Finally, a voice of reason

There’s a flood of articles being written now about central banks running out of ammo (which is of course ridiculous, as they still have massive stocks of paper and green ink.)  Thus I was very pleased when Stephen Kirchner sent me an FT article by Martin Sandbu, which cuts through all of the nonsense. Here’s the subtitle:

The monetary medicine is working. More is needed

There, that’s not so complicated, is it?  Even better, why not change the target so that you don’t have to use so much ammo?  How about level targeting?

There are two common reactions to this continuation of middling (or worse) news. One is to say the medicine is working but the dosage is too low. The other is to say it is not, so we should not expect better results from more of the same. An example of the latter was Michael Schuman’s Bloomberg View column that argues that the BoJ may be demonstrating “the outer limits and ultimate effectiveness of monetary policy”. That is a somewhat paradoxical reading after an announcement that was widely judged — even by Schuman himself — to have offered only minor additional measures.

Exactly.  The BOJ did less than expected.  So why is anyone surprised that the yen appreciated on the news?

There is a simple statistical measure that can make the point: the dollar, euro or yen value of the economies in question — that is to say nominal gross domestic product. In our current predicament with large debt overhangs everywhere holding back economic activity, there is a sense in which policymaking should be easy. NGDP could expand either because of inflation or real growth, but either way faster NGDP growth would be a good thing. If it doesn’t directly reflect greater production of goods on services it helps reduce the debt burden that is limiting the growth of such production. The chart below shows the rate of year-on-year NGDP growth in four economies. The main observation to make is that in the eurozone and Japan, whose central banks have redoubled their stimulus efforts in recent years, NGDP growth has duly picked up. In the US and the UK, where central banks have stood still or moved to tighten, it has been slowing since early 2014.

Monetary policy works and monetary policymakers know it. Which raises the question why do they not do more? That goes for all the main central banks. As Brad DeLong puts it in the US case: “If you had told the Federal Reserve at the start of last December that 2015Q4, 2016Q1, and 2016Q2 were going to come in at 0.9%, 0.8%, and 1.2%, respectively, a rational Fed would not only have not raised interest rates in December, they would have announced that they would not even think of raising interest rates until well into 2017, and they would have started looking for more things they could do that would safely boost demand.” And if that is true, surely they too should now aim to loosen further rather than tighten.

Again, what they really need to do is change the policy regime.  Their current discretionary approach will not work once the next recession arrives. It would be nice if they put NGDPLT in place right now.  Fix the roof while the sun is still shining.

PS.  Now watch everyone skip over my post, and comment on (Trump supporter) Newt Gingrich now saying that Trump is even more unacceptable than Hillary.

PPS.  Maybe Trump is a closet Libertarian.  He knew that Gary Johnson’s only chance of winning was if Trump got the GOP nomination, and then went down in flames.  The master plan is for Trump to pull out of the race in late October, and endorse Johnson.  Republican Hillary voters that were holding their nose will then swing to Johnson/Weld, once Trump has no chance.  Add together Trump voters, Johnson voters, and people supporting Hillary only because they hate Trump, and you might reach 50%.  A Libertarian President!

In my dreams.

PPPS.  Yes, I know, a Johnson/Weld America would be a nightmarish place, where every bakery was forced to carry Nazi wedding cakes.


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49 Responses to “Finally, a voice of reason”

  1. Gravatar of Bonnie Bonnie
    5. August 2016 at 16:57

    Johnson thinks there is an impending hyperinflation. And they say Trump is bad for the economy… while Hillary says, “We won’t print money because that is what caused the mess in the first place. We’ll have plenty of assistance programs for those caught on the wrong side of negative monetary shocks instead.”

    I am voting for Mickey Mouse, because then, we just might have a chance. 🙂

  2. Gravatar of Instugator Instugator
    5. August 2016 at 17:13

    I hate Nazi wedding cakes, but – Since Christians are already required to bake Garriage Cakes, it seems only fair.

  3. Gravatar of bill bill
    5. August 2016 at 17:26

    Scott, how do you interpret the rise in the DAX at 8.30 this morning?
    Thx

  4. Gravatar of Gary Anderson Gary Anderson
    5. August 2016 at 18:09

    A recent study about the BIS by two Yale professors linked to my article at my name clearly shows that treasury bonds are money, and that if you have a lot of them you are stinking rich. Lol. So, if you have a boatload of them you can’t have the minions at the university level advocating raising interest rates much when GDP is low. NGDP targeting is dead and maybe, if we look at Bernanke’s actions, it was never alive in the first place. Bond hoarding started long before the concept of NGDP targeting. Sorry, the system sucks, but it seems to be unmovable.

  5. Gravatar of Gary Anderson Gary Anderson
    5. August 2016 at 18:19

    So, there is base money, which is Fed money, and government money, which is sovereign bonds.

    The article which I cite at my article has this to say about government money. Note, that government money backing private money seems safe. But one has to judge that based on this passage from the study:

    During the U.S. National Banking Era, 1863-1914, national banks were allowed to issue their own national bank notes by backing them with Treasuries, which they deposited at the U.S. Treasury. The national bank structure was identical to the LCR. Analyzing the experience of the U.S. National Banking Era suggests that a system that requires government money to back privately produced bank money contributes to a scarcity of safe debt and encourages other forms of (shadow) short-term debt to emerge. The structure of the National Banking Era was designed to prevent bank runs, the same logic as the LCR. But a form of “shadow money” emerged, demand deposits, and the National Banking Era suffered five banking panics. During these banking panics, firms and households caused bank runs when they demanded national bank notes in exchange for their deposits.

  6. Gravatar of E. Harding E. Harding
    5. August 2016 at 19:41

    “Stephen Kirchner”

    -What kind of a name is that?

    “Fix the roof while the sun is still shining.”

    -Only if they can recognize there’s a hole in the roof.

  7. Gravatar of ssumner ssumner
    5. August 2016 at 20:28

    Bill, Perhaps the US jobs report? US stocks rose on the news, didn’t they?

  8. Gravatar of Ray Lopez Ray Lopez
    6. August 2016 at 01:14

    Sumner breezily opines: “which is of course ridiculous, as they still have massive stocks of paper and green ink” – luckily money is neutral short term and long, else this madman would ruin the USA just to appease his vanity.

    Sumner offers short term trading tips on the DAX. Comical.

    And finally, the real man that saved the world, not the blogger, but a real man, is: Stanislav Yevgrafovich Petrov, USSR officer, who did not report an erroneous ICBM strike in 1983, “Petrov’s trip to the United States, were filmed for The Man Who Saved the World”. Again, real effects matter, not imaginary ‘confidence fairies’ that are unverifiable. Unless you read this blog for laughs.

  9. Gravatar of SG SG
    6. August 2016 at 02:13

    Ray, if money is neutral, how would Scotts recommendations cause any harm?

  10. Gravatar of Ray Lopez Ray Lopez
    6. August 2016 at 03:59

    @SG – money is neutral short and long term, but common sense tells you that hyperinflation is hard to track, hence ‘shoe leather costs’ and ‘menu costs’ start taking a toll in Zimbabwe and Sumner-land.

    For you helicopter drop fans: Australia’s Rudd tried that in 2008, giving AU $1000 to every taxpayer. It failed. Look at AU’s GDP here: http://www.tradingeconomics.com/australia/gdp note it has been falling since 2013, compares unfavorably to the USA, UK, South Korea, even the EU area. You can argue that Rudd’s plan ‘made things better than it would have been’ but that counterfactual is hard to prove. You can argue that “$1k was not enough, not credible due to the Lucas critique” but that’s metaphysics. Only Sumner claims that if something works, it followed his theory, but if it does not, it doesn’t. Untestable metaphysics.

  11. Gravatar of ssumner ssumner
    6. August 2016 at 06:12

    Ray, You said:

    “Sumner offers short term trading tips on the DAX. Comical.”

    Another idiotic statement. I’ve never offered trading tips in my entire 7 years of blogging. Keep them coming Ray, so I know I’m on the right track.

  12. Gravatar of Brent Buckner Brent Buckner
    6. August 2016 at 06:25

    @Ray Lopez:

    You wrote: “For you helicopter drop fans: Australia’s Rudd tried that in 2008, giving AU $1000 to every taxpayer.”

    I don’t believe that met the definition of a helicopter drop as it did not have explicit central bank money financing (it had simple sovereign government deficit financing).

  13. Gravatar of Benjamin Cole Benjamin Cole
    6. August 2016 at 06:51

    Central banks have effective ammo.

    Send in the choppers, the whirlybirds and the helicopters.

  14. Gravatar of ssumner ssumner
    6. August 2016 at 06:56

    Brent, Yes, you are right and Ray is wrong.

    Again . . .

  15. Gravatar of msgkings msgkings
    6. August 2016 at 11:28

    @ssumner: Brian Wesbury at First Trust is always harping that the Fed should have raised rates sooner, and should do so ASAP now. His idea is that RGDP is held back for supply side reasons like too much regulation and too high of a government share of GDP. He feels that the Fed funds rate should approximate RGDP growth to be ‘neutral’.

    As a libertarian I’m sure you’d agree with the supply side take. And as a monetarist I guess you’d just say Wesbury is wrong about the Fed?

  16. Gravatar of Jeff Jeff
    6. August 2016 at 15:59

    @msgkings,

    If aggregate supply is restricted you get falling real output and higher inflation. Think 1979 oil price shock.

    That’s not what we see today. We see inflation well below target and slow nominal output. That’s inadequate demand, not restricted supply. I think Scott would agree there is too much regulation, but that doesn’t explain the low inflation.

  17. Gravatar of Chuck Biscuits Chuck Biscuits
    6. August 2016 at 16:30

    Paper and green ink?

    Oh dear, someone seems to think the Fed actually prints money.

  18. Gravatar of Kevin Erdmann Kevin Erdmann
    6. August 2016 at 19:33

    Jeff,

    The kicker is we have both. There is a persistent supply problem in housing. The cumulative effect of this in our urban centers has led to outrageous rents and extensive urban economic stress. The Fed has responded to this with 20 years of restricted demand so that inflation outside of housing has been persistently well below 2%.

    The worst, of course, was their unconscionable lack of concern for the collapse in home prices in 2007-2008. Even if one thinks home prices were too high in 2006, the collapse doesn’t really follow. After the inflation of 1979, nobody thought we needed 5 years of 5% deflation to make up for it. And, now, the inadequate demand from our politically restricted mortgage markets is creating a supply shock in housing. So, they are working in concert. Expanded mortgage markets would be disinflationary now.

    The whole thing is a mess.

  19. Gravatar of Gary Anderson Gary Anderson
    6. August 2016 at 20:39

    I agree with Kevin. 4 states had bubbles. The Fed should have bought commercial paper sooner, and not allowed mark to market. The Fed should have saved the rest of the nation and not destroy the entire economy because of 4 states. Yes, asset backed securities are not as trustworthy, but the Fed could have taken all that paper off the balance sheets of the banks sooner.

    The Fed literally stopped lending to real estate when it was totally unncessary. The Fed waited to buy commercial paper til after the house prices based on sound lending crashed. I think the Fed wanted the houses back for Wall Street. I think the Fed wanted to destroy securitization, which admittedly did produce some faulty loans. But by destroying securitization it just made everyone trust treasury bonds and sovereign bonds more and now there is massive demand for them.

    In the scheme of things, there is 1. money 2. sovereign bonds 3. gold 4 asset backed securities in that order of hierarchy for ratings for all collateral going forward. Nothing is more valuable than treasuries. They are like money itself.

  20. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    7. August 2016 at 04:26

    ‘…a rational Fed would not only have not raised interest rates in December, they would have announced that they would not even think of raising interest rates until well into 2017, and they would have started looking for more things they could do that would safely boost demand.” And if that is true, surely they too should now aim to loosen further rather than tighten.’

    Exactly, and is just what I’ve been saying here for months. If the Fed wants higher interest rates they need an expansionary monetary policy.

    As Paul Volcker said to James Tobin–re: John Taylor–back in 1982, the Fed doesn’t ‘set’ interest rates, it sets the money supply and the market interest rate responds to that.

  21. Gravatar of Scott Freelander Scott Freelander
    7. August 2016 at 05:44

    Scott,

    Hypothetically, with enough credibility, there’s no reason a negative Fed Funds rate wouldn’t be sufficient, correct? The problem with going to negative rates right now would be that, given the lack of resolve, in terms of going deeply enough negative for long enough, it would be self-defeating. Since the Fed erroneously loses nerve the lower interest rates get, them going negative would actually make things worse?

  22. Gravatar of Scott Freelander Scott Freelander
    7. August 2016 at 05:53

    Scott,

    And I realize you don’t like the focus on interest rates, but if the Fed committed to buying only short-term Treasuries, for example, wouldn’t a steeper yield curve be an excellent indication of success, especially if it went quickly back to a pre-slowdown trend in a hypothetical situation?

  23. Gravatar of Steve Steve
    7. August 2016 at 07:17

    OT: Scott Sumner’s sister is friends with Peggy Noonan!

    http://www.wsj.com/articles/the-week-they-decided-he-was-crazy-1470354031

    I end with a new word, at least new to me. A friend called it to my attention. It speaks of the moment we’re in. It is “kakistocracy,” from the Greek. It means government by the worst persons, by the least qualified or most unprincipled. We’re on our way there, aren’t we? We’re going to have to make our way through it together.

    https://www.themoneyillusion.com/?p=31862

    PS. My sister (who knows many more words than I do), recently taught me another:

    Kakistocracy

  24. Gravatar of Gary Anderson Gary Anderson
    7. August 2016 at 08:06

    @PatrickSullivan You hit the nail on the head Patrick. The money supply sucks: http://www.tradingeconomics.com/united-states/money-supply-m0

    The Fed is content to see sovereign bond sales go up as hoarders buy more and more, and could care less about the real economy and main street and the money supply.

    Is it in liquidation mode regarding the stock market? Certainly the Fed wants bonds to keep their value, even if we slow to a crawl.

    I just wonder how long the Fed can protect the hoarded collateral while the money supply continues to shrink? Or can it protect the collateral bonds even if the money supply expands for a time? Maybe Patrick could give a shot at an answer.

    One would think a slight expansion of the money supply over time would not destroy the value of sovereign bonds, but apparently the banks can’t afford even a little rise in rates. That is how it was in the Great Depression. Will Rogers said that the banks must be broke, since they could not afford a 1 percent rise. Now they can’t afford a quarter of that!!!

  25. Gravatar of Ray Lopez Ray Lopez
    7. August 2016 at 10:29

    bill 5. August 2016 at 17:26 “Scott, how do you interpret the rise in the DAX at 8.30 this morning? Thx”
    ssumner 5. August 2016 at 20:28 “Bill, Perhaps the US jobs report? US stocks rose on the news, didn’t they?”

    sumner 6. August 2016 at 06:12 “Ray, You said: “Sumner offers short term trading tips on the DAX. Comical.”
    Another idiotic statement. I’ve never offered trading tips in my entire 7 years of blogging. Keep them coming Ray, so I know I’m on the right track.”

    Res Ipsa Loquitur. Latin for The Idiot Speaks for Itself.

    @Brent Buckner – thanks you may be right, I did not research the AU helicopter drop. Does anybody know in the modern era if there’s been a heli drop anywhere in the world that’s been successful? There was one in the US Civil War.

  26. Gravatar of Bob OBrien Bob OBrien
    7. August 2016 at 10:45

    Maybe Scott should think bigger. Why not eliminate all federal taxes and instead use newly printed money to fund the federal government. No IRS, no withholding, no corporate taxing. The Fed could monitor NGDP and insure that it grows at just the right rate to fund the government.

  27. Gravatar of ssumner ssumner
    7. August 2016 at 11:11

    msgkings, In my view, regulations are just one of many factors holding back growth. And I favor having the markets set interest rates, not the Fed. Check out my new econlog post.

    Chuck, Oh dear, someone lacks a sense of humor.

    Scott, A steeper yield curve might signal success, but I’d rather focus on the Fed’s target, not their techniques for getting there. The main problem is they have the wrong target.

    Thanks Steve, I saw that yesterday and plan a post, although not on that word in particular. But you are right, I immediately thought of my sister.

    Ray, A trading tip is when you predict an asset price movement. Explaining it afterwards is certainly not a trading tip. Surely you can’t be that dumb?

    Bob, I think Zimbabwe tried that.

  28. Gravatar of Scott Freelander Scott Freelander
    7. August 2016 at 11:51

    Scott,

    Yes, but my point is that a good market monetarist, for example, could manage monetary policy just fine with the current regime, correct?

  29. Gravatar of Scott Freelander Scott Freelander
    7. August 2016 at 11:54

    Ray doesn’t know the difference between throwing out an interpretation of a market reaction that already occurred and providing trading tips.

    Can he really be this stupid, or is he trolling?

  30. Gravatar of Chuck Biscuits Chuck Biscuits
    7. August 2016 at 13:49

    So Scott, how can we tell when you’re making a serious statement, as opposed to just bullshitting? It’s honestly hard to tell.

  31. Gravatar of msgkings msgkings
    7. August 2016 at 14:07

    @Scott F; he’s just trolling, that’s by his own admission. He’s very bored where (and how) he lives.

    Harding is actually stupid. That’s unfair, he’s not stupid just slightly below average IQ.

  32. Gravatar of msgkings msgkings
    7. August 2016 at 14:09

    @Chuck: sometimes it’s the reader’s responsibility to know when a joke is being told. A monetary economist like Sumner knows that the Fed doesn’t use paper to ‘print’ money. That sort of goes without saying.

    If you are playing poker and you don’t know who the mark is, it’s you.

  33. Gravatar of ssumner ssumner
    7. August 2016 at 14:31

    Scott, You asked:

    “Can he really be this stupid, or is he trolling?”

    This is perhaps the deepest, most profound mystery in all of blogdom.

    Chuck, I gloss over facts that seem trivial. The Bureau of Engraving and Printing actually produces currency. The Fed determines the size of the base, and the public determines how much of the base is cash. I was just making the point that the Fed can boost the base as much as it wants; it never runs out of ammo. I don’t feel a need to always explain that the base is both cash and electronic accounts at the Fed, or that the Fed doesn’t actually produce the currency itself, as these details seem beside the point.

    Msgkings, You said (about Ray):

    “he’s just trolling,”

    Why can’t it be both? A stupid troll.

  34. Gravatar of Chuck Biscuits Chuck Biscuits
    7. August 2016 at 15:18

    That the Fed can increase the base at will and to any size it wishes, can be filed under the “no shit Sherlock” category. That’s not the issue. The claim, that you gloss over and never bother to support (as far as I can tell), is that the base constitutes “ammo”, i.e. the basis for increasing NGDP. Why is this supposed to be true?

  35. Gravatar of Scott Freelander Scott Freelander
    7. August 2016 at 15:23

    Scott,

    I wonder if it’s really worth it to fight for a Fed targeting regime change. I agree that something like NGDPLT would be much more straightforward and simpler for policymakers and the public alike. I agree that, specifically, it avoids the confusion that comes with low interest rates, among other opportunities for confusion. However, even if NGDPLT becomes widely accepted as the appropriate regime, we’re still talking about targeting implicit indicators of NGDP, unless something like a subsidized NGDP futures market is established.

    It seems this is just too much change to push for, when perhaps just arguing for more stimulus credibility and level targeting of variables would be a good first step.

    That’s not to say market monetarists haven’t made great progress. You have, but unless I’m mistaken, a good market monetarist could get us right back to real GDP potential and more or less keep us there within the current Fed regime.

  36. Gravatar of Chuck Biscuits Chuck Biscuits
    7. August 2016 at 15:35

    BTW Scott, are you actually joking, or just using a metaphor? msgkings clearly can’t tell either, you should provide some clarification.

  37. Gravatar of Bob OBrien Bob OBrien
    7. August 2016 at 16:19

    Regarding: “Bob, I think Zimbabwe tried that.”

    Yes and it seems to me it failed because the government of Zimbabwe spent too much money compared to the GDP of their country? In the long run we seem to be headed in the same direction. The fact that we do not finance our government like Zimbabwe may not protect us against their fate?

    I like Zimbabwe’s way of financing the government because it is a simple and low cost method and saves us from sending the government all our financial information every year.

  38. Gravatar of ssumner ssumner
    8. August 2016 at 14:23

    Chuck, You said:

    “Why is this supposed to be true?”

    Maybe it’s not true, and the US will own the world. Is that so bad?

    You said:

    “The claim, that you gloss over and never bother to support (as far as I can tell)”

    You must be new here, I have about 100 posts explaining transmission mechanisms.

    Scott, We try to make progress on any front that we can.

  39. Gravatar of Chuck Biscuits Chuck Biscuits
    9. August 2016 at 03:50

    I’m not new here, I knew immediately you would respond with your usual “100’s of posts” reply. I.e. that you wouldn’t reply at all.

  40. Gravatar of ssumner ssumner
    9. August 2016 at 05:56

    Chuck, You must be pretty dense if you’ve been here a long time and still don’t know my views on monetary policy.

  41. Gravatar of Chuck Biscuits Chuck Biscuits
    9. August 2016 at 20:14

    I’m not talking about your views on monetary policy, I could give two shits if you grouse about targeting NGDP instead of inflation. I’m talking about your central premise that the Fed can hit any target it wants. This is a pretty basic question, if you’ve got so many posts addressing it, simply post the important ones here, as far as I know you simply take it for granted and get by because most of your opponents (old monetarist or new Keynesian) share that assumption.

  42. Gravatar of ssumner ssumner
    10. August 2016 at 06:03

    Chuck, Read my Mercatus paper on futures targeting–link in right column.

  43. Gravatar of Chuck Biscuits Chuck Biscuits
    11. August 2016 at 03:54

    Thanks; was that so hard? At any rate, I don’t really see where you address this issue. You discuss how at the ZLB an interest-rate targeting regime will have problems a NGDP-targeting regime won’t, which is probably true but irrelevant. But you simply assume that if the central bank buys enough assets it can raise NGDP (or whatever). You don’t seem to grasp that in crisis situations, demand for credit collapses with velocity. You can protest all you want, but the reality is, in modern economies monetary policy is implemented through the banking system, and there is little a central bank can do by increasing the base (i.e. reserves) in a liquidity trap. (And no, I’m not an MMT’er so skip the partisan bullshit.). BTW this same objection applies to the Austrian free bankers, with whom you have much in common (they never address the point either).

  44. Gravatar of Brian Donohue Brian Donohue
    11. August 2016 at 04:59

    I will say again Scott that you are a credit to your profession. Great post.

  45. Gravatar of ssumner ssumner
    11. August 2016 at 06:03

    Chuck, You failed to address my argument that it would be even better if the Fed “failed”, as then we’d own the entire world. Do you seriously believe we’d be so lucky?

    In any case, with a NGDPLT policy at a reasonable rate we’d never hit the zero bound, so it’s a moot point.

    Thanks Brian.

  46. Gravatar of Chuck Biscuits Chuck Biscuits
    11. August 2016 at 07:27

    What argument is there to address? A thought-experiment where the Fed buys everything in existence? That’s just pure fantasy, you’re getting that from Bernanke’s 1999 paper on Japan, aren’t you? Bernanke the real-world central banker was rather different from Bernanke the clueless academic.

  47. Gravatar of ssumner ssumner
    12. August 2016 at 11:56

    Chuck, Of course a thought experiment is fantasy, that’s why it’s called a thought experiment. The question is what effect would it have if it did occur?

    No one denies that if the Fed refuses to purchase the amount of assets that it needs to purchase to hit its target, then the policy will fail. My response is: So what? What are the policy implications of that?

  48. Gravatar of Chuck Biscuits Chuck Biscuits
    14. August 2016 at 04:33

    Apart from the fact that this thought experiment does not remotely describe anything an actual central bank is realistically going to attempt (even if it was institutionally equipped to do so), the obvious point is that you’re question-begging. You assume that with sufficient monetization the central bank can hit its target, which is the point in dispute, not the necessary level of monetization.

  49. Gravatar of Scott Sumner Scott Sumner
    14. August 2016 at 20:16

    Chuck, OK, Let’s try one last time. A two dimensional graph with the inflation target on the horizontal axis, and the central bank balance sheet as a share of GDP on the vertical axis. The function is downward sloping as you move to the right, a much smaller balance sheet in Australia than in Japan.

    Now draw a horizontal line at the level of assets (as a share of GDP) that the central bank is legally allowed to buy. Now look at the intersection point. To the right of that point, central banks can hit their inflation target. To the left, the inflation target is so low that central banks cannot buy enough assets to satiate the public’s demand for base money at that inflation rate. In that case central banks cannot hit their inflation target.

    But both of those constraints (the height of the horizontal line and the position of the inflation target) are artificial constructs, that can be changed.

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