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More on Money, Currency-ness, Wealth, and Spending

Arthur over at New Arthurian Economics has posted a much-appreciated though decidedly negative reply to my recent post on the nature of money and financial assets. He and I have had very similar thinking over the years (and he has provided me, at least, with some Aha! moments), so I’d much like to convince him to give the thinking therein a solid road-test. This post is an attempt to encourage that.

First, slightly modified, what I said in a comment reply on that post:

The key (and I think hugely simplifying and clarifying) distinction:

money:financial assets::energy:barrels of oil.

In the vernacular we speak of oil as “energy,” but we know that they’re conceptually distinct. The energy is embodied in the oil. Just as it’s embodied in a rock at the top of a hill.

Pieces of currency are just financial assets (legal claims, or credits) that have particular characteristics, properties. As do barrels of oil and rocks on top of hills. We’ve always called those particular types of financial assets “money,” and therein is rooted much of the confusion and miscommunication we suffer under, IMNSHO.

Also, a key qualification that I’ve discussed in the past but didn’t in that post, which I’ll discuss more below: This thinking only works if you think of deeds as financial assets — claims on real assets, with the claim being conceptually distinct from the asset — the real estate — itself.

Like other financial assets, deeds as claims on real assets embody money. If you have more homeowner equity, you have more money. I don’t think this is crazy; homeowners’ ownership positions in the real-estate market, with associated mortgages, are arguably their most “financialized” positions. Owning (some portion of the claim on) a house in modern economies is fundamentally and conceptually different from owning an apple sitting on your kitchen counter. (I’ve long pondered a post on the nature of asset “ownership,” the legal and social constructs that constitute and define those claims, but I won’t go all the way there in this post…)

With that as background, some responses:

“… ‘money’ should be technically defined, as a term of art, as ‘the exchange value embodied in financial assets.'”

To me, money is the medium of exchange, not the exchange value.

Here, from the get-go, you are declining to try on this definition and conceptualization. By saying “money” is the “medium of exchange,” you’re thinking about money being currency-like things. I’m suggesting that that’s the very conceptual problem we’re struggling with. And as I’ve suggested before, the traditional textbook tripartite “definition” of money — medium of exchange, medium of account, and store of value — by its very tripartite nature, is a crippling non-definition. People talk past each other constantly, as I’m sure you’ve noticed in blogs and comments from Sumner to Rowe to Koenig to….

It sounds like you’re talking about erosion of the dollar’s value.

No. In fact that discussion is one key thing (inflation) that’s missing from my explanation and discussion. I was trying to keep that post somewhat short. See below.

But I think you are talking about the liquidity of financial assets.

Again, this is going to the J.P. Koenig “moneyness” place (which he says is purely a function of liquidity, an understanding that’s at the heart of divisia measures, for example). I’m suggesting that what he (and you) are really talking about is “currencyness.” That being the very conceptual problem I’m trying to address.

I see this as the source of our economic troubles. Things that are not money have come to be widely used and accepted as money.

I’m not really talking about our economic troubles here (until the end of the post, where I apply the conceptual framework from the beginning of the post). I’m talking about our economics troubles. Our difficulty thinking about how economies work.

How economies work? But since the crisis, or before, economies DON’T work.

I see you doing the same thing for “work” here that’s going on for “money” — confuting two meanings. I’m talking about how economies operate, how to think about the mechanisms. You’re saying they don’t operate well. (I of course totally agree, and think that’s partially because economists don’t understand how they operate.) Completely different conceptual levels/realms.

You make things too complicated:

I want to suggest: quite the contrary. Put on this conceptual suit of clothes and try it out. I’m finding it to be incredibly clarifying and de-complicating. No need for the endless (and by all appearances fruitless) wrangling about MOE, MOA, MB, M1, divisias, etc.

“dollar bills aren’t money. They’re embodiments of money”

Jesus, Roth. The embodiment of money IS money.

I’m not sure if you’re making that statement or ridiculing it. So two answers:

Making: If this, you are assuming a priori that currency-like things are money. And given that, I’m not sure what you mean by the embodiment of money here.

Ridiculing: That’s not what I’m saying at all. I’m saying that currency-like things (what we’ve always called “money”) are embodiments of money as I define it. As are other financial assets.

“Money and currency aren’t the same thing, and economists’ conceptual confution of “money” with “currency-like things” is central to the difficulties economics faces in understanding how economies work.”

Currency-like things are the things we spend… things that are current, things that flow.

I want to try a physical metaphor in hopes of making this thinking clearer: The stock of money is a bathtub full of financial assets. Their source is the two (or three) methods of creation described in the post. People can exchange those financial assets within the bathtub. (Give me your Apple stock and I’ll give you some currency or currency-like bank deposits. See Jesse Livermore explanation.)

There’s a pipe that comes out of the bathtub and goes directly back in. Every withdrawal is a deposit (between different accounts within the bathtub). Every expenditure is a receipt. Instantaneously, or almost. It must be so.

Those transactions cause transfers of real, newly produced goods and services between parties — sort of by induction as they pass by — thereby causing production of new goods and services. (When you transfer money to another’s account to pay for a massage or an iPhone, you cause a new massage or iPhone to be produced. Magic!)

The instantaneous withdrawal/deposit nature of those transactions is why this has never made any sense to me:

Take a dollar out of the flow and tuck it away as “assets”, and it is no longer in the current: It no longer flows.

I hear this kind of thing all the time. e.g. “Health-care spending is taking all that money out of the economy.” As you would say, “Nonsense!” 😉

You can’t “take a dollar out” of the bathtub (except by paying off loans to the financial sector, paying taxes to the federal government, or reducing the equity allocation in your portfolio hence driving down stock prices).

You can, however, reduce or increase the turnover of your stock of money in a given period. You can “hoard” or spend your money. Not-spending is indeed taking a dollar “out of the flow” (relative to the counterfactual of spending it) — reducing velocity. But in aggregate, not-spending doesn’t “tuck it away” any more than spending it does. If you spend it, it just ends up tucked away in somebody else’s account.

Spending vs. not-spending doesn’t change the amount of money in the bathtub. (Not directly or immediately, in an accounting sense. Increased turnover does have an economic effect over time: more spending causes more production, hence more surplus, more assets, which over time results in more money being created through 1. federal and private (bank-loan-financed) deficit spending, and 2. market-driven runups in equity values. That’s just describing a growing economy that needs and creates steadily more money.)

In the paragraph just before your graph, you seem to confuse two definitions of the word “real”. Here’s the offending sentence: We see this clearly when we look at recessions and the year-over-year change in real (inflation-adjusted) household assets — a measure of households’ total claims on real assets…

Both right and wrong.

Wrong: I intentionally use both meanings of “real” in that sentence, with no intention of obfuscation, trying to making clear through parentheticals which one I’m using. I should probably take my own advice and stop using real to mean “inflation-adjusted,” and just say “inflation-adjusted.” (As you’ve no doubt noticed, these dual meanings foment no end of confused discussion out there.)

Right: I cheated. The graph of household assets vis-a-vis recessions is indeed inflation-adjusted, while my argument has been (implicitly) about nominal values. The correlation between recessions and YoY change in nominal household assets is still apparent, but considerably less firm (more false negatives and false positives). This whether or not you include household home equity as “financial assets” (click any graph to mess with it in FRED):

I have various notions about how to think about this, but haven’t formulated them into a clear and coherent explanation. This is problematic, but I don’t think it disqualifies the core conceptual approach.

But you also say that if we want to spend more, the money will grow to accommodate us. Your statements are contradictory.

No. Exactly not. I said that “transaction cash” (i.e. currency-like stuff), not money, will grow to accommodate us. See what you did there?

Further, if all financial assets are money as you say, then to calculate the velocity of money one would divide GDP by total financial assets. Not by total assets as you show in your second graph.

This brings us back to the real-estate issue discussed up top. When you ask someone “how much money do you have?”, IOW what are your assets, or your net worth, do they include their real-estate equity in their answer? Heck yes. Especially for low-income/wealth households, their home equity often constitutes a huge portion of their assets/net-worth/”money.”

I admit this can be tricky conceptual stuff given how we’ve always talked about money (the deep meaning of “ownership” aka claims aka credits enters here), but really: if house prices/values go up, people feel like they have more money (especially if increases exceed CPI, in which case they really do), and feel free to spend more (though not necessarily increasing their V) — just as they do when stock prices go up. And of course the reverse when values decline. The economic effects are very similar though probably not identical. (The effects are certainly slower-moving with real estate; people don’t track their house value day to day). Pretty straightforward wealth effect. The only question is the wealth-to-spending multiplier function (which is almost certainly nonlinear on more than one dimension).

I’ve been wrestling with this. Go back to Jesse Livermore’s wonderfully clear discussion of bonds/cash vs. stock/equity, how people’s portfolio allocations relative to the stock of bonds/cash is the primary (short- and arguably long-term) determinant of stock-market valuations (and in my definition, changes in the stock of money). Now add another “equity” class into which people are allocating: home equity.

I pulled this chart — asset allocations into the three types of assets, over the decades:

Screen shot 2014-05-22 at 8.39.23 AM

Think about real-estate decisions: You can make a smaller down payment, and keep more money in stocks and bonds (effectively owning stocks/bonds on margin), or you can sell stocks/bonds and make a larger down payment, shifting your portfolio more into real-estate equity. Ditto with home-equity extraction for spending; you coulda sold bonds or stock and spent that money instead, and kept your real-estate equity allocation high.

In Livermore’s formulation, the key choice is between bonds/cash, and equity — whether that equity is in stocks or real estate. In my formulation, when people shift their allocation from bonds/cash to equity (either type), hence driving up prices, they’re increasing the stock of money. But that money ultimately has only two sources — deficit spending (reflected in debt outstanding), and animal spirits spurring the equity purchases. (High spirits are rooted, ultimately, in high and growing production and productivity, causing people to believe that all the real assets out there — which their financial assets are claims against — are actually more valuable than they thought).

I’m not quite sure what to do with this graph yet, but at the very least I find interesting the long-term secular decline in home-equity percentage since the eighties (with that valuation bump in the 00s). I’m thinking this is largely the result of increasing homeowner (mortgage) debt over that period — they borrowed more, kept their loan balances high and inflating both their own and banks’ balance sheets, hence holding more of their net assets in stocks and bonds/cash. More thinking to come.

Finally, I want to give an example to explain my contention that having a greater proportion of currency-like stuff doesn’t cause more spending as monetarists seem to believe (spending on real, newly produced goods and services, aka GDP stuff), while having more money (as defined by moi) does.

Say you’ve got a $100K portfolio as follows:

Stocks/equity: $60K
Bonds: $30K
Cash: $10k

Now the Fed under its QE program makes an attractive enough offer for your bonds that you sell them $10K worth. (That’s the only way they can suck up those bonds, by offering slightly more than private buyers are offering.) Your new portfolio:

Stocks/equity: $60K
Bonds: $20K
Cash: $20k

Are you going to go out to dinner more often because you now have more cash, even though you still have $100K?

Alternate scenario: the stock market goes up. Your new portfolio:

Stocks/equity: $70K
Bonds: $30K
Cash: $10k

You now have $110K. Will you go out to dinner more often? Quite likely. Some.

This works the same way if you add a fourth asset class, real-estate equity, and that goes up in value. You quite literally have more money — at least in my common-sense, uncomplicated, easily understood, straightforward, perfectly reasonable definition of money [grin] — so you’re more willing to spend money.

And yes: this explanation does serve to support what is to me a rather obvious conclusion — that greater wealth concentration results in less spending/velocity, because richer people spend less of their wealth each year. But that’s not the only reason I like it. I like it because it seems to really make sense.

I think that’s all I have to say at the moment. I’ll keep working on the inflation part of this thinking. Here’s hoping that Arthur has it all figured out for me.

Cross-posted at Asymptosis.

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Answering Brad DeLong’s “Deep Question”: Productivity vs. Power

As a naive young noodler on economic topics I always wondered: Why are players in the financial industry — which produces very few real, human, consumable goods and services that people value in their lives — so well-paid?

I figured it out pretty quickly: it’s because they are able to control who gets that real stuff. Sure: the financial industry is necessary to our ongoing assault on scarcity — increased productivity and production, yadda yadda yadda. But that’s not really why they get the big bucks. It’s because they’re playing the rivalry game. Anyone who doesn’t use their services (or become one of those players) loses that game.

Which brings me to an answer to Brad DeLong’s excellent question.

What is it, precisely, about Apple technology and today’s economy that gives it much more of a winner-take-all nature than Eastman-Kodak technology? And why was the same true of Andrew Carnegie-age technology and organization, but not of Alfred P. Sloan-age technology and organization? Deep questions.

I do like deep questions. My answer:

There are new technologies that produce more/better consumables (and methods to produce consumables with less human effort), and ones that give control over who gets to do the consumption (and take the leisure).

Computer technology is more like double-entry accounting and limited-liability corporations in that respect, and proportionally less like steam engines and electric motors.

Cross-posted at Asymptosis.

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“The US Labor Market is Not Working;” Antonio Fatas “On the Global Front”

This particular post was first picked up at Economist’s View and fits with Sandwichman’s posts on Labor. I have been watching Participation Rate in conjunction with U3 since 2001 along with others such as Laurent Guerby and while the US has decreased in the numbers of people in the Civilian Labor Force, our counterparts in Europe have seen increased numbers in the Civilian Labor Force. Krugman makes a statement “even the French Work harder than the Americans” which to me is rather bizarre given the French have a shorter work week and more time off than the American Labor Force. Perhaps it has nothing to do with working harder? We might find the reasons for an increased Civilian Labor Force in working smarter and more efficiently during a shorter work week. I think Krugman and the proponents of the 40+ hour work week tend to forget, it is all about throughput and efficiency and not about Labor as the latter can allow greater Labor participation. I find the comparison of the US to other countries interesting in that the other countries and associated appear to allow the citizenry to be more productive than the US by keeping more of them employed and working shorter hours. Maybe in the US we are just too militant for higher wages and time off???

Anyhoo, here the post by Antonio Fatas as taken from his blog “On The Global Front.” Antonio is certainly qualified to make such an analysis as he is on the Portuguese Council Chaired Professor of European Studies and Professor of Economics at INSEAD. INSEAD is a business school with campuses in Singapore and Fontainebleau (France). Antonio is a Senior Policy Scholar at the Center for Business and Public Policy at the McDonough School of Business (Georgetown University, USA) and a Research Fellow at the Center for Economic Policy Research (London, UK). His charts certainly provoke discussion as to what we in the US “are doing wrong.”


“In a recent post Paul Krugman looks at the dismal performance of US labor markets over the last decade. To make his point, he compares the employment to population ratio for all individuals aged 25-54 for the US and France. The punch line: even the French work harder than the Americans! And this is indeed a new phenomenon, it was not like that 13 years ago [Just to be clear, there are other dimensions where the French are not working as hard: they retire earlier, they take longer vacations,… but the behavior of the 25-54 year old population is indeed a strong indicator of how a society engages its citizens in the labor market. ]

So are the French the exception? Not quite. Among OECD economies, the US stands towards the bottom of the table when it comes to employment to population ratio for this cohort (#24 out of 34 countries).



What is interesting is that most of the countries of the top of the list are countries with a large welfare state and very high taxes (including on labor). So the negative correlation between the welfare state and taxes and the ability to motivate people to work (and create jobs) that some bring back all the time does not seem to be present in the data.

What is interesting is that the US looked much better 13 years ago (see numbers for 2000 below, the US was 10 out of 34).

The US has gone through a major crisis after 2008 with devastating effects on the labor market but so have other countries. In fact, most European countries have done much worse than the US in terms of GDP growth during the last 6 years. In fact, with the exception of Portugal, Greece and Ireland, the US is the country with the worst labor market record for this age group if we compare the 2012 to the 2000 figures.”

Hat Tip to: Economists View

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Waldmann V Waldman

I was reluctant to read this post by Paul Waldman Obama must fix VA scandal to redeem liberal vision of government. In general, I think very highly of him and think he does our [n]name proud. The post is OK, but I will criticize it.

My reaction to the Veterans’ Administration scandal was first to recall the claim that the VA provides better care than other US systems and second to suspect that the scandal doesn’t prove this claim false. I was pleased that my fellow Waldman[n] noted the claim (which was based on solid evidence) here

In 2007, Phillip Longman wrote a widely-praised article, later expanded into a book, documenting how the VA health care system had transformed itself into a model of excellent care, using creative problem-solving and early adoption of electronic records.

Exactly. But then the next sentence is

So what happened since then?

This assumes that something has changed. But the scandal doesn’t prove that the VA care is worse than any other care in the USA. Longman’s article compared the VA to the rest of the US health care non system. The fact that VA care is scandalously bad and a violation of our contractual obligation to our veterans does not mean that it isn’t much better than the rest of the US health care system. The post contains a catagory error (or maybe Longman’s article did) contrasting relative evaluation of VA vs non VA with relative evaluation of actual VA vs promised VA.

Waldman’s hypothesis is that something has changed since 2007 (sic) (or rather since the data Longman discussed in 2005 were collected). I think he is wrong. Steve Benen noted “In 2012, RAND Corp. found in nearly every category, “VA patients received consistently better care across the board, including screening, diagnosis, treatment, and access to follow-up.” ” Benen linked to this post by Jon Perr which is extremely convincing (just click there it’s too good to excerpt)

I didn’t know that, but I know the scandal doesn’t tell us two things. First it doesn’t tell us how the VA performs on average. Second it doesn’t tell us anything about the VA vs anything else in the world.

I think there are four problems here (and I don’t mean to pick on Waldman).

The first is that the data based response that things are worse in the rest of the US healthcare non system is not considered acceptable, because it suggests a lack of outrage or respect for the victimized veterans. I think in a discussion of horrible consequences of misconduct, reporting the fact that worse things have happened is not accepted. This means that there are facts which must not be mentioned. This is always a problem.

The second is a strong tendency to discount the not so distant past. Waldman should have looked for solid relevant evidence before guessing that something changed dramatically in the past decade. In fact, more recent studies comparable to the New England Journal of Medicine study which he indirectly cites reach the same conclusion.

A third is that there is (and must be) a legal and is (but shouldn’t be) a pragmatic distinction between making a promise and breaking it and not making the promise. The veterans were not given the care to which they were contractually entitled. Non veterans are not contractually entitled to (non emergency) care. At most, you are insured which means that you don’t have to pay for the care. There is no scandal related to secret waiting lists kept separate from the official public waiting lists by doctors with office practices. They don’t have official public waiting lists and you might be told to go elsewhere and not put on a waiting list at all. If there are no rules, there are no broken rules. A bureaucratic system will have scandals, because there are ruled to break and written records which can contain proof that they were broken.

The fourth is that in politics perceptions are reality and it is very hard to keep discussions of politics and policy separate. The public won’t be convinced by Rand studies. Stories beat statistics. A vigorous and severe response to the VA scandal isn’t needed just to make the VA as good as it must be, but also to refute the argument that the private sector works better, which is appealing to normal people outraged by the scandal even though the scandal provides almost no relevant evidence.

Waldman’s main argument is based on the fourth issue. His post explicitly focuses on the politics. I actually agree with his conclusion. But the post included the bolded sentence which is not supported by any evidence he presented and is contradicted by available evidence (which I didn’t personally find either).

update: back to the source. Ezra Klein interviews Phillip Longman here. He stands by his story.

the big question with these stories about the VA is, “compared to what?” This scandal wouldn’t exist if the VA didn’t have performance metrics on its employees. If it didn’t measure or care whether veterans get prompt appointments it could just do what the rest of the health-care system has done and not hold people responsible for these metrics. Now, certain people seem to have cheated on this metric. But that’s far better than what goes on in the rest of the health-care system where no one is accountable for this at all.


PL: The metric here is they tried to get vets in for non-urgent appointments for care within 14 days. Compare that to a survey done in 2009 on average wait times outside the VA to see a family physician. [skip] The average wait time in major metropolitan areas is about 20 days.

Oh just click the link and read the interview.


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Cheese-eating Job Creators (and the lump-of-labor fallacy)

I have been following Sandwichman for a long period of time. Since I do shop floor throughput exercises which no economist appears to understand in a micro sense, Sandwichman comes the closest to what I deal with on a day to day basis.

Paul Krugman in 2003:

“Traditionally, it is a fallacy of the economically naïve left — for example, four years ago France’s Socialist government tried to create more jobs by reducing the length of the workweek.”

Paul Krugman in 2014:

Well, I hadn’t looked at this data for a while; and where we are now is quite stunning:

“Since the late 1990s we have completely traded places: prime-age French adults are now much more likely than their US counterparts to have jobs.

“Strange how amid the incessant bad-mouthing of French performance this fact never gets mentioned.”

Now that you’ve mentioned this fact, Paul, how about revisiting the cogency of the lump-of-labor fallacy claim?

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Projecting a possible path for Inflation as the Fed rate rises

In a post yesterday, I presented a graph of how inflation moves with changes in the Fed rate. I want to explore the graph further, because at some point the Federal Reserve will start to steadily raise their nominal Fed rate. How might inflation respond when the Fed rate starts to increase?

exp ret 3

The orange line represents the short run movement of inflation to changes in the nominal Fed rate. As the Fed rate increases for example, inflation will react by decreasing. The blue line shows the long run equilibrium based on where the Fed rate will be at long run full employment, according to the Fisher effect. The long run Fisher effect is always underlying the short run movements.

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(Modern) Monetarist Thoughts on Wealth and Spending: Volume or Velocity?

I’ve bruited the notion in the past that “money” should be technically defined, as a term of art, as “the exchange value embodied in financial assets.”

In this definition, counterintuitively relative to the vernacular, dollar bills aren’t money. They’re embodiments of money, as are checking-account balances, stocks, bonds, etc. etc. Money and currency aren’t the same thing, and economists’ conceptual confution of “money” with “currency-like things” is central to the difficulties economics faces in understanding how economies work.

If this definition is safe, then the stock of money (I hate the term “money supply,” which suggests a flow) equals the total value of financial assets. Forget the endless wrangling about monetary base, M1, M2, divisias, and all that. Add up the value of all financial assets, and that’s the money stock. (There are certainly difficult measurement issues to discuss, but I won’t wrangle with those here.) People can exchange various financial assets for currency-like financial assets when they need to buy real stuff, but that’s largely mechanical; its macroeconomic effects are trivial.

In this definition “money” comes from two (or three) places:

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A Patient’s Story–How Much Can or Should– Your Doctor Tell You About Potential Risks?

AB Introduction: For a while now, Angry Bear has been featuring some of Maggie Mahar’s articles about Healthcare, the PPACA, and costs. Besides being a former 20th Century Foundation Fellow Maggie’s has also written as a financial journalist for Barron’s, as well as articles for Time Inc., The New York Times and other publications. Her first book, “Bull: A History of the Boom and Bust 1982-2003” (Harper Collins, 2003) was recommended by Warren Buffet in Berkshire Hathaway’s annual report and her latest book “Money-Driven Medicine: The Real Reason Health Care Costs So Much” touches on the squander and the waste found in delivering healthcare in the US. For more on her books, click here.

Besides writing at Angry Bear, Maggie has her own blog The Health Beat from which this article was originally published.

Below a non-fiction story from Pulse: Voices from the Heart of Medicine, “an online magazine of personal experience in health.” Pulse is both a magazine and an online community that provides a chance for patients, doctors, nurses, social workers to come together, and share their experiences.

The magazine’s founders write: “Despite the large numbers of health magazines and medical journals, few openly describe the emotional and practical realties of health care. We at Pulse believe that our stories and poems have the power to bring us together and promote compassionate health care. “ Pulse was launched by the Department of Family and Social Medicine at Albert Einstein College of Medicine/Montefiore Medical Center in the Bronx, New York, with help from colleagues and friends around the state and around the country (Subscriptions are free: You will find the home page here.

At the end of the story, see my note, asking HealthBeat readers: “What Do You Think: Should the patient have sued the doctor?” Would she even have a case?

Collateral Damage

By Brenda Scearcy

Dr. Robert’s office felt right to me, with a musical birdsong soundtrack, soft lighting and fresh green tea, and I had my best friend in tow: piece of cake. In this serene atmosphere, I was sure that I’d find out what to do next to finish treating my endometrial cancer.

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