Re: Piketty Reading Group: Chapter 12

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I volunteered, you monster. Don't grant Hitler any posthumous victories.


Posted by: Walt Someguy | Link to this comment | 08- 4-14 4:57 AM
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Tangential lifestyles of the rich and obscure class hatred link of the day

http://mobile.businessweek.com/articles/2012-12-13/the-ironman-triathlete-executives-ultimate-status-feat


Posted by: conflated | Link to this comment | 08- 4-14 6:14 AM
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2. Oh, puhleeze.


Posted by: chris y | Link to this comment | 08- 4-14 6:34 AM
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So firstly another clever bit of data sniffing by P and his research group to use sovereign wealth funds and uni endowments to shed light on the behaviour of large fortunes. That's quite neat, especially given other data sources are so weak.

On why information on private wealth is hard to obtain - my guess is for those with dodgy sources of wealth, it's deliberate, and for those with legitimate sources of wealth, it's a welcome accidental byproduct of jurisdiction hopping for tax minimisation. I have no particular evidence for either, though the black economy seems a reasonable cause for the debt / asset gap.


Posted by: conflated | Link to this comment | 08- 4-14 6:50 AM
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To prove your footnote right: he also said that it wasn't just Harvard and the like being "adventurous" (higher return via greater risk), but that their returns also did not seem to be significantly more volatile over time than the smaller-endowed universities' (implying the higher return is via better information).

Why don't investment services firms take the same advantages? Because, I think it was gestured at, a lot of the better investments are unlisted and overseas stocks, and I can imagine a lot of legal/practical complications with brokering those to consumers, on top of it being culturally an endeavor for the super-rich.


Posted by: Minivet | Link to this comment | 08- 4-14 6:52 AM
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There's a reason for better returns.

Buying shares of a listed company is (at least in principle) pretty passive-- share owner can assess the company from public reports which in turn reflect reality. Buying shares of something unlisted or foreign and poorly regulated is not passive-- figuring out what the company has and does requires at least access to auditors. Actively managing what you own is more costly.


Posted by: lw | Link to this comment | 08- 4-14 6:59 AM
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Only the super rich can drag Argentina clear through the entire U.S. court system to try to get 100% payment of the debt that the regular rich had to take a haircut on.


Posted by: Moby Hick | Link to this comment | 08- 4-14 7:02 AM
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5: Yes, I think there is a genuine agency problem here. Imagine if somehow a mutual fund managed to solve the legal problems and navigate the sensible regulatory protections so they could offer "Bob's Asset Management Super High Return Private Venture Capital, Tech Stock and Emerging Markets Fund". It's basically indistinguishable to me as a retail investor from "Bob's Dodgy Fly To Shanghai and Piss It All Up A Wall Fund" until five years later. Same with mixed funds that are supposed to include some high return component. Plus those actively managed funds have much higher fees. They often aren't a good deal.

So I guess you could say the higher returns are extorted or illegal in some way, Harvard finds ways of investing in Mexican drug lords or Belgian slavers indirectly and that's why returns are high. And if you think that I guess you would just try to regulate them out of existence in a kind of Kim Stanley Robinson Pacific Edge maximum income / capital regime. There is a partial overlap with avoiding Too Big To Fail problems.

Or if you have a rosier view of capitalism you could say these returns are real, something about these organisations finds them. And then you could let them get the returns but tax them so it is redistributed to some extent. And/or you could create more civic non-corporate orgs like Harvard, encourage transparent scale in private institutional wealth and sovereign funds.


Posted by: conflated | Link to this comment | 08- 4-14 7:18 AM
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Didn't Allen and Woz both go off to pursue other interests when they became fabulously wealthy, instead of hanging on for two more decades of growth to become mind bogglingly wealthy?


Posted by: conflated | Link to this comment | 08- 4-14 7:22 AM
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Didn't Allen and Woz both go off to pursue other interests when they became fabulously wealthy

Yes, but that doesn't imply that they necessarily sold their stock in Microsoft/Apple. Piketty suggests that most large fortunes remain primarily invested in the firm that made them.

And then you could let them get the returns but tax them so it is redistributed to some extent.

I would be astonished if such funds were located in any taxable jurisdiction.


Posted by: chris y | Link to this comment | 08- 4-14 7:32 AM
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Woz is also legendary for not giving a shit what happens with his money. I met him once -- walked up to him after a panel discussion to ask him a question, total interaction time maybe fifteen seconds -- and he gave me $10.


Posted by: Sifu Tweety | Link to this comment | 08- 4-14 7:34 AM
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You were supposed to bring him back a sandwich.


Posted by: Moby Hick | Link to this comment | 08- 4-14 7:37 AM
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Nah. He is just proud of having very unusual cash and wanted to share.


Posted by: Sifu Tweety | Link to this comment | 08- 4-14 7:40 AM
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I volunteered for 15.


Posted by: Minivet | Link to this comment | 08- 4-14 7:44 AM
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Too late.


Posted by: Moby Hick | Link to this comment | 08- 4-14 7:45 AM
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very unusual cash

Maria Theresa thalers?


Posted by: chris y | Link to this comment | 08- 4-14 7:46 AM
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Just to be perfectly clear, 15 was a joke. I'm not about to read Chapter 15, let alone the book up to that point.


Posted by: Moby Hick | Link to this comment | 08- 4-14 7:47 AM
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14: You've got 15, and looking back at the thread, I missed fake accent claiming 16.


Posted by: LizardBreath | Link to this comment | 08- 4-14 7:51 AM
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Apparently the high returns of investors like the Yale endowment is driven entirely by private equity. So the question is what drives the high return of private equity. The cynical explanation is that private equity investors have limitless ability to milk the firm for cash. Alternatively, public equity markets are kind of a terrible way to raise money for investment, so maybe private equity firms are better positioned to grow.


Posted by: Walt Someguy | Link to this comment | 08- 4-14 7:51 AM
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Walt is out of luck, for failure to actually name a specific chapter.


Posted by: LizardBreath | Link to this comment | 08- 4-14 7:52 AM
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Am I invisible? Can anyone hear me? Does LB have a plug-in that causes my comments to be hidden? Honestly, I couldn't blame her.


Posted by: Walt Someguy | Link to this comment | 08- 4-14 7:52 AM
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I was volunteering for whatever chapter no one else wanted, which is pretty goddamn virtuous. Am I rewarded for this virtue? No, I'm punished.

Wait, actually reading is work that I now don't have to do. I am being rewarded.


Posted by: Walt Someguy | Link to this comment | 08- 4-14 7:55 AM
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Right, you get credit for virtuously volunteering in the most selfless possible way. With $2.50, that'll get you a ride on the subway.


Posted by: LizardBreath | Link to this comment | 08- 4-14 7:58 AM
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16: perforated sheets of two-dollar bills.


Posted by: Sifu Tweety | Link to this comment | 08- 4-14 8:00 AM
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Nah. He is just proud of having very unusual cash and wanted to share.

Five $2 bills? Origami'd together into the shape of the demon Buer?


Posted by: Cryptic ned | Link to this comment | 08- 4-14 8:01 AM
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I'm old school. I just jump the turnstiles.


Posted by: Walt Someguy | Link to this comment | 08- 4-14 8:02 AM
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Off topic, but this is a hell of a defence counsel:

El-Wahabi's barrister Mark Summers described his client to jurors. "A more unlikely terrorist you may never have seen in this court," he said.

"Just picture this: Amal, that foul-mouthed, red-haired, talkaholic, opinionated, phone-addicted, weed-smoking kaffir, playing the dutiful burqa-clad [woman] cooking around the campfire in Syria. If a jury in this court in its 200 years has been invited to swallow a more preposterous proposition, I personally would have paid good money to see it."

El-Wahabi put her hand over her mouth as she laughed at his comments from the dock.

Summers went on: "Added to these unsuitable jihadist personality traits is selfishness. Everything that Amal says and does is about her. She wouldn't even attend a charity event if she couldn't get in free."

Reminds me of the Red Dwarf bit with Rimmer on trial. "Please, sir. My entire defence strategy hinges on proving you're a dork."


Posted by: ajay | Link to this comment | 08- 4-14 8:12 AM
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Sorry, link: http://www.theguardian.com/uk-news/2014/aug/04/terror-charge-preposterous-lawyer-amal-el-wahabi-syria


Posted by: ajay | Link to this comment | 08- 4-14 8:20 AM
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Thanks to Chris Y for an excellent summary (not sarcasm at all, I thought it was easy to read and very clear).


Posted by: NickS | Link to this comment | 08- 4-14 8:25 AM
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Querulous posts like this make me think there's a fair chance the US is going to catch a number of evaders with the new laws. OTOH, I imagine there are strategies the super-rich use more sophisticated than "keep a foreign bank account and don't tell the IRS."


Posted by: Minivet | Link to this comment | 08- 4-14 8:30 AM
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10: Well, you could also tax the directors of their modest New York and London branch offices. They might also be in low tax states rather than near-zero tax ones. Plus I can wave my hand Piketty-style and invoke a vision global tax co-operation, but that would be jumping ahead.


Posted by: conflated | Link to this comment | 08- 4-14 9:00 AM
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Seconding 29. 7 is a very good point.


Posted by: Barry Freed | Link to this comment | 08- 4-14 9:04 AM
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Seconding 29.

And 7 is a very good point.


Posted by: Barry Freed | Link to this comment | 08- 4-14 9:04 AM
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19: The return of private equity is interesting, I wonder if you can see it as a symptom of the increased private capital supply Piketty tracks. i.e. You don't always need the hassle of a public joint stock corporation nowadays, because there are enough mega rich who can invest in your firm in increments if 5 million instead.


Posted by: conflated | Link to this comment | 08- 4-14 9:06 AM
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Also worth mentioning in this discussion, a Felix Salmon post on venture capital and two posts on hedge funds:

His description of Venture Capital is entirely consistent with Piketty's thesis -- that there is a huge advantage to being rich and connected and being able to get in early. Later investors in a sector do much worse.

This is the kind of dataset that money, literally, can't buy: VC funds' investment agreements have such tight confidentiality clauses that Kauffman and other institutional investors would never be allowed to share this information with anybody else. But by anonymizing their data, and by self-critically coming clean on their own returns from venture capital, Kauffman's investors have managed to put together a detailed and compelling report with a very simple conclusion: venture capital is not much of an asset class, and insofar as it is an asset class, it's very, very broken.

...

This is very much a short-head, long-tail dataset, with the short head having high returns and the long tail being decidedly disappointing. What's more, the really high returns in this chart -- the ones which achieve that "venture rate of return" of 2x committed capital -- come exclusively from funds with less than $500 million committed: something which is very rare among top-tier VCs these days. What's more, most of them also come from funds raised before 1995. If VC funds were good investments once upon a time, they're not any more:

In terms of Hedge Funds he also things that they can't promise above-average returns as a class (not surprising) and that they also tend to reward insiders over outsiders. First a post with some charts showing who invests in Hedge funds

"E and Fs", by the way, is investmentese for "endowments and foundations". And this passage just doesn't ring true to me. Bond investors focus obsessively on capital protection; long-term institutional investors looking to capture an illiquidity premium, on the other hand, actively want more volatility, if it means that their long-term returns will be higher. If the institutional investors that Citi talked to are focusing on capital protection, I find it hard to believe that they're going to significantly increase their allocation to hedge funds. Partly because of those fees, and partly because no hedge fund is immune to blowing up. It's true that hedge funds as a whole lost less money than the stock market did during the plunge of 2008-9. But they still lost money -- if they were promising capital protection (something the stock market never promises), then they clearly failed at their job.

Second an post expressing some skepticism of the current hedge fund industry.

The main thing that you're looking at here is the final line. If you look at the money that investors made by investing in hedge funds, it comes to $70 billion -- a number substantially smaller than the $379 billion that the hedge funds managed to skim off in fees. Now the $70 billion is profit over and above the risk-free rate of return on Treasury bills. But it's not the end of the story. Because funds-of-funds were very popular for most of this period, investors also paid some $61 billion to them. Which left them with the grand total of $9 billion in profits, compared to the $440 billion that the hedge-fund industry took in fees.

I recall another post about venture capital which was entirely consistent with Piketty's theris


Posted by: NickS | Link to this comment | 08- 4-14 9:39 AM
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His point here is that, contrary to common assumptions, a large fortune can garner higher returns than a smaller on

Presumably this is the common assumptions of economists. I think if you asked the average person they would guess that larger fortunes get higher returns, because they see all around them the "Free to those who can afford it, very expensive for to those who can't" maxim playing out. The mechanisms are many and mostly obvious: tax planning/avoidance/evasion, political power to obtain tax cuts; access to sources of return that simply aren't available to anyone else; trade agreements and other economically favourable legislation; market power to secure better investments, terms and fee structures; general economies of scale.


Posted by: Ginger Yellow | Link to this comment | 08- 4-14 9:49 AM
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36: Do economists assume that? They assume diminishing marginal returns to capital, as we've discussed, but that applies to the market as a whole, not individual fortunes.


Posted by: Eggplant | Link to this comment | 08- 4-14 9:57 AM
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Notoriously if you buy IPO stocks the day after IPO, you do worse than if you just bought random stocks of non-IPO firms of the same size. The only investors who make money are the people who buy the stock at the actual IPO price and then flip it. These are all insiders. (The actual IPO is a private transaction between the firm and well-connected investors.)


Posted by: Walt Someguy | Link to this comment | 08- 4-14 9:58 AM
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36: Though I may have been brainwashed by economists at some point, I think most people would recognise this effect between the poor and middle class, or the middle class and rich, even, but that it exists between the 1%, the 0.1% and the 0.01% is not necessarily obvious, and a worthwhile empirical result. I would have expected more of a simple rich person hump once you can live off some part of your capital income, and just compound interest from there up.


Posted by: conflated | Link to this comment | 08- 4-14 10:02 AM
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It's humps all the way up.


Posted by: Eggplant | Link to this comment | 08- 4-14 10:05 AM
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36: Do economists assume that? They assume diminishing marginal returns to capital, as we've discussed, but that applies to the market as a whole, not individual fortunes.

Don't ask me. Ask Piketty. Or Chris Y.

I would have expected more of a simple rich person hump once you can live off some part of your capital income, and just compound interest from there up.

Well, that's the point. It's not just compound interest. It's all the various things that come to you as a result of being so staggeringly wealthy that politicians, money managers, entrepreneurs etc are actively seeking you out and giving you preferential terms over people with less money.


Posted by: Ginger Yellow | Link to this comment | 08- 4-14 10:18 AM
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35: Funds of hedge funds seem to me to be the most spectacularly stupid idea (for end investors) in an industry full of stupid ideas. Let's start with the premise not only that alpha exists and can be identified, but that it is so powerful and sustainable as to justify a 2 and 20 fee structure. Then let's throw out all that assumed alpha by investing not in the good hedge funds themselves, but in a collection of them which skims off another layer of fees and creates another layer of opacity and potential for negative alpha. And that's just the theory. When you look at the actual performance and practice of funds of funds, it's truly staggering that people would invest in them.


Posted by: Ginger Yellow | Link to this comment | 08- 4-14 10:24 AM
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41.1. Don't ask me, I was just reporting what P. says. I think if I'd had to report what I thought before reading this stuff, I'd have said that I imagined that all the advantages of scale and of close management applied and that this would be reflected in generally better performance by bigger portfolios, often very much better, but I would not have had a clue that there was a whole further world of privileged investment that was so far out of the reach of ordinary people that they have never heard of it or, if they have they have no idea how it works. And I suspect that this is the situation for most people who are not economists and don't work in the finance sector.


Posted by: chris y | Link to this comment | 08- 4-14 10:39 AM
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Come to think, this kind of illuminates the Madoff scam. Standing where I do, I found it a little mystifying that people fell for it for that long, because his returns were absolutely implausibly high compared to anything I'd ever heard of -- what was he purporting to get for his investors, a stable 10%? I would have thought that would have tipped off investors that something screwy was going on pretty quickly.

If his victims were small-to-medium-rich, on the other hand, they might have been rich enough to be aware that the seriously rich were getting returns like that, although not rich enough to get those returns themselves. At which point a scam that apparently let them in to the magic circle of people rich enough to have access to the really good investments seems easier to fall for.


Posted by: LizardBreath | Link to this comment | 08- 4-14 10:48 AM
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Ask Piketty. Or Chris Y.

Or Larry Summers, who has an opinion about how subsets of capital apply to the whole:

Or consider the case of housing. Economists are quite confident that the demand for housing is inelastic, so that as more housing is created, prices fall more than proportionally--a proposition painfully illustrated in 2007 and 2008.

So the housing bust was an example of what happens to marginal returns on capital, but the evidence of college endowments, sovereign wealth funds and plain-old rich folks is not.

I suppose that we can charitably say that Summers is describing a dramatic example of how capital behaves, but this seems more like an unfortunate analogy, given its context-specific nature and particularly considering Summers' complicity in the events that led to this spectacular bit of capital misallocation.

(I have developed an unhealthy obsession with that Summers review, which I continue to savor for its subtle awfulness. )


Posted by: politicalfootball | Link to this comment | 08- 4-14 11:11 AM
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I hereby resolve to never again extend any credit to economists. I don't know what came over me.


Posted by: Eggplant | Link to this comment | 08- 4-14 11:35 AM
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The advantage of liquidity in the housing market is abundantly obvious - so many places available at cheap prices but only if you can put 40% or much more down.

(I'm not sure I fully understand why this limitation exists, because on conclusion of a mortgage the total purchase amount gets transferred IIUC - I guess it's that the people or companies selling this properties want quick turnarounds and therefore buyers who don't need an inspection contingency or much/any financing contingency?)


Posted by: Minivet | Link to this comment | 08- 4-14 11:55 AM
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I thought the high down payment markets were for houses that couldn't be financed using the mortgage options available to owner-occupants (e.g. because the house is too shitty).


Posted by: Moby Hick | Link to this comment | 08- 4-14 12:05 PM
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Oh, is that it? What's the basis of that non-approval on the part of Fannie/Freddie/etc.? They think people shouldn't have do too much repair/improvement?


Posted by: Minivet | Link to this comment | 08- 4-14 12:09 PM
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I don't know the specific requirements of the various programs, but the idea always was that if it was a house for resale or renting out, the risk of default was higher than if you lived in it. Also, people taking out mortgages that require low down payments (like an FHA loan) are, by intent, cash constrained and thus wouldn't be able to buy a house and then do extensive repairs.


Posted by: Moby Hick | Link to this comment | 08- 4-14 12:28 PM
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Conventional 20% mortgages that Fannie/Freddie buy are very different from the very-low-down-payment ones offered by FHA and I think a few others.


Posted by: Minivet | Link to this comment | 08- 4-14 1:51 PM
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45: The very rich did take a significant hit in 2008

http://piketty.pse.ens.fr/files/capital21c/en/pdf/F12.3.pdf

... but it seems they were also able to seize chances of low prices as well, such that as a class their wealth had recovered in 3 years.

Summers is describing a real effect though, and the links in 35 are examples of venture capital and hedge funds both experiencing the same capital oversupply.


Posted by: conflated | Link to this comment | 08- 4-14 4:07 PM
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44: Yes, and Madoff was also very good at evoking a feeling that you were in an exclusive club now, as I recall.


Posted by: conflated | Link to this comment | 08- 4-14 4:10 PM
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45: You made me reread that review, damn you. That line you quote is an impressively stupid bit of argumentation from Summers. That being said, it doesn't directly address the varying of returns to individual investors with the size of the fortunes. Rather it concerns the return to capital on a economy-wide scale.
Thinking it through a bit more, shouldn't the standard neo-classical economist assume that everyone receives the same return, since it's a competitive market and anyone receiving outsized returns would soon be undercut? Pooling should take care of the effect of risk tolerance varying with fortune size.


Posted by: Eggplant | Link to this comment | 08- 4-14 5:40 PM
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Richest guy I've ever talked to about this was strongly of the view that normal investments are for chumps, and that the non-chump level starts extraordinarily high, like $20 million. He advised me to invest in low income rental units, aka be a slumlord. I never took the advice, because I don't have the starting capital, because 'm pretty sure he's not right, and because being a slumlord seemed like a total PITA.


Posted by: Robert Halford | Link to this comment | 08- 4-14 5:56 PM
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Friend of mine is a slumlord. He appears to be raking it in. At least based on the number of shitty houses he owns.


Posted by: Spike | Link to this comment | 08- 4-14 6:59 PM
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55: if you had more money, you could use low income housing tax credits to reduce your tax liability from all the other money you're making. They are still quite affordable, I think.


Posted by: Sifu Tweety | Link to this comment | 08- 4-14 7:04 PM
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First you get the low income housing tax credits, then you get the shitty houses, then you get the women.


Posted by: Moby Hick | Link to this comment | 08- 4-14 7:08 PM
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you could use low income housing tax credits to reduce your tax liability from all the other money you're making.

Nobody uses their own tax credits anymore. Its all about selling your tax credits to other rich people with bigger tax problems than you.


Posted by: Spike | Link to this comment | 08- 4-14 7:26 PM
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Is the basketball team before or after the women?


Posted by: JP Stormcrow | Link to this comment | 08- 4-14 7:26 PM
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59: I don't think anybody ever used them except rich people. They're designed to be sold.


Posted by: Sifu Tweety | Link to this comment | 08- 4-14 7:28 PM
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I'm guessing tax credit brokers make good money.


Posted by: Spike | Link to this comment | 08- 4-14 7:34 PM
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... but it seems they were also able to seize chances of low prices as well, such that as a class their wealth had recovered in 3 years.

Which is also part of why private equity outperforms - they're better positioned than your typical listed fund or cmopany to exploit low prices. Partly because they don't have lots of public shareholders tellling them to get out of markets perceived as risky (because they've already had the negative shock), and partly because they don't have shareholders telling them to return the large amounts of cash sitting on their balance sheet (so they aren't reliant on debt financing). It's a lot easier to take advantage of an opportunity to invest in a EUR 5bn non-performing loan portfolio being sold on the cheap by a bank desperate to offload assets if you can just throw cash at it. I'm not sure I've seen any data on listed private equity vs unlisted, but it would be interesting. Although it's not like the listed ones are much more transparent, so I'm not sure I'd trust the data too muchanyway.


Posted by: Ginger Yellow | Link to this comment | 08- 5-14 1:57 AM
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An example of this in practice: whose money was in all those small-town US banks and European landesbanks or local equivalent that took the other end of the property bubble era CDOs that Lehman, the Squid, RBS etc generated?

Not the poor - the poor don't have any money, it's kind of intrinsic to being poor. Not the middle class - they don't have enough money to make this sort of thing worthwhile and in any case they love directly buying houses too much. Not the super-rich; they're John Paulson's clients rather than his marks.

The answer is the ordinary rich, the tiresome local booster/tax-evader/teabagger types. Before the crash the business press was full of stuff about the "mass affluent", aka them, with between £1-10m to buy in. It's because there are a lot of them, and they are by definition rich, that there was so much money to rip off.

They were also the ones who tended to scarper with their cash first when the trouble began - they tend to be big cash depositors (remember that you need to be rich to have enough cash to go above the deposit insurance limit, but not rich enough to own the bank).

You see why they're still so pissed off; they thought they were in on the con against us, but they were really the suckers. and the classic mark's denial and stockholm syndrome explains why they turn to politicians who promise to double down on the same bullshit.


Posted by: Alex | Link to this comment | 08- 5-14 4:27 AM
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Yes it must come as a shock, if you think you're sitting at the top table, to discover that there's a whole further salon behind the curtain, and that when anybody's dining in there the waiters can't even be arsed to catch your eye.

Garry Trudeau, I think understood this, with the subtle distinction he drew between Mark Slackmeyer's dad, who was merely fuck you rich, and Jim Andrews, who is off the charts. He would have met plenty of both categories at Yale.


Posted by: chris y | Link to this comment | 08- 5-14 5:08 AM
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Rather it concerns the return to capital on a economy-wide scale.

Right. Which is part of what Piketty is doing with college endowments and whatnot. He's trying to say that the marginal return on rich people's capital increases. Summers responds by saying, no, look at housing in 2008, for example.

and the links in 35 are examples of venture capital and hedge funds both experiencing the same capital oversupply.

Have only skimmed, but they seem to be about rich people scamming other rich people. When a financial organization can make money without generating returns for investors, it'll often do that.


Posted by: politicalfootball | Link to this comment | 08- 5-14 5:53 AM
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64.last: "You can't cheat an honest man."


Posted by: politicalfootball | Link to this comment | 08- 5-14 6:00 AM
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I still find the existence of otherworldy investment opportunities, invisible to mortal man, and available only to those Illuminati inducted in their secret ways, counter-intuitive. Seriously, what are they?

If it is the same old asset classes as everyone else, but they get to ride the wave from the beginning because the have the experts and connections to spot it, it makes more sense to me.


Posted by: conflated | Link to this comment | 08- 5-14 8:25 AM
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I still find the existence of otherworldy investment opportunities, invisible to mortal man, and available only to those Illuminati inducted in their secret ways, counter-intuitive. Seriously, what are they?

It's not that they're necessarily invisible, they're just inaccessible. In the credit world, if you have the ability to throw several hundred million dollars in cash at something without needing a listed, rated, security, you're going to get approached with opportunities the listed-only investors would never see. Not all of them will be good deals and they require a lot of work, but that's where your economies of scale kick in. And these opportunities particularly arise (and are particularly off-limits to public investors*) in distressed credit, where the most outsized gains can be made (see Elliott and Argentina).

* I'm simplifying here and can elaborate if requested, but broadly speaking "public investors" are less able to play in obviously high risk/high reward sectors, at least in the sort of scale that gets you the best opportunities.


Posted by: Ginger Yellow | Link to this comment | 08- 5-14 8:37 AM
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So, with the proviso that I'm way, way behind in Piketty, I don't really get how things like the housing tax credits aren't an example of how this rich-get-richer business works in practice; they are only plausibly useful as an investment if you have massive tax liability -- millions and millions of dollars -- but if you have that then they provide what is in effect an instantaneous, guarantered 30% (or so) return (they generally sell for about that level of discount, I think).


Posted by: Sifu Tweety | Link to this comment | 08- 5-14 8:38 AM
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When I say "would never see", I don't mean they wouldn't be aware of the opportunity. But they wouldn't be approached by the people responsible for arranging the deal and might not get an audience if they went to them first.


Posted by: Ginger Yellow | Link to this comment | 08- 5-14 8:38 AM
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64: This really came out in the article by the journalist who got conned by Madoff a few years ago. He clearly thought that rich people were entitled to high risk-free returns, and that's why he fell for Madoff's scam.


Posted by: Walt Someguy | Link to this comment | 08- 5-14 8:45 AM
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The businesses I know reasonably well, especially Hollywood, fit the stereotype pretty exactly. If you're a connected insider, you get paid first and most and have access to the better deals and a huge variety of risk avoidance mechanisms. The industry is largely financed by more ordinary rich people who invest for a taste of glamour and basically get fleeced. Being a connected insider isn't precisely the same thig as being super rich but the only way you can get to be treated like a connected insider without actually being one is to be super rich.


Posted by: Robert Halford | Link to this comment | 08- 5-14 9:11 AM
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Has anybody ever tried letting the outsiders make more decisions? Because movies seem to suck lately.


Posted by: Moby Hick | Link to this comment | 08- 5-14 9:14 AM
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And IME Silicon Valley also works pretty much like 73 as well.


Posted by: Robert Halford | Link to this comment | 08- 5-14 9:15 AM
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74: going by London bus ads this summer:

Transformers
Mrs Brown' Boys D'Movie
Pudsey the Dog*

*a vehicle for a dancing dog in which the dog doesn't dance, I am reliably informed. maybe the director was inspired by Cat People, the famous monster flick where you never see the monster, but I think it's probably just that it's shit.


Posted by: Alex | Link to this comment | 08- 5-14 9:43 AM
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76: we cannot blame Hollywood for numbers two and three on that list, both of which look utterly dreadful. They're both from this side of the Atlantic - one a spinoff of a BBC drag-act sitcom and the other a spinoff of an ITV talent show.

I tremble for my country when I reflect that God has taste.


Posted by: ajay | Link to this comment | 08- 5-14 9:50 AM
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The question that we should be asking ourselves when a new film heaves itself onto the screen at the local fleapit is: does this film have Emily Blunt or Ros Pike in it, and, if not, why not?


Posted by: ajay | Link to this comment | 08- 5-14 9:52 AM
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I don't really get how things like the housing tax credits aren't an example of how this rich-get-richer business works in practice

Surely you don't mean to imply that a public program to help the poor obtain housing has been structured as a massive giveaway to rich people...


Posted by: Spike | Link to this comment | 08- 5-14 9:53 AM
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Surely you don't mean to imply that a public program to help the poor obtain housing has been structured as a massive giveaway to rich people in order to gain bipartisan support, thus preventing the total exit of the Federal government from the business of building low-income housing? I do, yes. Anyhow, it's just an example I know about; there are plenty of ways for rich people to take advantage of massive giveaways without actually helping anybody, if that's not something they're into doing even incidentally.


Posted by: Sifu Tweety | Link to this comment | 08- 5-14 9:57 AM
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74,80: Maybe we should offer rich people tax credits for investing in good movies. Final quality determination to be made by the commentariat at unfogged.


Posted by: AcademicLurker | Link to this comment | 08- 5-14 10:01 AM
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in order to gain bipartisan support

Now, now, I'm sure there were plenty of Democrats happy to also give money to rich people.


Posted by: Spike | Link to this comment | 08- 5-14 10:02 AM
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It's interesting to see how 10% to 20% of movies that get giant promotional campaigns in Britain are British movies that get absolutely no promotional campaign in America. Not even a prestige-based campaign or a campaign geared around the stars. This included "Harry Brown", "The Sweeney", "Tamara Drewe" and "The Disappearance of Alice Creed".


Posted by: Cryptic ned | Link to this comment | 08- 5-14 10:03 AM
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Maybe we should offer rich people tax credits for investing in good movies

Pretty sure this is already happening at a state level, where "good movies" = "movies made in our state".


Posted by: Spike | Link to this comment | 08- 5-14 10:03 AM
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This included "Harry Brown", "The Sweeney", "Tamara Drewe" and "The Disappearance of Alice Creed".

I've never heard of any of these. You just made them up.


Posted by: Spike | Link to this comment | 08- 5-14 10:04 AM
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Don't know about good, but a huge chunk of film financing is about tax credits (not just the breaks for filming in certain locations or the dumb German law that reacted Uwe Boll. though those are the most famous). Another good way for knowledgeable insiders to manipulate the money flow.


Posted by: Robert Halford | Link to this comment | 08- 5-14 10:06 AM
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Jason Statham in particular seems to be like the Jackie Chan of Britain. He's in like 5 movies a year over there, beating up chavs and pillocks. Whereas we only see him in wacky romps.


Posted by: Cryptic ned | Link to this comment | 08- 5-14 10:06 AM
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85: I've never heard of 50% of them and I actually live here. And I've only heard of "Tamara Drewe" because I saw it in the discount bin in a second-hand DVD shop.


Posted by: ajay | Link to this comment | 08- 5-14 10:06 AM
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I've never heard of any of these. You just made them up.

Everything about Britain is made up. You didn't know?


Posted by: AcademicLurker | Link to this comment | 08- 5-14 10:07 AM
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Whoa.


Posted by: ajay | Link to this comment | 08- 5-14 10:09 AM
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I knew it! No way is there an actual place called "Wales". Wales are a fish, darnit!


Posted by: Spike | Link to this comment | 08- 5-14 10:21 AM
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91: If you were Canadian there would be a nice symmetry in that.


Posted by: JP Stormcrow | Link to this comment | 08- 5-14 10:22 AM
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hey're both from this side of the Atlantic - one a spinoff of a BBC drag-act sitcom and the other a spinoff of an ITV talent show.

Wait, for real? There's an ITV spin-off called Pudsey the Dog? Are they just trolling the BBC?


Posted by: Ginger Yellow | Link to this comment | 08- 5-14 10:23 AM
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Tamara Drewe was based on a graphic novel by Posy Simmonds which was serialised in the Guardian. It's as parochial as that. It got quite good notices, but not quite good enough to send me to see it.

(Simmonds' kids' books are quite good, although ever so middle class, if anybody's looking for such at the moment.)


Posted by: chris y | Link to this comment | 08- 5-14 10:41 AM
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Tamara Drew is quite funny, but it is basically a TV sitcom at feature length. Good cast, some good gags, but pretty lightweight even of its type.


Posted by: nattarGcM ttaM | Link to this comment | 08- 5-14 11:02 AM
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Everything in this chapter about higher levels of returns available to the super-rich seems as if it might be a real complication to the simple r>g story of the book. Piketty talks about the concentration of capital in the hands of the top decile or so, and talks about how because r>g, that concentration will, not inevitably maybe, but generally tend to increase. But a lot of the concentration of capital he's talking about is in the hands of the small rich, and it's not clear to me that for them returns are high enough that their capital will naturally tend to accumulate further; if the average rate of return to capital is about 5%, and the super-rich are doing much better than that, then the small rich are presumably doing noticeably worse.

I find myself really curious about at what level of wealth capital becomes self-sustaining; where it starts tending to accumulate rather than dissipate? And then what portion of capital is in the hands of people that wealthy? That seems like an important breakline for policy purposes: e.g., it might be a worthwhile policy goal to structure taxes specifically to try to keep people below that level of self-sustaining wealth.


Posted by: LizardBreath | Link to this comment | 08- 5-14 11:30 AM
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Capital is self-sustaining at more than 1/r times outlays. People spend more as they make more, but their expenses usually go up at a slower rate due to declining marginal utility (of course, you can buy new stuff like yachts and islands and space station visits). If r is 5%, anyone who has more than 20 times outlays is increasing their capital from solely from capital income; if we want to compare that to the general population, let's throw in an order of magnitude fudge factor due to taxes and higher living standards of the rich and say 200 times the median household income. That's around $50k, so that gets us at, what, $10mil capital (not net worth)? Maybe that's a bit high, but somewhere in the single figure millions shouldn't be too far off.


Posted by: dalriata | Link to this comment | 08- 5-14 11:43 AM
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I'm wondering. Largely, I'm wondering what r is likely to be for the small rich: if it's well over 5% for the super-rich, is it under for the small rich?


Posted by: LizardBreath | Link to this comment | 08- 5-14 11:47 AM
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I don't really see how a difference in r between greater and lesser rich people is a problem for the overall (general) r>g=more inequality (whenever capital is distributed unequally) thesis. A greater r for the tippity-top of the distribution will make the problem worse, because the very rich will just do that much better than the lesser rich, but the thesis still holds. Maybe I'm missing something.


Posted by: Robert Halford | Link to this comment | 08- 5-14 11:55 AM
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Based on what I know of return rates I have trouble imagining it's much less than 5%, but I'm probably making some categorical error like not factoring in inflation.


Posted by: dalriata | Link to this comment | 08- 5-14 11:57 AM
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Also I don't really understand why self-sustaining capital should be the metric. Most people who own capital also receive income, often times income sufficient to sustain a lifestyle without drawing down on the capital at all.


Posted by: Robert Halford | Link to this comment | 08- 5-14 11:57 AM
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What I'm poking at (and this may all be clear if you read more attentively than I do) is that Piketty seems to be making an argument in the following form:

1) Capital is as concentrated in the upper deciles as it was a century ago.

2) Because r>g, the concentration of capital is a self-sustaining process; once you have capital in the hands of the upper deciles, in the absence of government action the future is going to have still more capital in the hands of the current rich or their heirs.

And I'm not sure that he's made an argument that the concentration of capital is a self-sustaining process for smaller 'fortunes' (because of their systematically lower returns). If it's not, then his statistics for how concentrated capital is now seem to me to be misleading as a source of insight into how stable the current concentration of capital is.


Posted by: LizardBreath | Link to this comment | 08- 5-14 12:02 PM
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To be clear, I don't think I've found a fatal flaw in the book or anything like that, just an area where I think more detail (if there were a way to get it) would be interesting.


Posted by: LizardBreath | Link to this comment | 08- 5-14 12:03 PM
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Maybe the key is that r is always a blended rate? Obviously any given income-producing asset will have a different return, and different individual investors will always return a higher r. So knowing that r is greater than g, in the aggregate, may tell you something interesting about inequality, but you have to know more detail about the actual structure of returns (and capital ownership) to get more precision about who the rise in inequality will benefit. Though I think he says somewhere (should note here that the reading groups has finally surpassed me since I put the book down for a while, I haven't read Chapter 12 yet but will now be trying to catch up) that he thinks the future petits rentiers are likely to earn close enough to the aggregate r, which will surpass g, that the importance to them as a group of their capital is likely to increase and that they are likely to become relatively more wealthy vis a vis their peers than we have seen in the past.


Posted by: Robert Halford | Link to this comment | 08- 5-14 12:25 PM
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Eh grammar writing errors whatevers.


Posted by: Robert Halford | Link to this comment | 08- 5-14 12:26 PM
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Piketty is using figures for g of around 1.5% for today. That leaves a lot of room between 5% for the super rich for the merely rich to still get r>g.

http://piketty.pse.ens.fr/files/capital21c/en/pdf/T2.5.pdf

I can't recall him going back and recalculating rates for the 1-0.1% based on this, and that might be interesting, but it is a huge window to drive his point through already, so I guess he might choose not to finesse it.


Posted by: conflated | Link to this comment | 08- 5-14 2:29 PM
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Reading The Madras House. Struck by the various references to capital:

MRS. HUXTABLE. People spend their money now-a-days. I remember my father's practice was to live on half his income. However, he lost the greater part of his money by unwise investments in lead, I think it was. And he educated me above my station in life.

--

MR. STATE. And I suspect that you are no more interested in money than I am, Mr. Madras. Anyone can make money, if he has capital enough.

--

MRS. BRIGSTOCK. I agreed to it [letting her husband live in the employee dormitories]. We've been saving quicker. It's three hundred pounds now, all but a bit... that's enough to start on. I've got my eye on the premises. It's near here, I don't mind telling you. Why shouldn't we do as well as others... and ride in our carriages when we're fifty!
MISS YATES. Oh... premises near here and three hundred pounds. Perfect foolery, and William ought to know it is. This firm'll undersell you and eat you up and a dozen more like you... and the place that's trusted you for your stock will sell up every stick, and there you'll be in the gutter.
MRS. BRIGSTOCK. [More drenched with the cold water than she'll own.] I'm much obliged, I'm sure... I've my own opinion...

--

CONSTANTINE. Kept by their husbands... or if they live on their dividends, kept by Society.
PHILIP. What about men who live on their dividends?
MR. STATE. No... now don't let us go on to politics.

Posted by: Minivet | Link to this comment | 08- 5-14 3:06 PM
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Anyone can make money, if he has capital enough.

Basically the epigraph to Piketty's book.


Posted by: chris y | Link to this comment | 08- 6-14 1:59 AM
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Interesting interview with P. here, which addresses some of the points people have raised over the past weeks. Transcribed, in case his accent is too heavy for you.


Posted by: chris y | Link to this comment | 08- 6-14 8:02 AM
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Were it not for Piketty's accent, we might not be having this conversation. His "easily understandable but slightly exotic accent [is] perfectly suited to today's media," as you would know if you read Larry Summers.


Posted by: politicalfootball | Link to this comment | 08- 6-14 9:48 AM
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The Unbelievable, Unknowable Wealth of the World's Super-Rich


http://www.slate.com/blogs/moneybox/2014/08/08/global_wealth_inequality_why_we_don_t_really_know_how_rich_the_global_elite.html


Posted by: peep | Link to this comment | 08- 8-14 12:19 PM
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Posted by: Craig Wilson | Link to this comment | 10-31-16 1:24 PM
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