Morning Report

Vital Statistics:

Last Change Percent
S&P Futures 1275.5 -7.1 -0.55%
Eurostoxx Index 2462.2 -14.720 -0.59%
Oil (WTI) 93 -0.960 -1.02%
US Dollar Index (DXY) 75.083 0.052 0.07%
10 Year Govt Bond Yield 2.34% -0.05%

Markets are giving back a little after yesterday’s furious rally. By all accounts, this euro deal does not solve the problem, it just is a downpayment. Sovereign credit default swap levels declined yesterday, but not dramatically. EURIBOR / OIS (an esoteric calculation that measures fear in the banking system) did not tighten yesterday as one would expect. That is a caution flag.

Volatility is a characteristic of bear markets, which is why trading them is so hard. Yesterday’s rally certainly had the feeling of bears throwing in the towel, and maybe some of it was end of the month window dressing. I am still of the view that we are in a secular bear market in equities that started in 2000 and probably has a few years left to run. That said, earnings have been increasing as the equity markets have marked time, and the dividend yield on the S&P 500 is nearly that of the 10-year bond. Yet people continue to sit in the 10-year. Ben Bernake must be tearing his hair out.

In economic data this morning, personal incomes were up .1% in September, while the employment cost index was up .3% for 3Q. Spending was up .6% in Sep while inflation remains subdued. The WSJ has an article this morning discussing the dynamic between incomes and the employment cost index. Wages aren’t rising, but employees are getting more expensive. It has all sorts of effects not only on employment and productivity levels, but also income inequality.Link

66 Responses

  1. "That said, earnings have been increasing as the equity markets have marked time, and the dividend yield on the S&P 500 is nearly that of the 10-year bond. Yet people continue to sit in the 10-year. Ben Bernake must be tearing his hair out."Real estate markets in Austin and elsewhere are good for buyers seeking income return, too. Prices are down but rents are UP, way UP, and promise net returns of 5-7% APR after all maintenance costs, without even factoring in the potential depreciation advantage.What keeps investors from moving out of Ts?My guess is "fear of loss of principal".That is what makes my wife, the CPA with MS in Taxation, continuously tell me we are not going to buy rental units "at this time", while we hold low performing cash and bond instruments.*****************OT – Resident WaPo humorist Milbank called Cain "the dog who caught up with the car" on POTUS this morning.**********************

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  2. Yves Smith has something to say regarding the European rescue.But it is a particularly bad sign to see disagreement within the officialdom about the just-annnounced deal. The Telegraph (hat tip reader Jim Haygood) reports that the Bundesbank, which has considerable influence on the ECB, is trash talking a critical part of the pact: "Hours after an all-night summit of euro governments ended, flaws began to emerge in a package that was billed as a “grand and comprehensive” solution to the European debt crisis. The concerns were led by Germany’s powerful central bank, which expressed fears that a plan to leverage a €440 billion eurozone rescue fund to amass a “fire power” of €1 trillion, or £880 billion, resembled the risky finance methods that triggered the crisis in 2008. EU leaders are expected to sanction the establishment of a so-called special purpose investment vehicle, or SPIV, to be set up in the coming weeks. It is aimed at attracting investment from countries such as China and Brazil. Jens Weidmann, the president of the Bundesbank and a member of the European Central Bank, sounded the alarm over the plan to “leverage” the fund by a factor of four to five times without putting any new money into the pot."We’ve pointed out the only way this scheme might work is if it attracts enough new money, which as the Telegraph indicates, is presumed to be the BRICS (I gather the sovereign wealth funds are too smart for this sort of thing, and even if they went along, their aggregate contribution would not be big enough).

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  3. Here's a really fascinating piece in The Nation from earlier in the week that I somehow missed. It's long but worth the read.It took three decades of lopsided borrowing to produce the breakdown, Kumhof and Rancière explain, but the ominous trend was evident for years. In the early 1980s the 95 percent had debts equal to about 65 percent of their income. By 2006 that figure had risen to 140 percent. They were devoting so much of their paychecks to making payments on old debt—credit cards, equity lines and mortgages—there was nothing left to make the payments on new debt. Defaults and bankruptcies were already swelling. The collapse came when creditors grasped the danger and started selling off their mortgage bonds and loans to consumers.It seems odd that the financial interests, with their brilliant analysts and high-speed computers, didn’t see the nature of the crisis until it was breaking over their heads. They may have been blinded by the fabulous wealth they were harvesting. Kumhof and Rancière point out that the same ominous combination—a run-up of debt accompanied by gaping inequality—preceded the crash of 1929. Greed may inspire optimism.But why did ordinary debtors fall into this trap? The standard line is that they, too, were blinded by greed, eager for consumer pleasures they couldn’t afford. This is true for some, but the explanation libels most working people. Wage stagnation started in the 1970s and spread widely in the Reagan era. Typically, as incomes faltered, families faced two bad choices—either go deeper into debt or surrender their middle-class standard of living. Naturally, most people tried to hang on to what they had.The responses to this crisis are well-known. People worked more—women and teenagers entered the workforce, family members took two or three jobs. And they borrowed more, paying the bills with credit cards. In these terms, average families were making heroic efforts to maintain their standard of living. They were doomed to fail unless dramatic economic reforms improved their lot. University of California economist Clair Brown predicted nearly two decades ago in her landmark study of American consumption that sooner or later working people would have to retreat to lower levels of consuming. Working harder and borrowing more had sustained them for twenty years, but neither of these remedies was repeatable. At some point the merry-go-round would have to stop.The retreat is now in full flight. Homeownership has declined by 1.1 percent over the past decade. Wages are stagnant or falling. Foreclosures are tearing through communities, and falling home prices are destroying family equity. Americans, as Whalen says, are experiencing the reverse New Deal.There are other assertions in there that will cause some people's hair to stand up on the back of their neck.Graeber thinks Judaism’s reform laws were probably influenced by the Babylonians, who issued “clean slate” edicts when excessive debt accumulation threatened social crisis. Graeber notes that nearly every society, ancient and modern, shares moral confusion about debt, with contradictory attitudes. On the one hand, “Paying back money one has borrowed is a simple matter of morality.” On the other hand, “Anyone in the habit of lending money is evil.” Americans share this ambivalence.Here is what Americans can learn from the ancients: severe inequality of wealth and income is not just a question of morality. Inequality is the fundamental source of the disorder that leads to financial crisis and chokes off the economy. Ancient religious principles like the limits on interest rates were a practical way of maintaining balance in economic life. Taking away those rules—as US politicians did when they repealed prudent regulations of banking and finance—in effect authorized the growing inequality that eventually leads to chaos.

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  4. If income inequality could be reduced to a level you find fair, and let's say it could happen rapidly, what beneficial things would occur as a result of this inequality reduction, and what kind of time frame would it occur in?

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  5. Troll, I am on the road again with limited ability to surf and blog. I know you are a Glenn Reynolds guy like me. Be sure you look at (and try to grab if you can) the links he had yesterday again refuting the "growing inequality" dogma. As is well known by now, I am an inquality denier. I think the whole hullabaloo is a sham.

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  6. QB, saw those, thanks!

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  7. I guess I am just a shameless oligarch at heart. Or more like a stooge of oligarchs. So I have been told.

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  8. if Troll is also a stooge, can I be the third one? dibs on Moe.

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  9. "…a stooge of oligarchs."You lucky bastard! I'm still a bootlicker of oligarchs, yearning for a promotion to Flunky. Stooge is still just a dream for me.Sigh.

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  10. How about "Henchman"?

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  11. "stooges of oligarchs"great band name, btw

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  12. Alas, "Henchman" will always be out of reach for me. The most I could ever expect to achieve, given my limitations and the society we live in is "Toadie."As Yoda said, "Dare to dream!"

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  13. Stooge, lackey, minion, pawn, b*tch–these we could potentially be. But henchman might presume too much stature and dignity, because we have to be both victims and tools. Imo

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  14. As for band names, Zydecho Trainwreck would be my choice.

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  15. I suppose I should aspire to Undergroup Vice Captain. My dad would be so proud.

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  16. Or is it Subgroup Vice Undercaptain.This deposition is getting boring.

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  17. Did you guys confuse me with Liam or something?McWing, I don't think it matters too much what I think since it's all just a pipe dream to rescue the middle class. If we all wait long enough the middle class will pay off their debt the old fashioned way and hopefully the businesses that rely on the them will still be around.

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  18. ack, it's lms! everyone act busy and productive. [shuffles medpac papers.]

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  19. I didn't say who called me that. : )I am the 94.3%!

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  20. Heh. I am actually listening to an eminent doc being questioned by a biglaw lawyer. Wrestling match over stats and the like.

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  21. Fair enough Lms, it's just that I'm still struggling with why the income inequality we have now is bad and what less of it would do that would be beneficial.But I'm still working hard! (picks up phone and starts shouting about the TPM Reports cover sheet.)

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  22. QB, at least your not in church posting comments.

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  23. I have a fairly dim view of game theory in general, but here is a question for some game theory expert.The usual liberal strategy is to get the 51% to gang up on the 49% (as seen by us right wingers). Now OWS is (it imagines) getting the 99% to gang up on the 1%. But what is the optimal cut-off point for a pitch fork revolt to dispossess the upper crust?

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  24. Homer and the congregation pray. The kick is good, and Homer stands up, yelling, “It's good! It's good!'' All eyes turn to him. “It's good…to see you all in church.'

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  25. lmsinca- Your batting average is far higher than Liam's. We do appear to have stumbled into some conservative/libertarian version of the drum circle where affirmations are replaced with thinly veiled insults poorly disguised as self-deprecating comments.

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  26. "rescue the middle class"in all honesty, I don't know what that means anymore (the middle class, that is). I think I have a middle class lifestyle. But I'm also very aware of the fact that i'm much closer to that 1% than the rest of the country. I was reading one of those "does this make one rich" articles and was left with the thought that "if a savings account, some retirement savings, and a college fund for the kids makes one rich" we are all screwed.

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  27. "thinly veiled insults poorly disguised as self-deprecating comments"We try, but what can you expect from retrograde neanderthals like us? 😉

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  28. "We try, but what can you expect from retrograde neanderthals like us? ;-)"Touche! I'm going to head over to the PL to dig up some insults. That job would be easier if Cyrus, or another of your geeky childhood heoroes, were to make an appearance.

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  29. I know the 1% is only above an AGI of $350K or thereabouts, but then it also encompasses the millionaires and billionaires. The AGI of 90% is barely above $32K. I think most of us are in the other 9%, but it's no wonder so many people used their houses as a cash cow all these years.Wages have remained stagnant for most people while the upper crust have seen pretty significant gains. I don't really understand why this is acceptable to so many of us. And since I have no clue how to fix it or believe there's really any will to fix it, we wait and hope for the best I guess. We should probably all be working in the health care or energy industry for the future.

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  30. Hmmm…all I got was to call you part of the Confederate Party….so there.

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  31. I'm pretty sure I'm not terribly close to the 1%. I think I'm pretty middle-middle class, except for having some money set aside for the kid's college. There are plenty of months where I'm juggling to pay the bills. "But what is the optimal cut-off point for a pitch fork revolt to dispossess the upper crust?"Anybody who has a dollar more than you. That's always the problem. 😉 The more serious perhaps just want to see more entitlements, more progressive taxation, more government spending on education and healthcare and whatnot, and feels we could be doing a lot more than we are, and their approach is to protest. "I'm still struggling with why the income inequality we have now is bad and what less of it would do that would be beneficial"I think the answer to that is that high income inequality leads to a perception of the 1% as Marie Antoinettes, living luxurious lifestyles unaware of the suffering of others, and, dammit, they're going to hear about it. There's also a sense that, in the labor market, we're all working towards to manufacturing of the widgets or the processing of the paper, yet some people seem to benefit not twice as much, or five times as much, not ten times as much, but 200-times as much, and there overall contribution doesn't seem to justify it, so, dang it, why can't they get a little less and the folks on the front lines get a little more? Dang it. And it it gets mixed up with other stuff. We're a rich country, we should be able to help people out "more than we do". But there are people suffering and who can't get healthcare when the super rich are building opulent palaces and buying yachts. It's just not right! And so forth. Or it could be that the greener grass in your neighbor's lawn? That's income inequality. When the dog with a bone in his mouth saw another dog, like him, only with a bigger bone in his mouth in the reflecting pool . . . that's income inequality, too. I doubt there is an acceptable level of income inequality at the end, because there have always been complaints about income inequality, even when it was much lower than it is today. I'm not sure there is a point where everyone will be satisfied, but when people feel like they can't get a job and they are struggling to make ends meet and their retirement lost a bunch of value, they're going to be a lot more worried about income inequality than they would be if the economy were humming along.

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  32. ""if a savings account, some retirement savings, and a college fund for the kids makes one rich" we are all screwed."I've got enough retirement savings for at least two months. But I do have college funds set up for the kids (priorities). I'm rich! Rich, I tell you.

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  33. McWing is the King of self-deprecation, I've complimented him many times on those skills. I've actually kind of missed it over here……

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  34. Don't have kids, kept my retirement in the divorce (#1 priority). I'm rich! Rich, rich rich!!!!!So there, Kevin!

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  35. " I don't really understand why this is acceptable to so many of us."The same reason rain is acceptable. What are you going to do about it?I mean, in the case of income inequality, in general I think it would be difficult to address that as a problem and not kill the goose that lays both the golden and tin eggs. Admittedly, our tin eggs aren't fancy, and they certainly aren't made of gold, but you kill the goose to put an end to those golden eggs, you end up losing the tin eggs in the bargain. Even if you could, it's not going to happen that the entire planet is going to cooperate in such an endeavor. If they would, we wouldn't be worried about it now. Instead, efforts to reduce income inequality would end up with people and businesses moving into countries or circumstances where they could continue to accumulate as much as possible. As I have said before, I like the idea of a more even distribution of wealth. I just don't think it can be done as a matter of regulation or tax policy without bad and potentially catastrophic results. Much better to focus on where's some tax revenue, what does the government need to do, and how are we going to pay for that.How we reduce the gap between rich and poor (as a question) is likely to lead to some bad answers with some unfortunately secondary and tertiary consequences.

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  36. lms–clearly we need to start insulting him more. . .

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  37. ashot, how about "intellectually lazy", I've heard that one enough to last a lifetime.

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  38. "Don't have kids"Well, heck, if I'd have avoided that, I'd be rich like you. Cruises and big screen televisions and fancy new cars all end up going into the money pit known as children.I suppose it's payback for being money pits for our parents, although I don't think I could have possibly cost as much as my children have (and will) cost me.

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  39. lmsinca: "ashot, how about "intellectually lazy", I've heard that one enough to last a lifetime."I agree, that's intellectually lazy.

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  40. i think this highlights the problem of taxing wages. setting aside the best way to raise revenue, I think taxing wages has to be one of the worst ways. It the difference between assets and wealth vs. income. you've all heard of DINKs, i'm sure (double-income, no kids) .. most of my circle are HENRYs (High Earners, Not Rich Yet). So my expenses are mortgage, daycare, taxes. and taxes are more than daycare, which is a lot. and if we didn't pay daycare, we wouldn't have the means to make the income to pay the mortgage or the taxes. it's kind of a trap. it's a problem, but all things considered, it's a good problem to have. PS — I never would have posted this on PL

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  41. "I'm still struggling with why the income inequality we have now is bad and what less of it would do that would be beneficial"If I could take a crack at it, I would say the problem is as people's income stays the same year after year (more accurately they shrinks) they have less money to spend on goods and services. If more and more people have less and less money to spend the economy goes in the tank, businesses close or trim back. Generally businesses responses hurt the middle class because it's their job that is cut or their wages that are frozen. Thus the divide widens. Or it could be the petty jealousy thing to which Kevin points. Where I differ from some of my liberal bretheren, and probably the OWS crowd, is that not all wage stagnation is the product of CEOs or Wall Street hoarding profits to increase the price of their own shares in the company. That certainly happens, but there is obviously a reduction in what these jobs are worth given various global factors.

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  42. lmsinca- I prefer "intellectually dishonest." It seems like a haughtier insult than intellectually lazy. And you're not a true liberal if you're not haughty and elitist.

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  43. Oh, and Kevin, I didn't mean that as an imperative, but as a statement that I don't have kids.But same end result.Ashot: I'm haughty and elitist and work in an ivory tower. . . do I qualify for super lib status??? 🙂

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  44. "I know the 1% is only above an AGI of $350K or thereabouts, but then it also encompasses the millionaires and billionaires. The AGI of 90% is barely above $32K. I think most of us are in the other 9%, but it's no wonder so many people used their houses as a cash cow all these years."I thought $33k was the median income. No way it's the 90th percentile.http://www.irs.gov/taxstats/article/0,,id=102886,00.html

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  45. "Ashot: I'm haughty and elitist and work in an ivory tower. . . do I qualify for super lib status??? :-)"Need to see the boots before such lofty status can be bestowed.

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  46. This is probably going to sound weird but what I see happening based on our conversations with our middle class, small business owner customers, is not jealousy or envy but depression. No one has money for fun or vacations or any of that anymore. I think those are important to people and maybe that sounds petty but everyone's working harder and longer hours, if you're lucky enough to have a job, just to stay afloat. I don't agree it's taxes though, they're historically low, so I have to assume it's wages.Our daughter is going through the job offer process in the energy industry right now and apparently she is this year's "Golden Child", so there's a lot of competition to get her on board. One of the companies just upped the vacation ante to beginning at 5 weeks……. that's what I'm talking about.

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  47. Need to see the boots before that such lofty status can be bestowed.Working on that. It might be Sunday before it gets up; did you know that it is virtually impossible to take a picture of boots on your feet with a phone camera? There's more than one way to skin a cat, though, and I think I've got it figured out.Kevin will weep. . .

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  48. jnc, yes, I meant median.

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  49. "I don't agree it's taxes though"sorry … not just feds. property, state, payroll, sales, etc. just an astonishing part of our budget. granted, I'm predisposed to line item every dime that goes toward taxes. of course, i'm the odd duck that considers those things an expense. anyway, i'm off. bye all.

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  50. I key my paychecks into Microsoft Money with the breakdown. Federal Income taxes are easily my largest monthly expense category, following by housing (mortgage) then the payroll taxes. Everything else is down the list. From a value standpoint, what the Federal government provides to me in services bears no resemblance to what I'm paying in taxes.

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  51. Have a nice weekend NoVA.

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  52. "Federal Income taxes are easily my largest monthly expense category, following by housing (mortgage)"Sounds like you need to make less or buy a bigger house! If you were a real American you would do both.

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  53. We don't have much of a mortgage left, just a small LOC from building our warehouse. And our income keeps going down every year, as much by design as anything else, semi-retired? Our biggest expense is our health insurance premiums. We're at $1600/mo for the two of us.

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  54. Speaking of stooges:There's going to be a new Three Stooges movie.Sean Hayes from Will & Grace is playing Larry. I'll be interested to see what he does with the performance. Not familiar with the guy playing Moe (apparently he's done a lot of TV stuff), but I'm confident Will Sasso will do a dead-on Curly.

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  55. The WSJ article touches on part of the problem – health care costs. Employees are getting more expensive even if wages aren't rising because or health care costs. If we can tackle that, then wages may increase. How we do that, though, is anyone's guess. But I do believe that for the low end of the income scale, since health care costs account for a large % of total compensation, the increase in health care costs has eaten the raise they were supposed to get. On the other side of the coin, executives are paid largely in stock, and over the past 30 years, we have had the mother of all bull markets. I think cash executive comp has probably remained about the same, but stock (and especially stock options) balloon as the market rises.

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  56. "From a value standpoint, what the Federal government provides to me in services bears no resemblance to what I'm paying in taxes."You're paying for me! While I do pay in income taxes, I think they resemble what I ought to be paying–even if my income wasn't providing for my wife and two children. But it's the deductions that, at $60k, keep my income taxes from being my biggest single expenditure.The self-employed, who have to double their social security taxes–they get screwed. I was effectively self-employed for my former employer for a year, and it sucked.

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  57. "Sounds like you need to make less or buy a bigger house! If you were a real American you would do both."Or file married with two dependents. Both Bush tax cuts and Obama tax credits, plus deductions, have helped me mightily in that regard. Also deducting mortgage interest and charitable donations. Plus, we had a screened in porch put in last year and, irrationally, the 1/3rd of the expense was deductible because it was an energy efficient roof (even though it's an open porch, so the energy efficient roof doesn't actually real meet the spirit of the tax incentive). The downside is, even when you have reasonably priced health insurance, family-sized insurance is still a major expense. It's more than my income tax! I guess it's a trade off, although I still don't pay as much as lmsinca.

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  58. Ashot,Thanks for that. I can see where wage stagnation coupled with inflation could erode purchasing power. However, the government tells us that there is currently no inflation (I don't believe that), so theoretically, no erosion in purchasing power. Also, consumer goods prices have been going down with the proliferation of the big box stores (competition) and imports (cheap[er] labor, cheap transportation,) so it again could be argued that there really has been no purchasing erosion.

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  59. So that still leaves us with the problem of why wage inequality is bad. Is there more on an answer than envy?

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  60. Man is a creature of pleasure. Rather than constantly fighting that, legalize prostitution and drugs and then federally tax the hound out of 'em! Rather than closing marijuana dispensaries, the Federal Government should be licensing them with 100% user-fees on each transaction. That's my opinion. That would raise revenue! And it would make patronizing prostitutes and doing drugs a patriotic activity.

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  61. "So that still leaves us with the problem of why wage inequality is bad"Well, there are theories that wage inequality is somehow causal of wage stagnation for the rest of us, that wealth concentration takes money out of the economy, and that, aside from envy, it's unjust or unfair that so few should have so much and be under no onus to help those less fortunate. Also, we often have a zero-sum-game feeling about the economy. If you have almost all the money, that's where all the money is. The rest of us are frozen out because you took all the money. We can't expand the pie fast enough to make up for your money hoarding, you rich b*st*rd! You're hoovering up all the resources and telling us poor unfortunate folks to eat cake! That's not envy, that's resentment.So, resentment. And, generally, a more egalitarian distribution of wealth, if it happened organically, would be a good thing, wouldn't it? It would certainly end up with more money circulating in local economies and less consumer debt.

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  62. " One of the companies just upped the vacation ante to beginning at 5 weeks……. that's what I'm talking about."That is sweet! I've got 10 days of vacation until I've been here 5 years, then I get another 2 days. Which doesn't sound like a lot, but it will make a big difference. Right now, I'm constantly having to work my vacation schedule like trying to crack a code. After 10 years, I get 15 days. After 15 years, I get 20 days, but that's the maximum, and I think they accrue per month–so I may technically have 20 days I can take in a year, but I only add 12 days per year in accrued time, so unless I skip taking vacation days I'll never accrue enough to actually get my 20 days. But I'll be happy when I get 12 days. Those two extra days will make a difference.

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  63. kevin, is it possible to get a "boss button" for this blog? (I'm thinking of the one ncaa.com has on streaming broadcasts of first two rounds of ncaa men's basketball tourney — you click the button and the screen changes to a fake spreadsheet.)

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  64. okie, are you being a naughty girl??

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