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The Incredible Vanishing Takeaway from the CBO Report on Minimum Wage

March 10th, 2014 1 comment

I’m surprised that nobody highlights what for me is the key takeaway from that report.

They predict, with a $10.10/indexed increase:

Low-end incomes increase $19 billion.

High-end incomes decline $17 billion.

For a net GDI increase of $2 billion.

Table 1, page 2:

Screen shot 2014-03-10 at 12.18.13 PM

Pie gets bigger, all that rot.

The increase is presumably explained by the last phrase in footnote F to that table:

increases in income generated by higher demand for goods and services.

Cross-posted at Angry Bear.

Why the Fed Hates Inflation: 1.2 Trillion Dollars of Why

March 10th, 2014 38 comments

Upate: Those who have qualms about the methodology and underlying assumptions here would do well to consider Thomas Piketty’s thinking on page 210 of Capital in the 21st Century. He distinguishes between “real” and “nominal” assets, pointing out that real asset values climb along with inflation and growth, while nominal asset values don’t.

A simple rule of economic arithmetic that economists seem to studiously ignore:

Inflation transfers real buying power from creditors to debtors, with nary an account transfer visible anywhere on anyone’s account books. Inflation means that debtors pay off their loans over time with less-valuable dollars — dollars that can’t buy as much bread, butter, and guns.*

Higher inflation causes, is, a massive transfer from creditors to debtors.**

And the Fed is run by creditors. Inflation is, always and everywhere, very very bad for them.

How bad? Look at the fixed-income assets and liabilities of financial corporations:

Screen shot 2014-03-10 at 8.41.15 AM

Financial businesses are net creditors to the tune of $9-$14 trillion dollars.

If inflation was 1% higher than it is, it would transfer between $90 and $140 billion dollars to their debtors. Every year. For every extra point of inflation.

Add it up: an extra point of inflation over the last ten years would have cost financial businesses $1.2 trillion dollars.

It’s enough to get a banker’s attention.

And that’s before you even consider the Fed powers-that-be in their roles as equity shareholders, and the Fed’s dual mandate. By emphasizing low inflation over low unemployment — and stomping on growth whenever the bogieman wage inflation threatens to rear its head*** — the Fed maintains a pool of unemployed and weakly compensated employees that cripples labor’s bargain power and empowers the steady growth of corporate profits over labor earnings.

It kinda makes you think about Mankiw’s fourth principle of economics: “People respond to incentives.”

I’ve said it before: if it weren’t for inflation, the rich really would own everything, instead of almost everything.

* Some will caveat: this is only true of unexpected inflation, because contracts are written with expected inflation in mind. The proper response: since the future is impossibly uncertain, all changes in the inflation rate are unexpected.

** Meanwhile economists fetishize notions about menu costs and the like, which in their largest estimations are an order of magnitude smaller than the inexorable arithmetic effect described here.

*** It’s happening now.

Cross-posted at Angry Bear.

Dean Baker on Piketty’s Capital: Or, How FDR Proved Marx Wrong

March 10th, 2014 5 comments

Thomas Piketty’s important new book, Capital in the Twenty-First Centurypredicts a bleak future of increasing concentrations of financial assets in few hands, stagnant wages and labor share of income, and declining returns to capital — secular stagnation. He enunciates and demonstrates the part of Marx that Marx got exactly right.

But Dean Baker points out where Marx got it wrong, and where an optimist  can hope that Piketty’s got it wrong. By changing our institutions, laws, and regulations — the rules of the capitalist game — we can head off that seemingly inevitable downward spiral. Dean gives several examples of institutional changes that could prevent or even reverse it, from patent laws to cable monopolies to financial-transaction taxes.

Which prompts me to finish this post, started long ago, and to point to Steve Randy Waldman’s eloquent rejoinder to the pessimistic view. Steve ingested this contrary view with his mother’s milk:

I remember pride in my businessman father’s voice when he explained to me that this [pessimistic view] was wrong. Marx had underestimated the ingenuity and flexibility of capitalist societies, and particularly of the United States during the New Deal. Government intervened to solve Marx’s collective action problem, enabling capitalists secure their enlightened self-interest by keeping a distribution of prosperity sufficiently broad that the predicted collapse could be avoided. … To my father, American capitalism’s adaptability and ingenuity had proved Marx definitively wrong, in the best possible way — by producing a stable society that served the vast majority of its citizens, while countries whose politicians had followed Marx’s prescriptions grew into monsters.

So Marx was wrong both ways — economically and politically — even while he was right. The capitalist tendency to concentrate financial assets at everyone’s expense is inevitable – unless we as a society decide to do something(s) about it.

You’ll find this very same thinking elsewhere, for instance in this line from Joseph Stiglitz’s review of Robert Skidelsky’s Keynes: The Return of the Master.

Keynes’s great contribution was to save capitalism from the capitalists

And in this 2001 article from The Hoover Digest:

How FDR Saved Capitalism

This is a clear, cogent, and coherent story, but one I rarely hear from the left. I’d like to suggest that progressives should be moving this rather moving narrative to the front of the rhetorical bookshelf.

Now if someone could just convince Obama to go all FDR on us…

Cross-posted at Angry Bear.

The “Global Savings Glut” Is Conceptually Incoherent. “The Economy” Cannot “Save”

December 13th, 2013 7 comments

When you hear people talk about the Global Savings Glut, you can be quite sure they are talking about monetary “savings” — the global aggregate stock of money embodied in financial assets.

What they don’t seem to realize is that the net holdings of global financial assets minus liabilities — claims and counterclaims — is always exactly zero. By accounting identity.

Every financial asset is a claim against another party. For every asset (credit, claim) in the account of a financial-asset holder, there is a equal and opposite liability (debit, counterclaim) in the account(s) of some other party or parties.

Sum up all those assets and liabilities, and you get zero. The gross quantity of financial assets (and liabilities) can increase, but the net quantity always remains the same.

Here’s a physical example that might help make this clear:

Imagine an organism floating in space. It has one input (sunlight) and one output (heat). It’s able to convert the sunlight into stored mass and energy, with some loss in the form of heat. So it can grow, get larger, storing up mass and energy in various physical/chemical forms.

Now you could call that “saving,” but it’s probably better described as “growing.”

Now suppose that for whatever reasons, parts of that organism periodically run short of resources, while others are holding more than they currently need. The surplus holders can give resources to those who are short resources. The receiver notes down a new tally in a financial account book — a debt or liability. The giver records a promise, an asset. An IOU. A credit.

You’ve just created money.

An aside: it drives me crazy when people say that liabilities are money. They’ve got it exactly backward. When you’re holding someone’s IOU, you’re holding an asset, a credit. Think: a Target gift card. They’ve got an offsetting debit, a liability, recorded on their books. When you give the Target gift card to your brother-in-law, you’re not transferring the liability; it remains unchanged on Target’s books. You’re transferring a credit. Money is credit. I think that everyone will agree that in normal vernacular speech, money is an asset, not a liability.

Two new things are created by that transaction in space, ex nihilo: two tally entries on accounting books – the credit and the debit, the asset and the liability. (But no “real” things are created.) Together they increase the gross quantity of financial assets and liabilities (which are just tally entries, often represented by physical tokens), but have no effect on net aggregate “money savings.”

This transaction, of itself, has no effect on the organism’s creation or accumulation of new mass and energy from sunlight, or the loss via heat. It just changes different parts’ future claims on that mass and energy. So if you want to call that physical accumulation “saving” (rather than “growth”), you have to say that the transaction has no effect on saving.

And if you want to call the accumulation of accounting tallies “saving” (“money saving,” which is what most people think of when they hear the word), you have to say that the transaction also has no effect on net saving. There is no more net money in the world than there was before the transaction (though there is more gross money). That net number is still, and will always be, zero.

This is even true if a government prints, say, dollar bills and helicopter-drops them over the countryside. People pick up those credits, so it seems like there’s more “money.” And for the picker-uppers, there is — they have more credits against government liabilities (taxes and fees). But since they can use those credits to pay off liabilities to the government, the government has reduced its ability to demand the already-existing dollars out there through taxes.* While it’s increased the amount of credits out there, it’s reduced its power to demand (claim) existing credits back by an equal amount.

Once again: net zero.

So: there are massive quantities of financial assets out there. Does this mean there’s a Global Savings Glut? No: because there are equal and offsetting quantities of financial liabilities.

Should we call that a Global Liability Glut?

Net global money “savings” (financial assets minus financial liabilities) is always zero. If we’re talking about money savings, there can never be a Global Savings Glut. It’s an incoherent concept.

I’ll leave it to my readers to ponder what that means for the notion of “loanable funds” — a notion you’re invoking every time you use the term “Savings Glut.”

What we have instead of a Global Savings Glut is:

1. A Global Labor Glut: more human effort and ability available than is needed to provide goods that provide high aggregate marginal utility, and,

2. A global financial and political system that — despite the reality of #1 — fails to transform that abundance into maximum aggregate human utility via reasonable distribution of that abundance.

* Used to be, you had to give the lord of the manor one of your cows, or some of your corn, every year. When he issued money ex nihilo – probably to pay soldiers — and started accepting that credit instead for taxes, he sacrificed some of his claim on your cow. He exchanged one asset/credit/claim (for your cow/corn) for another (the solders’ services) .

Cross-posted at Angry Bear.

 

Brad DeLong Sez It! Inequality Kills Growth

December 11th, 2013 9 comments

Okay well he doesn’t say it quite so succinctly.

Or categorically.

In fact he hedges his statement several ways from Sunday, and uses a hundred-and-twenty-three-word paragraph to do so:

The near-consensus view over here at Equitable Growth and at the Equitablog is that U.S. economic growth over the past generation has been very disappointing. Too-much of our economic growth has been wasted producing the wrong stuff and delivering it to the wrong people, and we have failed to properly and productively invest at the rate we could in people, machines and buildings, ideas and organizations, and institutions. The hunch around here is that these two are tightly coupled: that the rapid rise in inequality as a result of the derangement of incentives has both decoupled the links between higher measured real GDP and human economic welfare and material well-being, and has also slowed the growth of our potential to produce real GDP.

I know: he’s being responsible and careful not to overstate the case or torture the known evidence to date.

But still. Goddam liberals.

Happily, he then passes you on to Ashok Rao and Evan Soltas, who comprehensively eviscerate the inequality-causes-growth arguments of Scott Winship.

So at least we’ve got full-throated arguments that the arguments against the inequality-kills-growth position are hooey. We’re getting there.

Cross-posted at Angry Bear.

 

 

Shiller on Fama: “maybe he has a cognitive dissonance”

December 11th, 2013 No comments

Here, emphasis mine:

It must affect your thinking somehow that they really believe in markets. I think that maybe he has a cognitive dissonance. His research shows that markets are not efficient. So what do you do if you are living in the University of Chicago? It’s like being a Catholic priest and then discovering that God doesn’t exist or something, you can’t deal with that, you’ve got to somehow rationalize it.

Cross-posted at Angry Bear.

Equality and Growth Is Breaking Out All Over!

December 7th, 2013 No comments

Sadly, not in the real world. But in the econoblogosphere. Much of that is arguably thanks to the newly launched Washington Center for Equitable Growth.

Traveling and family time, so I can’t do a big writeup, so just a few somewhat randomly chosen links:

Brad Plumer: Is inequality bad for economic growth?

Jared Bernstein: The Impact of Inequality on Growth

David Howell: The Great Laissez Faire Experiment

Much of what we’re hearing (even from said Center) is still of the weak-kneed or even actively dismissive variety that is the best we’ve been getting out of the liberal establishment for lo these many years. But we’re starting to hear some full-throated arguments with strong theoretical and empirical grounding.

For instance here’s a new paper from Barry Z. Cynamon of the Federal Reserve Bank of Saint Louis and Steven M. Fazzari of Washington University: Inequality, the Great Recession, and Slow Recovery. Nice summary here.

We show that the rise of inequality that began around 1980 resulted in large part from a slowdown of income growth for the bottom 95 percent of the income distribution, that is, for just about everyone.

And for those who still complain that ironclad, irrefutable evidence is lacking, here’s Steve Randy Waldman explaining why you should STFU. Here just the conclusion; read the whole thing:

You can tell me the “jury is still out” on those. But the jury is not out, it never reasonably has been out, on the reality of distribution-related MPC effects. I’ll disagree, respectfully, if you claim that for supply-side or libertarian reasons we should ignore that reality and prefer other means of supporting demand (or that we should not worry about supporting demand at all). But don’t say “it’s unclear” whether income distribution affects aggregate demand, holding other factors constant. Of course it does.

Or in my words, the arithmetic of income/wealth concentration and the MPC effect is straightforward and inexorable. (But of course that doesn’t mean it’s the only effect we need to consider.)

In passing, he also does a much better job of eviscerating Paul Krugman’s (Milton-Friedman-based) theoretical argument against what Paul calls the “underconsumption” theory than my feeble effort (though do look at the graphs in that post).

Of course, you had to be an idiot to believe that the Permanent Income Hypothesis fully accounted for MPC effects. Undoubtedly consumption smoothing explains a part of cross-sectional variation in marginal propensities to consume, but you don’t need careful empirics to prove that it can’t explain all of them. Why not? Because not consuming leaves a residue, something called savings, which becomes wealth. If across the income spectrum everyone spent and saved in equivalent proportions, we’d expect no cross-sectional variation in terminal wealth as a proportion of lifetime income. But in real life, much of the bottom of the income distribution dies with zero or negative wealth (i.e. they stiff their creditors), while those near the top of the distribution leave large bequests. An intergenerational Permanent Income Hypothesis could only explain this if poorer people expect their kids to be much wealthier then the children of moguls. Which is not so plausible.

Cross-posted at Angry Bear.

“A liberal is someone who doesn’t know how to take his own side in an argument.”

December 5th, 2013 No comments

This quote is right up there with the great Will Rogers line: “I don’t belong to an organized political party. I’m a Democrat.”

Matthew Yglesias opens his recent post with it. I don’t know if he coined it, but if so, A Huge Kudos. It’s utterly and painfully true. A deservedly iconic statement.

Here’s what he’s talking about (emphasis mine):

Clinton administration official Alan Blinder and co-author Mark Watson [look] at the well-established fact that GDP growth under Democratic Party presidents is more rapid than under GOP Presidents, and concludes that it’s all just a coincidence.

Except they don’t mount a very strong argument for that conclusion.

Even Koch-funded Tyler Cowen’s headline (“Why is there superior economic performance under Democratic Presidents?”) stipulates without caveat to this Blinder-Watson statement:

The superiority of economic performance under Democrats rather than Republicans is nearly ubiquitous; it holds almost regardless of how you define success.

This is a bare, uncontestable fact. (Though conservatives do try…)

The most immediate and obvious (but not inevitable) conclusion from this fact is that Democratic policies are economically superior; they result in faster growth and more prosperity. At the very least, it’s unequivocal that in advanced, prosperous countries over many decades, more taxes/government spending do not result in slower growth.

This the strongest, most powerful argument liberals/progressives/Democrats can make. It’s the kind of (admittedly shallow but) compelling story that conservatives/Republicans have deployed brilliantly, unremittingly, and with extraordinary success for decades — despite a desperate paucity of good evidence supporting their story.

But for whatever reasons, Democrats won’t take up this winning rhetorical gauntlet: “we are the party of growth, prosperity, and true economic freedom.” They keep whining about equity/equality — which is great in my book, but really: Americans just change the channel.

Leading liberal economists are horrendous in this regard. There is a solid, cogent theoretical and empirical argument that in prosperous countries, wider distribution of income and (especially) wealth — more equity/equality, arrived at through whatever institutional means — delivers faster growth, and more prosperity for all. Bigger pie. All boats rise. All that rot.

Liberal economists could be arguing this strong case:  equ(al)ity causes economic efficiency, growth, and prosperity. Or put another way: widespread distribution of  wealth and income both causes and is widespread prosperity. Or, the weak (and more accurate) form: excessive inequality — extreme concentration of wealth and income — quashes growth.

There are unlimited, rich, theoretical and rhetorical grounds to explore here, largely untouched in mainstream economic discussions. Here just two out of dozens:

1. A higher minimum wage incentivizes producers to invest in productive technology, driving prosperity even in the old Solow growth model.

2. Widespread prosperity gives producers more choice in which products to develop. (Libertarian choice-fetishists, take note.) Would Apple have had incentive or opportunity to develop the iPhone absent a market of hundreds of millions in the prosperous middle class? Units sold matters, not just dollar volume. (Think: Amortization of fixed costs.) Absent that widespread demand, would Apple be producing diamond-studded dumb phones instead?

But leading liberal economists don’t just ignore the strong argument for the economic efficiency of equity, they actively pooh-pooh it. They don’t just accede to but support the hoary old idea that inequality = faster growth/more prosperity, before the argument has even begun.

They leave the strongest rhetorical (and theoretical) argument for progressive policies lying on the floor, mouldering.

And as Matthew points out about Blinder/Watson, their counterarguments are remarkably weak and armchair-conjectural, mostly relying on some particular and arguably inapplicable empirical measure rather than a deeply grounded theoretical model or broadly researched empirical evidence.

Yesterday I took on the strongest argument I’ve found* against what Paul Krugman calls the “underconsumption” story (not a good moniker, IMO), an argument from…Paul Krugman. I found it to be seriously unconvincing. You can draw your own conclusions.

Aside from Krugman’s argument, here’s what we hear from leading liberal economists. You can draw your own conclusions about these as well:

Paul Krugman:

December, 2008: There’s no obvious reason why consumer demand can’t be sustained by the spending of the upper class — $200 dinners and luxury hotels create jobs, the same way that fast food dinners and Motel 6s do.

November, 2011: …any such story, basically an underconsumptionist story, would seem to depend on the notion that rising inequality has led to rising savings. And you just don’t see that.

January 2013: …we do not know how rising inequality interacts. There are more poor people who are liquidity constrained but they have less spending power, so we are not sure how it goes.

 Brad Delong:

Replying to me, two days ago: I would expect greater inequality coupled with a higher propensity to save on the part of the rich to drive all asset yields down. Yet what we have seen has been a steep, prolonged fall in Treasury bond yields while stock-market equity yields have plateaued at about 5%/year. (I replied to this here.)

Jared Bernstein [and Paul Krugman, channeled by Kevin Drum]:

January, 2013: “I wish I could sign on to this thesis,” says Paul Krugman, “and I’d be politically very comfortable if I could. But I can’t see how this works.” Me neither. I spent a couple of months trying to write a magazine piece based on this thesis, and I finally gave up. By the time I was done, I just didn’t believe it. So I gave up and spiked the idea. [I've pinged Kevin repeatedly asking for a post explaining why he gave it up -- I'm really dying to know -- but all I've seen is this:]

November, 2013: “I’ve been surprised at just how much the rich can spend,” said Jared Bernstein, former chief economist to Joe Biden, when I called to ask him about this last year.

“I’ve been surprised at just how much the rich can spend”? “$200 dinners and luxury hotels create jobs”? This is the counterargument?

Why is there such strong resistance to this compelling story among liberal economists? One would expect them to embrace it wholeheartedly (though not blindly or unequivocally).

My very brief, condensed, and quite possibly quite wrong explanation: even these brilliant liberal economic thinkers are crippled by fundamentally incoherent, traditional mental models of “capital” and “saving,” tenuous tenets of classical economics that IMHO should have been thoroughly eradicated by the outcome of the Cambridge Capital Controversy — but which have continued their mental sway, zombie-like, for decades. (That, plus oddly excessive allegiance to Friedman’s rather iffy lifetime-income hypothesis.)

They don’t fully grok that saving money is not saving corn (QTC, actually; saving money means that corn is not produced, so cannot be saved), and that financial assets are not “capital” (roughly, they’re claims on capital).

But they do understand on some level: what Krugman calls the “underconsumption” story is a direct challenge to that mental model, to the troubled tenets that they have been (unconsciously?) promulgating for their whole careers. Few humans of a certain age relish the prospect of rethinking their mental models from the ground up.

But really, they don’t need to do that. They can simply drop their weak, rather knee-jerk objections to the idea, embrace its powerful arithmetic appeal as a potentially useful rendering of how economies work, and explore it using the rigorous theoretical and empirical methods in which they are so competent and well-versed. Here’s one place to start (HT: Stone and Steve Randy Waldman).

It’s time for liberals to start taking their own side in this argument.

* I forgot to mention one other argument in that post: the strong (market) monetarist position that different distribution wouldn’t matter (nor would anything else, for that matter) because the Fed would just step on faster growth. Nick Rowe makes essentially this argument in his response to one of my previous posts on this subject.

Cross-posted at Angry Bear.

Wealth Concentration and Secular Stagnation

December 3rd, 2013 1 comment

I’m rather terrified to find that Brad DeLong has replied to my recent post on this subject.

I would expect greater inequality coupled with a higher propensity to save on the part of the rich to drive all asset yields down. Yet what we have seen has been a steep, prolonged fall in Treasury bond yields while stock-market equity yields have plateaued at about 5%/year:

To reply to this specifically: I would point out that the conversation going around is about SecStag post-1980. And we did see a “steep, prolonged fall” in equity yields over that period.

Why did it stop at 5% while Treasuries hit the floor? I’d suggest a pretty simple explanation: it’s because many/most financial investors evaluate “risk” based on historical price volatility including Sharpe ratios and the like (arguably inappropriately, but nevertheless). Equity prices are historically more volatile than Treasury prices, so investors demand a minimum yield in return for that (perceived) risk. Since they measure that volatility looking back over many decades, the risk perception doesn’t change much. There’s a floor. If they can’t get that minimum return for perceived risk, they’ll just buy bonds — especially Treasuries, which have zero risk if held to term.

So basically, I don’t think post-1990 equity yields tell us much about the secular stagnation story.

There are, though, a lot of good stories explaining how extreme wealth concentration and the (true) truism of declining MPC in a high-productivity, affluent economy could deliver the secular stagnation symptoms we’ve seen over recent years and decades. As usual, Steve Randy Waldman tells one of the best stories, and tells it best. Really, read the whole bloody thing, it’s brilliant as usual, impossible to choose what to excerpt.

I told a story here, as well. It’s only a partial story, but it emphasizes what I think is a key driver: the turnover, velocity of financial assets: wealth.

Paul Krugman’s response to Steve’s post points out where I think even liberal and saltwater mainstream economists are off the tracks.

…any such story, basically an underconsumptionist story, would seem to depend on the notion that rising inequality has led to rising savings. And you just don’t see that. Here’s private saving as a share of GDP:

Obviously it jumped up after the housing bust, but until then it was actually declining, and even now it’s below historic highs. I just don’t see how to make the underconsumption story work.

I want to suggest that this is not the best measure to be looking at, for many reasons theoretical and empirical that I won’t burden you with here. Rather, look at spending (aka not-saving) relative to the stock of financial assets (“money”).

Here, Personal Consumption Expenditures as a percent of Household Financial Assets:

You could use many other, different measures to flesh out this picture, but the picture’s pretty clear. People are turning over their wealth much more slowly.

I think this picture is very much in keeping with the notion that increasing wealth concentration and people’s declining marginal propensity to spend out of wealth results in less spending (relative to a more-equal counterfactual), hence less production, less surplus, less accumulation, and less saving. Less GDP. Less prosperity. And far less aggregate utility. Stagnation.

I find this wealth-turnover/velocity story especially compelling because the upward redistribution and increasing concentration of wealth over recent decades has been utterly off the charts, completely dwarfing the already eye-popping increase in income concentration.

Cross-posted at Angry Bear.

Elephant in the Room: Upward Redistribution, Concentrated Income and Wealth, and Secular Stagnation

December 2nd, 2013 3 comments

Update: Brad DeLong has replied, and I have replied to him.

Dean Baker quite rightly takes Robert Samuelson to task for his op-ed on the causes of secular stagnation.

Samuelson:

The problem might not be a dearth of investments so much as a surplus of risk aversion. For that, candidates abound: the traumatic impact of the Great Recession on confidence; a backlash against globalization, reduced cross-border investments by multinational firms; uncertain government policies; aging societies burdened by diminishing innovation and costly welfare states.

Dean’s right that this doesn’t even touch on perhaps the most likely explanations. But Dean’s explanation also misses the the 800-pound gorilla:

Actually the most obvious cause for most of the shortfall in demand is the trade deficit.

Brad Delong, likewise, reels off four possible explanations today while ignoring what seems to me to be the most obvious one.

How about a three-decade upward redistribution of income, and massive increases in wealth and income concentration?

Add declining marginal propensity to spend out of wealth/income, and you get a so-called “savings glut” (aka “not spending”) and secular stagnation.

The arithmetic of this is straightforward and inexorable. Extreme inequality and upward redistribution kills growth.

Of course this effect doesn’t exist in a vacuum. (Only a Republican would point to this and say, “Look! It’s obvious.”) But theoretically and arithmetically, it’s huge.

Why is it not even part of the conversation?

Cross-posted at Angry Bear.