It’s not often one finds a dose of sanity in the New York Times. When one does, it should be celebrated, rather than ignored. In this case, the sanity comes from David Stockman, former budget director for President Reagan. His bottom line is no different than what I’ve been predicting since 2009. It’s just as gloomy:
[T]he Main Street economy is failing while Washington is piling a soaring debt burden on our descendants, unable to rein in either the warfare state or the welfare state or raise the taxes needed to pay the nation’s bills. By default, the Fed has resorted to a radical, uncharted spree of money printing. But the flood of liquidity, instead of spurring banks to lend and corporations to spend, has stayed trapped in the canyons of Wall Street, where it is inflating yet another unsustainable bubble.
When it bursts, there will be no new round of bailouts like the ones the banks got in 2008. Instead, America will descend into an era of zero-sum austerity and virulent political conflict, extinguishing even today’s feeble remnants of economic growth.
He calls it a state-wreck, which is exactly what it is. An arrogant government that thinks it can fix everything, help everyone, and create money out of nothing has corrupted the markets & political culture, and mortgaged our future.
Even now, the Fed, after two previous rounds of "monetary stimulus"—code words for creating en ever larger supply of "money"—is dumping $44 billion cash into the market every month. And where it going? Creating millions of new jobs? No. It’s just going to Wall Street, where the equity markets have hit an all-time high.
The wheels have been wobbling for the last five years. Sometime in the not-too-distant future, they’ll simply…come off, and then we shall see what we see.
Read the whole article. Save it. Print it out. Keep it. That way, you’ll be be able to show your children how the richest, most powerful nation in the history of the earth committed suicide.
This week, Bruce, Michael and Dale discuss the events of the week.
The direct link to the podcast can be found here.
As a reminder, if you are an iTunes user, don’t forget to subscribe to the QandO podcast, Observations, through iTunes. For those of you who don’t have iTunes, you can subscribe at Podcast Alley. And, of course, for you newsreader subscriber types, our podcast RSS Feed is here. For podcasts from 2005 to 2010, they can be accessed through the RSS Archive Feed.
Ever have one of those days? My DSL has been down for 2 days, and I’m currently sitting in a public library trying to get some work done and sending out this post.
And I was actually going to concentrate on work until I saw this article about something Obama said about the Buffett Rule:
President Barack Obama argued Sunday that his calls for wealthier Americans to pay a greater share of taxes aren’t about sharing the wealth, but about getting the American economy on a path for solid growth.
“That is not an argument about redistribution. That is an argument about growth,” Obama said in response to a reporter’s question at a news conference in Colombia. “In the history of the United States, we grow best when our growth is broad based.”
Broad based growth is not driven by heavily taxing one income class, Mr. Obama. Nor is broad based growth driven by government spending (i.e. “redistribution” or “sharing the wealth”).
The “Buffet Rule” doesn’t do anything to provide those incentives or inspire that confidence. In fact, it seems to be mostly a tax of desperation. The numbers just don’t support the supposition that it will drive anything but more government spending, and, frankly, not much of that.
This is class warfare plain and simple. It is also an attempt to offer up the rich as a panacea to the revenue problem blamed as the reason we’ve seen government borrow multi-trillions of dollars.
There is no revenue problem. There is a spending problem. And taxing billionaires won’t solve that problem. In fact it will likely exacerbate it.
More importantly, the words Obama has spoken speak to two things: a) a deep seated ignorance of economics and b) a deep seated belief that government is the answer to all ills.
Both are dangerous and promise even more economic woes in our future.
We can’t afford that.
We’ve been seeing some better—if not good—economic numbers lately, mainly in employment, but also in industrial production, and general business conditions. One might be tempted to believe there’s at least a mild recovery on the way. That’d be nice.
But I’m…troubled. First, there’s this:
Oil prices aren’t high right now. In fact, they are unusually low. Gasoline prices would have to rise by another $0.65 to $0.75 per gallon from where they are now just to be “normal”. And, because gasoline prices are low right now, it is very likely that they are going to go up more—perhaps a lot more…
In terms of judging whether the price of WTI is high or low, here is the price that truly matters: 0.0602 ounces of gold per barrel (which can be written as Au0.0602/bbl). What this number means is that, right now, a barrel of WTI has the same market value as 0.0602 ounces of gold.
During the 493 months since January 1, 1971, the price of WTI has averaged Au0.0732/bbl…
At this point, we can be certain that, unless gold prices come down, gasoline prices are going to go up—by a lot.
In other words, there’s at least an 18% price differential in the current price of oil compared to gold, compared to the historical average.
Another important thing to remember is that the current rise in energy prices does NOT appear to be related to demand for energy. According to the US Energy Information Agency, the US demand for both electricity and petroleum has been decreasing.
Statistics for energy use usually run a couple of months behind, but the recent figures for petroleum are that from August, 2011 until November 11, Total Crude Oil and Petroleum Products consumed, in thousands of barrels per month, fell from 593,757 to 562,019. Figures for the same months in 2010 are 609,517 and 569,312, respectively.
Similarly, the most recent electrical generation numbers, in millions of kilowatt hours, show that from August to November, 2011, total electricity consumption fell from 370,073 to 273,053. Both figures are about 2 million kWh less than the same months in 2010.
Now, maybe in the last two months there’s been a huge turnaround in energy consumption, but please note that the year-on-year demand is declining, and in general, has been since 2006.
So, if energy use is declining, while prices are increasing, and supply remains steady—or is increasing—then we can reasonably look to monetary reasons for the price increase, as the economic fundamentals do not explain the price changes.
The implications for energy prices, therefore, are not good. Start saving those pennies, kids.
For all the good it’ll do you.
Oh, and by the way, if the economy is recovering, why is energy demand decreasing, rather than increasing? Just asking.
President Obama did the nation a huge service today, in two respects. First he took off the mask and told us explicitly that the "change" he wants is an explicit move towards welfare-state socialism, and, second, in doing so, he set out the major thrust of his re-election campaign. In a 55-minute speech in Osawatomie, KS, the president explicitly argued that capitalism is a failed economic system, and the main thrust of government economic policy should be the redistribution of income.
It’s darkly amusing that he makes this argument just weeks—perhaps months—before a major political and financial crisis, caused mainly by their socialist policy leanings, strikes Europe. They are just about to hit the stark reality of what happens when you run out of other people’s money to spend to finance extravagant social benefits. President Obama, it seems, is keen to rush us down the road to meet them. Not that we aren’t already pretty far down that road ourselves. The national debt is now over $15 trillion, more or less 100% of GDP, with no clear path to reducing that percentage in the near future, or even in reducing the rate of growth substantially.
President Obama apparently thinks that the solution is to take the money from "the rich" and distribute it to the rest of us. The trouble is, we could take pretty much everything the rich have, as well as all the profits of all the Fortune 500 companies, and it wouldn’t even even cover 1 year’s worth of government spending. As economist Walter William notes:
This year, Congress will spend $3.7 trillion dollars. That turns out to be about $10 billion per day. Can we prey upon the rich to cough up the money? According to IRS statistics, roughly 2 percent of U.S. households have an income of $250,000 and above. By the way, $250,000 per year hardly qualifies one as being rich. It’s not even yacht and Learjet money. All told, households earning $250,000 and above account for 25 percent, or $1.97 trillion, of the nearly $8 trillion of total household income. If Congress imposed a 100 percent tax, taking all earnings above $250,000 per year, it would yield the princely sum of $1.4 trillion. That would keep the government running for 141 days, but there’s a problem because there are 224 more days left in the year.
How about corporate profits to fill the gap? Fortune 500 companies earn nearly $400 billion in profits. Since leftists think profits are little less than theft and greed, Congress might confiscate these ill-gotten gains so that they can be returned to their rightful owners. Taking corporate profits would keep the government running for another 40 days, but that along with confiscating all income above $250,000 would only get us to the end of June. Congress must search elsewhere.
According to Forbes 400, America has 400 billionaires with a combined net worth of $1.3 trillion. Congress could confiscate their stocks and bonds, and force them to sell their businesses, yachts, airplanes, mansions and jewelry. The problem is that after fleecing the rich of their income and net worth, and the Fortune 500 corporations of their profits, it would only get us to mid-August.
We could take everything the rich have, and it still wouldn’t give us a balanced budget for one year. Collecting money the next year would also be…problematic, too.
But, the president has to be—well, not admired, exactly, but recognized—for his utter inability to accept that reality. As well as his apparent ability to construct "realities" that aren’t true.
At no time during the president’s hour-long perversion of the country’s economic history did he even allude to the massive growth in government spending we’ve seen, the cronyism between government and big business that led to private profits and socialized losses, or the explosion of debt that’s grown from $1 trillion in 1980 to $15 trillion today, all of which has resulted in removing money from the productive economy, and funneling it into government priorities, rather than into private income and investment. At no time did he mention the aggressive enforcement of the Community Re-Investment Act, which essentially forced banks into making sub-prime loans—indeed, explicitly instructed banks to make such loans—that led to the mortgage bubble and, when the less credit-worthy mortgagees couldn’t pay, it’s collapse—as a prime cause of our present economic difficulties. These are failures of government, and the president calls it a failure of capitalism.
"The market will take care of everything," they tell us. If we just cut more regulations and cut more taxes — especially for the wealthy — our economy will grow stronger. Sure, they say, there will be winners and losers. But if the winners do really well, then jobs and prosperity will eventually trickle down to everybody else. And, they argue, even if prosperity doesn’t trickle down, well, that’s the price of liberty.
Now, it’s a simple theory. And we have to admit, it’s one that speaks to our rugged individualism and our healthy skepticism of too much government. That’s in America’s DNA. And that theory fits well on a bumper sticker. (Laughter.) But here’s the problem: It doesn’t work. It has never worked.
In the president’s mind, economic freedom and capitalism don’t work. Never have. How he explains America’s ability to become the richest country the world has ever seen while operating under such a system is a complete mystery. And never mind that, to the extent the American system has failed, it is the reduction of economic freedom and the growth of government—especially over the last 50 years—that caused the failure.
But have no doubt that he believes this foolishness, even as the government-run technocracy he admires so much is literally weeks away from running the European Union’s economy straight into the ground. In a bit less than a year from now, we’ll see whether a majority of Americans believe it as well.
And if they do believe it, then the interesting question will be how they expect to pay for it.
There is an implicit, if unspoken consensus among many—if not most—in the economic community of the west that the worst portion of our current economic difficulty is behind us. That the economy, weak and shaky as it may be, has avoided the danger of complete collapse. The opinion holds that we can look forward resignedly, if not confidently, to a period, however long, of subpar economic growth, but growth nonetheless.
I fear that confidence is misplaced. The fiscal and monetary policy mix we seem determined to pursue, is not only unwise, but presents grave economic risks that should not be overlooked. I am not the only one to feel this way. On Monday, Professor Kevin Dowd gave the address shown below at the Adam Smith Institute, the UK’s leading Libertarian think tank. It’s entitled The Decapitalization of the West, and it’s primary theme, as a survey of the economies of the West, and their policy results, can best be encapsulated with the lyrics of a Noel Coward song: " There are bad times just around the corner, There are dark clouds hurtling through the sky".
It takes an hour of your time to watch this. You owe yourself that hour, if for no other reason than to learn how you might prepare for the economic troubles for which 2009 was just a prelude.
"Keynesianism has been tested to destruction," and we’re about to pay the price for that testing.
James Pethokoukis writes, "Goldman Sachs drops this H-bomb on the Obama campaign:
We have lowered our forecast for US real GDP growth further and now expect real GDP to grow just 2%-2½% through the end of 2012. Our forecast for annual average GDP growth has fallen to 1.7% in 2011 (from 1.8%) and to 2.1% in 2012 (from 3.0%). Since this pace is slightly below the US economy’s potential, we now expect the unemployment rate to be at 9¼% by the end of 2012, slightly above the current level.
Even our new forecast is subject to meaningful downside risk.
So, we got that goin’ for us.
Let’s see how today went, shall we? We got our debt ceiling deal, but the Dow dropped 266 points, and the S&P 500 fell 33 points, so it’s now negative for the year. The yield on the 10-year T-note dropped to 2.61%. Gold, meanwhile, hit a fresh record high of $1,644.50/oz. So, I guess this year’s Recovery Summer is over.
None of this, by the way, has anything to do with the debt limit battle in DC. No one on Wall Street really thought a deal wouldn’t be struck. At the end of the day, everybody was pretty confident that the debt ceiling would be raised, and a default avoided.
Stock prices are volatile, of course, so one day’s movement doesn’t mean much, but we have lost about 800 points on the Dow since 22 July, so the trend isn’t good. What’s worse is the steady decline on treasury yields and the climbing price of gold. When you couple that with the 0.4% 1Q GDP increase, and the danger of downward revisions to the lackluster 2Q GDP over the next two months, the evolving picture doesn’t look pretty. We’ve also has a few weeks of unremittingly bad economic releases, showing the economy might be heading back towards recession, and unemployment getting closer to 10% than 8%.
So then what’s the problem? I mean, we’ve had our big stimulus, and our TARP and our Quantitative Easing I and II, and we’re still not only barely budging into positive GDP territory, but now all the signs are showing the economy slowing. What’s happening? Why isn’t any of this working?
I think the answer can be found in what I wrote in my previous post about debt levels, and how over the last several years…
…a body of peer-reviewed work has been developed (PDF) that shows that an excess of government debt serves as a drag on the economy, shaving at least a full percentage point off of annual GDP growth. And we’ve learned that this negative economic effect has a non-linear effect on economic growth as debt increases.
What seems to happen is that, as you begin to approach a debt-to-GDP ratio of 100%, economic growth slows. As you add debt, there’s a non-linear decrease in economic growth. and each additional increment of debt slows growth more than the last. As I also pointed out, this has some pretty scary implications for Keynesian policies, because as you add debt, you’re no longer stimulating growth, you’re hindering it ever more strongly.
That puts policy makers in a pretty bad spot. For instance, right now, real short-term interest rates are effectively zero, so the interest rate tool is no longer of any use to the Fed. You can’t lower rates below 0%. With that tool gone, the only thing left to try and stimulate the economy is to add more debt. Conversely, cutting spending will result in more government workers and contractors being moved over to the unemployment line, and the economy still slows. It’s a trap, where all the standard policy moves result in a slowing economy.
Back in the 80’s my fellow Econ and Business undergrads would debate about all the debt Reagan was adding, and trying to figure out when all that debt would begin crowding out private investment and slowing economic growth. As it turned out, it took far longer than any of us believed it would, but I think we finally have the answer.
The really scary this is that, if we decided that we had to bite the bullet, and impose some austerity, it really wouldn’t help much. We could cut discretionary spending by half, and all it would do is gain us a few years of breathing space before the coming explosion in Social Security and Medicare entitlements—about $60-76 trillion worth of them—eat up any short-term savings and debt reduction we might acquire. After all, discretionary spending—including defense—is only about 39% of the current budget anyway.
What part does economic growth play in all this? Well, it’s clear that 2% per year isn’t going to help much.
It is a generally accepted truism that the trend rate of growth in a mature economy is 3%. There are a lot of reasons given for this; slower population growth in developed countries, large sunk costs in plant and capital, blah, blah, blah. But why should any of that matter? Just because population growth is slow, it doesn’t necessarily follow that the growth of wealth or human ingenuity is hampered.
Here is a reason for that slow growth that’s almost never given. You see, one of the things that mature economies all seem to have in common is large government expenditures, extensive entitlements, massive regulatory oversight, and increasing debt. All of that is financed by taxation to remove money from the productive portion of the economy. So, one of the primary reasons we have slower economic growth is because we trade it for public goods.
Now, we may love these public goods. And they are certainly nice to have if you can afford them. But the evidence is increasingly that we cannot. if we could, we wouldn’t be racking up a level of peacetime debt that’s nearly 90% of GDP. Not only do we give up a lot of economic growth to sustain these public goods, but, apparently, we eventually give up all of it…at which point, we have to give up the public goods as well.
If we really want to climb out of this hole, then what we really need to do is to radically rethink what government should be, what it should be allowed to do, and how it’s funded. It’s not enough any more to cut budgets, while leaving the regulatory, entitlement, taxation, and spending structure intact. A truly radical solution would be to limit government spending and revenues to no more than 10% of GDP in peacetime. Replace the income tax with a 10% VAT. Eliminate the departments of Education, Commerce, Labor, Transportation and Agriculture. Repeal most Federal criminal laws. Privatize social security. Enforce free markets, rather than the crony capitalism we have now.
No one in our current political class has the slightest interest in any of those suggestions. Drastically reducing the size and scope of government is the only solution that can possibly increase economic growth substantially, and give us a shot at paying off our ever-increasing debt, but our current political class will never embrace that.
The thing is, reality doesn’t care what the political class—or anyone else for that matter—wants. It just is what it is. So, no matter what happens, we won’t have to worry about the deficit or government spending for much longer. Either we’ll fix the problem by electing a political class that’s devoted to cutting government across the board and paying down the debt. Or we won’t fix the problem, and the resulting bankruptcy and hyperinflation will allow us to monetize our debt, wipe out the life savings of every person in the country, and we will start over from scratch with a bright shiny new currency!
But the problem will get solved. The only question is how much control we’ll retain over the process, and how much government we’ll retain at the end of it.
Especially when you’re talking about GDP growth:
The "new normal" is a term coined by the brain trust at the giant bond fund PIMCO. Anthony Crescenzi, a PIMCO vice president, strategist and portfolio manager, is part of that brain trust.
"The difference between 2 percent growth and 3 percent growth is of major importance and has major implications for the entire economy, for financial markets, for the budget," he says. And the heart of the problem is job creation.
Crescenzi and his colleagues argue that the U.S. economy could actually grow 2 percent a year without adding any new jobs. That’s because the productivity of current workers is rising at about 2 percent a year. "In other words a company can produce 2 percent more goods and/or services a year even if it doesn’t increase the number of people it employs," he says.
Smaller Incomes Mark Zandi, chief economist at Moody’s Analytics, thinks some new jobs would be added in an economy growing 2 percent a year, but far fewer than one growing 3 percent. "In a 3 percent world we’d create roughly 1.6 million jobs a year," he says. But he says that in a 2 percent world, job creation would be less than half — around 700,000 jobs.
Meanwhile, in China, growth hit 9.5%. So what is China doing, policy wise, that the US isn’t? Well, for one thing it is encouraging businesses and has established a positive business climate. Additionally, it isn’t borrowing money to pump into some black hole it calls “stimulus” at a rate faster than we’ve seen in recent history. Etc.
It’s pretty bad when you have to look to China to point out what the US should be doing. As Henry Kissinger recently said, the Chinese used to think we had the financial side of things pretty much figured out. Then this mess and resultant stupidity in reaction to it. The one thing we should have had the inside track on, we didn’t, because we chose to recreate the failed policies of the Hoover/FDR era without a world war to finally pull us out of the mess (or at least I hope that’s the case).
Is this the “new normal” as Crescenzi claims? PIMCO, btw, is the world’s largest bond fund (almost 2 trillion). PIMCO also recently announced that it would no longer be buying US debt.
Why? Because no one is confident the Federal Reserve knows what it is doing:
Some Fed officials at the June meeting also said additional monetary stimulus would be appropriate “if economic growth remained too slow to make satisfactory progress toward reducing the unemployment rate and if inflation returned to relatively low levels after the effects of recent transitory shocks dissipated,” according to the minutes.
So they are considering a “QE3”? Note the change from “last August” to now.
Last August, when Bernanke signaled in a speech in Jackson Hole, Wyoming, that the Fed would embark on a second round of Treasury bond purchases, employers were cutting jobs, pushing up the unemployment rate to 9.6 percent. The weakness in the economy prompted Bernanke to focus on the possibility of deflation, or a broad-based drop in prices and asset values including homes and stocks.
The economy is in better shape now than in August, though hiring remains “frustratingly slow,” Bernanke said at a June 22 news conference. Employers added 18,000 jobs to their payrolls last month, the fewest in nine months, the government reported last week.
The Fed’s $600 billion Treasury bond-buying program, completed in June, was designed to spur economic growth, employment and consumer spending by lifting stock prices and reducing borrowing costs.
Is the economy in “better shape now than in August”? I say ‘no’. And so do most of the economic indicators. Dr. Robert Barro, Paul M Warburg Professor of Economics at Harvard University makes it clear where the current policy is leading:
Turning to quantitative easing, he warned that the US and UK are storing up inflation and that the Bank of England may be too complacent. Although there is no threat to inflation now, he said: "You have to have an exit strategy. Ben Bernanke [chairman of the US Federal Reserve] and [Bank Governor] Mervyn King are aware of this, but I think they are a little over confident about how they can accomplish it. Because you want to have this exit strategy without having a lot of inflation.
"That’s when the inflation would occur. If there’s a recovery and there’s all this liquidity and somehow the central bank has to reverse it."
That’s precisely where this is all headed – somehow at, at some point, the Fed has to wring out all this money it pumped into the economy. And that stored up inflation is likely to explode during that process – a real economy killer. Barro is saying he has little confidence in the Fed, deeming them “over confident” in their ability to do that while avoiding letting the inflation dragon out of the cage.
Meanwhile, in Europe …
Yeah, it’s a mess. And given the propensity of our policy makers to recreate the policies of the Great Depression, I don’t see it getting better any time soon. So yes, for at least the foreseeable future, the “new normal” may be 9.2% unemployment. Because there is still no reason or incentive for US businesses to take the chance of expanding and hiring in such an uncertain economic atmosphere.
Until they are much more confident in the policies of this administration and the Federal Reserve, few if any are going to change the status quo.
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William Gale regales us with what he calls "Five myths about the Bush tax cuts" , in the Washington Post today.
Highlights, or lowlights if you will, of a couple of them are as follows. “Myth” one:
Extending the tax cuts would be a good way to stimulate the economy.
And the ammo that makes it a myth:
According to the Congressional Budget Office and other authorities, extending all of the Bush tax cuts would have a small bang for the buck, the equivalent of a 10- to 40-cent increase in GDP for every dollar spent.
So a 10% to 40% increase in GDP – at this time – is something to sniff at? Note how he worded the increase. He used the word “cent” instead of “percent”. Yeah, no attempt to shade the point at all, huh?
As the CBO notes, most Bush tax cut dollars go to higher-income households, and these top earners don’t spend as much of their income as lower earners.
Right. A) they’re the ones who actually pay taxes – many lower income earners do not. B) “Spending” is a loaded term. The high income earners don’t bury their money in the back yard safely tucked into a coffee can. They invest it. And, for those paying attention, it is investment in the economy that’s lacking at this time.
The rest of the “myths” are as pathetically argued as the first.
In reality, this is just another in a long line of liberal justifications for taking your money based in the premise that it isn’t really yours to begin with.
If you don’t believe me, look at “myth” 3 which states “Making the tax cuts permanent will lead to long term growth. Gale says:
A main selling point for the cuts was that, by offering lower marginal tax rates on wages, dividends and capital gains, they would encourage investment and therefore boost economic growth. But when it comes to fostering growth, this isn’t the whole story. The tax cuts also raised government debt — and higher government debt leads to higher interest rates.
Note that Gale tacitly admits that the "myth" is actually true. However he tries to caveat that with a horrible result that I assume he believes effectively destroys the point. The tax cuts “raised” government debt.
Uh, no, they didn’t. Excessive government spending without the revenue raised government debt. These tax cuts have now been in place for years and government debt has grown exponentially. How is that the fault of a tax cut or the tax payer?
Of course it’s not – unless you believe that money, all money, really belongs to government and it gets to decide how much you can or can’t have. How else do you claim allowing an earner to keep more of what he earned as a cause for "increased government debt?"
Of course Gale forgets one of the aspects of letting the tax cuts expire – but I suppose that’s because it’s not a "myth" in his book. A recent study finds the following to be true as a result of letting the Bush tax cuts expire:
The study found that raising just the lowest income tax rate from 10 percent to 15 percent would cost 88 million taxpayers an average of $503 next year.
Lowering the child tax credit from $1,000 to $500 per child would cost 31 million families an average of $1,033 in 2011; the reinstatement of the so-called marriage penalty, a peculiarity in the tax code that forces some married couples to pay more for income tax than they would if they were single, would cost 35 million couples an average of $595 each, according to the preliminary numbers.
Income tax rates will rise for almost every bracket, with the bottom rate going from 10 to 15 percent and the top rate going from 35 percent to 39.6 percent. Dividends and capital gains taxes also are expected to rise.
So the “your taxes won’t increase by a single dime” pledge for the gullible 95% was a crock and they should have known that when Obama promised to end those tax cuts. But it’s hard to do that when you’re also gulled into believing that they were only tax cuts “for the rich”.
In fact, they were across the board tax cuts and now the middle-class will discover that at the end of the year as they crank up the Turbo Tax and are shocked, shocked I tell you, that their taxes have increased.
And that’s no myth, my friend.
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