Opinion

Felix Salmon

Internet libel suit of the day

Felix Salmon
Sep 30, 2010 19:19 UTC

What is Charles Smith thinking? He’s the winemaker at K Vintners, where he makes very expensive wines, and occasionally shares them with bloggers such as Blake Gray. One blog entry on Smith and his wines produced some comments saying that he is more of a wine promoter than an actual winemaker. Smith’s assistant, Andrew Latta, responded in the comments with simplicity and anger:

Charles and I work side by side on these wines. All the vineyard visits, the punch downs, the pressing, the racking and blending must have just been for photo ops.

The comment thread died out within a week, as comment threads are wont to do, and the story would normally end there.

Now, however, Charles Smith has decided to sue the anonymous commenters! I’ve turned the lawsuit into a PDF and put it here, in case you’re interested.

It’s hard enough to sue people for libel when they post under their own name; when they post anonymously, it’s pretty much impossible. Still, Smith is trying: he’s sent a subpoena to Google, who publish the blog, asking for the IP addresses of the commenters in question. And it seems, although it’s not clear, that Google is going to comply with the request.

I doubt that a list of IP addresses is going to help Smith win the suit, or even identify the commenters to the satisfaction of a court of law — but maybe he just wants to find out who left the comments, and has a suspicion which might be confirmed if he gets that data.

From reading the comments on both blog entries, Smith might well be the kind of person who uses the expensive and elaborate tool of a libel suit just to try to find out who’s saying rude things about him on the internet. But if he does think he’s found out who the commenter is, that person is liable to find themselves defending a lawsuit, which is never pleasant or cheap even if you win.

If the person being sued is the person who left the comments, then being sued is itself harsh punishment for what’s little more than mean gossip. And if the person being sued did not leave the comments, then the whole thing could turn out to be extremely unfair indeed.

I do hope that Smith had bothered to read up on the Streisand effect before filing this suit. As Jim Caudill, one of Gray’s commenters, says, this suit is a prime example of how not to handle criticism:

I think counsel for CS failed to mention that this approach will only bring renewed attention to the comments he finds libelous, as this is tweeted and posted and reported on again and again.

Smith would have been much better advised to take the Randall Grahm route, and simply set up a blog of his own. He could use it to respond forcefully to critics, and to show clearly his involvement in making his wines. Instead, he decided to show the world that he’s a thin-skinned bully. Which is certainly not going to make me remotely well-disposed towards his wines.

COMMENT

Maybe I have the wrong impression but I thought that some of the comments sounded like they might have come from employees of Smith’s. In which case what he is trying to do is find out who they are and fire them. Just my opinion.

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Obama’s tax cut for the rich

Felix Salmon
Sep 30, 2010 15:54 UTC

Thank you, Jonathan Chait, for making an important point about the NYT’s silly story today on the subject of taxes and “the definition of rich”.

The Times article starts off by asking “whether a person who earns more than $200,000 a year should be taxed at rates similar to those who make $5 million”, and continues:

Others in Congress have questioned why ending what Mr. Obama frequently calls “tax cuts for millionaires and billionaires” should also raise taxes on families making $250,000…

In some expensive sections of the country, many families with income levels near the $250,000 cutoff insist that they have more in common with middle-class Americans than millionaires or billionaires.

Let’s put to one side the fraught question of whether a $250,000 income makes you rich. That’s a question of judgment, while there are basic empirical reasons why the NYT’s angle here is fundamentally flawed. As Chait explains:

The main problem with the article is that it presupposes that individuals making $200,000, or couples earning $250,000, will pay higher taxes. They won’t. The tax hike only applies to income over that threshold. When you go from $250,000 to $250,001, you only pay a higher tax rate on that one extra dollar. Your taxes will go up by a few cents. If you earn $300,000, you will pay a slightly higher tax rate on the last $50,000 of your income — less than a couple thousand dollars.

Even people making half a million dollars a year won’t be “taxed at rates similar to those who make $5 million,” because only half their income will be taxed at the top rate.

This actually understates the matter. For one thing, we’re talking taxable income, here — so you can automatically exclude 401(k) contributions, charitable contributions, mortgage-interest payments, and all manner of other deductions.

On top of that, everybody earning more than $250,000 gets the full value of all the tax cuts for everybody earning less than that. Take Chait’s example of someone earning $300,000: they might pay a higher tax rate on the last $50,000 of their income, but they will also pay a lower tax rate on the first $250,000. As a result, their overall tax bill will go down, rather than up.

So when the NYT’s David Kocieniewski starts talking about “many families with income levels near the $250,000 cutoff”, he’s making a serious error. If you’re anywhere near that cutoff, your tax bill is set to go down, even as the tax bills for those millionaires and billionaires are set to go up.

The clear implication of Kocieniewski’s article is that the rich middle classes — “a couple in Westchester County, a police officer with a lot of overtime and a principal at a public school”, say — are going to suffer the same tax hike as millionaires and billionaires. And that simply isn’t true, even if they’re making significantly more than $250,000 between them.

COMMENT

Everyone (and I mean everyone) should read the book “The Trouble with Billionaires”. I won’t explain…just read it.

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AIG’s positive valuation

Felix Salmon
Sep 30, 2010 15:28 UTC

Back in January, the bien-pensant received opinion was that AIG’s stock was worthless, and that the market was delusional in valuing the company at $26 billion. (See, for example, Jonathan Weil, Paul Smalera, and me.) The company’s debts to the US government were just too large, we all said, for there to be anything left over for shareholders.

Does anybody still think that way? The government has now announced that AIG has a plan to repay taxpayers in full, by converting Treasury’s debt to equity and then selling off those shares in a series of stock sales.

Here’s one way of looking at it: there was nothing wrong with the analysis we were doing in January. There was no chance of AIG paying back the government then, and there’s no chance of AIG paying back the government now. But so long as the stock market remains delusional, then people wanting to own AIG’s stock can pay back the government instead. Essentially, the government is taking advantage of the bizarre positive valuation that the stock market is assigning to AIG, and saying that so long as there are people out there willing to think that way, it’s happy to let them take as much AIG risk as they want.

Here’s another way of looking at it: the world has changed over the past nine months, and there’s now significantly more value in AIG than there was in January. The people valuing AIG’s stock at $26 billion weren’t delusional, they were just prescient. And now even the government can see that value. After all, AIG is an insurance company, and insurance companies have enormous amounts of money in the stock and bond markets, and the stock and bond markets have risen a lot this year.

Given the choice, I’d be more inclined towards the first view than the second. But maybe we can split the difference with a third view. A large part of the value of any financial-services company is based in trust. Consider the idea that the value of a company is equal to the last price at which a share was traded, multiplied by the number of shares outstanding. Or the idea that deposits at a bank are “cash”, available to depositors on demand.

Back in January, AIG stock was a crazy speculative bet. But it has now held its value for long enough that it’s reasonable to consider it a genuine store of value — one which the government can actually monetize in a series of stock offerings.

I’m not convinced that the US will ultimately get paid back all the money it lent to AIG — and it certainly won’t be paid back with a level of interest commensurate with the amount of risk involved in the deal. It’s one thing to look at the value of the small number of AIG shares in free circulation; it’s something else entirely to assume that the government will be able to sell tens of billions of dollars’ worth of its own shares at anything like the same level. But it’s certainly worth a try. So long as the stock market continues to place a significant positive value on the company, it would be foolish of the government not to.

COMMENT

@Felix

First, the government – we the taxpayers – will hold risk first for as long as it takes to dump the stock.

Second, delusional is not about being prescient but about ignoring reality, suspending it. How long can the superior delusional government, the ones who own AIG stock until someone else buys it, suspend reality?

Finally, mark my words, the government will not sell a portion of that stock but use it to quietly with no press release pay off the claims against AIG in settlement of the Crisis One 2002-2005 Ohio litigation. If more plaintiffs make more deals like that, the government will use it again to pay off the Crisis Two settlements that are surely coming. That may actually be the best and highest value use of those shares rather than open market sales, as long as AIG doesn’t need another taxpayer infusion after the debts for prior bad acts are paid by the taxpayer who thinks a return on investment is still coming.

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Elizabeth Warren’s principles

Felix Salmon
Sep 30, 2010 13:57 UTC

Elizabeth Warren isn’t shy about taking sides in the debate between rules-based and principles-based regulation:

In her speech and in an interview earlier in the day, Warren said she hopes to take a more “principles-based approach” to regulation, rather than simply saddling companies with more of what she calls “thou shalt not” rules — which make for burdensome, costly compliance and which banks often start trying to skirt as soon as they are written

“Regulators can make more pronouncements from on high, identifying suspicious practices in the various markets and banning them. Or regulators can layer on more disclosure requirements,” Warren said in her remarks. “But neither restores customer trust.”

Rather, she said, “Let’s measure our success with simple questions” — Can customers understand a product? Do they know the risks? Can they easily figure out what it really costs?

Warren, remember, is a law professor: she knows full well that the main effect of laying down rules is to send a thousand lawyers scurrying to find ways around them. And she’s surely also seen the way in which other regulators — the SEC springs to mind — become overrun by lawyers looking for people breaking rules, rather than regulators trying to ensure a clean and level playing field.

At the same time, principles-based regulation is new to the US, and will be worrying to banks who will never know for sure whether what they’re doing is allowed or not.

Good.

It’s true that a malicious and vengeance-minded principles-based regulator would be capable of wreaking havoc on the banking industry, but the same can be said of a malicious and vengeance-minded rules-based regulator, too.

The fact is that it makes perfect sense for a consumer-protection bureau to regulate from the point of view of the consumer, rather than from the point of view of bank managers. Warren’s simple questions are good ones, and they’re hard to capture with rules. If banks provide valuable products to consumers, then consumers will value them. If, on the other hand, banks create products which are designed to prey on human foibles, then consumers will come to believe, in Warren’s words, that “dealing with banks is like handling snakes – do it long enough and you’ll get bit.”

Ultimately, the Consumer Financial Protection Bureau could prove an important case study for other U.S. regulators thinking about moving to a principles-based approach. Such an approach is hardly sufficient to fend of a crisis, as the UK’s Financial Services Agency can attest. But it probably stands a better chance of doing so than thousands of pages of new rules.

COMMENT

Ted K seems like a standup guy with his own brand of magic… and wish he were from up North of me… sadly he is American. Did you mean because he is so obviously bright?

And it’s loonies… after the Canadian Loon on the one dollar coin.

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Counterparties

Felix Salmon
Sep 30, 2010 04:04 UTC

20-page paper on When Microfinance Goes Public — CGAP; see also the blog

Carl Paladino blows up, curses at, nearly fights NYP editor, plus report of a photog with broken ankle — NYDN

“When you have a 10,000-word story, smooth scrolling is not a good option” — AllThingsD

How much is the New Yorker paying Dan Zalewski? — NYO

Otiose shareholder of the day, B&N edition

Felix Salmon
Sep 30, 2010 03:31 UTC

Steven Davidoff goes into lots of detail today on the close-run fight between Ron Burkle and Leonard Riggio for control of three board seats at Barnes & Noble. It was a nailbiter of a vote, and informed opinion had it that Riggio, B&N’s founder, was going to end up the loser, despite controlling a large chunk of the outstanding shares. After all, the most powerful shareholder advisory firm, Institutional Shareholder Services, favored Burkle — and big investors like Vanguard and BlackRock generally follow ISS’s lead.

This time around, however, they didn’t, which is interesting. But what’s absolutely astonishing, in a vote of this importance, is the pathetic showing from State Street, which controls about 1 million shares, or about 1.75% of the company. In a vote as close as this, that’s a massively important stake, which can easily tip the outcome one way or the other.

State Street somehow came to the conclusion that it wanted to vote for an unholy mixture of the two antagonists: for two of Burkle’s nominees, but against Burkle himself, and against Riggio’s poison-pill plan. It was a vote which would have satisfied no one — had it counted.

But then, just to add an element of utter farce to the proceedings, State Street contrived to vote its shares late, thereby ensuring that none of its votes were counted at all.

If State Street had simply intended to vote for one side or the other, the move could have been some kind of weird schoolyard attempt to curry favor with the winner had the vote gone the other way: State Street could always have said “I did vote for you”, or “I didn’t really vote against you”, or something annoying like that.

But since the attempted vote itself was so lily-livered, this looks to me like simple incompetence.

Maybe a shareholding worth $17 million or so is ultimately just not all that important to a firm the size of State Street. But it’s surely important to Burkle, Riggio, and B&N’s board, and these kind of antics come close to openly mocking the concept of shareholder democracy.

We hear a lot about the obligation that companies have to their shareholders. But equally, large shareholders have an obligation to the companies they own: to take their stake seriously, and not to play silly games by delaying borderline-incomprehensible votes until it’s too late to cast them. If this is how State Street treats the companies it owns, I wouldn’t want to entrust them with my heard-earned savings.

Update: Some good comments here, surrounding State’s Street’s status as a custodian and the difficulties it faces in learning from the shares’ beneficial owners how it should vote. But Davidoff made it sound as though State Street was going to vote all its shares the same way; is that not true? And the delay in voting seems to have been a matter of minutes, rather than days. In any case, it seems to me that voting shares is one of the few things that custodians are expected to do well, and that State Street obviously failed on that front, this time.

COMMENT

In all probability, these votes represented ETF shares, and State Street’s voting was determined by some very complex interests. I’ve voted a lot of these, and they can be done over the phone or via Internet, weeks in advance. If State Street was representing multiple voting blocks, they could have processed them as the decisions came in. However, considering that they were voted consistently across all the shares, it does not appear that they were polling the holders to determine the vote.

If they were ETF shares, State Street likely would not vote something egregiously anti-shareholder, but it also doesn’t want to get in between two powerful interests that may try and make their lives difficult. My best guess for the strange split, late vote was that State Street was trying to vote whoever was winning, was unable to get a proxy tally until the start of the meeting (as it is highly material, inside info), got a close tally, and then rushed to put in a split ticket, too late to count. They might have been sued if they did not attempt to vote at all, but this gave them some cover.

The growth of ETFs = the death of shareholder democracy.

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Mutual fund datapoint of the day

Felix Salmon
Sep 29, 2010 23:16 UTC

The Bloomberg headline is pretty clear, at least by Bloomberg standards: “Fidelity Loses Top Mutual-Fund Spot to Bogle’s Indexing.” The news: Vanguard, the home of passive investing, now has more assets than Fidelity, the home of stock picking.

But this was puzzling:

In the 10 years ended Aug. 31, actively run domestic stock funds returned 0.9 percent a year compared with an annual loss of 2 percent for index funds, data from Chicago-based Morningstar Inc. show. Fidelity’s equity funds returned an average of 2.1 percent a year versus 1.2 percent for Vanguard’s, according to Lipper.

I’d love to learn more about this ten-year outperformance of active funds over passive funds: it’s something I’ve never heard of before. Is there a survivorship bias here? How are the averages calculated?

And then there’s the enormous outperformance between Vanguard’s funds (+1.2 percent, annualized) over index funds (-2% percent, annualized). How is that possible?

Eventually, much lower down the article, a hint appears:

Indexing doesn’t explain all of Vanguard’s success. About 49 percent of the firm’s assets are in actively run funds, Rebecca Katz, a Vanguard spokeswoman, said in a telephone interview.

That shocked me. Jack Bogle’s company has half its AUM in active funds? Wow. I’d love to know how that number has evolved over time, and especially recently. After all, if Vanguard is overtaking Fidelity because people are pouring money into the actively-managed Wellington Fund and similar, that rather undermines the main thesis of the article.

And if Vanguard’s index funds have been losing something on the order of 2 percent a year while its overall performance is +1.2 percent, then that implies its active funds have been outperforming not only the indices but also Fidelity. In other words, what we’re seeing here might not be a move from active to passive, so much as a move from Fidelity’s funds, which were hot in the 80s and 90s, to Vanguard’s actively-managed funds.

In any case, if there’s a shift from active to passive — and I believe that there is — I suspect that it’s going to show up mostly in ETF figures, rather than in a preference for Vanguard funds. Vanguard’s AUM isn’t a good proxy for the popularity of passive strategies in general, partly because it has all those active funds, and partly because it’s a small player in the ETF space.

As for Fidelity, it’s surely still near the beginning of a long, slow decline. The world of fund management moves glacially yet inexorably, and although Fidelity will certainly continue to make billions of dollars in profit for many years to come, its best days are now far behind it. Vanguard’s, too, most likely. The future looks much more like it will belong to shops like Blackrock and Pimco.

(Incidentally, what’s going on with Bloomberg’s SEO and URL management? Check out the web address of the story, and it looks like something very different indeed. Most peculiar.)

COMMENT

For more on the Vanguard vs. Fidelity story:

http://investingcaffeine.com/2010/10/03/ changing-of-the-guard/

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The Larry Summers view of airports

Felix Salmon
Sep 29, 2010 20:48 UTC

It doesn’t matter whether you fly private or whether you fly commercial: you still have to fly from an airport. Which clearly annoys the Obama administration’s top plutocrat, Larry Summers. Justin Fox was in Washington on Tuesday to hear Summers give a speech on the inadequacies of US infrastructure. And he came up with a truly classic example to make his point:

“Compare the quality of our great resorts with the quality of the airports you take off from to visit those great resorts.”

It’s clearly not easy, being Larry Summers. For all his millions, he still needs to travel from A to B, and keeps on finding himself stymied. First of all he lost his Harvard town car and chauffeur when he moved to Washington, and stood out there for demanding a similar car and driver in recompense for not getting the job of Fed chairman.

And now, it seems, the poor chap has to navigate airports fit only for the masses, while making his way to luxury resorts designed to pamper the every whim of the gilded elite.

As an economist, Summers should know that it makes perfect sense for great resorts to spend enormous amounts of energy on the kind of quality he’s talking about: that’s their comparative advantage, the very heart of what they’re selling. Meanwhile, Summers isn’t really even the customer of the airports he’s passing through: the airlines are the customers, and the passengers are the goods being transported. So the airport doesn’t have much in the way of economic incentives to ease Summers’s way.

I’m sure that Summers has encountered lots of shiny new airports in his travels around the world, in comparison to which US airports look decidedly crumbly. But a lot of that is simply a function of age: it’s easy for Chinese airports to be super-modern and efficient, just because they’re brand new. (And have the advantage of very low construction costs.) It’s much harder for Delta’s Marine Air Terminal to be as Summers-friendly: it was built in 1939, long before anybody ever so much as imagined the TSA. (Indeed, it was before the planes which landed there even landed on solid ground: it was designed to service sea planes.) But because the terminal is one end of the Delta Shuttle from National Airport, I’m sure Summers knows it well.

More to the point, a lot of the money spent on shiny new airports around the world is simply wasted, from an economic perspective. National governments, especially in developing countries, like to show off when it comes to the airports where luminaries like Summers arrive. But all that expense isn’t really necessary for the smooth functioning of the airport.

Summers has been a vocal proponent of infrastructure investment, but if his idea of good infrastructure investment is cosmetic airport revamps which give him plusher lounges and colder drinks, then that’s just depressing. The really crucial infrastructure investment is in things like the national electricity grid, or NYC’s Water Tunnel 3 — expensive, yes, but decidedly unglamorous.

So let’s leave the provision of luxury to America’s great resorts, and maybe to the airlines trying to upsell Summers to a first-class seat. When it comes to infrastructure investments, there are much more important priorities.

COMMENT

So, you are a snob and an elitist if you prefer to spend hours and hours of your life in a functioning, 21st century facility instead of a dysfunctional shithole where nothing is done well?

It is like American airlines themselves. Are they crappy because they are old? No, they’re crappy because they are not run for the benefit of their consumers. The superiority of Asian carriers is about attitude; ditto their airports.

If there’s no edible food at JFK and there’s acres of sushi and champagne bars in Bangkok’s Suvarnabhumi it has nothing to do with how old JFK is. It’s because Americans don’t give a damn and Thais do. And to say that hub airports – by being opulent – don’t attract billions in revenue on many levels is highly questionable. I bet they do, and I’m sure they make money for their countries too.

But aside from that it’s also a question of pride. So American carriers and airlines are getting to feel distinctly third world. What’s the upside?

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Mandating annuities in retirement

Felix Salmon
Sep 29, 2010 15:23 UTC

Dan Ariely had an interesting column in the latest issue of HBR, talking about how Chile forces its citizens to save money and annuitize their pensions:

When employees reach retirement, their savings are converted into annuities. The government auctions off the rights to annuitize retirees in groups of 250,000…

Institutionally, Chile has cracked an age-old problem with annuities. It’s risky business to predict how long people will live, so insurance companies charge a high premium to cover that risk, which makes for an inefficient market. Annuities also suffer from an adverse selection problem… By pooling the risk, the Chilean government makes annuities an attractive business with more competition and better prices. And since everyone is forced to annuitize, the adverse selection problem simply disappears.

This is rather clever, if it’s true. But a Chilean technocrat, Axel Christensen, responded on the HBR website, saying that Ariely misunderstood what he’d been told. The groups of 250,000 are allocated to fund managers, he said, not annuity providers.

At retirement, Chileans may choose between a fixed inflation-adjusted annuity offered by an insurance company or a variable annuity from by the same company that managed their retirement account. It is an individual decision, with no pooling as you stated. The insurance companies have to bid for the contributor´s savings that increases competition, but the system does has its flaws, like the adverse selection you identified.

This doesn’t clear things up a lot: it seems to me that if you have to pick an annuity, then adverse-selection problems are minimized even if there’s no pooling at all. After all, the problem with adverse selection is that people who buy annuities will live longer than people who don’t buy annuities. If everybody buys an annuity, there isn’t a problem.

And when Ariely republished the column on his blog after Christensen had made his comment, the column was unchanged. I don’t know what to make of that: maybe Ariely didn’t see the comment, or he thinks that for some reason it’s unimportant.

Ariely says that schemes like Chile’s wouldn’t go down well in the U.S., where Americans would consider it “heavy-handed and limiting”. I daresay he’s right. But it would be great if there were some way of allowing people to voluntarily commit to annuitizing their pension fund upon retirement. One of the problems with pension funds is that nobody actually needs some big multi-million-dollar nest egg at age 65. What they need, instead, is a healthy income in retirement. But converting a nest egg into an income is non-trivial. You want to maximize your income by spending principal as well as interest, but you also want to make sure you don’t run out of money if you live a long time.

Annuities solve that problem, but they do suffer from adverse selection: people who buy them live longer than people who don’t, and so insurance companies have to make allowances for that. If everybody in a big pool was committed to annuitizing, then the insurance company could ensure that people who died at a younger age would help to subsidize those who live a very long time — as should happen in any good pension system.

This, indeed, is one of the central problems with defined-contribution pensions rather than defined-benefit pensions. When we “save up for retirement”, we’re conflating two things: the savings, on the one hand, and our retirement income, on the other. If we die before we retire, then our retirement income is zero, but the savings are still there, and the only retiree they’re likely to benefit is our spouse, if we have one.

Are there any numbers on the amount of money which is paid in to Social Security against which no benefits are ever drawn? I’d include people working in the U.S. on temporary work visas, here, as well as people who die before retirement while unmarried. On top of that, of course, people who die early in retirement end up taking out of the system much less than they put in. And the benefits of that cross-subsidy accrue to the long-lived, who need money to live on in their 90s and beyond. It’s a humane and sensible system: the living need money more than the dead do.

Off the top of my head, I can’t think of a way of replicating anything like this on a voluntary basis. I could invest my retirement savings in a fund which automatically annuitizes with everybody else in the fund when I turn 65, for instance. But if I get cancer when I’m 64, I’ll surely move those savings into cash instead of meekly accepting a short-lived income.

So the Chilean system of mandating annuitization for certain types of retirement assets makes sense to me, if indeed there is a mandate there. Maybe people could have a choice: they can invest pre-tax dollars in retirement funds which are forced to annuitize, but if they want to retain control over whether or not they annuitize, they have to invest only post-tax dollars.

And then, of course, we’d have to look to see whether the insurance companies actually improved their annuity rates significantly in response to the new mandate. Is there any data from Chile on that? All of this government interference might make sense in theory, but the real world is nearly always much messier.

COMMENT

As an aside, most of the annuities sold seem to be fixed — not adjusted for inflation. You get a much higher initial payout on a fixed annuity, but the longevity risk attached to such a product is very scary. I don’t want to be 10 years into retirement and living on half the purchasing power that I bargained for.

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