Monthly Archives: March 2013

Marriage is …

Reprimand ProjectI’ve seen this, among many other things circulating in the social media world, with approval from even some of my Tea Party friends. Not so much for me. In their cases, I think it is an attempt to come to terms with what they think is propbably inevitible — and maybe it is.  Inevitible, that is.

I mean, would it be the end of the world if the word Marriage got redefined in our culture to mean something it has never meant in Western Culture at all?  No. Probably not.  I do think it would lead to the further deterioration of Western Culture in the long run.  And some are arguing that that is the intent.  Maybe it is.

This is certainly not the way I would handle this issue.  It’s still in support of an attempt to unilaterally and legally re-define a culuturally significant word with complete insensitivity and, frankly, often comtempt for the culture it is being forced upon. . There are other ways to ensure legal frameworks that work for everybody. This is the wrong way to do it.

If you doubt the contempt part, just look at the website of the people who put this out. The “Reprimand” Project. They’re there to “reprimand” people who don’t agree with them. 

Check out this paragraph, the first of the explanations for what “reprimand” is all about.Pay special attention to the last sentence. It’s dripping with contempt for men, in particular. Frankly their whole manifesto is as well.

REPRIMAND (Required Exam of PRostate In Male ANdrogen Deficiency)

By legally requiring that all doctors and healthcare professionals give men a full, manual (i.e. with a finger in the rectum) prostate exam when treating not only issues of erectile dysfunction, but all symptoms that point towards low testosterone, we can ensure that men receive the critical, preventative care they need. It also means that men get something stuck up inside them for seeking legal medical services.

I can’t say I disagree with every position they have, though I will say without hesitation that I disagree fundamentally with their worldview and political outlook.  These people are divisive and petty. They’re all about punishing what they don’t like, even if they’re punishing a person who hasn’t engaged in that behavior.  A little full of themselves if you ask me, in the way that one might be if one had just finished a womens’ studies course and really got the fever.  If you read closely, their “equalizing” philosophy is not to extend freedom to people who they feel don’t have it, but to restrict it from people who do. I’ve got no use for them.

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Earth Hour is…

A “dry run” at not-solving a phony problem, so we can get our pretend-to-solve-it skills at peak performance [for] when we start not-solving the real ones.

Words of wisdom from me, over at the Hello Kitty of Blogging.

Veering off on a tangent, in a piece of correspondence, I elaborate “off line”:

People are frustrated, bored, want to go through the motions of building something great and grand. But…They are destroyers, not creators. You ask them what they’re building, they can’t answer. You ask them what they’re destroying — they can. You ask their political opponents “What are those people over there trying to build, and what are they trying to destroy?” and the answers you get back, are identical to the answers you got from the participants in the movement themselves; only the terms are less glittery, less flattering. Example: The democrats want an “estate tax” and the Republicans call it a “death tax.” They disagree on the terms, but they agree on the implications of it and how it is supposed to work. What does it build? What does it destroy? Nobody can say what it builds. Well, it turns out a lot of human energy is going into things like that. Building things is scary. If someone comes along to quiz you about it, you have to say how it’s all supposed to work. And then when you actually do it, you have to get everything right. That means developing skills. Otherwise you do something stupid like put the wrong kind of fuel in the President’s limousine.

So in anticipation of the scrutiny and the assault of other destroyers, people find it easier to be destroyers; they’d rather do the quizzing, than be the ones who are getting quizzed.

I remember a very smart guy, the Chief Financial Officer for a company I once fooled into hiring me, and promoting me…came up with a real gem, which I must paraphrase and probably paraphrase poorly. Here goes. In government, even the people at the very top of the structure lack the authority to make anything go. But everybody, all the way down to the mail room, can bring the authority needed to put a stop to something. Everyone can stop something. Nobody can make it go.

Well, it isn’t true of just government. Authority and wherewithal to make things go, to build something new, are rare things. Because these things are rare, they are therefore precious. That the discipline involved is difficult to master, makes them even more rare and more precious. The authority and wherewithal to destroy such efforts, to bring them to a stop, are in abundance. The ritual of the destroyer quizzing the creator, obliging the creator to stop his creating if he can’t answer each question honestly, accurately, completely and to the satisfaction of the person asking. Doing that kind of quizzing is easy and fun. Being on the receiving end of it is frustrating, and not fun.

This is where I become truly embarrassed when I hear about the wrong fuel being put in the President’s limousine. The problem isn’t quite so much lack of skill. Heck, who am I to criticize, I never did find out if it was gas in a diesel engine, or diesel in a gas engine, and I’m at the point where I don’t give a hang. The problem is that it just wasn’t taken seriously, and I know why. The leadership is in the business of destruction because destruction is easier. They like to pretend they’re building something cool. They can’t say what it is they’re building. And, they lack the greater discipline required to build things.

Quoting Spock again:

As a matter of cosmic history, it has always been easier to destroy than to create.

Cross-posted at House of Eratosthenes and Right Wing News.

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Get Going on it, Rand

Looks like Rand Paul has the same take on this whole Gay “Marriage” issue that I do.

“I’m an old-fashioned traditionalist. I believe in the historic and religious definition of marriage,” he says. “That being said, I’m not for eliminating contracts between adults. I think there are ways to make the tax code more neutral, so it doesn’t mention marriage. Then we don’t have to redefine what marriage is; we just don’t have marriage in the tax code.”

 

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Regressives

A couple of old Coyote Blogs from the good old days before Hope and Change.  First, how progressives are conservative:

. . . I must say that on a number of issues, particularly related to civil liberties and social issues, I call progressives my allies.  On social issues, progressives, like I do, generally support an individual’s right to make decisions for themselves, as long as those decisions don’t harm others.

 

However, when we move to fields such as commerce, progressives stop trusting individual decision-making.  Progressives who support the right to a person making unfettered choices in sexual partners don’t trust people to make their own choice on seat belt use.  Progressives who support the right of fifteen year old girls to make decisions about abortion without parental notification do not trust these same girls later in life to make their own investment choices with their Social Security funds.  And, Progressives who support the right of third worlders to strap on a backpack of TNT and explode themselves in the public market don’t trust these same third worlders to make the right decision in choosing to work in the local Nike shoe plant.

 

Beyond just the concept of individual decision-making, progressives are hugely uncomfortable with capitalism.   Ironically, though progressives want to posture as being “dynamic,” the fact is that capitalism is in fact too dynamic for them.  Industries rise and fall, jobs are won and lost, recessions give way to booms. Progressives want comfort and certainty.  They want to lock things down the way they are.  They want to know that such and such job will be there tomorrow and next decade, and will always pay at least X amount.  That is why, in the end, progressives are all statists, because, to paraphrase Hayek, only a government with totalitarian powers can bring the order and certainty and control of individual decision-making that they crave.

Second, why the labor theory of value is lunacy.

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Feedback

As I’ve often argued here and in the comments at House of Eratosthenes, one of the weakest points in the anthropogenic global warming argument is the heavy reliance on positive feedback assumptions.  CO2 is a weak greenhouse gas, and can be projected to cause rapid, catastrophic warming only if we assume that it will increase water vapor, which is turn is a much stronger greenhouse gas.  The problem is that there is little evidence that the positive feedback mechanism exists, and even some reason to suppose that the feedback may be negative.

New evidence from NASA’s water vapor project highlights the uncertainty:

Climate models predict upper atmosphere moistening which triples the greenhouse effect from man-made carbon dioxide emissions.  The new satellite data from the NASA water vapor project shows declining upper atmosphere water vapor during the period 1988 to 2001. . . .  The cooling effect of the water vapor changes on OLR [outgoing longwave radiation] is 16 times greater than the warming effect of CO2 during the 1990 to 2001 period.  Radiosonde data shows that upper atmosphere water vapor declines with warming. . . .  Both satellite data and radiosonde data confirm the absence of any tropical upper atmosphere temperature amplification, contrary to IPCC theory.  Four independent data sets demonstrate that the IPCC theory is wrong.  CO2 does not cause significant global warming.

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Unmoored Part IV

[continuation of the Unmoored series]

I made an allusion to “baiting hooks” to get people who couldn’t afford them to take out loans.  Some of it was with teaser rates.  Some of it was with balloon interest payments. No down payment.  Somewhere along the line they came up with the idea of an “interest only” loan, where you make interest payments only, never paying down any of the principal. I’d heard of these well before the crash and wondered who in God’s name would sign up for such a “deal”?  But we’re not done yet.  There were also negative amortizing loans.  Yeah. Look that one up.  Most of these look like they were designed to fail.  And maybe they were.  (Still doesn’t excuse the idiocy of taking someone up on a deal you can’t afford).

I suppose there’s one born every minute. And on Wall Street, I think many actually take pride in screwing each other over. I imagine that’s what Michael Lewis’ book “Liar’s Poker” is about.  Don’t have that one yet.  But when he brought it up in one of these other books (written from his own experiences inside of one of these firms) he meant it as a warning.

He was shocked and dismayed to find that people were using it as an instructional resource.

In “The Big Short”, he runs down character profiles for two people involved. The first guy started out as a real self-interested go-getter who came to despise the system but kept working under it just to screw over people he thought were screwing other people over.  The second was a bright introverted medical student who was bored with medicine and had a knack for researching and subsequently picking stocks in a manner that made a lot more money than anyone else was able to.  These two people end up being ground zero of an epidemic that exploded sometime in 2006.

Both were certain, after looking at the numbers of BBB loans packaged in AAA-rated packages along with a stagnant housing market and the nature of especially the ballooning and teaser rate loans, that enough of these loans would soon go bad to sour the packages. I’m not sure who came up with the mechanism … I think it was that medical student … but someone came up with the idea of Credit Default Swaps.

This one finally gave me no choice but to ask… what. the. hell?????

Suppose I was worried about my house being destroyed by fire or flood or a tornado.  Most people are concerned about these things enough to buy insurance (their lender makes them buy house insurance while they have a loan, as the lender has a vested interest in keeping your house viable for collateral).

Now insurance is about risk-spreading, and it makes sense to do it.  If, say, 1 in 500 houses will experience a disaster like this, it’s nice to be able to pay a relatively small amount a month into a pool so that if any one of your houses gets hit, the huge sums of money it takes to fix a house will be there to fix yours.  Risk spreading adds efficiency to ensuring that your investment in your home is protected.  Insurance company makes money on the surplus.  Win-win.

Credit Default Insurance, one would think upon first hearing the term, would be similar to the mandatory insurance your lender makes you have on your home to protect their interest in it. I’m not sure if anything like it existed in the market before this, but the next twist is truly bizarre.

The new mechanism allowed people to buy insurance on stocks in which they had no vested interest in the first place.

It would be as if I took out fire insurance on YOUR house.  And I don’t mean buying the insurance on your behalf.  I’m the beneficiary if your house burns down.  Talk about a conflict of interest.

This completely decouples the risk from the reward as far as the original loan transaction is concerned, and even as far as the sale of packaged mortgages were concerned.   I didn’t make the loan, I didn’t buy the package, but I get money if the package goes belly up (if I rember right, they even came up with a way to get the money as the individual loans went belly up rather than wait for the whole package to go bad).

It isn’t risk free, but the potential payoff to investment ratio made it quite akin to gambling.  It *was* gambling.  And with a housing bubble that had clearly peaked, the odds were pretty much in your favor.  But man, how does this even enter someone’s head as an idea?

So who did they talk into insuring other people’s bonds on their own behalf?

Well, it was mainly AIG.  At first.  I guess the folks at AIG were talked into creating a product that they could sell to insure person A against person B’s risk, and they were further convinced that person B’s risk was low because the bonds were rated AAA.  And nobody at AIG stopped to think, “Hey … what’s THEIR angle?!  What are we missing?  And why are we selling so many of these things?”

If they did, all they ended up with was “selling GOOD!!!!”

So now we had people making money selling bad loans in with good loans, and packaging ever increasingly large numbers of bad loans in with those loans — and selling those packages and making a fortune.  And we had people buying lottery tickets with good odds betting that the loans in the packages would go bad, and they’d get big payoffs.  And we had people thinking they were making (well they were in the short run) lots of money selling “insurance” to that second group of people for loans they didn’t even own.

The insurance is an abstraction of an abstraction of an abstraction of an abstraction. There is no value being produced at this level. The people involved in the original loan transactions are lucky to be colored dots on a screen. It was all a game of hide the turd between financiers now.

To make matters worse, when the few people who did understand that the more bad loans, the higher the payoff from the insurance …

.. they actively scared up more bad loans to buy “insurance” on.

Now we’ve gone from sinkhole to blackhole.

If all of this had had remained private obligations between private parties with no government bailouts, it would have been bad for those people and those companies.

But millions of regular people had those companies and those bonds in their investment portfolios.

The Libertarian in me says, “well they should have looked into their investment companies’ strategies”.   Never a bad idea.  But my heart wouldn’t really be behind that statement.  The reason I go with a broker in the first place is — it’s all too complicated for me.  I don’t have the time or the inclination for it.  It shouldn’t be. But it is.  That leads to problems like this.

I myself am pretty unmoored from the underpinnings of my own investments.  I can look, and sometimes do, at the ones my broker is in charge of.  But I never look at what the company pension looks like.  I don’t have any control over that.

Still, I disagree with the government bailouts.  As Rick Santelli put it, it’s rewarding bad behavior.  Sometimes the best way to learn the permanent lesson … don’t touch a hot stove … is to get burned by one once.

[one more part coming, I think]

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Unmoored Part III

[continuation of the Unmoored series]

What value did the CDO bond add to the economy?  The argument was it allowed lower interest rates to more people so they could afford to by homes and iPods (turns out CDO’s also often had credit card debt bundled in them). And that may have some truth to it.  But I believe the cost, the tradeoff — in breaking the risk-reward relationship outweighs it. And that breakage was the incentive for their creation – the credit extension to more people was just the justification.  I don’t think Wall Street sits around thinking “how can we help out the less well off by offering them more credit?”.  Partially because human (and animal) nature has a force that draws us for the most reward for the least effort or risk. There’s nothing inherently wrong with that.  It’s the way all life works.

But the CDO did not really create a new value sink.  As I alluded, it isn’t that they are valueless to the economy, it’s that they come with social and economic consequences that outweigh the value they may add.

What they effectively create is a value sinkhole.

And some investment firms and bankers stood at the edge of this sinkhole and like filter-feeders and tried to skim as much of the accompanying abstract cash flow as they could as it spilled into the growing pit.

They had these subprime loans that loan clearinghouses created by this bond market wouldn’t buy.  How to sell them off, too?

I remember when a standard bag of sugar was 5 lbs.  Now it’s 4.  It was done to sell us less for more without raising the price of “standard” unit (by changing the standard size).  You’re hard pressed to find a 16 oz can of anything in the grocery store. 15 and a half. Packs of gum have 5 sticks in them instead of 7.  I even notice that the 12-pack bubble-packs of gum we usually buy now have 11 pieces.

So how do you get people to buy subprime loans on the bond market?

Well, someone came up with the grand idea of packaging them with prime loans and get the package rated higher than the original loans.  Watered down CDO’s. Since subprime loans historically get paid off, just not at as high a rate as prime ones … the argument was made that it the risk was still good (even though, by definition, that couldn’t be the case) and the rating companies agreed that they were still good enough to rate AAA, rated them so, and so they sold.

So now we’re not only further unmoored from economic reality (value transactions where the value remains close to the individual) … we’re being slightly dishonest.  It always starts with the white lies.

With this milestone behind them, packagers argued that the biggest risk in the subprime market was that housing prices would fall.  While that sometimes happened in this region or that, the argument was that the chances of housing prices falling all over the country at the same time was small, so they packaged disparate subprime loans from different regions and again got the packages rated higher than the individual loans were rated, and sold those.

There was an absurd assumption that housing prices would always go up.  Historically, though, that’s not true. In a little longer view of history, they tanked about 50% in the Great Depression.  That ain’t hay.

Depressions and recessions happen, and they do affect entire nations, and often other parts of the world.

The market for these bonds was good, and people were making money selling the bonds.  So they wanted more bonds to sell. So they needed more people to take out loans.  They baited hooks to entice people with less and less money into taking loans that the banks at some level probably knew they couldn’t pay back.  But they didn’t care.  They were selling the loans and making money off the bundles.  It would be someone else’s problem.

Now in a sane society, this would not work very often.  People should be brought up knowing how loans and interest work, and they should learn how to budget and learn how much they can afford to spend on a house and still do the things they want to do.  I always figure out, for every car loan I’ve taken out, my student loans, my house loan… how much the payments would be per month, added them up, and structured the term of my loan so that it fit my budget with plenty of wiggle room.

But in our affluence we’ve spoiled a few generations by not teaching them basic economics growing up, and shielding them from the consequences (risks) of their ill-advised behavior.  They don’t know the meaning of the word “responsible” (No, contrary to that stupid insurance ad campaign it doesn’t mean helping a lady across the street. That’s courtesy, not responsibility.  See, they don’t even know what it means.)  We bail them out, they get something for nothing, and they think this is the way the world at large should work.

So when somebody presents them an offer that would sound too good to be true to a responsible person — they just see it as more candy from a new daddy.  And they bite.  And then go screaming that the evil bankers took their homes away when they couldn’t afford the payments.  I’m not letting these consumers off the hook.  It’s a big problem with our culture, and it needs to be fixed.

All of this was bad enough.  But what happened next truly boggles the mind, and turned what would have been some bad private investment losses into a catastrophe that reached into the wallets of unsuspecting Main Street America.

[to be continued]

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Unmoored Part II

[continuation of the Unmoored series.]

I had a discussion a few years back with a friend where he incredulously explained that bankers created money “out of thin air”.  I had never really thought about it.  And while I utlimately realized that this was technically true, I also knew there had to be some relationship to reality.   Money is, at the bottom of it all, an exchangeable value store.  It makes it so that I don’t have to trade a plumber two chickens to fix my kitchen drain. In a very crude but useful illustration, say I fix a computer problem for a farmer, and he gives me the money he made from selling two chickens to a distributor, I take that money and give it to a plumber to fix my kitchen sink, and he uses it to buy two chickens from the grocery store.  I never touched a chicken and the grocery store doesn’t really care if my kitchen sink is working or not.

Now … if there were a static amount of money in the world, an increasing population alone would cause a problem.  The price of everything would be astronomical by now.  So clearly money needs to be created in order for all of this to work without me getting chicken feathers all over my hands.  (Chickens don’t fit in your wallet very well, either, and the feathers jam up the cash registers.)

The objection was that a banker, say with $100, makes loans for $1000 and he gets to say he has $1000 in assets. He “created” $900 “out of thin air”.

I had to think about that for a while before I found the connection to reality.  No, he didn’t create $900 of value.  He created a value sink to collect value from the people who took out the loans in the first place.  People create value, almost out of thin air, by doing things for others.  We typically call it “work”.  It turns out that most of the value in most products is not wrapped up in the raw materials so much as in the work that was done with those raw materials to make, say, a tire or an iPhone.  So people who take out loans make tires and iPhones and give some of the money they get from making tires and iPhones back to the bank to pay off their loans.

Of course, some of them might not manage their cash flow well, or get fired or whatnot, and they may not actually end up paying back that loan. Which introduces risk on the part of the lender.  So the lender charges a fee to help offset that risk, which we call “interest”.  All of this is old stuff, but we don’t usually stop to think about how it all really works.  It’s kind of strange, because money is an abstraction of value and so requires abstract thought to understand … but … at least you can see how money generally ties back to reality without too much headache.

So the pool of money expands so that a million of us aren’t fighting over the same fixed amount of money 100 of our ancestors had.  This works. There’s no perfect way to abstract value, as people value things differently. Yes, the moneychangers have an advantage and yes, they often abuse it. Life is not fair. But it’s pretty much how it’s worked for quite some time now. Banking itself is very regulated for these reasons.

Oh, but people are clever. When one lacks moral fortitude, any regulation can be thwarted by a technicality.  I’m not suggesting specific regulation upon specific regulation to try to patch up the problems with it, either. That road, after a point, tends spawn more unintended problems that the original problem caused. It is the way it is.  There are no solutions. Only trade offs.

The banking market got tightly regulated over the years, but the bond market, not so much.  So brokerages started creating packages of loans to sell as bonds, and structured them in such a way that the person buying the bond was insulated, in large part, from the risks of default.

Money is an abstraction of reality.  A loan is an abstraction of an abstraction  with a risk-reward balance. We’ve seen how they relate back to reality.  It functions as a value sink.  But now we have an abstraction of an abstraction of an abstraction in these bonds.

This is where academia goes wrong, and it is also, IMHO, where the financial industry went off the tracks.

At this level of abstraction, the risk-reward balance is eroded if not completely broken … and that is its intent.  To me, this is the departing point, the unmooring — which while I don’t like I can understand the justification.  I just don’t agree with it. But that’s not the end of it. It gets worse.

[to be continued]

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Unmoored Part I

We took a road trip recently with some friends I’d met on the bus on the way to DC in 2010. Good people. Aunt and uncle of Chris Loesch, it turns out. It was a pleasure trip to go see a concert 450 miles away, so there was plenty of time for talking about other things, and we did talk books.

The big “Bush’s Fault” 2008 crash came up, and he asked if I’d read “The Big Short” or “Boomerang”. They were about what was going on inside Wall Street and the second — around a few other countries in the Western World … in the early 2000’s up to 2008.

Now people ask me to read and watch all sorts of crazy things that I won’t. Anything that starts out telling me about how Jews are controlling the world from a bunker in London, 9/11 truther crap … not buying it.

My interest piqued when he told me it was the same author that wrote “Moneyball” … which I had recently watched (good movie) and “The Blind Side” … another good movie that I think did rather well in the theaters. I think Sandra Bullock was in it. So I thought hey, even if he turn’s out to be a crackpot he’s not your average anonymous crackpot, and I liked the material and treatment in those two movies so the odds were against.

Thanks to the evil corporations of Barnes and Noble and Amazon, and Intel and AMD and all the corps involved in running the internet … I had a copy on my nook tablet within 10 minutes of checking into the motel.

I read “Boomerang” and am most of the way through “The Big Short”.

I’m titling this series “Unmoored”. Hopefully you’ll see why.

I frankly knew few of the actual inside details of the crash. I knew AIG was involved big, as well as Goldman Sach’s. I knew it had to do with banks making loans to people who couldn’t afford to pay them back (I would like to point out the flip side of this — people who couldn’t afford to pay them back were TAKING loans from banks). And it was mostly these big banks. The quasi-government alinstitutions Freddie Mac and Fannie Mae were connected to it. Government anti-red-lining policies contributed. I knew it was triggered by overextensions (I thought of banks) and defaults by real estate loan holders. All true, but far from the whole story.

I’d heard the terms “CDO” and “Default Credit Swap” tossed around, but really didn’t know what they were exactly. I basically knew what it was to “short” a sale, but I couldn’t wrap my head around how it pertained to home loans.

So here’s my general understanding of it now:

In the real-estate loan market, there are good risks and bad risks. People with higher credit ratings are good risks and get the best interest rates, and people with poor credit ratings are bad risks and get higher interest rates to cover the risk. Yes, it seems “unfair” to charge people with less money more money — but it’s a loan, not charity, and the lender needs to cover the cost of the people who won’t pay theirs back to make it worthwhile. All basic stuff we already knew. Those last loans are called “subprime”. The borrowers don’t meet normal credit rating standards for a prime rate.

The Community Reinvestment Act of 1977 opened this market up quite a bit and probably contributed to the problem … but I’m finding out it really was a (relatively small core group of) bankers and people some big investment houses that spun this whole thing out of control. It’s very hard to wrap your head around the mechanisms, not so much because they were THAT complicated — it’s just — you can’t make any sense of what relation to actual economic reality they bore. In other words, “who even dreamed this stuff up????” Most of the management at the banks didn’t even understand them – and they didn’t care – as long as their portfolios looked better every year. This was as much of the problem as the core group’s wild schemes.

This core group, actually, weren’t a “group” in the sense that they got together and colluded. They would just as soon have stabbed each other in the back, I think. But there were a few people doing the same kinds of things, studying and copying each other and extending the ideas to more and more absurd mechanisms further and further unmoored from economic reality.

[to be continued.  I’m making this a series both to make it easier to read and easier to write.  I am going somewhere with this.  I think.  It’s a little fuzzy right now, but I’m going somewhere as long as I keep the word “unmoored” in mind.]

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