Relevant and even prescient commentary on news, politics and the economy.

The Flaw in the Reasoning…

Brad DeLong (pulled from an otherwise-spot-on post):

Two years ago, after all, the recession was over.

The Recovery:

I started these from the first month after NBER’s recession end date. Note that there is one true, consistent growth line—sadly, that’s the mean (average) duration of Unemployment.

If this is victory, Pyrrhus of Epirus had nothing to complain about.

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A Brain-Dead "Financial Reporter" at NPR Defines the Problem

Via Doctor Black, who printed the answer but not the question:

PIGNAL: This is actually the second bailout for Dexia. In 2008, it had to be bailed out after exceptionally imprudent investing, including in U.S. subprime mortgages. This time around, it was basically dealing with the legacy of the past, and it was trying to do what it could to get back into safer waters. But with the Eurozone debt crisis in the past year, it basically ran out of time.

SIEGEL: Yeah, that was the past. This is now. And if the 12th most secure bank in Europe just collapsed, does that mean that several more bank collapses are in store? [idiocy emphasized by me]

This is what happens when you try Extend and Pretend while leaving the Management (think Pandit, Moynihan) who screwed up in the first place in charge of the burning building.

Anyone stupid enough to hire Robert Siegel as a “financial reporter” should be defenstrated with all deliberate speed.

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Sheer Idiocy, European (and American) Style

It’s rare to see theft described so directly:

Proposals made in July by the Basel Committee on Banking Supervision should be redrafted to allow banks to use so-called contingent capital to meet the obligations, the European Banking Federation said in a letter seen by Bloomberg News. They should also be changed so lenders that can’t meet the requirements don’t immediately face restrictions on their ability to pay dividends and bonuses, the EBF said.

Stringing up a few EBF bankers is seeming more and more like a calm, rational approach to solving their issues. Especially when even investors are calling out their lies:

“European banks are in the deepest hole of all. Over the past five years, the European financial sector has shed 900 billion euros in capitalisation and two thirds of its value,” said Jacques Chahine, chairman of European investment firm J.Chahine Capital.

“Although the sector has raised 450 billion euros in capital over the same period, this has clearly been inadequate to cover increased risk on sovereign debt. We believe banks will have to be recapitalised by an additional 450 billion euros to cover that risk,” he said.

The response from the European Banking Authority is less than encouraging:

“The stress test recently conducted by the EBA showed that EU banks have significantly strengthened their capital positions and are able to withstand adverse macroeconomic scenarios, a view not changed by the additional disclosure of sovereign exposures,” it said….



“The main EU banks have significantly strengthened their liquidity buffers, lengthened the maturity profile of their liabilities and covered most of their funding needs for 2011. However, going forward it will be important that normal access to medium and long-term funding markets is restored,” the EBA said. [emphasis mine]

Well, so long as it’s not an immediate crisis, everything is hunky-dory. Ignore that woman running the IMF.

Lest you think I’m only bashing Europeans—a role usually left to Rebecca, who uses their data, not their words—let’s also look at the glories of U.S. corporations. I’m taking the more delicate quotes here, just so you don’t think I’ve gone all Mish:

Central bank and Commerce Department data reveal that gross domestic debts of nonfinancial corporations now amount to 50% of GDP. That’s a postwar record. In 1945, it was just 20%. Even at the credit-bubble peaks in the late 1980s and 2005-06, it was only around 45%.

The Fed data “underline the poor state of the U.S. private sector’s balance sheets,” reports financial analyst Andrew Smithers, who’s also the author of “Wall Street Revalued: Imperfect Markets and Inept Central Bankers,” and chairman of Smithers & Co. in London.

“While this is generally recognized for households,” he said, “it is often denied with regard to corporations. These denials are without merit and depend on looking at cash assets and ignoring liabilities. Cash assets have risen recently, in response to the fall in inventories, but nonfinancials’ corporate debt, whether measured gross or after netting off bank deposits and other interest-bearing assets, is at peak levels.”

By Smithers’ analysis, net leverage is nearly 50% of corporate net worth, a modern record. [emphasis mine]

This should come as no surprise. The lie coming out of KocherlakotaLand in early 2008 was that since companies drawing down on previously-unneeded-and-therefore-unused lines of credit was evidence that we were not in a recession [warning: PDF the reading of which will damage your brain; superstitious Christians should note the Working Paper Number].

Now, those same borrowings, along with capital market moves, are being used to show that companies have “record cash holdings.”

Borrowing money without having a use for it is good in two circumstances: (1) if you are paying down higher-cost debt [oops, that’s a use] and (2) if the carry is positive (that is, if you can earn more than you are being charged in interest–oops, that’s a use, too).

If families worked like European banks, we would all be taking vacations and spending like there is no tomorrow. If they worked like American corporations, they would be borrowing money and boasting about how much cash they have on hand.

Can we now stuff the sh*t about how “governments have to work like families”? Corporations—and most especially financial services intermediaries—certainly do not.

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The Monetary Policy Debates

This article by David Leonhardt in the New York Times is getting a lot of attention.

Leonhardt argues that there is an active debate in the economics profession between inflation hawks, moderates and doves and that only the position of hawks and moderates are represented on the Fed open market committee (FOMC). He guesses that Perry’s equating dovishness with treason (now for monetary policy too) might be part of the problem.

I personally have a strong objection to Leonhardt’s article. He lumps together people who think that the Fed should not cause higher inflation with people who think that the Fed can’t cause higher inflation.

IF you were to conduct a survey of the country’s top economists, you would find a fair number who did not believe that the Federal Reserve should be taking more aggressive steps to help the economy. Some would worry that injecting more money into the economy might unnerve global investors or set off uncontrollable inflation. Others would wonder whether, with interest rates already so low, the Fed even had much power to lift economic growth.

But you would also find a sizable group of economists who thought the Fed could and should do far more than it was doing. This group, known as doves, tilts liberal, though it includes conservatives as well. If anything, it can probably claim a larger number of big-name economists — J. Bradford DeLong, Paul Krugman (an Op-Ed columnist for The New York Times), Christina D. Romer, Scott Sumner and Mark Thoma, among others — than the camp that believes the Fed has done too much.

Note that the group that think that the Fed doesn’t have much power to lift economic growth are lost somewhere between the two paragraphs. Leonhardt goes on to present the debate between DeLong et al on one side and FOMC hawks “Richard W. Fisher of Dallas, Narayana R. Kocherlakota of Minneapolis and Charles I. Plosser of Philadelphia.” with the moderates such as Bernanke in the mushy middle.

The hawks and those who doubt that the Fed can cause higher inflation absolutely disagree. The hawks say there is a risk of higher inflation. DeLong says higher inflation is possible and would be good. They agree on the first question and then disagree about the effects of inflation and the relative importance of economic catastrophe and whatever costs 4% inflation would have (small to minimal according to top conservative academics like uh Kocherlakota).

It is just not true that no prominent FOMC nominee Nobel Laureate has expressed doubt as to whether the Fed can cause higher inflation. Leonhardt seems to have decided that Peter Diamond just doesn’t exist (or to agree with Sen Shelby that he doesn’t know about money — I might add that top academic N. Kocherlakota’s research on money is all based on Peter Diamond’s search model).

I don’t have the sense that Romer and Krugman firmly disagree with those who think the Fed can’t do much more. They call for more more more, but don’t IIRC express confidence that anything the Fed might do would have a really big effect. Conflating the questions of should the Fed try to cause higher inflation and can the Fed achieve it makes them definitely doves. That’s why I object to the conflation.

Before the jump I note (again) that I think the Fed could do more which would be useful — buy risky assets (via Maiden Lane III if necessary). But that means I absolutely don’t agree with people who call for QEIII and look at the quantity and not the quality or who think that saying more inflation would be nice would have much effect or who call for targeting nominal GDP (why not jut “target” real GDP and cut out the middle man ?).

By the way Leonhardt forgets about Diamond also when making the obligatory claim that both parties share blame “The Obama administration has also been slow to fill some Fed openings. At least one of the 12 seats has been vacant since Mr. Obama took office, and two are now.” as Leonhardt knows perfectly well, the Obama administration can’t fill Fed openings if Republican senators filibuster votes on nominees. Obama is not the reason that there are two vacancies, Shelby is. Hat tip Tom Levenson

On the other hand the article does contain news for anyone who thinks that Scott Sumner is reality based.

Mr. Sumner has become so dispirited by the Fed that, before leaving on a trip for Italy last week, he left a post on his well-read blog, The Money Illusion, under the headline, “Not enough.” The headline, he wrote, “refers to my reaction if the Fed does something while I’m gone.”

Sumner just wrote that he doesn’t bother to wait to learn the facts, because he already knows the answer. I knew that was true of him (in general) but you aren’t supposed to say so.

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Spot Effing On, as The Mainstreamers Edge Leftward

We have just printed the eleventh (11th) straight week in which new jobless claims have exceeded 400,000 people. As Krugman notes, “The Fed predicts disastrously high unemployment as far as the eye can see(pdf) [a]nd, in response to this dire prospect, it declares its work done.”

So this it is almost palliative that Barry Ritholtz writes the Quote of the Day, or perhaps the Decade:

The sooner we recognize that the field of economics is a branch of Sociology and not Mathematics, the better off we will all be.

Anyone who has looked at the CF that Microeconomic doctrine has created over the past twenty years will not be surprised by Ritholtz’s conclusion. The question would almost be why he waited so long to say so explicitly.

Other signs that people are coming around to the positions taken at this blog:

  1. The gracious, even-tempered Mark Thoma has been driven to pointing out that the math, let alone the social issues, don’t work:

    I had hoped to see more acknowledgement that the current soft patch may turn out to be something more significant than a temporary aberration in the numbers, and some hint of willingness to ease further should those worries come true. But the Fed shows no such willingness, in fact as Neil Irwin notes, the “employ its policy tools as necessary to support the economic recovery” language is gone, and the main question at this point is when the Fed might begin tightening policy by reversing QE1 and QE2 rather than when they might ease further.

  2. Brad DeLong channels Bruce Webb or me in talking about Diane Lim Rogers:

    Get out of the defensive crouch, Diane. If you and your peers won’t stand up and say that every single Republican presidential candidate is talking hogwash and that every economist who wants high federal office in the next Republican administration is acting like a craven coward, then you are giving them every incentive to do so.

  3. The NYT—Gretchen Morgenson, of all people—notices that Executive Pay is not aligned with optimal company management, let alone shareholders:

    WHEN does big become excessive? If the question involves executive pay, the answer is “often.” …just how this paycheck stacks up against, say, a company’s earnings or stock market performance is rarely laid out.

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Monetary Policy. I’m not only not feeling it, I’m dehydrating because of it.

by Daniel Becker

Continuing my prior post suggesting that what ever monetary policy has done, it has not reached that vast majority nor has it addressed what is the main issue, I viewed this chart by Mike Kimel and thought: Perfect!
Then comes Ken Houghton linking to this article with it’s chart.
What do they have in common? Income inequality. So let me repost this graph from my 12/2007 post.
I’m only posting the second half of the graph, as that is the one that matters.

Take a look at 1996. That is the year that personal consumption crossed over the income level of the bottom 99%. It’s been borrowed money ever since. For an economy that runs on making money from money, that’s not a problem for those who earn their income by such a manor, is it?

Back to Mike’s chart. He noted that the change in what type of spending was associated with recessions happened around the early 70’s. That time is when another major event happened. The rise in productivity disconnected from the rise in wages. That is, any rise in productivity did not produce a corresponding rise in wages as was the historical norm. My position is that this was the start of the “new” service economy of making money from money that went into full mode with Reagan. Ok, we went from government spending to private sector spending as the fuel for the economic engine which I agree with Mike is what is the real mechanisms that is behind the results Mike notes Tyler Cowen labeled The Great Stagnation. Mr. Cowen is correct, it’s a great stagnation, but stagnation has it’s cause. Regarding both Mike and Mr. Cowen, the shift from government spending to private sector spending being considered the fuel that resulted in stagnation is not the complete answer. The change in the means of spending coincides with the ideology change. We went all Milton and Rand ideologocially. However, the act of spending dollars and the means by which dollars are spent is not the fuel of the engine, it only referrers to the distribution of the fuel. Mike is taking about the distribution system and Mr. Cowen is talking about the results of using that system.

So, what is the real culprit? What is it about the fuel that made us get to where we are today?

We started starving the engine of fuel. And we did it by using a supposedly better fuel distribution system. Instead of moving the money into the engine via the broadest distribution system, we followed an idea that suggested a more focused distribution system would work. It has not worked. It has quite literally starved the engine of fuel. I noted this here.
To quote that post using the time span of 1933 to 2005:

For the first 43 years, GDP doubling was always ahead of the income. For the next 32 years, GDP growth was always behind the income which was do to the top 1%’s share. Their’s is the only income that increased faster than the economy. In chart form it looks like this:
First 43 years doubling: GDP 8.6 yrs, 99%’ers 10.75 yrs, 1%’ers 14.3 yrs.
Next 32 years doubling: GDP 10.6 yrs, 99%’ers 11 yrs, 1%’ers 8 yrs.

The first 43 years the share of income to the top 1% was declining to a low in 1976. After that in was increasing.

Ok, now to Mike’s chart. He stated:

Basically, if you corner enough economists, you might get them to tell you recessions begin if there’s a big drop in private consumption, private investment, or gov’t spending.

Reading that statement while looking at his chart should be causing fire alarms and sirens to sound. This is because, if “private consumption” is an accepted cause of a recession, and the only time such appears to be associated is this current recession in 72 or so years of having recessions, then something has radically changed. If that chart showing that an accepted cause of recession only happened once in recent history, then honey, it’s the big one.

I think there is no way to deny it. Income inequality is the dinosaur in the room. It is the meteor that hit the earth. It is why all the past solutions theorized and used since the New Deal recovery are not working.  

They can’t work because they do not address the predicted but never before (recent history) experienced.

So, look at my chart again. It’s borrowed money that keep the consumption going since 1996 (yeah the supposedly great Clinton year). You do know that the share of income rose faster to the top 1% during his 2 terms than during Reagan, Bush 1 and Bush 2? It was debt combined with “new products” designed to pretend people could pay the debt which kept it going.

In terms of numbers: $1,400,000,000,000. That’s 1.4 trillion dollars every year, year in and year out that the original system had moving through it that is now somewhere in the new system doing nothing as it relates to building a larger, stronger, healthier economic engine. You can’t cut taxes enough to make up for this. You can’t distribute enough money via QE to make up for this mostly because QE does not address this at all as noted.
 
Still not convinced with my graph, Mike’s chart and the chart Ken referred too? Then try this on for size: Recent Trends in Household Wealth in the United States: Rising Debt and the Middle-Class Squeeze—an Update to 2007, by Edward N. Wolff, Levy Economics Institute of Bard College

March 2010 Page 20 to 22

As noted above, the ratio of debt-to-net-worth of the middle three wealth quintiles rose from 37 percent in 1983 to 46 percent in 2001 and then jumped to 61 percent in 2007. Correspondingly, their debt-to-income rose from 67 percent in 1983 to 100 percent in 2001 and then zoomed up to 157 percent in 2007! This new debt took two major forms. First, because housing prices went up over these years, families were able to borrow against the now-enhanced value of their homes by refinancing their mortgages and by taking out home equity loans (lines of credit secured by their home)…Where did the borrowing go? Some have asserted that it went to invest in stocks. However, if this were the case, then stocks as a share of total assets would have increased over this period, which it did not (it fell from 13 to 7 percent between 2001 and 2007). Moreover, it did not go into other assets…The question remains whether the consumption financed by the new debt was simply normal consumption or was there a consumption binge (acceleration) during the 2000s emanating from the expanded debt? That is, did the enhanced debt simply sustain usual consumption or did it lead to an expansion of consumption?

The average expenditure of the median income class was virtually unchanged from 1989 to 2001 and also from 2001 to 2007. Thus, the CEX data, like the NIPA data, show no acceleration in consumer spending during the debt splurge of the 2000s. As a result, it can be concluded that the debt build-up of the 2000s went for normal consumption, not enhanced consumption.

Got that? Let’s summarize: The share of income to the 99% of people declined from 1976 onward. At the same time the means of making money changed from labor production to money manipulation (producer economy to finanicialized economy) adding to the reduction in share of income. We also changed the ideology to one from relying on the vast population (as represented by the individual and We the People) to relying on a small portion of the population to distribute what money was created. We did this for 33 years. By 1996, people were borrowing as a means to sustain their standard of living (not increase it). If the people are not spending to increase their standard of living, then is the economy really growing? By 2006 people were no longer able to make the payments and consumption was declining.  Then gas hit $4/gal and winter heating was looking like another $4000 to $6000 would be needed.

To date, nothing has been done to address this. Nothing at all. And, by “this” I mean, the income inequality that has resulted in an an economy where a very small group of people (top 1%) are taking money out of the system (that is money that would fuel the engine) faster than the engine can make it which results in an ever faster declining share to the rest of the people. Instead, we have refined new fuel and dumped it right into the top 1%’s hands and wonder why the engine is still sputtering?

One other issue I have with framing and the words used today: Under water.

People are not under water. They are not drowning in debt. On the contrary, people are dehydrating. They are starving for water. Do you know what the symptoms are of dehydration? You get thirsty and then urinate less to conserve water. (debt spending) Then you stop making tears and stop sweating. (can’t borrow) Eventually your muscles cramp, the heart palpitates and you get dizzy. (close to bankruptcy, voting against your interest) Let it go long enough and you get confused, weak and your coping mechanisms fail. (Tea Party, etc) In the end, your systems fail and you die. (recession)

People are dehydrating and Washington is doing nothing about it because they believe it is drowning.  They are throwing out life boats to people in a desert.  That is the chart Ken linked to.

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The Future of the Fed

Spent the morning at this event: presentations and discussion by Joe Stiglitz, Yves Smith, Mike Konczal, Joe Gagnon, Matt Yglesias, Tom Palley, and many others.

Mike K. tole me he expects that video will be available this evening, at least of the speakers’s presentations. I plan to post at more length later; meanwhile, you can review the real-time commentary on Twitter by @NewDeal2.0 and others with the #FutureofFed hashtag. (Some of my early Tweets went out as #FedFuture before I “got with the program” and surrendered that 1.4% of TweetSpace to the Greater Good.)

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Thought-Experiment of the Day

It’s no secret I’m not a fan of the birth-death adjustment to the employment serieses: not from a necessary belief that they’re biased, but rather because they give the lie to the illusion of accurate monthly data.

But imagine for the moment that there had been no adjustment before the January data release.  The headline number for January might well have been north of 400,000, making the past three months even more impressive (from a headline perspective only, but still…) in terms of job creation.

Would that change anyone’s opinion of the timing and/or need for tightening?  (See also my post earlier today with the graphic borrowed from The Big Picture marking a growth comparison with 2003-2004.)

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Feeling Hopeful About the Recovery

Crossposted at The Street Light.

The more I get to know this recovery, the more I’m starting to like it.

Yes, it’s been rather standoffish, giving the cold shoulder to millions of unemployed Americans. And true, through much of 2010 it was maddeningly elusive, never giving us confidence that it was here to stay. But the more data I review from the second half of 2010, the more I start liking what I see. Particularly because the data suggests to me that this recovery, while not roaring, is being built on a solid foundation, and therefore has the potential to grow into something pretty meaningful as this year progresses.

There are four things in particular that make me guardedly happy about this recovery.

1. The manufacturing sector.
I’ve spent a lot of time over the last week explaining why I am bullish on US manufacturing. The manufacturing sector is too small to make a significant dent in the US’s vast unemployment problem. However, it has been the source of some net job creation (see table), and more generally is a good indicator of the competitiveness of the US economy in terms of international trade. Which brings us to…

2. US exports.
Exports from the US did very well in the second half of 2010, which helped to give the US economy a substantial boost toward the end of the year. Best of all, this strong export performance was driven by sales to the growing, dynamic, developing countries of the world like China. That makes it likely that continued rapid growth in China and other developing countries will actually provide a noticeable boost to the US economy in 2011 and going forward. Compare this with what happened during the recovery from the previous recession. As shown in the chart below, in 2002-03 US export growth only provided a modest 0.45% boost to GDP. This time around, however, US export growth has been adding over a full percentage point to US GDP growth.


3. Business purchases of investment goods.
Unlike the recovery from the last recession, when businesses were extremely slow to begin purchasing new equipment and machinery, in 2010 business spending on things other than buildings grew at a healthy rate. In fact, investment spending in “equipment and software” (the “e&s” in the chart above) added over a full percentage point to GDP growth through 2010. The best part of this kind of spending is that it provides a much greater boost to productivity, and thus long-term economic growth, than personal consumption spending. The fact that in 2010 far more of the growth in real GDP came from business investment (and less from residential investment) than was true during the previous recovery is a very good sign for medium and long-term economic growth in the US.

4. Household financial retrenching.
The biggest drag on economic growth during this recovery has been the ongoing financial rebalancing that US households have been doing by paying down debt. But while this has meant that consumption has not grown as rapidly as it might have, it also means that this recovery is not (unlike the previous one) being built on borrowed money. Household debt levels have fallen dramatically over the past two years (see the chart below), and while arguably still higher than they should be, the fact that households have been reducing their debt in a pretty determined way suggests that households will be able to increase, and sustainably increase, their spending in 2011 and beyond as incomes grow faster.


Yes, all in all, I think there are some very nice things to like about this recovery. Now we just need it to set to creating new jobs in a serious way. But based on the strong foundations on which this recovery is being built, I think it won’t be much longer before we see meaningful falls in unemployment levels in the US.

I must say: after being very bearish on the US economy through all of the 2000s (and particularly during my previous stint writing for Angry Bear, 2003-06), it’s nice to finally have something hopeful to write about this surprisingly alluring recovery…

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David Streitfeld Knows Better than This

The NYT moves deeply into delusion:

The rolling real estate crash that ravaged Florida and the Southwest is delivering a new wave of distress to communities once thought to be immune— economically diversified cities where the boom was relatively restrained.

In the last year, home prices in Seattle had a bigger decline than in Las Vegas. Minneapolis dropped more than Miami, and Atlanta fared worse than Phoenix. [emphasis mine]

Putting it politely, that is h*rs*sh*t. Anyone who was paying attention in the Atlanta area—or who has been paying attention to Georgia Bank Failures—has described the Greater Metro Area’s housing prices (let alone Atlanta itself) as a bubble. (As I noted at the link above, one of our commenters, Nancy Ortiz, was all over this in June of 2009; and the old Business Week covered it in an article published in October of that year. Does the NYT believe that local banks fail for no reason? As Peter Carbonara wrote in the BusinessWeek piece:

One Material Loss Review released today, for example, describes the death throes of FirstCity Bank, which had $297 million in assets and was based in Stockbridge, Georgia, a town not far southeast of Atlanta. FirstCity, like many other banks in the metro Atlanta area, partook of the state’s late, lamented enormous real estate boom, making a large number of loans to local builders. When the boom turned into a crash in 2007, those loans turned bad. The bank failed on March 20. [emphasis mine]

Minneapolis is another clear case where the locals were talking about a bubble back in late 2006/early 2007. Commenter TrickStar was all over Minneapolis at Barry Ritholtz’s place it in November of 2008. (Indeed, by March of 2010, the S&P/Case-Shiller Index was claiming a “recovery” for Minneapolis [link is PDF]. Talk about “green shoots.”)

That same PDF&again, from 11 months ago, using January 2010 data—discusses Seattle, which had the fifth-largest drop in housing prices during 2009. And that was over a year ago. As the Seattle Bubble blog noted, things only got worse last year.

SEATTLE UPDATE: Even David Leonhardt piles on. Hint to the NYT: Institutional Memory is an Asset only when used. If you need someone to run your Knowledge Management division, give me a call and we’ll talk.

In short, anyone who was paying attention knew that all three cities were prime examples of housing bubbles. The idea that the NYT’s best economics writer doesn’t is frightening at best.

To riff on a phrase from Brad DeLong, Why Can’t We Have a Better-Informed Press Corps?

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