From around the blogosphere

1.  JimP sent me this link showing that I am not the only one who thinks tight money is the cause of our current predicament:

Tim Congdon – a hard-money Friedmanite from International Monetary Research – says the Fed is still not easing enough, perhaps because it is spooked by so much criticism or faces a mutiny by its own hawks. “If Ben Bernanke and his officials are listening to this sort of stuff and taking it seriously, they are making the same mistake as the Fed in the early 1930s,” he said. The US “output gap” is near 7pc. That is a powerful lid on inflation.

The sin has been to let M2 money growth wither since January, to let bank lending contract at a 5pc annual rate, and to let 10-year bond yields rise to nearly 4pc. The Fed pays lip service to the Friedman-Schwartz theory of the Depression, but has not digested the lesson.

Mr Congdon’s prescription is what Britain did in 1931 and 1992: monetary stimulus à l’outrance (today: bond purchases), offset by spending cuts. This mix – easy money/tight fiscal – would halt debt deflation without ruining the public finances of the US, Britain, and Europe in the way that Keynesian schemes ruined Japan. “The markets would rocket,” he said.

My doppelganger.  BTW, those of you who think I’m an inflation dove should note that Tim Congdon is described as a “hard money” guy.

Update 6/23/09:  David Beckworth deserves some praise.  The Telegraph article was influenced by David’s blog.  And David also anticipated the ideas in Bob McTeer’s blog (see point 3 below) way back in October (see here.)

2.  Arnold Kling has an interesting post on whether “bad bets” or co-ordination problems played a bigger role in the financial crisis.  I agree with his conclusion that bad bets were more important, but I also believe he left out the most important factor.  Here is my guesstimate of the relative importance of three factors:

1.  Coordination failures — 5%

2.  Bad bets  —  20%

3.  Falling NGDP (tight money) — 75%

My baseline policy is for the Fed to buy or sell unlimited amounts of NGDP futures contracts at a price that rises 5% per annum.  Under that regime I think the financial crisis would have been no more than 1/4th as large, and indeed probably even less than that.  Even the subprime part of the crisis (which is not the largest part) would have been considerably smaller.  Had that policy been followed, NGDP would probably be around 8% higher today, and housing prices would probably be 15% to 20% higher today (as they are pricing in further subpar NGDP growth over the next few years.)

3.  Bob McTeer argues that the decision to pay interest on reserves is a mistake on par with the Fed’s decision to double reserve requirements in 1936-37.  I have made the same argument.  He is the former president of the Dallas Fed.  If only some of the current members of the FOMC understood this.

4.  Tyler Cowen has a nice post on the futility of trying to model growth by simply looking at the C+I+G+NX components of GDP.  In case anyone is interested, here is my take from back in February.

5.  Tyler also linked to an interesting website that is going through the 1930 Wall Street Journals one day at a time.  Here are some items from today’s link:

Treasury Secretary Mellon denies Smoot-Hawley tariff will damage business, says tariff will end uncertainty, criticism has been exaggerated, and flexible provisions in the law will be used to improve it. Says previous tariffs have always caused “gloomy prophecies” that have never materialized.

Hoover had decided to sign Smoot-Hawley on Sunday June 15th.  During the previous weeks the stock market had fallen sharply, and the fall was almost certainly due to the Congressional fight over Smoot-Hawley.  While the government was whistling past the graveyard, the mainstream press also tried to convince the public that all was well:

Front page above the fold editorial: “This is America. Piffling talkers would turn back the calendar to the nineties and destroy the economic progress of thirty years. Vicious rumors spread for selfish purposes; flippant predictions of a five-year slump in business; wholesale demands for the cutting of wages are unworthy of American intelligence. Credit is super-abundant. Business is no worse than three months ago. Twelve months of declining volume is behind us. Many adjustments have been all but completed. Engineering and marketing brains are as fertile as ever. Problems there have always been. To proclaim their insurmountability is childish.”

Al least academic economists opposed Smoot-Hawley, but alas their predictions were also worthless:

Economists feel the current situation in commodity markets is starting to look like a bottom; a combination of underproduction and easy credit at low rates should work as usual to correct conditions.

In fact, the decline is commodity prices was accelerating.  And just as today, Congress went on a witch hunt looking to for scapegoats for a depression that was actually caused by a sharp fall in AD (caused by gold hoarding by central banks.)  Their villains turned out to be short sellers.  I guess their theory was that the stock crash was caused by people selling stocks:

Resolution introduced by Congressman Sabath to form a committee to investigate whether “the tremendous professional shortselling of stock on the various exchanges was responsible for the November, 1929, and present ‘crashes,’ and to what extent it is responsible for the depression of business.” Will also look into taxing short sales or outlawing them completely.

So this is the sort of propaganda that Wall Street traders read when they woke up on Monday morning, the day after Hoover decided to sign Smoot-Hawley.  All was well despite the crash on Wall Street during the previous weeks.  How did they react to that news?  With a big %&#@ &$% to the government, the press, and the economists.  The Dow fell 7% that day, the largest fall of the entire year.  The markets knew the real story.  This is from the following day’s NYT:

“There was a feeling of discouragement that extended to all of the speculative markets.  Everywhere the disposition was to lay the blame at the doors of Congress.   Loud lamentations against the tariff bill were heard throughout the financial district.  Traders, gathered in the customers’ rooms of brokerage houses, berated the administration and Congress.  One disgruntled person posted a placard in a brokerage house reading, ‘A Business Administration””the Only Party Fit to Rule?'”  (June 17, 1930, p. 1)

In contrast, here’s how the WSJ described the reaction to Hoover’s decision:

Hoover’s announcement on tariff favorably received due to removal of business uncertainty, and his announced intention to use his authority via the tariff commission to fix problems with the law.

What’s the lesson?  If you want to know what’s really going on, don’t look to the government, don’t look to the press, and don’t look to the economists.  Look at the markets.  They won’t sugarcoat the truth or look for scapegoats.

By coincidence, I mentioned how I had read all the 1930s NYT in yesterday’s post.  Elsewhere I argued that 2008 was like 1929 and 1937.  That makes 2009 like 1930 and 1938.  Let’s hope it’s more like 1938.



27 Responses to “From around the blogosphere”

  1. Gravatar of JimP JimP
    22. June 2009 at 10:11

    Personally, I think as many of us on this blog as possible should write letters – to the Fed board and to Bernanke – expressing our views. They are slowly strangling the whole world economy – out of ignorance. Surely there must be more we can do than simply write these posts.

    It is sort of like the people of Iran. We want to hear some ARGUMENTS for these insane policies – and we have not heard one single one yet.

  2. Gravatar of JimP JimP
    22. June 2009 at 10:23

    And this is deflation:

  3. Gravatar of Nick Rowe Nick Rowe
    22. June 2009 at 10:52

    Scott: I don’t think you have done this yet, or did I miss it? But I would be really interested in seeing you write a post comparing today to the 1930’s. What’s different? What’s the same? I see parts of the answer scattered among your other posts (like this one), but not a direct comparison of all the (relevant) similarities and differences.

    My main ground for optimism today is that at least we don’t have the Gold Standard to worry about.

  4. Gravatar of Jon Jon
    22. June 2009 at 11:19

    Have you considered the possibility that there is substantial slack only in certain activities? And that other activities are highly constrained?

    The broad brush of an ‘output gap’ really makes me cringe.

    Nick: Unlike the 1930s there is very little evidence that the unemployment is broadly based across sectors.

  5. Gravatar of Alex Golubev Alex Golubev
    22. June 2009 at 12:32

    Scott, i see your predictions for what could have happened if the Fed acted correctly. Could you please make a case for why the current environment is 4x less FAIR? I personally prefer creative destruction, just to keep things honest, cause i suspect whoever’s holding things that are worth 25 cents instead of $1 made a few bad calls along the way. We learn from our failures a lot more than from our successes (including career choices, if you’re arguing unemployment). i know this sounds like the medicine of the 30’s, but please do make a case for why we’re currently 4x more unfair.

    Jon, welcome to misallocation of resources. My house is on fire, so let’s flood the whole block. That actually IS a good idea at some point. i’m just really confused when that point comes and who should have the power to call it.

  6. Gravatar of » Blog Archive » Lesson From the Depression: Different This Time? » Blog Archive » Lesson From the Depression: Different This Time?
    22. June 2009 at 13:03

    […] project is a blog that is looking at news from the Wall Street Journal in 1930. (Hat tip, Scott Sumner) Some of the similarities are spooky. For example, “A Turn of the Tide Near” … “It […]

  7. Gravatar of » Lesson From the Depression: Different This Time? » Lesson From the Depression: Different This Time?
    22. June 2009 at 14:55

    […] project is a blog that is looking at news from the Wall Street Journal in 1930. (Hat tip, Scott Sumner) Some of the similarities are spooky. For example, “A Turn of the Tide Near” … “It […]

  8. Gravatar of TGGP TGGP
    22. June 2009 at 17:02

    We’ve already repeated a bit of economic ignorance from the Great Depression. The SEC halted short-selling on 799 financial stocks.

    Elsewhere in the blogosphere Peter Boettke at The Austrian Economists responds to Casey Mulligan’s “What Monetary Policy Cannot Do”, which I linked here earlier. In the comments section Steve Horwitz (and others) continue their argument with Nikolaj over whether any steps should be taken in response to deflation. You might want to note down some of the more concise retorts in the event that your blog is inundated with the 100% reserve Rothbardians that multiply like rabbits on the internet.

  9. Gravatar of David Beckworth David Beckworth
    22. June 2009 at 18:36


    In case you are interested, I also noted the similarities between the Fed’s excess reserve policy and Fed policy in 1936 here.

    Also, that Telegraph article that discusses deflation was partly based off of this post

  10. Gravatar of Tom Tom
    22. June 2009 at 18:39

    Scott, you misinterpret McTeer. He’s NOT arguing that paying interest on excess reserves is a mistake equivalent to the Fed’s doubling reserve requirements in 1936-37. On the contrary, he’s arguing that to tax such reserves on the grounds that they are “excess” is to repeat the old errors. The reserves may be “excess” in the accounting sense of exceeding legal reserve requirements. But they are not excess in bankers’ eyes’. Bankers seek to hold them because they provide safety and security in troubled times. To tax such reserves, as you recommend, is to endanger reserves banks regard as necessary, and to recreate the error of ’36-7.

  11. Gravatar of Bill Woolsey Bill Woolsey
    23. June 2009 at 01:44


    Where are these contrained activities?

    Macroeconomic equilibrium, in my opinion, is a situation where the expanding sectors and the shrinking sectors balance. Or, more exactly, given growing population, capital accumulation (until first quarter this year, anyway) and improving technology result in expanding sectors expanding a bit more than contracting sectors shrink.

    A recessionary disequilibrium is a situation where the shrinking sectors shrink more than the expanding sectors expand. And a growth recession is where the growing sectors to not grow sufficiently more than the shinking sectors shrink.

    The notion that all sectors must grow or shrink–well it seems a bit odd and inconsistent with the nature of creative destruction. But, creative destruction should always be seen as shifts in the composition of output in the background of growing production. My view, is the best macroeconomic environment for this process is for aggregate demand to grow with productive capacity.

  12. Gravatar of ssumner ssumner
    23. June 2009 at 04:44

    JimP, I am open to suggestions for more publicity. I have been talking to some outlets recently (AEI, Cato, CBSMoneyWatch, Reason magazine, etc.) and hope to have some articles coming up soon. I will let you know.

    The article you linked to may be worth a post. “The froth is still working itself out” What a heartless way to describe 9.4% unemployment! You bring out the populist in me.

    Nick, That’s a good idea. In a way I agree about the gold standard, it should be easier to inflate today. At the same time the very rigidity of the GS gave FDR an advantage; it made his dollar devaluation policy highly credible–nobody doubted it would raise prices.

    What do you think about the following argument. Suppose the US housing bust reduced the Wicksellian real interest rate. And also suppose that integrated global capital markets tend to equalize real interest rates around the world. Then suppose major central banks target nominal interest rates. Then suppose they are too backward-looking, and tend to respond slowing to drops in the unobservable Wicksellian real rate. Does this provide a mechanism as to how a deflation shock could be transmitted from the US to the Eurozone, despite the supposed policy independence offered by floating rates?

    Jon, I like the way you think about problems, one must be careful of output gaps (which I tend to mistrust) and there is a distinction between sectoral and aggregate problems. But I still think your analysis here applies more to the first part of the recession. After August it spread far beyond housing and I question your statement that implies many sectors are not affected. I heard on the news recently that only health and education were gaining workers—everyone else was shedding jobs. Isn’t it now a generalized problem of too little AD, or NGDP? Again, your logic is fine, but have you checked the job data recently?

    Alex, With the house fire analogy, I’d say we had someone smoking in bed who got his own house on fire, and then it spread to three other non-smoker houses because the Fed, I mean the fire department, didn’t show up on time.

    TGGP, Thanks for those links. Yes, I agree we are repeating many of the same mistakes. By the way, Rothbard’s argument about the 1920s is more plausible than applying the same argument today. They were constrained by the gold standard in the 1920s, so there is a sense in which tighter policies in the twenties might have made the dropoff after 1929 less step. But I don’t think that approach is realistic today. (Except in Japan, for some odd reason.)

    David, Great stuff! I added an update near the top of the post linking to your two papers.

    Tom, I disagree. I do understand what he is saying. Both policies increase the demand for reserves, that is why they are both bad. He may not support my proposal, but it would reduce the demand for reserves, and thus be expansionary. He is not saying that it is a good thing banks hold lots of ERs, he is saying that if you raise the res req. they will simply hold more total reserves, which is bad.

    Bill, It is a judgment call, but I agree with you that Jon overstates the purely sectoral aspects of the most recent phase of the recession. It is pretty general. I should have mentioned however, that one reason I prefer NGDP targeting is that it gets the Fed out of the business of estimating output gaps, and I agree with Jon that we are not very good at doing that (as we saw in the 1970s.) But overall I think you view is better for the current situation.

  13. Gravatar of Current Current
    23. June 2009 at 05:21

    JimP – Do you have some big debts you need to pay off?

    Only joking 😉

    More seriously I can’t see how the Fed can do much more than what they are doing. I’m not sure if they aren’t currently doing too much.

  14. Gravatar of Alex Golubev Alex Golubev
    23. June 2009 at 06:14

    Scott, that’s true on smokign in bed and getting three other houses on fire, but how many houses do we want to damage with water to prevent the spread? I think that’s what worries a lot of the people here is that the fed has such sweeping, indiscriminate tools at its disposal. i’m not talking about blame anymroe. let’s assume that it was their fault for not showing up on time and not the fault of (political and public opinion) TRAFFIC. now they don’t have a house that puts out the fire in a house on wire… they have to soak the whole block, if not more.

    Now getting back to makign a better system. I get that the houses are on fire and there’s the argument above that we should soak allt he houses, but it’s not the only argument. i think we should really focus on people that smoke in bed and the process by which the fire spreads. we don’t have to argue that there’s room for only one argument, but it seems like you’re making that point. you obviously don’t have to look into those since you focus on purely monetary issues, but i don’t think you can deny that those are ongoing issues that may seem minor to the current fire (category 5), but ARE the #1 causes of fires to begin with (category 1-5). It’s true that it takes “pouring fuel on the fire” or not pouring water to make it a 5, but i don’t think 3-4 category fires shoudl be ignored simply because we encounter a category 5 every 70 years.

  15. Gravatar of Alex Golubev Alex Golubev
    23. June 2009 at 06:15

    LOL… sorry spelling insanity. this is wrong:
    “now they don’t have a house that puts out the fire in a house on wire… ”
    shoudl read:
    “now they don’t have a hose that puts out the fire in a house on fire… “

  16. Gravatar of TVHE » The lingo never changes … TVHE » The lingo never changes …
    23. June 2009 at 14:01

    […] that it looking at each day in 1930 we have this beaut of a quote (ht Paul Krugman, and initially Scott Sumner): Leading economists and market observers are looking for clues on how long the current trade […]

  17. Gravatar of Jon Jon
    23. June 2009 at 16:55

    After August it spread far beyond housing and I question your statement that implies many sectors are not affected. I heard on the news recently that only health and education were gaining workers””everyone else was shedding jobs. Isn’t it now a generalized problem of too little AD, or NGDP? Again, your logic is fine, but have you checked the job data recently?

    Fair enough…

    Lets look at a sector breakdown:
    Construction: 21.1%
    Education: 4.9%
    Finance: 5.7%
    Manufacturing: 12.6%
    Services: 10.4%

    There are substantial variations depending on gender and age–unemployment for women overall is ~6%. Unemployment of college educated people over 24% is ~4%. At all levels of education over 24: ~7%. Unemployment of engineers is ~3%.

  18. Gravatar of Bill Woolsey Bill Woolsey
    24. June 2009 at 02:33


    What are the changes in the unemployment rates?

    I am in education. We are not expanding. We are cutting investment. We have laid off temporary workers. We have had furloughs (temporary layoffs.)

    Now, if the unemployment in education had been 5.9%, and it has since dropped to 4.9%, and further, you showed evidence of expanding production, then I would see this as evidence as eductaion being an expanding sector with resource constraints.

    Why is it so hard to understand that there is a major sectorial shift going on (from overproduce housing to the rest of the economy) as well as a rapid drop in nominal spending that has not resulted in sufficiently lower prices and wages to maintain real expenditure equal to productive capacity.

    There are two things happening at once.

    Perhaps Scott’s temporaly way of describing it is confusing. We had a sectorial problem, and now we have an monetary disequilibrium problem. I think it is obvoius that we still have the sectorial problem (though presumably some progress has already been made on correcting that) and starting about a year ago, a monetary disequilibrium problem was overlaid the sectorial shift problem.

    I fully agree with Scott that he monetary disequilibrium is vastly more important than the sectorial shift issue.

  19. Gravatar of ssumner ssumner
    24. June 2009 at 04:18

    Current. What more can the Fed do? How about target NGDP at 5%, put an interest penalty on excess reserves, and do OMOs until the market shows roughly 5% expected NGDP growth? That’s what they could do. In other words, I’d have them do right now exactly what I favored them doing in 2005, 1995, 1985, etc.

    Alex, Specifically what is the water damage from 5% steady NGDP growth? And then contrast that with the damage from NGDP growing 7% one year, then negative 5% a few years later.

    Jon, When I look at those numbers I see strong sectors in education and finance, and a depression in construction. Fair enough, (although the finance number surprises me, but let’s put that aside.)

    But here’s my point, both services and manufacturing show severe recession in the 10-13% range. And services and manufacturing are pretty big parts of the economy. I agree there are some sectors doing better, but I think in any recession there are some recession-proof areas. My point is that the recession has spread far beyond construction (the original problem) and I still think its fair to say we have a generalized fall in AD that is affecting the entire economy.

    Bill, Yesterday even Harvard, far and away the world’s richest college, announced heavy layoffs. So I agree. Education is not doing too bad in a relative sense. But it is normally recession-proof. This time around it is suffering somewhat, albeit less than other sectors.

  20. Gravatar of Alex Golubev Alex Golubev
    24. June 2009 at 06:20

    what’s wrong is that you’re zoomed out too much. 5% growth for WHO??? who benefits? The economy isn’t split fairly is my point due to assymetric payoffs + leverage. You keep focusing on the current crisis and i keep saying that forget the crisis, the current policies never have allow for fair trade. It’s so short sighted. Every category of financial storm has been cause by unfair incentives. Yes, we’ll put out this fire eventually, but we’re doing absolutely nothing for the future.
    If you think i’m a newcomer to econ/finance, try one of the most respected economic commentators (FT’s Martin Wolfe) who has been through a few cycles unlike Krugman or dr Doom (why waste time arguing with folks who are only 1/1?):
    (i just can’t figure out if i’m plagiarising)

  21. Gravatar of Jon Jon
    24. June 2009 at 06:28

    Why is it so hard to understand that there is a major sectorial shift going on (from overproduce housing to the rest of the

    How did I give you the impression that I don’t believe a sectorial shift is going on? How did you get the impression that Fed is not very deliberately trying to stop the shift by pumping very directly into home-loan market. Or that there was a lot of fretting over rising inflation expectations hindering home loans.

    economy) as well as a rapid drop in nominal spending that has not resulted in sufficiently lower prices and wages to maintain real expenditure equal to productive capacity.

    That’s very Keynes (sic) of you.

  22. Gravatar of Jon Jon
    24. June 2009 at 06:29

    Bill, Yesterday even Harvard, far and away the world’s richest college, announced heavy layoffs. So I agree. Education is not doing too bad in a relative sense. But it is normally recession-proof. This time around it is suffering somewhat, albeit less than other sectors.

    Elementary school teachers dominate the sector.

  23. Gravatar of ssumner ssumner
    25. June 2009 at 04:11

    Alex, I have quoted Wolf before, and agree with his analysis. But once again, most people overlook the fact much of this crisis is caused by slow growth in NGDP, not financial turmoil. But I certainly agree with his view that deposit insurance is a root cause of the financial crisis, and I have done posts calling for reform of deposit insurance. Of course we will do nothing of the kind, instead you have my Congressman (Barney Frank) calling for a return to the old days, asking Fannie Mae to loosen up and start purchasing higher risk condo loans. Nothing will change.

    Jon, (I think your first point was aimed at someone else.) Regarding your second point, thousands of elementary school teachers are being laid off in states like California, but I do agree that in a relative sense education is holding up well, as in all recessions.

  24. Gravatar of Alex Golubev Alex Golubev
    25. June 2009 at 07:40

    i fully agree that IF we wanted to save the system, the easiest thing to do is to ease. it’s quite clear from devaluations of the 30’s, which I’ve agreed with you on before. i guess i’m not overly passionate about using monetary policy (easing OR 5% NGDP targetting) at this time or any, because it won’t really change the future, merely extend the unfainess. It’s true though that the short term pain of a depression won’t necessarily undo the assymetric incentives and if anythign create more of them. Unfortnunately i think i’m willing to roll the dice on that, otherwise we’ll be punishing the savers. It seems like a question of ethics mroe so than economics. Would you kill an innocent person to save two. i guess monetarists argue that all three are gonna die anyways (savers will get hurt if there are runs on banks) and i’m saying i have a strong immune system. I’ll take creative destruction even if there’s a risk of complete destruction, but obviously i’m a saver.

  25. Gravatar of ssumner ssumner
    26. June 2009 at 06:05

    Alex, Reforming deposit insurance would allow for more creative destruction, so perhaps we can agree on that?

  26. Gravatar of Alex Golubev Alex Golubev
    26. June 2009 at 12:59

    The Bank Architecture post is one of the best. You say: “So what do we do? If the root cause of the problem is moral hazard, then we could try to repeal FDIC, and other policies like “too big to fail,” in order to get back to the system of the 1920s. But that is not politically feasible”

    Yes, FDIC is a great example of moral hazard. Reform wouldn’t hurt; I see it helping in speeding up creative destruction (10/10) much mroe than in preventing misallocation of resources (3/10 – depositor needing to do due diligence instead of uncle sam).

    Preventing the misallocation of resources (as opposed to speeding up the destruction) is chalenging as well. Once again two fronts. The public vs powerplayers.

    I think educating the masses on the concept of market cycles in highschool would be great. why teach math/theory only as it applies to the physical world. Health is a required subject. We need the same for personal finance. It’s not that hard. I don’t buy that argument for a second. It’s circular ignorance.

    Power players need to have mroe skin in the game in every TYPE of incentive (not just equity), which is vested over X years, so it isn’t as relevant as the current year’s 6+ figure bonus based on bendable accounting #’s or even worse revenues and not p/l. bonuses have to be vested as well. Agency problem – helllloooo!! the proportion of compensation needs to make sense. 1 year’s #s aren’t THAT important. shareholders dont’ approve compensation plans, the board of directors and managers do and they don’t have tehe same incentives as the shareholders so this is where this stems from.

    i find the power players issues much mroe politically infeasable than the public ones, particularly education. Money has a tendency of leading to power according to Scarface and he had a poweful “little frien'”. But by the same token, public ignorance is the source of that money/power and i’m very optimistic that education is key. a simple concept of budgeting (dont’ spend more than you earn! compound interest, yo!), market cycles (market levels are like broken clock – grounded (ha) in fundamentals but ALWAYS oscilate based on SENTIMENT!),etc… exclamation points are optional. I’m actually optimistic on this front, because internet is giving printing presses to the public and popularity of the “presses” is market based (ie google, blogs, youtube). The educational system has barely tipped its toes into the power of the internet. so far it’s used for greater efficiency of communication much mroe so than content and idea generation. Textbooks vs wikipedia for example.

  27. Gravatar of ssumner ssumner
    27. June 2009 at 09:55

    Alex, I agree with much of what you have to say. But before we educate the high school students, we need to educate the teachers. (I’m just kidding here, so if you are a teacher don’t write in angry.) The serious point is that many people, even college teachers, don’t buy into the free market system. So we have our work cut out for us.

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