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EJ
03-20-09, 11:30 AM
http://www.itulip.com/images/Schumpeter1.jpgGhost of Joseph Schumpeter and the end of the Monthly Payment Consumer, again

More than 25 years of successful credit bubble re-inflations have trained us to think of consumer retrenchment as temporary. This time it is not. Invest accordingly.

The monthly payment consumer (MPC) first appeared in the late 1920s with the advent of installment credit that temporarily extended the purchasing power of the American middle class enough to make exciting consumer products affordable, products that entrepreneurs unleashed in a wave as they beat government financed WWI military technology swords into consumer products plowshares--radios, refrigerators, and automobiles. By 1929, personal consumption expenditures (PCE) grew to 75% of US GDP and briefly spiked to 83% in 1932 as GDP collapsed faster than PCE during The Great Depression. PCE fell rapidly to 49% percent of GDP in 1944 and never again reached the 1929 pre-crash level, but peaked at 71% in 2008, the same year household debt service payments as a percent of disposable personal income peaked at 14.3%.
Joseph A. Schumpeter said of the consumer crisis in his 1939 book Business Cycles: “Consumers' borrowing is one of the most conspicuous danger points in the secondary phenomena of prosperity, and consumers' debts are among the most conspicuous weak spots in recession and depression... the load of debt thus light heartedly incurred by people who foresaw nothing but booms should become a serious matter whenever incomes fell. Nothing is so likely to produce cumulative depressive processes as such commitments of a vast number of households to an overhead financed to a great extent by commercial banks.”
The credit bubble that started in the early days of the FIRE Economy (http://www.fireeconomy.com/) in the early 1980s collapsed with the housing bubble starting in 2006. Debt deflation and global depression will put an end to the MPC over the coming years in a rhyme of events that Schumpeter explained 70 years ago.


http://www.itulip.com/images/PCE1959-2009.gif
Personal consumption expenditures decline for the first time in over 70 years

http://www.itulip.com/images/householddebt1959-2009.gif
Household debt levels fall for the first time since The Great Depression


The collapse of the FIRE Economy is revealed in the March 2009 Fed Flow of Funds report Z.1 table d.2 for anyone to see.


http://www.itulip.com/forums/../images/debtgdp1978-2008.gif


Since it started in the early 1980s, every time the FIRE Economy ran into trouble (1987 post stock market crash, 1989 post LBO bubble collapse, and 2000 post tech stock collapse) it was bailed out by central banks either directly or indirectly. In 1991, debt levels declined in every category except financial, which virtually doubled, accounting for the growth shown. After the tech stock bubble collapse, foreign central bank borrowing restarted the FIRE Economy. But in 2008, all avenues failed. Non-financial, finaicial sector, and even local and state government debt growth declined, all except for Federal government debt. (See: Flow of Funds Q4 2008: Debt Deflation confirmation - Eric Janszen (http://www.itulip.com/forums/showthread.php?p=83348#post83348))

Wrong lesson

The Federal Reserve mistakenly believes that the lesson of 1930s was to re-inflate a credit bubble quickly before its collapse becomes self-reinforcing, when in fact the lesson lost was to not allow a credit bubble to form in the first place; collapse is inevitable and cannot be stopped but the debt excess canceled either by monetary deflation or inflation, and the Fed is committed to the latter path.


http://www.itulip.com/images/PCEdivGDP1929-2012.gif
End of the second credit and consumption-based US economy in 70 years, forecast in red


The economic crisis will again turn a generation of Americans into savers and critical consumers that look at total prices of goods, not monthly payments, and avoid debt. The era of mass marketing of consumer credit and riding the wave of debt-financed consumerism of the past 25 years is over. Only those companies that prepare for this sea change in consumer attitudes will survive.

See also:
Can Anything Bring Down the Monthly Payment Consumer? - Jane Burns Aug. 2007 (http://www.itulip.com/forums/showthread.php?p=5961#post5961) (free)
Can Anything Bring Down the Monthly Payment Consumer? Revisited - Eric Janszen - Mar. 2009 (http://www.itulip.com/forums/showthread.php?p=81591#post81591) (free)
Venture Capital in a Transformational Depression - Janszen - Mar. 2009 (http://www.itulip.com/forums/showthread.php?p=85003#post85003)($ubscription)

iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032): The Investment Thesis for the Next Cycle™
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cbr
03-20-09, 11:50 AM
what do you think will happen as far as trends with the consumer credit/debt collections business? will FICO scores survive or be relevant other than for a house? I presume autos may still be financed but on a much more rational basis... how long do you see the tail on debt collection business lasting?

i have been toying with starting up a consumer attack business, empowering consumers abused by credit and service companies to achieve real results and/or winning legal claims, but it seems that it may be a bit late...

icm63
03-20-09, 12:20 PM
:)
Back to the finance world of the 1950s.

30% deposit minium for house buying

Coy that sell stuff by 'but now' interest free for 18 months, no money down, will see there business adjusted: cars, furniture, appliances
(of course it already happened).

The same stuff will be sold, but how its sold changes.

BEST INVESTMENT ADVICE: Find a COY that has a great market leader product, but sells on hoc ( ie debt), when that collapses BUY the COY. The product will survive under better balance sheet conditions.

ricket
03-20-09, 12:23 PM
what do you think will happen as far as trends with the consumer credit/debt collections business? will FICO scores survive or be relevant other than for a house? I presume autos may still be financed but on a much more rational basis... how long do you see the tail on debt collection business lasting?

i have been toying with starting up a consumer attack business, empowering consumers abused by credit and service companies to achieve real results and/or winning legal claims, but it seems that it may be a bit late...

I, personally, have successfully emerged from the "Monthly Payment Consumer" mentality. I no longer look at how much I can afford monthly, but how much it will cost me, both in a literal sense, and a long term cost of use. For example, my vehicle is approaching 10 years of age and I am deciding if I should make any repairs or buy a newer, more fuel efficient, vehicle to save money. I have spent hours calculating how much I drive, how much I want to save towards buying, how much repairs will cost me, etc. But not once have I ever even *thought* about financing a new vehicle. No way, because I understand how the banks create that "financing" out of thin air and charge me money to which I have to pay extra for and which I feel like they do not deserve.

Also, EJ, I was re-reading your updated post that you cited above from March. You noted that Infrastructure Bonds should be issued and purchased. How come so many people discredit *housing* as viable infrastructure? Just because housing has become "financialized" does not make it any less of an infrastructure improvement. Think of all the infrastructure that had to be built to put all those homes in place (ie roads, electrical wiring, broadband communication lines, water, sewage, etc). One cannot discount how, if effectively utilized, that could greatly improve the prosperity of this nation. I think alot of people are greedy and they dont even realize it. Why not just literally give/force the banks that have received taxpayer bailout money to give up homes to those that need them? There's no reason why Tent Cities should be popping up in various cities, while there sits literally millions of homes vacant with no one living in them. Some of the McMansions you could put 2-4 families in!

I think a potential business model is realizing that we had this huge boom in real estate (which can be classified as an infrastructure improvement, similar to rail/mass transit), where we can literally put millions of homeless people off the streets and/or house most of the population in the US. Now find a way to connect all those homes together in such as way that eliminates the spatial boundries that typically define a "city". From there you can begin to build a productive model for an economy that is more local, more productive, and is sustainable over the long term. Wishful thinking on my part...perhaps. But grand ideas are never borne out of pessimism simply because pessimism is, as a whole, negative and self-serving at the expense of takings risks that may one day pay off exponentially.

wayiwalk
03-20-09, 12:34 PM
"The economic crisis will again turn a generation of Americans into savers and critical consumers that look at total prices of goods, not monthly payments, and avoid debt. The era of mass marketing of consumer credit and riding the wave of debt-financed consumerism of the past 25 years is over. Only those companies that prepare for this sea change in consumer attitudes will survive."


I think the most interesting change not mentioned will be consumers will be looking for products with a useful lifespan that is greater than 1 or 2 years.

Anyone have a plastic zipper on a $100 coat break lately?:mad:

ricket
03-20-09, 12:38 PM
Anyone have a plastic zipper on a $100 coat break lately?:mad:

Actually, if you look real careful, you should see how the zipper is either hot-glued or sewn to the edge of the fabric/coat. You can go to a local fabric store and find you a seam ripper and a replacement zipper. Find a grandmother who has a sewing machine and wah-lah.

The crafty people will be the prosperous ones in the upcoming depression. Better put your thinking hat on!

goadam1
03-20-09, 01:14 PM
Don't count out new and improved forms of credit. What about the rental or subscription forms of indentured purchasing? Do you "own" a cell phone? I paid $300 for a phone and $120 a month add infinitum to use it. Or "subscription" forms of entertainment. You get the beatles for a dollar a month, forever. I bet some other models can be invented.

don
03-20-09, 01:32 PM
Don't count out new and improved forms of credit. What about the rental or subscription forms of indentured purchasing? Do you "own" a cell phone? I paid $300 for a phone and $120 a month add infinitum to use it. Or "subscription" forms of entertainment. You get the beatles for a dollar a month, forever. I bet some other models can be invented.

Good points :)

Of course credit will become curtailed as the ability to pay dramatically shrinks but to call an end to the MPC means eliminating a favorite FIRE hor'derve and forfeiting the powerful political lever of capping wages and salaries with a debt escape hatch. Shifting the rising cost of labor onto money-making debt access for labor is what a lot of the last 30 years has been all about, at least at this level of examination.

We'll see a virtuous circle of public funding of the MPC before we see its demise.

ax
03-20-09, 01:33 PM
Amazing how even now in every interview with Obama or his minions all they mention is "we need to get credit flowing again," i.e., the consumers spending again. If Florida is the Ponzi state, America is the Ponzi economy.

goadam1
03-20-09, 01:55 PM
It's like the economy has a bad prostate.

Spartacus
03-20-09, 01:58 PM
Amazing how even now in every interview with Obama or his minions all they mention is "we need to get credit flowing again," i.e., the consumers spending again. If Florida is the Ponzi state, America is the Ponzi economy.

the wasp has injected the toxin into the brain
and now the economy & government are being
led around by the stumps of their antennae

http://itulip.com/forums/showthread.php?p=77708&highlight=wasp#post77708

ricket
03-20-09, 02:55 PM
the wasp has injected the toxin into the brain and now the economy & government are being led around by the stumps of their antennae

What an incredible analogy LOL.

ssvasulu
03-20-09, 04:15 PM
Monetary inflation coupled with risk & debt averse consumers. Don't you think it is godsend event for govt? Govt can just keep spending money on all trash programs without causing inflation (because consumers use it either to pay off debt or to increase savings balances). When will the monetary inflation start to have impact?

bpwoods
03-20-09, 04:25 PM
Picked this up to-day in the library.

'...(it) is like a sausage machine; it grinds all the brains together in one mash; and that's why we see nothing but porridge-heads and pulp-heads all around'.
H. Ibsen.:D:D

Recognize anyone we know?

rchdenton
03-20-09, 05:29 PM
I, personally, have successfully emerged from the "Monthly Payment Consumer" mentality. I no longer look at how much I can afford monthly, but how much it will cost me, both in a literal sense, and a long term cost of use. For example, my vehicle is approaching 10 years of age and I am deciding if I should make any repairs or buy a newer, more fuel efficient, vehicle to save money. I have spent hours calculating how much I drive, how much I want to save towards buying, how much repairs will cost me, etc. But not once have I ever even *thought* about financing a new vehicle. No way, because I understand how the banks create that "financing" out of thin air and charge me money to which I have to pay extra for and which I feel like they do not deserve.



10 years old! But how many miles and is it Japanese? By a Toyota, they don't go wrong and are good for 20 years and 200,000 miles. You could get embarrassed if you don't drive many miles a year though...

metalman
03-20-09, 06:41 PM
10 years old! But how many miles and is it Japanese? By a Toyota, they don't go wrong and are good for 20 years and 200,000 miles. You could get embarrassed if you don't drive many miles a year though...

a toyota... nicely broken in at 100k/10 yrs. buy a lexus and at the stupid thing still isn't showing any wear at 100k. keep it for 150k and you feel like a dope giving up a perfectly good car for no money that's 80% of the car you bought 10 yrs before.

same goes for bmw, btw.

not... not... not... saturn.

vanvaley1
03-20-09, 08:43 PM
a toyota... nicely broken in at 100k/10 yrs. buy a lexus and at the stupid thing still isn't showing any wear at 100k. keep it for 150k and you feel like a dope giving up a perfectly good car for no money that's 80% of the car you bought 10 yrs before.

same goes for bmw, btw.

not... not... not... saturn.

I have a 1997 runabout Corolla with about 120000+ miles. Had to change tires and windshield wipers. Other than servicing when required by Toyota that's the major expenses. Anybody know of tires that go over 120,000 miles or 'extends' windshield wipers?

orion
03-20-09, 09:11 PM
Don't count out new and improved forms of credit. What about the rental or subscription forms of indentured purchasing? Do you "own" a cell phone? I paid $300 for a phone and $120 a month add infinitum to use it. Or "subscription" forms of entertainment. You get the beatles for a dollar a month, forever. I bet some other models can be invented.

Hopefully my fellow citizens will show a deep revulsion for this slavery. I am busy undoing all my lifetime contracts (cutting back cell phones, reviewing cable options). I think Microsoft was trying hard to get in on this gravy train idea just like the anti-virus guys with annual subscriptions. I am switching to Open Office, and other free services.

I also think people will begin to make life simpler, anything to cut down the amount of mail you get, things you belong to, stuff you have to track, etc.

ricket
03-20-09, 10:55 PM
10 years old! But how many miles and is it Japanese? By a Toyota, they don't go wrong and are good for 20 years and 200,000 miles. You could get embarrassed if you don't drive many miles a year though...

Ford Ranger, 106k miles and I drive about 1300 miles a month thanks to my commute. Gas mileage is about 17mpg on the highway. It drives good and is definitely a dependable vehicle. Wife drives a Toyota that gets about 31mpg, but she'd be rather irritated if I commandeered it ::thumbs down:: Really, the main point was that in all of these thoughts, I never even considered financing any part of it from a bank. Theyre thieves, practically every single one of them, and I never willingly do business with thieves. It's that simple.

santafe2
03-21-09, 02:19 AM
:)
Back to the finance world of the 1950s.

30% deposit minium for house buying

That world lasted a lot longer than you might suspect. Our first house, 1980, required 1/3 down. We weren't yet married and that was a ding on our credit worthiness and the house was 60 years old which didn't help either.

We had savings and we sold everything we had that had value or had a payment attached to it. Our parents lent us half the down payment, we assumed the 1st and we took out a 21% 2nd. Then we worked for a little over a year to pay off the 2nd and after that the family loan. Those 1950s values were, and are, our values. We were both raised that way and we've raised our kids that way.

Those values will be very wide spread in 5 years but reinterpreted by the 30 and 40 something crowd in a different way than we understand it or my kids understand it. I feel fortunate to have been raised by 50s parents who were raised by 30s parents. We're all very cautious. The generation that came of age in the mid 80s has been taught to create value and wealth through debt. I don't feel smart for avoiding the current mess, just lucky enough to have been born in a slice of time where our grandparents could tell us stories about hardship and the importance of family and to have parents that had grown up with that appreciation.

With any luck we'll go back to that world my wife and I faced in 1980 where we sat across a desk from a banker that wanted to know our character and our families as much as our ability to pay...but as usual, I dream.

santafe2
03-21-09, 02:37 AM
Ford Ranger, 106k miles...

My daily commuter is a 4 year old Fisher. I gave up the hard tail original after 22 years and a few crashes that proved that this human is not as tough as a Fisher bike. Schumpeter would have loved to know that people are still biking to work.

cjppjc
03-21-09, 02:56 PM
Why not just literally give/force the banks that have received taxpayer bailout money to give up homes to those that need them? There's no reason why Tent Cities should be popping up in various cities, while there sits literally millions of homes vacant with no one living in them. Some of the McMansions you could put 2-4 families in!

I think a potential business model is realizing that we had this huge boom in real estate (which can be classified as an infrastructure improvement, similar to rail/mass transit), where we can literally put millions of homeless people off the streets and/or house most of the population in the US. Now find a way to connect all those homes together in such as way that eliminates the spatial boundries that typically define a "city". From there you can begin to build a productive model for an economy that is more local, more productive, and is sustainable over the long term. Wishful thinking on my part...perhaps. But grand ideas are never borne out of pessimism simply because pessimism is, as a whole, negative and self-serving at the expense of takings risks that may one day pay off exponentially.


With all due respect, you aren't serious. This is a pretty silly idea.

The Outback Oracle
03-21-09, 05:16 PM
Aus is a bit interesting at the moment

My daughter is buying a house (against my advice but the nesting instinct has got too much for her) and she can borrow at 5.25%. Also gets a Govt subsidy of $14,000 ON THE PURCHASE - First Home Buyers Grant

You can still get 500 days (or 500 years or something) "interest free" on a Flat screen etc

I got a notice from a mining company for a meeting to ratify a restructuring of debt...Interest rate currently 12%. Talk about a country with its priorities wrong!!!

One change on the House Purchase...unless she has 25% deposit (or a gurantee from someone with some substantial assets) there is a $6500 Mortgage Insurance charge on a loan of $25000!

ChessMan
03-21-09, 09:12 PM
Nice article. To me looks like PCE is headed back down. What's a sustainable level for PCE? I think ~65% of GDP.

nero3
03-22-09, 08:54 AM
I'm afraid pretty bad inflation is here now. There is the irony that the consumer saves in the bank, typically in the times when it ravages their savings the most, and in the times it is smartest to have a big loan, like right now.

snakela
03-22-09, 11:38 AM
Since it started in the early 1980s, every time the FIRE Economy ran into trouble (1987 post stock market crash, 1989 post LBO bubble collapse, and 2000 post tech stock collapse) it was bailed out by central banks either directly or indirectly.

Full Disclaimer[/URL][/FONT]



But why will this time be any different? That is the question I am trying to get my mind wrapped around and the answer will likely determine the path I choose for my career.

Slimprofits
03-22-09, 01:12 PM
But why will this time be any different? That is the question I am trying to get my mind wrapped around and the answer will likely determine the path I choose for my career.

Consumer citizens are tapped out.


The economic crisis will again turn a generation of Americans into savers and critical consumers that look at total prices of goods, not monthly payments, and avoid debt. The era of mass marketing of consumer credit and riding the wave of debt-financed consumerism of the past 25 years is over. Only those companies that prepare for this sea change in consumer attitudes will survive.

metalman
03-22-09, 01:30 PM
But why will this time be any different? That is the question I am trying to get my mind wrapped around and the answer will likely determine the path I choose for my career.

read the whole atrticle?


The credit bubble that started in the early days of the FIRE Economy (http://www.fireeconomy.com/) in the early 1980s collapsed with the housing bubble starting in 2006. Debt deflation and global depression will put an end to the MPC over the coming years in a rhyme of events that Schumpeter explained 70 years ago.


http://www.itulip.com/forums/../images/PCE1959-2009.gif
Personal consumption expenditures decline for the first time in over 70 years

http://www.itulip.com/forums/../images/householddebt1959-2009.gif
Household debt levels fall for the first time since The Great Depression


The collapse of the FIRE Economy is revealed in the March 2009 Fed Flow of Funds report Z.1 table d.2 for anyone to see.


http://www.itulip.com/forums/../images/debtgdp1978-2008.gif


Since it started in the early 1980s, every time the FIRE Economy ran into trouble (1987 post stock market crash, 1989 post LBO bubble collapse, and 2000 post tech stock collapse) it was bailed out by central banks either directly or indirectly. In 1991, debt levels declined in every category except financial, which virtually doubled, accounting for the growth shown. After the tech stock bubble collapse, foreign central bank borrowing restarted the FIRE Economy. But in 2008, all avenues failed. Non-financial, finaicial sector, and even local and state government debt growth declined, all except for Federal government debt. (See: Flow of Funds Q4 2008: Debt Deflation confirmation - Eric Janszen (http://www.itulip.com/forums/showthread.php?p=83348#post83348))

Slimprofits
03-22-09, 03:37 PM
The editors, advertisers and benefactors behind Newsweek magazine, owned by the Washington Post Company, are worried and understandably so. The jig is up.

As consumers hibernate and investors hoard cash, the economy is withering. This new age of thrift is understandable. But for a recovery to take hold, Americans will need to start taking risks again.


http://yubanet.com/uploads/2/689.thm.jpg

The rush to hoard cash and pinch pennies is understandable, given that some $13 trillion in net worth evaporated between mid-2007 and the end of 2008. But while it makes complete microeconomic sense for families and individual businesses, the spending freeze and collective shunning of nonguaranteed investments is macroeconomically troubling. Especially if it persists once the credit crisis passes.

For our $14 trillion economy to recover and thrive, hoarders must open their wallets and become consumers, and businesses must once again be willing to roll the dice. Nobody is advocating a return to the debt-fueled days of 4,000-square-foot second homes, $1,000 handbags and $6 specialty coffees. But in our economy, in which 70 percent of activity is derived from consumers, we do need our neighbors to spend.

http://www.newsweek.com/id/189232

metalman
03-22-09, 03:42 PM
The editors, advertisers and benefactors behind Newsweek magazine, owned by the Washington Post Company, are worried and understandably so. The jig is up.

As consumers hibernate and investors hoard cash, the economy is withering. This new age of thrift is understandable. But for a recovery to take hold, Americans will need to start taking risks again.


http://yubanet.com/uploads/2/689.thm.jpg

The rush to hoard cash and pinch pennies is understandable, given that some $13 trillion in net worth evaporated between mid-2007 and the end of 2008. But while it makes complete microeconomic sense for families and individual businesses, the spending freeze and collective shunning of nonguaranteed investments is macroeconomically troubling. Especially if it persists once the credit crisis passes.

For our $14 trillion economy to recover and thrive, hoarders must open their wallets and become consumers, and businesses must once again be willing to roll the dice. Nobody is advocating a return to the debt-fueled days of 4,000-square-foot second homes, $1,000 handbags and $6 specialty coffees. But in our economy, in which 70 percent of activity is derived from consumers, we do need our neighbors to spend.

http://www.newsweek.com/id/189232

make that a $11 trillion economy and 60% consumption and we're on the same page :)

snakela
03-22-09, 04:05 PM
read the whole atrticle?

Yup. The way I comprehend this - there's nothing that states consumer debt and the FIRE economy won't just pick back up after short speedbump. It says the FED hasn't learned its lessons and every MSM news article such as the newsweek one is begging us Americans to go into more debt "for the greater good". If keeping the FIRE economy alive wasn't the goal, would interest rates be so low?

Slimprofits
03-22-09, 04:15 PM
Snakela, I don't think anyone is arguing that the goal so far hasn't been to keep FIRE alive. What EJ has mapped out and what others are seeing on the ground is a retrenchment.

Not only are people being layed off, have lost 50% of their investments, some are underwater in the mortgages, etc. etc, but also many people that aren't in trouble yet have seen their credit lines and Helocs shrink as a result of other customers defaulting. (edit: read this (http://www.itulip.com/forums/showthread.php?t=8765)) Extend all of that to businesses and factor in losing many customers since October.

The Great American Consumer is dead.

metalman
03-22-09, 04:25 PM
Yup. The way I comprehend this - there's nothing that states consumer debt and the FIRE economy won't just pick back up after short speedbump. It says the FED hasn't learned its lessons and every MSM news article such as the newsweek one is begging us Americans to go into more debt "for the greater good". If keeping the FIRE economy alive wasn't the goal, would interest rates be so low?

no, it says pce and household debt have not declined... ever... since 1930.

they pulled it out ever other time. not this time.

read the article that covers the flow of funds... the magic is gone. fire went out in 2008.

where will the money come from to restart it? sales of securitized debt? nope. sales agency and treasury bonds to foreign investors? nope. no fresh flow of $$$ from sales of debt, no fire. kaput. done. over.

cjppjc
03-22-09, 05:39 PM
The article does seem to long for a new bubble. No where in the MSM can you find an article telling people to bite the bullet. The debt must go down. Instead calls to the consumer to spend. Nowhere in the MSM is the idea of a fake prosperity. That asset deflation is not the result of asset inflation.

FRED
03-22-09, 05:49 PM
The article does seem to long for a new bubble. No where in the MSM can you find an article telling people to bite the bullet. The debt must go down. Instead calls to the consumer to spend. Nowhere in the MSM is the idea of a fake prosperity. That asset deflation is not the result of asset inflation.

We like BusinessWeek and they like us.

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But there is a divergence here. Maybe we need an iTulip interview of BusinessWeek?

cjppjc
03-22-09, 06:03 PM
We like BusinessWeek and they like us.

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But there is a divergence here. Maybe we need an iTulip interview of BusinessWeek?


Yes. But I could imagine in preparing for that interview the questions would have to be benign enough so the answers don't lead to your fingrs around their neck.