playbook.  So the reasonable way for them to proceed is to raise taxes on the rich – as a matter of “equity”.  After all, were it not for the government and the tears and sweat of the miserable masses, these people could never have achieved their success.  We all remember Obama’s famous, “You didn’t build that speech”.

According to the economic theories of the left, trickle down economics doesn’t work nor does it improve anyone’s life except for those doing the trickling.  And more importantly, their firm belief is that just because the wealthy worked hard, been creative and took responsibility for their financial future, they have an obligation to those in society who sat back, got fired from a multitude of jobs for performance and who believe the way to wealth is sitting home collecting unemployment while watching the soaps and eating potato chips, taking only a break from this in order to get out with fellow economic failures and picket outside the business du jour demanding a higher minimum wage.

Now it’s an interesting phenomenon that while conservatives believe that lowering taxes increases the number of businesses that are created and because of this may actually result in higher amounts of taxes collected because of higher GDP, they have an interesting ally in the State of New York – headed by Governor Andrew Cuomo (D) who comes from the left’s own tradition.

There is an ad being run by the state of New York which begins, “New York is changing the way we’re doing business by lowering corporate and individual tax rates.”:  The ad goes on to say that manufacturers who relocate to the state will receive a ten year exemption from paying any income taxes.  If I didn’t know better this sounds remarkably like a plan that could have been authored by President Reagan’s economic adviser, Arthur Laffer.

But if the conservatives in this country need further validation of their economic policies, perhaps the strongest example may come from the Commonwealth of Puerto Rico which is asking that Congress pass a law granting them the same ability to file bankruptcy as Detroit, another Democrat controlled stronghold.  Otherwise they warn us that there will most certainly be default on the debt obligations the commonwealth has issued.  But while waiting for Congress to act on this desperate request, the Governor has, among other proposals, found an interesting way to combat Puerto Rico’s insolvency.  He has proposed lowering the minimum wage for hourly workers on the island.

Talk about mixed (and confusing) messages.  No wonder we’ll be at $20 Trillion in “official” debt by the time Obama leaves office.  Well, he promised “Hope and Change” in his drive that landed him in the White House.  And by the time he leaves office, we may all hope that he’ll leave us with some change – even if it’s small change.

THE CHANGE PURSE

It was a Christmas present from my mother to hers.  Perhaps you might not consider it to be a gift of significance, a mere change purse and, for that matter, one that looked like the one that Grandma had in service for a decade, but you would be misinformed.  There was no “accessory” that was more important to Grandma than this little black leather purse with the silver-like top and clasp.  It was at the center of her managing her finances – a matter that she took with the utmost seriousness.

Grocery shopping was an almost daily routine in Grandma’s life.  She reasoned, “Why would I stock up on produce which will only lose its freshness in the refrigerator if I can buy something daily at the produce stands?”  Of course, like most businesses then, the stands were closed on Sunday so Saturdays were particularly busy.  Most people who had the time seemed to share Grandma’s view on buying lettuce, tomatoes and cantaloupes.  It was a part of their daily lives.

When Grandma went to the store she would, of course, take her purse containing her little bit of monetary treasure.  The change purse, sometimes bulging with coins and sometimes quite slim, was always at the bottom of the purse, usually with a few other items placed on top of it, perhaps so that a potential purse snatcher might miss it in case he made a dash and grab.  The outer part of the purse had a zippered compartment in which the few bills that Grandma would take with her were carefully folded, the larger denominations, never more than a twenty, were nestled, secured inside the smaller bills.

When the clerk told her the total of her purchases, Grandma would reach in her purse, unbury the change purse from its hiding place, open the clasp and begin counting out change.  It was always better to try to pay for as much of the purchase with coins before having to resort to using paper.  Those bills were hard to come by.  But I wondered, “Where did all the money that filled that change purse come from in the first place?”  And then one day I found the answer.

On the third of each month, or the fourth if the third fell on a Sunday, a little group of our apartment building’s residents would assemble near the mail boxes in the downstairs hallway.  Our mailman, Mr. Shapiro, right on schedule, would appear promptly at nine thirty to distribute the mail to the forty boxes.  The group, including Grandma had two characteristics in common.  They all had gray (or very little) hair and they all were awaiting the arrival of their monthly social security checks.  Since we lived in one of the “A” apartments, our mail was deposited early on in this process which was a good thing since then Grandma could collect it and return to the chores she had set for himself to accomplish that day.

But how did that one piece of paper turn into all those coins and the green money with the pictures of presidents and other important people?  That was my first lesson in banking and finance.

Grandma bought all the groceries for our family of four and paid for them out of her social security check – a check that was for a little more than one hundred fifty dollars a month.  The Saturday after she received her check, she and I would make our way to Fourth Federal Savings and Loan Association to cash it.  Despite the fact that there was a bank just a few blocks away, she went to Fourth Federal because they paid an extra one quarter percent interest per year (four and one quarter percent) and because they credited all deposits which were made by the tenth of the month as if they had been made on the first.  Ten days of extra interest and a higher rate.  Despite her third grade formal education, Grandma understood the basics of economics and interest.

She had been one of the earlier depositors with Fourth Federal and owned Account number 1093-4.  The four signified that her current passbook was the fourth one they had issued for her account, the other ones having been filled with earlier transactions.  She still had these old books and showed them to me.  The first two had been handwritten but Fourth Federal had moved into the modern age of technology and had since implemented a system where these transactions were printed by a machine at each bank teller’s work station.  What would they think of next?

There were two things I noticed when I looked at these passbooks.  The first was that ever since Grandma made her initial ten dollar deposit, she had never made a withdrawal.  The only entries were additional deposits and interest that had posted to her account.  Month after month and year after year she had continued to add to her account without fail.  This stemmed from her belief that if you didn’t have the money to buy something you did without and her second belief, probably stemming from earlier hard times and doing without a lot of things that she would have liked to have bought her daughters or herself, that this little nest egg was inviolable.

When we got to the S & L, Grandma reached in her purse to pull out her check and endorsed it.  She carefully entered the amount on the line that said “Checks.”  She then pulled out her change purse, unzipped the pocket containing the bills, pulled them out and counted them.  These were “leftovers” from last month.  That month she had saved twenty-two dollars after paying all her expenses.  She subtracted that and the twenty dollars she saved each month and requested her cash back in the amount of one hundred eight dollars.

The teller, a middle aged woman who had been with the S & L since they opened asked how she would like her cash.  Two twenties, four tens, two fives and eighteen singles.  Eight of those singles would be set aside for a two dollar a week donation to be placed in the collection plate at church.

When Grandma received her money, she held it in her hand and we returned to the little desk that had the deposit and withdrawal slips on it.  She pulled the twenty-two dollars from the side pocket of her change purse and sandwiched those bills in with her withdrawal, making sure that all the bills faced in the same direction before zipping them back in the pocket and burying this little hoard in the bottom of her purse.  We then began immediately for home without stopping since this was far too much money for a person to carry on herself at one time.

But before we left the S & L, Mr. Bohanek, the president stopped by to say hello to us.  He was a ruddy faced, sandy haired man with tortoise shell glasses who always enjoyed speaking with his depositors.  He and the loan committee decided to whom their institution would make loans, long before there were such things as credit scores.  Instead, they based their decisions on a person’s character and credibility.  They must have been good judges of those as rarely did they make a loan on which the borrower failed to make repayment.  Perhaps that also was a statement about how people treated their financial responsibilities in those days.

When we returned home, Grandma put her purse on the little desk in our apartment’s foyer.  She removed the change purse, unzipped the side and pulled out all but twenty five dollars from the pocket.  That would be more than enough to buy the groceries for the week.  The rest went into a yellowed business size envelope that she had used for many years to house the remainder until it was needed.  That envelope went back into the secret compartment in the desk.  And then the change purse went back into the bottom of her purse where it would rest until her next shopping trip.  She used this change purse for the next eleven years until her death.

I still have that worn black leather change purse.  It is a relic of a simpler time, a time when people had a different attitude toward life.  It was a time when we appreciated the simple things and were grateful for the gifts we had received in loving friends and families.  It was a time when simple things were more than enough to keep us happy, believing that if we had enough simple things they could grow into great things and the future would be bright.  It was a time when security meant having a little black leather change purse, bulging with coins with a few bills neatly folded in a little zipped up pocket on the side.  It was a very good time to live in America.

THE ASHEN VIZIER AND THE 535 MENTAL MIDGETS

We know that if we give a junkie a dose of heroin she’s going to use it and come back asking for more.

We know that if we send government our tax dollars they’re going to spend them and come back asking for more.

We call the junkie a law breaker.  We call the politician a law maker.  That’s about the only difference between them.

If we apprehend the junkie, we the taxpayers pay for her support either in a rehab facility or a prison.  We the taxpayers who elect the politicians pay their support through our tax dollars to ensure they have ready access to what little they leave us in our pockets.

My friends used to laugh at my view of owning a car.  I summed it up one day on returning from a repair shop where I had some mechanical work done.  As I put it, “Owning a car is like having a vacuum cleaner permanently attached to and sucking at the contents of  your wallet.”

That’s a lot like the way government operates.

Many years ago my father was audited by the IRS.  For three years in a row.  The focus of their pogrom was on determining whether the business deductions he took were legitimate.  The result of these audits were three “No Change” determinations by that esteemed agency.  In other words, dad had documentation for every penny that he claimed and those deductions met the definitions of the Internal Revenue Code.

Nevertheless, it’s always stressful when you are accused of something and are assumed to be guilty until you prove your innocence – which is the approach that the IRS takes with us taxpayers.  So dad dreaded these encounters passionately.  I think that was mostly because he was an honest man and the implication that he was otherwise challenged his sense of decency.

At dinner one night, I believe it was at the conclusion of the second audit, my father told us that he had said to the auditor, “Wouldn’t it just be easier if you took everything I made and then just refunded what you think my family and I are entitled to live on?”  Little did he know that would be the direction this country would turn a half century later.

As we are now little more than three weeks from the much touted precipice of the “fiscal cliff,” who is in charge of making rational decisions to repair the folly we have already wrought?  It should not surprise you that it is the very people who have brought us here in the first place.

Our players consist of the Ashen Vizier and the 535 Mental Midgets – a cartoon cast that would be the envy of both Walt Disney and Cecil B. DeMille.  (My apologies to the twenty or so responsible people in Congress who have a pulse, a brain, common sense, and the moral courage both to understand and to tell the truth).

So here’s where we are.  Stuck over defining who’s “rich” and who should pay more of their “fair share.”  As though that matters any more than renaming a school in honor of Horace Mann will provide the students inside with a better quality education.

The facts are (and amazingly both sides agree on this) that if we follow the Ashen Vizier’s plan and start taxing the “rich” more, we will raise less than three percent of the money we need to balance our budget.  In other words, this “plan” leaves ninety-seven percent of our problem unresolved.

Since it’s hard for any of us to contemplate something that has burgeoned into the size of our deficits with all those zeroes, let’s look at this from a standpoint which we all can understand because we all have to deal with it.  A family and its budget.

You and your spouse have been wasteful and indulgent of the kids.  You’ve let your finances get out of control – but you’ve finally decided it’s time to deal with reality and get yourself back on the right path.  (Those annoying phone calls from creditors might have given your decision some impetus).

So you go down to Ashen Vizier & Associates credit counseling service.  You’ve seen their ads on television (a lot) and they promise that they have the solution to your financial woes.

The nice receptionist asks you to fill out a profile of your monthly income and expenses and then you are brought in for an audience with the Vizier himself.  He is a very self-assured and impressive sounding chap.

After he reviews your situation, he astutely points out that you are spending one thousand dollars a month more than you are taking home.  You and your spouse, in awe at this wisdom, nod your heads in agreement.  Okay.  The Vizier has identified your problem.  That’s a great start.  But, you ask him, “What do we do about it?”

As he stands up from behind his desk and completes the putt he was working on when you came into his office, he says, “No problema.”  He turns to the reference library which is on the wall behind him, filled with hundreds of the largest books you have ever seen.  He immediately pulls one down from the shelf and turns expertly to the middle of this tome where he finds the solution to your difficulty.

On page 462, Paragraph 7 he shows you a program which the Federal Government has developed just for people who are like you.  All you need to do is complete the paperwork and every month thereafter you will begin receiving a special allotment of thirty dollars.  It’s the program called “A Little Something Extra For The People Who Are A Little Short Each Month Entitlement.”

it is with some trepidation that you point out that will still leave you nine hundred seventy dollars a month deeper in debt.  But the Vizier grins broadly at you and says, “Don’t worry – that will take care of itself.”

Armed with this wisdom (and the promise of an extra thirty dollars a month) you and your spouse leave the office in an upbeat mood.  You decide to go to a movie, buy some popcorn and a few sodas and spend the thirty dollars you will soon be getting plus a little more.  Like your old hero, Alfred E. Neuman and your newly found one, the Vizier you are comforted with their life-guiding principle, “What, me worry?”

Somewhere I have quite a few copies of “Mad Magazine” stored away.  I think I know where they are.  Talking about all this financial stuff always makes me a little dizzy.

If I can find them, maybe I’ll curl up with a couple and drift off to sleep.  As I think about it, they are nearly forty years old and may be worth something.  Which is more than I can say for the Ashen Vizier and the 535 Mental Midgets.

FOR THOSE WHO JUST DON’T GET IT (THOUGHTS ON THE LOTTERY)

I don’t anticipate a lot of “likes” on this post.  As I’ve said before, stories that appeal to our human side and are warm and fuzzy get the most people hitting that button not only on my blog but on others that I regularly read.  I understand that since I often make my “like” decisions based on whether I walk away smiling or thinking.

This is one of those “thinking” posts and it deals with one of the most banal of all subjects – economics.  I probably wouldn’t have even gotten your attention if I hadn’t changed the title to include a reference to the lottery.  But I promise to make this as painless as possible.

I have decided to use the explanation of how taxes affect productivity using the example of the lottery because for the many who have never run their own business this is an easy example for them to understand.

So what is a lottery?  If you have followed for some time you’ve probably heard my definition of it that for most Americans it is one of the two ways they view becoming wealthy.  The other one is filing a law suit.

The actual definition is “that it is a game of chance in which players pool their money which is then redistributed in a small number of large prizes after the promoters deduct their fees for operating the game.”  I think we all understand the concept.  It is nothing more or less than a scheme for wealth redistribution.

I am always bothered when I hear people say that they “invested” X number of dollars in a lottery drawing.  Sadly, this speaks to the extreme lack of financial education that most Americans share.  This is a “gamble” not an “investment” and I am in no way passing judgment on whether gambling is good, bad or indifferent.  I mean, after all, I live in Las Vegas.

So these are the economic realities of the lottery.  You buy a ticket for two dollars.  The operators (the inter-state Lottery System) immediately pocket one dollar to cover profit and operating expenses.  (Fifty percent of your money just disappeared when you completed your purchase).  The remaining dollar gets added to the prize pool.

Now that one remaining dollar “investment” is still working for you.  You have approximately a 1/175,000,000 chance of hitting the jackpot – although you might collect a smaller prize.

Fortunately for you, you were born under a lucky star and are one of the two winners of the grand prize.  You and the other winner both decide to accept the lump sum option of $384 Million which is split between you.  (Please note that this represents a 35% reduction from the advertised $587 Million amount you would have received if you took your prize as a 30 year annuity).

And now, of course, you owe taxes on your winnings to both the Federal government and, for most winners, to the state in which they reside.  So the gross amount of your prize of $192 Million each now shrinks by an additional 35% to become $125 Million.  Still, that’s more money than you had in your checking accounting the last time you balanced your bank statement so you’re a very happy camper and are probably debating which color you should choose for your new Ferrari.

If you opened a bank account with a deposit of $1,000 and got your statement at the end of the month and the bank had “charged” you $500 for opening the account, then an additional $175 for “maintenance fees” and then an additional $113.75 for “miscellaneous fees” leaving you with a balance of $211.25, you would probably be screaming at the top of your lungs that you were “ripped off” – and you would be correct.

If you do the math, of the total prize pool collected, the Federal, state governments and the Lottery wind up with well over 70% of the money that is “invested” – and the players with less than 30% of the money.  That is the economics of the lottery – but is actually not the main point of this post.

When you go to your grocery store to buy oatmeal and diapers, that store is operating on a margin of only 2 – 3 %.  So your twenty dollar purchase might net them a whopping $.60.  And yet grocery stores by rigorously controlling costs, minimizing theft and being able to negotiate favorable contracts with wholesalers are able to survive.

They struggle but they are still able to turn a profit – which is a good thing for us because if they didn’t there would be no place for us to purchase oatmeal and diapers.  Of course, they don’t pay their employees extravagant wages because if they did they would be out of business.

I wrote the last two paragraphs because of the picketing which took place during the Thanksgiving weekend at Walmart for paying its employees “low wages” and offering “minimal benefits.”  They really don’t have much choice in the matter based on the economics of their business.  Just for disclosure, I have no axe to grind regarding Walmart as I don’t own stock in the company and almost never shop there.

On the other hand, government doesn’t have that problem.  When you consider that the lottery nets them collectively 70% of the gross revenue it generates, they can well afford to pay their employees (our employees) beaucoup bucks – and they do.  When you’re swimming in cash you can afford to be careless with it – and we have been to the tune of some $16 Trillion.  And yet, that still is not the point of this post.

But we have now arrived.

At the heart of the deadlock on the fiscal cliff is the question of raising taxes on “the rich.”  Warren Buffett recently offered a suggestion that we should consider “the rich” as a family which earns $500,000 per year rather than the $250,000 that President Obama made a campaign theme.  Those earning that or more would see an increase in the percentage of Federal Income Tax that they paid.

The Republican House has been adamant, so far, in its position that there shouldn’t be any tax increases on the “most productive members and the job creators” in our society because this will undermine our economic recovery.  (This is commonly described as “trickle down economics”).  Of course, this notion is pooh-poohed by their opponents in this debate.

So let’s get back to the lottery as a frame of reference to investigate the “fallacy” of this theory.

If you’ve read this post diligently and have followed the math, you are now aware that government is already collecting 70% of the revenue from lottery sales and winnings.  With only a 30% return to the players people are still lining up in droves to buy tickets.  If government decided to up their stake to 80% of the money spent on the lottery we would probably see some decrease in the amount of sales and at 90% an even further decline in interest in the game.

So what if they decided to raise that to 100% of the amount collected?  How many people do you think would be lining up at convenience stores to purchase tickets, knowing that if they “won” they would have to turn over all prize money to their state and the IRS?  And that’s the problem with “trickle up” taxation.  You see, at the point where government confiscated all the profit, even someone who had invented a time machine and knew what numbers would be drawn would have no incentive to play.

Similarly, a small business owner, burdened with some of the highest tax rates in the industrialized world combined with needing to comply with regulations which in many cases serve more to provide someone a job to oversee them than to accomplish anything productive will ask himself the question – do I want to play this game anymore?  Those business owners (and people who have considered opening their own new business) have looked at the way the game is structured and said, “No.”  And that is why we are unable to make any serious progress in reducing our rate of unemployment.

Of course this does suggest a solution to the “fiscal cliff” debate which is ongoing in Washington.  As you have seen, the Lottery is an enormously profitable scheme for the operators (making anything that Wall Street has concocted look like mere child’s play).  So I would like to offer this solution to our financial conundrum which I hope will make its way to our legislators and the President.

If you want to get the country out of debt, balance the budget and have money left over to waste on who knows what, simply require that all left over money that a wage earner has at the end of a month must be “invested” in buying lottery tickets.

I can already visualize the headlines now:

“Lucky Hoboken resident splits $239 Billion Lottery Jackpot with 157 other winners.”

America – what a country!

A PRIMER ON ARITHMETIC (COURTESY OF A. EINSTEIN)

As a follow up to the two previous posts on government accounting it just so happened that I was reading today that Albert Einstein’s brain was “different” from most of ours.  Without going into the specifics (of which I have only a poor grasp), let me just acknowledge that he was a genius – whatever the reasons for that might have been.

Einstein claimed that his greatest discovery was “The Rule of 72”.  He happened upon it when he was employed in the patent office as a clerk and had some down time in his duties.  The rule is very simple.

If you want to know how long it takes money to double at a specific compound rate of interest, divide the interest rate into 72 for an approximation.  In other words, one dollar will double at a rate of one percent interest in approximately 72 years; at two percent in approximately 36 years, at three percent in approximately 24 years, etc.

This rule becomes less accurate the higher the rate of interest – as we can see by inspection.  An interest rate of seventy-two percent is not going to double in the expected one year but show an increase of seventy-two percent.  The smaller the rate of interest, the more accurate the calculation.

What the rule demonstrates is the power of compounding.  That can work either to our advantage or to our detriment.

The handwritten chart below demonstrates this principle at five different interest rates.  There is a reason that the chart is handwritten (pardon my calligraphy).  Yes, I can use Lotus and Excel spreadsheets.  Yes, they look neater.  But plugging in formulae and letting a computer do the thinking for us is one of my pet peeves.

You see I believe that, notwithstanding the wonderful achievements we have attained through technology, once in a while it is imperative that we use our own brains to solve problems.  Otherwise, we unintentionally wind up dumbing ourselves down – and there is a lot of that going around.

This example assumes that Grandma made a gift to her grandchild in the amount of $100 at the age of sweet 16.  The child had the choice of placing this gift in an investment that would yield a consistent return at one of five specified interest rates, ranging between two to twenty-four percent.  (You will say, there is probably no investment available that would yield a consistent twenty-four percent and you would be correct.  In today’s market environment it’s hard to find an investment that yields a consistent two percent).

This example also assumes that there would have been no tax collected on the increase of the investment during the years from 16 to age 70 when the grandchild cashes in her gift.  (Now there’s hallucinatory thinking elevated to its epitome).

So here’s the chart:

CCF11202012_00000

As you can see, after fifty-four years of working on behalf of the grandchild, the investment which yielded two percent has now grown to a mere $286.  (I computed the difference from age 52 to age 70 manually since this investment required a 36 year period to double).  That’s pretty anemic.  Of course, the investment at four percent did better – but not twice as well as many would expect.  It did almost three times better than its lower tier brother.

And then we get into the shocking return on the eight percent investment.  Again, twice the interest rate had the effect of producing eight times the result.  And the twelve percent interest rate dwarfed that, providing the beneficiary of Grandma’s original $100 gift by rewarding her with $51,200 in her account.  We’ll save discussing the twenty-four percent interest rate for just a bit.

It really is amazing how the difference in the interest rate on an investment coupled with long time periods results in different returns.  Unfortunately, most of us are not cognizant of this because we are never taught these principles in our schooling – and many of our parents are as unaware of them as our teachers.

Now there is good news and bad news in all of this.  You’re probably correct in believing that receiving a guaranteed return of twenty-four percent a year is un-attainable.  And you’re right – unless you happen to be a bank that issues credit cards to less than top notch borrowers.  A twenty-four percent interest rate on unpaid balances is not unusual for people who fall into that category.

So instead of an investment, let’s think of this $100 as a loan.  The bank which issues it is very generous.  They are making it for a 54 year period – and the terms (other than the rate of interest) are very beneficent.  Nothing will be due until the loan recipient reaches age 70 – at which point the principal and interest will become payable in full.

As you can see from the chart, this $100 loan and accrued interest has grown to the staggering amount of $26,214,400.  Egad!  And that is the negative effect of compound interest.

After reviewing and, I hope, thinking about this for a bit, you will perhaps understand why the American consumer has gotten herself into very muddy waters with credit card debt.  But that is merely the tip off the iceberg.

We have a government that has similarly encumbered itself (and all of us) in the same problem.

It is estimated that the interest that will be due on our National Debt for calendar year 2012 will be approximately $360,000,000,000.  For those of you who, like me get lost with all those zeroes, that’s $360 Billion.  Take into account, that amounts to an interest rate of only 2.25% of our current outstanding balance – even with the Federal Reserve’s current policy of artificially suppressing interest rates.  The reason the effective interest rate is this high is because a significant amount of this debt was issued at higher rates than the one quarter of one percent rate that is currently in effect.

So if you want to think about an apocalyptic event, consider what a return to normal interest rates, (in the area of 3 – 5 %) would mean in terms of the amount of money that would be required to pay the interest on our $16 Trillion National Debt balance.

And that’s why, when you hear people say that we have encumbered ourselves and our children and our grandchildren with an almost unresolvable problem – short of default – they have a serious point that they are making.

And on that happy note, I’m going to spend a bit of time reading and then head off to slumber land – thinking about the National Debt and Albert Einstein.

Darn, that guy was smart.

English: Albert Einstein Français : Portrait d...

English: Albert Einstein Français : Portrait d’Albert Einstein (Photo credit: Wikipedia)

GOVERNMENT ACCOUNTING –PART II

It is the Tuesday before we turn our attention to our national day of Thanksgiving.  We have a lot for which we should be grateful despite the many challenges that lie ahead of us.

I began writing this blog a little over a year ago.  With the exception of about ten posts which were the work of others and which I re-blogged, the writing has been an expression of my thoughts and feelings, my hopes and my concerns.  There are now over 450 original posts which have been uploaded for your review.

No one either lives or writes in a vacuum.  If a person were to write the “Great American Novel” and no one read it, would its existence matter?  And so I remember that when I began and started to learn to navigate a little bit around Word Press, the excitement I felt when someone first clicked the “like” button on something I had written.  I remember thinking, “Oh my gosh, somebody actually read what I had to say.”  I guess we all need a little validation for our efforts.

As my blogging journey continued, I suddenly had a “follower”.  Just one – but that was exciting.  And then another and a few more.  As I began reading other blogs, it was only natural that I noticed how many followers some of them had.  Hundreds and hundreds, which led me to feel that what I had to say was probably only important to me and perhaps a handful of others.

And while I wanted to stop and enjoy a private pity party for a bit, I realized that if what I had to say mattered only to an audience of one – myself – I was honor bound to say it – with or without the acclamation of others.  It seems to me that is what personal honesty and responsibility are all about.

Perhaps one of the nicest compliments I have heard about my posts has come from two different people at the dog park who are not “followers” but are regular readers.  In the past week both of them have commented on specific posts and have described them as being written with “passion”.  I can think of no higher accolade and I am grateful to them for those words of encouragement.

And it is to all of you have taken the time either to click the “like” button and especially to those of you have taken your time to leave a comment to whom I want to express my gratitude and thanks.  Although you may not have realized it, your comments were a sustaining nourishment that enabled me to get as far with this blog as I have.

And there is one more thing about your comments which needs to be said.  You have provided the inspiration for many of these posts by causing me to think about things which otherwise I might have overlooked.  Such is the case with this post’s predecessor – which before reading the three comments that are currently posted, I considered a completed work.  But your thoughtful commentaries have now given rise to this post, and two more which will follow in the next few days.

So with a grateful heart, I say to all of you, “Thank you.”

And now – on to the subject of this post which I dedicate to all those who have taken their time to comment in the past.

When Gracie and I returned home this morning from the dog park I was sitting out back enjoying a beautiful morning and a strong cup of coffee.  Gracie, who in many ways is my muse, was happily munching on a homemade dog biscuit and I was thinking about the comments that “illero” and “irishsignora” and “William Lawson” had left on the first episode of “Government Accounting”.  And then I was inspired.

I agreed in my reply to “illero” that the amount of money deprived our seniors through SSA’s accounting gimmickry was chump change, although we both felt that the practice was petty and wrong.  But then I read “irishsignora’s” comment about how she is teaching her children about the value of things.  The combination of the two caused me to think about the real story here – one beyond that which I reported in the first post on this subject.

That caused me to think about Albert Einstein who understood the importance of “compounding” (read more in the next post) and that led me to think about the implications of this practice not just in one year but over periods of time.

If you followed my logic in “Government Accounting” (I wonder if I have to go back and rename it Part I – nah), SSA is currently saving $200 Million a year through their practice of always rounding down to the next lowest dollar the benefits that they pay out to seniors.  When you have a government running a $1 Trillion annual deficit, that is truly small potatoes.

But think about it for a moment.  According to the SSA, the “average” beneficiary receives a payment for a little over 16 years.  So, assuming that there is an annual increase in benefits of any amount (we just had a three year period where there were no increases – but that is an all time first in the history of the program), each year this accounting gimmick is going to compound the savings to SSA by an equal amount.  So in year two, the savings will amount to $400 Million, in year five, $1 Billion and in year sixteen, $3.2 Billion.  This is no longer “chump change” – and I think the late Sen. Everett McKinley Dirksen would strongly agree.

And what is the cumulative amount denied our senior Social Security recipients over this sixteen year time horizon?  It totals up to a rather staggering $30.2 BILLION.

Those of our elderly who may occasionally have to resort to eating canned cat food could certainly trade up and buy a whole lot of filet mignons with that much money.  Even at the current market price.

PARADOIXCALLY SPEAKING

There were probably a number of reasons that Mitt Romney lost the election – the most important being that he received fewer votes than President Obama, plain and simple.

Whether that was due to the fact that 6 million voters were so unimpressed with our choices that they “disappeared”; whether it was that Gov. Romney and the Republican party took the mid-road and failed to interest conservatives in his campaign; or whether it was a function of a well-run and well-executed campaign of demonizing the governor for his being financially successful doesn’t really matter.

I wanted to consider the third of those possibilities in this post – that Governor Romney was perceived as being unable to relate to the needs and concerns of the ordinary citizen because he is wealthy.  And therein lies a paradox.

If you look at the roster of those whom we elect to Congress (and continue to re-elect) you will find a Who’s Who of millionaires.  That doesn’t seem to deter the voters in their districts from returning them to office.  Apparently the voters don’t have the same concern when it comes to a Rep. Nancy Pelosi or Sen. Harry Reid to name just two.  But the list of millionaires in Congress includes multitudes of members affiliated with both major political parties.

While Congress boasts the lowest approval rating in U. S. history, for some reason we hate the institution but we love our own representatives and senators in it.  Of course, that line of thinking leads to our re-electing a collective assembly of people, many of whom are incompetent, self-serving, just plain corrupt and, of course, wealthy.

But let’s move to addressing the issue of the anger over Governor Romney’s accumulated wealth.  Those with a liberal agenda cite this as “prima facie” evidence of his lack of concern for the common man and an outgrowth of his lack of compassion.  He and his kind should be stripped of the income that they are receiving through their paying Federal Income Taxes at a  more “equitable” (i.e. higher) rate.  And, of course, these new found funds should be added to the public dole for those unfortunates who have not demonstrated any ability to succeed on their own.

Raising taxes on the rich is a cornerstone of the Obama plan for restoring fiscal order to our very dis-ordered financial house.  It is the major element causing the stall in negotiations as we hang at the edge of the “fiscal cliff”.   Everyone who has looked at this “solution” agrees that if we were to implement the President’s proposal, it would only raise enough revenue to chip away at 7.5% of our annual budgetary deficit.  But let’s ignore the facts and assume that this would actually eliminate the entire deficit.

If that were the case, then the salvation for our economic mess would be due solely to one group – the wealthy whom the President and the voters excoriated in the recent election.  But if we don’t allow people to become wealthy by dis-incenting people from creating successful businesses, then we will have eliminated the possibility of having any saviors whom we can fleece in the future.

We’ve already started to see an exodus of successful entrepreneurs move to other countries where they receive more favorable tax treatment.  There is no reason to expect that those who were clever enough to make fortunes are not smart enough to protect them from government encroachment and will choose to live in a more welcoming environment.

And when the last of those who are creative have gone, what then will become of those who have been trained to be dependent on the revenue they provided so that they could receive their monthly government-issued stipends?  Will they like rats, suddenly deprived of an adequate food supply, turn on their fellows and devour them?

That is the paradox that may soon be resolved.  I wonder if the answer will be one for which we are prepared.

THE AARP AGENDA

I was approaching one of those milestone birthdays – you know, one of those ending in a zero.  It happened to be my 50th and several months before the actual day I had a new friend who didn’t want the day to go by unnoticed.

The American Association of Retired Persons as it was formerly called, began sending me solicitations to become a member of their organization.  A number of my friends were members and the cost to join was inexpensive, so I returned my invitation together with a check.

AARP efficiently returned an informative membership packet and I began receiving a copy of their bi-monthly magazine.  As it turned out, I was already getting the travel and hotel discounts that they offered from other sources, their offerings for Medicare health insurance supplements were not available to me because of my age and I found I could do better shopping on my own for auto and homeowner’s insurance.

The magazine which AARP publishes is very informative and I highly recommend it to people who do not have the time or are unwilling to make the effort to do their own research.  I have always preferred learning things on my own, comparing several sources so that I get a variety of views and then drawing my own conclusions.  So after perusing several issues, the remainder of my subscription went into the recycling bin unread.

At the end of my year’s membership, AARP sent me a renewal form which also went into recycling as have many solicitations that I received from them over the following years.  I have chosen not to renew my membership in AARP.

If you’ve watched any television recently, you will certainly have seen some ads for “AARP endorsed” Medicare supplement plans.  That is because the period between October 15th and December 7th is “open enrollment season” when seniors on Medicare can choose to switch or change their supplemental coverage for the following calendar year.

I admit that with my sometimes twisted sense of humor, when I hear “open enrollment season” I think of hunters going after our senior population, armed with bazookas to bring down their targets.  There is big, very big money in selling Medicare insurance supplements – a fact that is not lost on AARP.

As part of our regulatory system, both “for profit” and “not for profit” organizations must file financial statements with the Federal government.  What is required of “not for profits” is less than for their counterparts.  But reviewing these statements can still be informative.  So that’s what I did.

In the year ending December 31, 2011, AARP received more than two and one half times the amount of revenue from “endorsing” insurance products than it did from its membership fees – a rather staggering, $704 Million.  By anyone’s standard, this could hardly be considered chump change.  The vast majority of this income was derived from royalties paid by United Health Group based in Minnetonka, MN, but some of it was derived by its “affiliate programs” with other insurers who provide auto, homeowners and life insurance to AARP members.

If you can recall any of United Health’s ads for Medicare supplements, to promote sales of their products they include the phrase, “the ONLY Medicare supplement endorsed by AARP”.  The implication, of course, is that AARP wouldn’t “lend” its name to a product that it hadn’t thoroughly checked out in much the way that consumers used to look for the “UL” label on an appliance to make sure that Underwriters Labs, an independent organization, had thoroughly tested the product before passing on its safety.

There is a big difference between the UL seal on a product and the AARP endorsement of a Medicare insurance supplement.  Underwriters Labs provides an independent assessment of each product it reviews.  It is not compensated by any company for passing or rejecting their products.  AARP has a significant vested financial interest in promoting products by United Health because they receive a royalty for each one of these supplements which are sold.

United Health Group is a fine and reputable company.  It owns the largest portion of the Medicare supplement business with a 30% market share.  I am not suggesting that their products are in any way inferior to those offered by their competitors.  In fact, if I may cite one example in which government regulations have actually proven effective, it is the Medicare supplement business.

Our seniors can choose a “lettered” supplement which will pay part or all of the costs which Medicare does not cover.  The government has standardized these different options and each insurance company which underwrites them must offer the same government-specified coverage for that particular contract as does its competitors.  The only difference between them is the cost that a particular insurer charges and the service that the insured receives from the underwriter.

Considering that fact, an AARP endorsement, or lack of one, makes absolutely no difference to the consumer when they select a Medicare supplement.  It all comes down to the cost of the product and the service that they will receive should they need to file a claim.

According to the financial statement which AARP filed for calendar year ending December 31, 2011, of its $1.35 Billion in income which the organization recorded, more than 50% of it was derived from royalties from insurance contract sales.  In other words, AARP has a vested interest in making sure that there is no threat to its primary source of income – the royalties it receives from the sales of insurance contracts.

And that brings me, together with another item in its financial statement, to question its motivation in criticizing the Romney campaign for statements that they have made regarding Medicare and Obamacare.  Are these criticisms that have been leveled by an independent organization whose mission is to defend and protect our senior population?  Or are they self-serving statements made by a business, intent on protecting its own interests?

The other item in the financial statement which stood out to me was the income the AARP received from “grants”.  The amount that it recorded was $101 Million, and of this amount $92 Million came from the Federal government.

My friends in academia used to sweat bullets when it came time for their “grants” from Uncle Sam to be reviewed for renewal.  Although they may have lived in ivory towers, they realized that the individual who made the determination of continuing or stopping their grants had the power of financial life or death over them.

I would suggest that AARP is in much the same position as my academic friends.  If you combine the royalties it receives from the sale of Medicare supplements and the money it receives in grants, AARP is dependent on the Federal government and its programs for over 60% of its income.

Is it, therefore, any surprise, that AARP took Mitt Romney to task for challenging the administration on its healthcare programs calling his statements “false and misleading?”

As I head out with Gracie for our morning visit to the dog park, the old adage comes to mind.

“You don’t bite the hand that feeds you.”

VOTING IN FEAR

The 15th Amendment to the Constitution struck down the denial of the right to vote based on race.

The 24th Amendment to the Constitution struck down the ability of the states to impose a poll tax on voters – whose goal was ultimately to undermine the 15th Amendment and to deny black Americans the right to cast their ballots.

I offer this information as historical background.  The right to vote is an inestimable privilege and responsibility.  To go into the public forum and state your opinion, free of the prospect of harassment.  Which brings me to the subject of this post.

A few days ago I spoke with an elderly neighbor, a lady in her 80’s and asked if I might take her to the grocery store with me.  She readily agreed since I think that she recognizes her driving is not quite as good as it once was.

This lady, I’ll call her, Lily is a white woman who grew up in Biloxi, Mississippi.  She married a man who had a career in the U. S. Air Force and whose last deployment was here in Las Vegas at Nellis AFB.  He passed away quite a few years ago.

During our ride to the store, Lily brought up the rapidly rising cost of groceries and engaged me in a political conversation – much to my surprise.  Of course, regular readers of this blog will realize these are subjects which interest me, so we spoke.

She said that, “Despite everything that he has done, I am thinking about voting for President Obama on November 6th.”

I asked, “Why?  Do you have something against Romney?”

“Oh, no.  I think he is honest – but doesn’t have a lot of personality.  I think he probably would be a better President.”

This confounded me, so I asked, “Well, why would you vote for Obama?”

Her answer really shocked me.

“I’m afraid what will happen if Obama loses.  I’m afraid that a lot of his supporters will start breaking into stores and burglarizing houses because they see the end of their meal-ticket.  And I live by myself.  I’m afraid for my safety.”

By “a lot of his supporters” I took it that Lily meant people who happened to be black Americans.  I find that statement (if my inference is correct) to be offensive – but I also understand her cultural background in making it.  And I understand her fear which is real.

I remember the riots in Watts, almost 47 years ago to the day.  And I know that Lily remembers those events as well.

What Lily may not understand is that this is not a matter of color but is a matter of economics.  And there is less opportunity for many members of the black community than there is for other members of our society. We see that clearly in the rate of unemployment for blacks which is nearly twice the national average.

In the 1960’s and 1970’s I knew some people who looked at welfare, then merely in its infancy, and looked down on the people who accepted it.  Concurrent with their disdain was the underlying belief that this was a program that was designed only for the benefit of black Americans.  They were wrong.  At the time, the majority of welfare recipients were white.

If you create a class of people who have no upward mobility because of lack of education, few marketable skills and a mindset that life is about waiting until the first of the month when the EBT card gets refilled so that they can survive another thirty days, you have created the kind of potential scenario which my friend Lily fears.  That is just what we have created through our government policies which have transformed slavery into welfare.

What my friend Lily may not understand is that eventually this has to stop for the simple reason that we have run out of the ability to pay for these sorts of programs (and probably, whether our politicians will admit it or not, realize that this was a poorly misguided attempt to bring about social justice).  There is simply no quick fix for a problem that has been fifty years in the creation.

It would be naïve to believe that President Obama is the cause of this problem.  It would be equally naïve to believe that a President Romney will spend four years in office and fix it.  But we know that continuing our present path is surely not the answer that a person with vision would endorse.

The answer at its most basic lies with education.   That is, by it’s nature, a long-term solution and does not address the issue of those adults who have not benefited from it themselves and who comprise a growing portion of our society.  To be candid, I do not know the answer for how to improve their prospects – but at least I am willing to face the problem and think about it honestly.

What Lily may not understand is that we are at a turning point – irrespective of who is the next President.  Our fiscal imprudence is going to cause us to have to look not only at social programs like welfare but the entire way that we as a country conduct ourselves and our business.

At some point, all it would take would be those who have willingly purchased our bonds to float our increasing debt to say, “We don’t know if our money is safe in America any more,” and to stop.  That would create an implosion that would be heard around the world.  And with the recent downgrade in our debt, for the first time in our history, that day many not be too far down the road.

Or consider a natural disaster.  A violent sun spot emission knocks out our communication systems.  We have become so dependent on technology that if we found ourselves without it, most of us would find ourselves helpless.  With no communication, society would quickly find itself victimized by the predators who would loot stores and steal food.  And when that food has disappeared from the shelves,  with law enforcement taxed beyond anything it was ever designed to do, you can see the possible scenarios that might ensue.

This is a dire picture.  It is not one that any of us wants to imagine or believes might happen.   In fact, we find it so dreadful that those who have the ability to take steps to avert it, our political leaders, have declined to do so because the remedies will require that we all change our lifestyles and our outlook.  And people whose way of life is challenged don’t make for happy voters.

We have a choice this November.  We may, like may friend Lily vote to continue the policies which have brought us to this place – for fear of the possibility of civil insurrection.  But that will merely insure that state of unrest will come to pass – if not now, soon.

Or we can take the common sense approach – acknowledge that we have real problems that demand realistic solutions and vote for people who tell us the truth, as painful as that may be for us to hear, and who start us back on a course away from the brink – while there is still time.  If there is still time.

Living in fear is a terrible existence.  If our fear determines how and for whom we vote, we bring that misery down on an entire nation.

.

THE CONSUMER

Have you ever played chess?  If you have then you realize the most important value of your eight “pawns” is that they serve as sacrificial lambs in your effort to checkmate your opponent.  American consumers are little more than pawns in the game of chess that our banking system including the Federal Reserve and  our politicians are perpetrating on the nation.

In 1988, John Carpenter made one of my favorite films, “They Live.”  It is a combination of science fiction and film-noire.  As it is probably a movie that most of my readers have not seen, here is a synopsis of the plot.

The film is set in Los Angeles.  Aliens have come to earth and they have allied themselves with the rich and powerful – titans of industry and those who are in political power – promising these people untold wealth and riches as they engage in their ultimate strategy which is to rape the planet of its resources before they move on to another planet to do the same.

The aliens have installed broadcast towers around the world which serve two purposes.  The first is to cloak the aliens from identification (Carpenter portrays their real form as Halloween ghouls) and the second is to allow them to put subliminal messages on advertising billboards which humans absorb but don’t actually see.  Those messages direct us to “Buy,” “Spend,” “Use,” “Replace”, “Throw Out.”  These are the ultimate consumerist messages.

The reason that the aliens want us to do this is that, even as they use us to help in their mission of despoiling Earth’s resources, they want us to work faster and harder and if we are perpetually nearly broke, we will have to continue on our unwitting assistance of their agenda.

A drifter, Roddy Piper gets work in construction and discovers a box of sunglasses which, when worn, reveal the aliens’ true form.  The sunglasses are later replaced with an updated version in the form of contact lenses.  Piper, who’s character is named “Nada” joins a movement of other humans who realize the truth of the plight of earth’s people.  Their goal is to tear down the broadcast tower which cloaks the aliens’ true appearance and emits the signal for their subliminal messages so that all people will see them for who and what they really are.

At the conclusion of the movie, the tower and signal are destroyed – but Nada gives his life in the process.  Presumably, humans learn the truth and the aliens will be routed, but that is a conclusion left to the viewer to reach.

The American consumer is responsible for  two-thirds of our Gross Domestic Product.  It is our buying, replacing, using and throwing out things that keeps our economy fueled.  We make purchases based on the latest fad and fashion and for many of those, the products are nearly obsolete as soon as they have been released.  These spending habits are why we have amassed the incredible amount of consumer debt that is on the books.

While we are cautioned about being in all this debt, it is really the only way that we can finance our need to buy and spend and use and throw out.  And the banks love it.  Lending money to the consumer at 18% – 24% while they borrow from the Federal Reserve at  0.25% is very profitable business.

And our politicians hope that we will continue on our present path – and accelerate our journey on the way since they depend on us to fuel the economy and their own re-election efforts.  A happy consumer is more likely to be a voter who will once again return the establishment to their places of privilege at the top of the food chain.

The motto of The Science Fiction Book Club is, “Today’s fiction is tomorrow’s fact.”    Some of Carpenter’s views in 1988 might have been fiction.  But if you look around you will see that a lot of that has indeed evolved into fact.

Is that because of alien intervention or is it because of our own foolishness and consumerism?  Does it really matter?  The results are the same.

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