US Debt
The US Debt:GDP ratio passed 100% today according to the debt clock: http://www.usdebtclock.org/
Wasn't Congress supposed to be reporting about now how to cut the deficit or else across the board cuts including to the Pentagon would come into force? I can't see the Congress actually coming to any form of deal, but will the Pentagon really be given a reduced budget?
Why can't the US take, say, all the people with government-backed student loans, and sell them as slave labour to China? Or some east Asian country with active sex tourism? That should bring in some income. And you could pick up everyone who's on food stamps and grind them to use as dog food in Europe (as I suspect that'd bring in more money than selling the feed to African nations).
In the future, the Berlin wall will be a mile high, and made of steel. You too will be made to crawl, to lick children's blood from jackboots. There will be no creativity, only productivity. Instead of love there will be fear and distrust, instead of surrender there will be submission. Contact will be replaced with isolation, and joy with shame. Hope will cease to exist as a concept. The Earth will be covered with steel and concrete. There will be an electronic policeman in every head. Your children will be born in chains, live only to serve, and die in anguish and ignorance.
The universe we observe has precisely the properties we should expect if there is, at bottom, no design, no purpose, no evil, no good, nothing but blind, pitiless indifference.
uhm I don't like America but that just generated a rather unpleasant image in my head.
Besides I have faith in European health regulations which would never allow me to poison my dog in such a manner, have you seen what average Americans eat and you wouldn't even be getting the average ones in your deal.
That's true.
Make soap out of the fat ones?
In the future, the Berlin wall will be a mile high, and made of steel. You too will be made to crawl, to lick children's blood from jackboots. There will be no creativity, only productivity. Instead of love there will be fear and distrust, instead of surrender there will be submission. Contact will be replaced with isolation, and joy with shame. Hope will cease to exist as a concept. The Earth will be covered with steel and concrete. There will be an electronic policeman in every head. Your children will be born in chains, live only to serve, and die in anguish and ignorance.
The universe we observe has precisely the properties we should expect if there is, at bottom, no design, no purpose, no evil, no good, nothing but blind, pitiless indifference.
Oh, please, about a third of that is money the government owes itself; debt owed to the public is about 68-69% of GDP. A bit high, but not crazy, especially given the incredibly deep and liquid markets for Treasuries. Most other governments don't have a $5 trillion trust fund, eh?Originally Posted by RandBlade
That's not to say that current deficits aren't unmanageable in the long term, or that medium-to-long term issues with entitlements don't need to be addressed. But the hype about current debt is misguided and counterproductive.
I'm very disappointed about Congress, of course - it seems clear that no deal will be reached before the Wednesday deadline (it needed to be given to the CBO for scoring today if a deal was made), which means that the whole standoff over the debt negotiations this summer was a waste and just a chance for politicking as usual. Congress has a real opportunity here to make a grand bargain - clean up the tax code and raise some more revenue, reform entitlements for changing demographics, curb the growth in healthcare costs, and slim down bloated departments - all while keeping from too much short-term austerity. It would have something for everyone (and, obviously, some concessions from everyone), but would be able to set us on the path towards fiscal responsibility. Instead we get zealots staking out uncompromising positions and ruining our chances for the future.
The US is one of the wealthiest countries, with the most dynamic, advanced economy in the world. We can easily meet our fiscal obligations with some careful planning, but instead our politicians waste a good crisis and political capital without fixing anything. I don't care which party they hail from - Democrat or Republican - they've all failed us. Very frustrating.
As for reality, the 'mandatory' spending cuts only happen in 2013 (about $600 billion from defense and the same from non-defense discretionary/some entitlements/etc.), and it's very likely the law will be modified to prevent this from happening. The military has been bracing for about $400-500 billion in cuts (including some already taken), and they can probably manage that much without serious degradation in their capabilities and readiness, assuming Afghanistan winds down as expected. Slashing more would start to really hurt, though. Ditto for non-defense discretionary spending, which frankly isn't the problem and has already been hit hard in deficit cutting. I'm sure they'll weasel their way out of this mandatory cut and instead muddle through with some half-assed plan after the election.
edit:
Fascinating piece in the BBC from a few months back where they interviewed four fairly prominent economists about what they think should be done with monetary and fiscal policy to deal with the current malaise: http://www.bbc.co.uk/news/business-14644823
Notably, they all more or less said the same thing: fiscal stimulus is absolutely necessary right now, and monetary stimulus might help as well. One or two argued that dealing with medium-term fiscal problems is important (duh), but that it's only really useful right now in that it can free people up to do more near-term stimulus. It kills me that we have the example of timid Japan staring us in the face, but we continue to flirt with a lost decade for no good reason.
Last edited by wiggin; 11-21-2011 at 10:39 PM.
They interviewed 4 Keynesians and got 4 Keynesian responses; I'm really, really surprised. Next, they can interview four prominent people who don't think global warming exists and then conclude that global warming doesn't exist.
Coincidentally, we might have different definition of what a "top economist" means, because I don't think financial economists qualify. It's like saying that the top physicists are engineers.
Hope is the denial of reality
Actually a large portion of what is owed in any nation is to that own nations citizens, which doesn't make the damnedest bit of difference if the government ends up struggling to pay up though. A 100% of GDP current debt isn't by itself a critical issue, Greece managed to cope with it for over a decade (albeit with the euro ignorance) before collapsing. But there is 9% deficit as well.
No, its a starting point - nothing more or less.That's not to say that current deficits aren't unmanageable in the long term, or that medium-to-long term issues with entitlements don't need to be addressed. But the hype about current debt is misguided and counterproductive.
The "sequestration" is pathetically piddly. Cuts in spending need to be far, far greater than $1.2tn in the first place.I'm very disappointed about Congress, of course - it seems clear that no deal will be reached before the Wednesday deadline (it needed to be given to the CBO for scoring today if a deal was made), which means that the whole standoff over the debt negotiations this summer was a waste and just a chance for politicking as usual. Congress has a real opportunity here to make a grand bargain - clean up the tax code and raise some more revenue, reform entitlements for changing demographics, curb the growth in healthcare costs, and slim down bloated departments - all while keeping from too much short-term austerity. It would have something for everyone (and, obviously, some concessions from everyone), but would be able to set us on the path towards fiscal responsibility. Instead we get zealots staking out uncompromising positions and ruining our chances for the future.
That's been true in all western nations. The problem is that there's only so long that you can put off the issue before you end up having greater problems from delaying. Interest payments - even with interest rates at historically low levels at the moment - are one of the largest parts of spending. It wouldn't take much increase in the US yield to cause absolute havoc, especially if the problem is allowed to go much further unaddressed. A 7% yield on US Treasuries would be just as devastating as it was for Italy, Greece, Portugal and Ireland.The US is one of the wealthiest countries, with the most dynamic, advanced economy in the world. We can easily meet our fiscal obligations with some careful planning, but instead our politicians waste a good crisis and political capital without fixing anything. I don't care which party they hail from - Democrat or Republican - they've all failed us. Very frustrating.
So in other words its not going to get dealt with.As for reality, the 'mandatory' spending cuts only happen in 2013 (about $600 billion from defense and the same from non-defense discretionary/some entitlements/etc.), and it's very likely the law will be modified to prevent this from happening. The military has been bracing for about $400-500 billion in cuts (including some already taken), and they can probably manage that much without serious degradation in their capabilities and readiness, assuming Afghanistan winds down as expected. Slashing more would start to really hurt, though. Ditto for non-defense discretionary spending, which frankly isn't the problem and has already been hit hard in deficit cutting. I'm sure they'll weasel their way out of this mandatory cut and instead muddle through with some half-assed plan after the election.
You still Japan is the worst that can happen?Fascinating piece in the BBC from a few months back where they interviewed four fairly prominent economists about what they think should be done with monetary and fiscal policy to deal with the current malaise: http://www.bbc.co.uk/news/business-14644823
Notably, they all more or less said the same thing: fiscal stimulus is absolutely necessary right now, and monetary stimulus might help as well. One or two argued that dealing with medium-term fiscal problems is important (duh), but that it's only really useful right now in that it can free people up to do more near-term stimulus. It kills me that we have the example of timid Japan staring us in the face, but we continue to flirt with a lost decade for no good reason.
NO! There is a huge difference between debt owed to citizens and debt owed to the government. Debt owed to citizens is still better than foreign-owned debt (for a number of reasons; for example, that's why Japan can get away with such high debt loads), but that's not what I'm talking about. Public debt is any debt the government owes to a person or organization outside itself, including citizens; anything else is essentially accounting fictions. This is only 68.6% of GDP at last reckoning.
There are actually supposed to be multiple stages of spending cuts, with this deal theoretically only being the first (though they could have avoided later negotiations with a 'grand bargain' on the order of $4 trillion or so). Also, a ten year (or so) horizon is kinda silly - our problems really start to crop up in later decades unless entitlements are fixed, so there's almost a push with this short-to-medium term thinking to play with discretionary spending and ignore the real problems. Frustrating.The "sequestration" is pathetically piddly. Cuts in spending need to be far, far greater than $1.2tn in the first place.
Interest payments are not that large, actually. I believe they're running in the $450 billion range right now? That's a lot, but manageable for the size of the US economy. And the US has been lengthening the maturity of its debt structure, which gives us a lot more flexibility for volatility in yields (though nothing like the ridiculously long maturities for gilts). There are costs to such a strategy (there was a great presentation from the Treasury about this a while back), but it gives you a bit more flexibility in funding. There's some other bits of flexibility compared toe PIGS as well. This isn't to suggest that debt isn't a problem in the long term, but we need to be measured in our approach. Hysteria is not a good way to deal with these issues.That's been true in all western nations. The problem is that there's only so long that you can put off the issue before you end up having greater problems from delaying. Interest payments - even with interest rates at historically low levels at the moment - are one of the largest parts of spending. It wouldn't take much increase in the US yield to cause absolute havoc, especially if the problem is allowed to go much further unaddressed. A 7% yield on US Treasuries would be just as devastating as it was for Italy, Greece, Portugal and Ireland.
Indeed.So in other words its not going to get dealt with.
The worst? No, that would probably be nuclear war or wholesale collapse of the economic system. But the most likely and damaging blunder for US policymakers? Definitely.You still Japan is the worst that can happen?
Loki: The four interviewed were not all straightforward Keynesians in their responses, but fair enough. That being said, they all had PhDs in economics, and whether or not they were working in academia or actually, you know, doing something, they had fairly prominent positions (1 actually was a professor, FYI). If you'd prefer I say 'financial economists', that's fine. I'd ask an engineer for help fixing a broken bridge well before I'd ask a physicist, even if the fundamentals of why it broke have to do with physics.
Wiggin, it's cute how you every time come down on the same side of the economic debate. The side that allows government to steal from its citizens by excess inflation and the side that punishes people who actually save their money.
Congratulations America
Uhm, I would think it's reasonable that I'm consistent in my opinions, yes? I obviously would disagree with your characterization of my views, but it's not unreasonable to have a consistent worldview, I would think.
Inflation has been subdued since the 80s when monetary policy got a revamp; excess inflation is hardly US policy. As for 'punishing savers', I don't think we do that, though I think it's reasonable for governments to encourage people not to save too much in useless savings (e.g. cash) and instead invest their money in something useful - a business, a chunk of a company, whatever.
(edit: I do want to say that I'm a bit uncomfortable with people who have argued for GDP targeting instead of inflation/employment targeting. This probably would lead to more volatility in inflation, and I'm unconvinced they could appropriately prevent a wage-price spiral when inflation expectations could fluctuate so much. It's an interesting idea that would help to deal with our output gap, but I think it's probably unwise without a lot more careful analysis.)
You are indeed consistent, and consistent in the way I described.
Mind telling me when the last time you could get a decent return on money in a savings account in the US? Is it strange I think you will come out at a date well before the beginning of this century?
It also really baffles me how you can say excess inflation is not the business of the US, given that we're living through a time where the FED's only missing action is to actually fill up helicopters with money and throw it at the country that way. I see no reasonable path how to reverse the monetization of the moment once the economy no longer is deflationary-tending. How high inflation will go then is anybody's guess.
Congratulations America
Hazir: In general savings returns have been pretty low; this is because inflation has been low, and there has been fairly easy access to credit for the last two decades (it has a lot to do with the us being the consumer of last resort). This is hardly unique to the US; savings on cash have generally been low since the early 80s. This is a reflection of the fact that it's a very safe investment right now (guaranteed insurance up to $250k, low inflation) and because yields on equities are relatively low, so banks don't have much of a margin. You can get a bit over 1% on cash right now, which is not unreasonable given the circumstances. Back in 2005/2006, there were accounts running at 5%, but inflation was a bit above normal, equities were doing well, and savings rates were low.
This is not somehow penalizing savers - it's just encouraging them to put their money to work, rather than just letting it sit somewhere.
Regardless, can you please show me the ridiculous inflation numbers you're talking about? During 2009 and 2010 inflation was negative or very low (most of the time below 2%). There was higher inflation in 2008, which was during QE I, but that had a lot to do with transient factors on food and oil; if you look at core PCE inflation numbers as 6 month moving averages, they haven't been above 3% since Sep 2006, and they continued downward since then (DURING QE I and QE II) to a trough in May 2010. Core inflation only recovered to about 2% in the last couple months. This is hardly indicative of policy aimed at excess inflation. Fed action has not led to runaway inflation, full stop. Get your data right.
(Reversing this is super easy - the Fed can just sell their assets on the market or raise rates. VERY easy to reverse QE and cut inflation. Not that it's needed right now.)
There a significant art of debt that is owed by government to the government and there is a less significant but still very important owed to the federal reserve. Can someone clarify how exactly this appear and what is the reason for this strange accounting. I am guessing debt towards federal reserve is just a different way of saying hey we printed money to cover our expenses and recorded it as debt so now we pay interest to ourselves on it. What is debt government owes itself, where did it get the money to lend itself, obviously there is another figure that is inflated somewhere where the government is listing said debt as an asset.
Intragovernmental debt (mostly owed to the SS trust fund) is just debt the government makes up between one program and another. Essentially, since the 80s Social Security has been taking in more tax receipts than it gives out in benefits, so the extra goes to buy government bonds, which are used to finance other government programs. It's real debt, but only really matters in that when SS starts taking in less taxes than it gives out in benefits, they'll have to finance the difference with greater deficits. It's a problem, but not 'real' debt until SS needs it.
Debt owned by the Fed is different; the Fed is an independent organization which has chosen to buy a number of assets - mostly mortgage-backed securities and US Treasuries - to prop up equity markets and increase lending by lowering rates. It is NOT monetizing the debt, since the Fed buys these securities on the secondary market (rather than just printing money to cover the deficit) - this means that when conditions are right, the Fed can sell these bonds back to the market, reducing the money supply in the process. It's essentially monetary policy by other means when you hit the zero interest bound - it's no more monetizing the debt than lowering short-term interest rates monetizes the debt.
Of course I can't show those inflation figures, and we both know why I can't; your excess is exported abroad still with the Chinese and others mopping up US dollars by the trillion.
What the markets show us is that it's so massive out of whack that even the euro hanging over the abyss it will not move down significantly against the dollar.
Congratulations America
I've been meaning to start a thread on the whole 'exorbitant privilege' debate. Perhaps I'll do so after Thanksgiving, and we can hash this out. The US current account deficit doesn't directly affect domestic inflation, though it does have a number of effects on things like bond yields and the like. It's not clear, though, whether foreign demand for dollars is a good or bad thing for the US.
What is relevant, though, is that inflation only matters to US consumers in what they actually pay, not how many dollars there are in the world. Thus, PCE or CPI are decent measures of what matters from a perspective of monetary and fiscal policy - it controls things like wage-price or deflationary spirals, not our current account deficit. That's part of a broader analysis that's largely irrelevant to the question of whether the Fed is pursuing an inflationary policy.
In fact, one could argue that foreign demand for dollars has bound the Fed's hands - it's really hard to deal with a financial crisis if everyone is piling into your currency - it hurts your exports, hurts your ability to have effective monetary policy, etc. If people didn't buy dollars in times of economic crisis, the Fed could have used much smaller interventions with bigger results. Instead, we get countries trying to preserve their artificially devalued currencies against the dollar, which mops up any excess liquidity in US markets and makes it very tough to ease monetary policy in a domestically relevant manner.
I'll be looking forward to that topic. And I do agree that if you take your eyes from the short term the policy indeed is counter productive. But who bothers to look at the long term picture these days, sure as hell not politicians and central bankers.
Congratulations America
It's not only piddly, it's dishonest. We aren't talking real cuts in governmental spending, what's actually being considered is slightly decreasing the rate at which our spending increases. All told, even with these hellish cuts, we are still talking about an overall increase of over 1.5 trillion dollars in the next ten years. How this can be seen as an impossible, draconian feat, or the machinations of mindless austerity zombies is beyond me.
Last edited by Enoch the Red; 11-23-2011 at 03:19 AM.
Because the automatic cuts include less funding to general defense spending. That's not just less money to Homeland Security and those in TSA or border control, but also our voluntary soldiers and returning vets, less "subsidies" to states that build war weaponry, depending on how it's categorized. Halliburton, Northrop Grumman, etc. That tends to get war hawks' attention.
Sounds like fun! Premature, but has potential to define what a 'command economy' means in today's terms. Or how it's any different when a central bank or government defines the terms.
If by less funding you mean there funding isn't going to increase next year, that would be true. They might even have to cut a couple billion the first year. But over the next 10 years, even with the sequester, the defense budget will increase by 100 billion.
To put things into perspective, the defense budget was at 300 billion in 2001. Today it's just under 600 billion. I somehow doubt that the US military couldn't find a couple billion here and there to cut for a year or two.
Preaching to the choir here, Enoch.Military / Defense spending isn't the sacred cow that war hawks claim. Cutting their budget wouldn't mean putting the US "at risk". Not spending $2 billion per week or per month in oil-rich foreign nations wouldn't make us weaker....as long as we have a national energy policy that doesn't include continuing military interventions in those oil-rich nations.
On the low interest rate, you realise you are implying that savers should not have any money in deposits because that is not 'money at work'?
First of all that of course is not true, because it negates the function of banks of using that money to do their business, but secondly it also implies that people should have all their savings (basically any income they don't need or want to spend immediately) in other asset classes. That of course is incredibly Keynesian (after all for Keynes, saving money is like robbing workers) and I wouldn't think it beyond you but why then have deposits insured against bank failure. Come to think of it, why have banks at all? They are just promoting lazy investment behaviour by people who chronically underspend and hamper growth of the economy.
Yes, that is a bit of a hyperbole, but it isn't far off from what you promote consistently and your derisive treatment of people with money deposits.
Congratulations America
Our problem is the disconnect between the academics and economicsts iwt the politicans who instead of doing the people's work are doing the lobbyists work. Clearly if our politicians were not so entrenched with their supporters we could make reasonable compromises on tax increases, cutting programs, scaling benefits and pay for all government employees, with the ailments of the economy. No one can remain glutonous during a famine. All these problems come partly because of greed, but more importantly because of a structure that breeds moral hazards, and conflicting interests.
That's true of all debt until it gets reigned in it doesn't hurt us. Certain intragovernmental loans aka the kind that never have to be paid back are fine. If department of agriculture takes funds from the department of transportation and it's not causing us to be behind on the costs of transportation related issues then who cares. If we borrow from our own people that can be a problem (they won't neccessarily spend it how we need them to/want them to).which are used to finance other government programs. It's real debt, but only really matters in that when SS starts taking in less taxes than it gives out in benefits, they'll have to finance the difference with greater deficits. It's a problem, but not 'real' debt until SS needs it.
Edit: You alluded to this perk in owing debt to your own people, in namely, they have a vested interest in America doing well. More so than anyone else.
Last edited by Lebanese Dragon; 11-26-2011 at 01:08 AM.
Big difference between what's in a "budget" and what's been spent that wasn't funded. Like two wars spending a billion or two per week, for ten years. Young Vets with injuries that didn't translate into more funding for their healthcare, that will last for decades to come. Unfunded Medicare Part D Prescription plans. Bush tax cuts that ate into revenue and haven't been allowed to expire as promised.
I don't know about the Keynesian part, but the rest is [sadly] true. The main function of banks has been turned on its ear the last decade or so, once they merged commercial banks with investment banks, decided to over-leverage themselves, and reduce risk by selling debt-as-profits. They'd rather push other peoples' money into other asset classes and not "own" any of the risk in their game of musical chairs.
It's outrageous that savers and depositors are being punished for the casino-type shenanigans the financial industry created. Many of them walked away with golden parachutes and million dollar bonuses for "breaking things", and forced gov't to prop them up (because, ya know, who wants the whole financial sector to melt down?) I don't believe that has one damn thing to do with inflation, but everything to do with corruption and rigged croneyism.
In general, yes. Money in a cash account is better than money under a mattress, but even better would be to use it to start/expand a business, consume (but not beyond one's means), leverage, etc. People should only have enough cash for 6-12 months of expenses and MAYBE some cash if they're saving up for a large near-term purchase (e.g. saving for a downpayment on a home). Otherwise, excessive savings deposits are fairly wasteful.
The bigger issue, of course, is not retail savers, but corporations. Keeping rates low encourages them to stop parking their money on the sidelines (in cash or cash-equivalents like extremely short term gov't debt) and instead use it to expand, hire, or fund R&D - or distribute to shareholders who can then spend it.
Banks can leverage deposits, yes, and if people actually kept 6-12 months of funds in cash savings (not to mention corporations keeping a nice cash cushion), that would be more than enough capital for banks to lend. They also have other revenue streams; retail savings is only one source of capital.First of all that of course is not true, because it negates the function of banks of using that money to do their business, but secondly it also implies that people should have all their savings (basically any income they don't need or want to spend immediately) in other asset classes. That of course is incredibly Keynesian (after all for Keynes, saving money is like robbing workers) and I wouldn't think it beyond you but why then have deposits insured against bank failure. Come to think of it, why have banks at all? They are just promoting lazy investment behaviour by people who chronically underspend and hamper growth of the economy.
I have far more money saved in a savings account than the average American; I don't dispute that people on the low end of the income spectrum don't save enough. But viewing it as anything other than insurance is silly. The rate of return on cash is never going to be very good for obvious reasons, and lamenting the poor saver who isn't making much money on their extremely liquid, insured cash deposits isn't something that concerns me. Although I'm in my mid-20s, I already have more money in equities than my cash cushion, and by ten years from now I'll have a lot more money in equities and other assets than my cash equivalents. I don't see why this is somehow aberrant behavior.Yes, that is a bit of a hyperbole, but it isn't far off from what you promote consistently and your derisive treatment of people with money deposits.
When I was early 20s I expected to have lots of equities by my 30s. I turn 30 next June and don't have a single penny in publicly listed equities (though I have got shares in my own business), OTOH I (with my fiancée) own my own home which was bought with a 25% deposit I'd saved up and am trying to pay that down.
Typically saving in interest bearing cash savings accounts, for the house deposit previously and now to be able to afford our wedding. Don't want to get into any debt paying for that ourselves.
Depends on the circumstances, RB. I only had (small) cash savings in grad school until my wife and I got married; after that, my stipend combined with her (real job) income gave us plenty of cushion to start real saving. If one is living on the cheap on 1.5 incomes, it's pretty easy to establish an emergency cash fund and then start saving/investing for the future.
You, obviously, felt that the advantages and returns of owning a home would outweigh the advantages of getting into equities - I can't blame you, especially if property prices in your area did a swan dive like they did in many parts of the US. My wife and I aren't in a position to have a 20% down payment (in our area, that would probably run to $100-150k), let alone the upkeep and property tax on a home - price to rent ratios are simply too high. Factor in the high chances we won't be staying put for 5+ years, and it makes sense to go for equities, especially given the tax advantages. So, we sock away $10-15k per annum in cash or near-cash for a future home, somewhere, and invest the rest in various tax-protected accounts for the future. By the time we're 35, we'll undoubtedly have both a home and many times our cash savings in equities (it's already about 1.1X); even with kids, two professional incomes gives you a lot to work with.
Regardless, I think you'd agree in principle that cash savings should not be viewed as an investment, but merely a safe holding place for money you might need access to in a hurry.
Definitely, long-term.
I do think having a rainy day cash fund is the most important thing people should do first though to avoid the risks of debt etc - or being forced to sell equities at a non-opportune moment. Too many people live payday to payday without even doing that
Holy crap, your area is even more expensive than my area.
To stay slightly more on topic, I agree with Rand and I think wiggin. Banks should be for short-term cash supply, and other places should be for more long-term savings. The banks should still have enough even with only everyone's short-term cash to do their business.
Moving further back off topic, Rand: You might want to reconsider paying down your home fast. I know it's tempting, I'm tempted to do the same thing, but if your interest rate is anything like mine, you're better off financially paying the minimum each month and putting the rest of that money to work for you. This is even more true if the UK has a mortgage credit on taxes like the US does.
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