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Archive for July, 2011

Socialism for the Rich – Capitalism for Everyone Else

Few people question current arrangements for money issue, but allowing privately owned banks to create money is like putting a three year old in charge of a sweet shop.

by Mark Braund

Renegade Economist (July 27 2011)

The wider public is depressingly disinterested in the workings of the economy; nowhere is this more evident than in their ignorance of the monetary system. If more people understood the means by which banks create money, the way it swells the coffers of the already wealthy, and the destabilising effect it has on the real economy, then surely there would be a outcry of Murdochian proportions. Banks create money by making loans to their customers. This method accounts for around 97 per cent of the money in circulation. Nearly all money is created as debt, repayable at interest. This means that all loans have to be repaid with money also created as debt and loaned at interest. No wonder the economy struggles, when the system of money creation heaps cost upon unnecessary cost. And no wonder the banks generate such enormous profits.

Entrepreneurs – Banks Are Not Your Allies…

This system, known as fractional reserve banking, is an integral part of the nexus of unearned wealth: Banks’ shareholders earn dividends from the super-profits extracted by the process of money creation; banks loan money to their own investment arms to finance speculative activities which undermine the real economy and then pay themselves unwarranted bonuses from the proceeds; and money issued as debt helps drive up asset prices, especially land, through the housing market and the market for commercial property.

Not only does the system of money issue skew the economy in favour of the already wealthy, it places an unnecessary burden on genuine entrepreneurs by charging them for the use of money. Money is not wealth, but it is required to pay for land, labour and capital. Why should enterprising businesspeople pay a premium for the use of money, when without it business is impossible?

It gets worse: Through the activities of credit card companies, banks try to cover up their economic misdemeanours by lending money for consumption to those unable to earn enough to get by. This creates an impression that the economy is in good health because people keep spending. In fact, UK personal debt, at GBP 1,452 billion is roughly equivalent to the country’s GDP.

Reformed Capitalism – for Everyone

If they are to remain in private ownership, banks must be obliged to work under a revised system of full reserve banking: they should only lend money which they can fund from deposits and reserves. If the money supply needs to be increased, new money can be issued through banks by a central authority. Banks can continue to lend money at interest in order to cover their costs, and make a reasonable profit, but they should not be permitted to create new money at interest, and they should be required to compete for business by offering the best possible savings and borrowing rates to their customers.

The current system of money issue widens the gap between rich and poor by concentrating its lending for investment on large corporations, while charging the economically excluded exorbitant rates on borrowing for consumption. It conspires against an optimal supply of money by ensuring that the quantity of money in circulation never reflects the amount of wealth being created, thus introducing instability into the economy and driving the damaging cycle of boom and bust.

Economic stability, business efficiency and social justice all demand a complete overhaul of the monetary system.

 

 

The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it. The process by which banks create money is so simple the mind is repelled.

– John Kenneth Galbraith

 

 

 

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Mark Braund Is a freelance writer with a specific interest in the prospects for transformative social change towards a more just, inclusive and sustainable society. He also is regular contributor to the Guardian and lives with his family in London. His website is www.markbraund.com.

http://www.renegadeeconomist.com/blog/socialism-for-the-rich-capitalism-for-everyone-else.html

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Speculate, Accumulate and Derail the Economy

Speculative investment is held up as a cornerstone of modern capitalism, but given the way it screws up the economy, I’m surprised it’s still legal.

by Mark Braund

Renegade Economist (July 20 2011)

As a way of securing wealth without engaging in real economic activity – the act of combining land, labour and capital to create something with exchange value in the market place – it’s been around almost as long as land rent. But unlike rent, the gains enjoyed by speculative investors arise not as a side-effect of legitimate economic activity, but as a result of a conscious effort by people with spare cash to subvert the natural workings of the economy. Speculative investment reduces the ability of the economy to meet it’s primary objective: enabling everyone to satisfy their basic needs through a process of mutual exchange.

Three broad types of speculation are worth considering here: speculation in land, in tangible commodities, and in the markets for money and other financial instruments.

Sit Tight ’till the Price is Right …

Over time, land values rise because people are willing and able to pay more for the use of land. But speculators don’t generally make use of the land they own; they want it simply because it grows in value. And the act of speculative landholding itself causes land values to rise further. It drives up prices making it harder for people who need land to get access to it: some end up homeless, others unemployed. The same happens with speculative investments in tangible commodities like oil or wheat. Again, speculators have no use for the commodity in question, but they drive up prices for those who do. We all contribute to the unearned wealth of speculators each time we put fuel in our cars. And in poor countries, hungry people pay with their lives when wheat prices are driven up beyond the means of governments to import sufficient to cover the shortfall in domestic production.

If I Didn’t Do It Someone Else Would …

But screwing up the land and commodity markets is not enough for the ambitious speculator: speculation in the financial markets promises even greater rewards. Not only can currencies be played off against one another, regardless of the consequences for the citizens of countries so targeted, but there is no limit to the number and nature of financial ‘products’ than are invented, traded, and thus made subject to speculation. Among these are ‘naked’ Credit Default Swaps, whereby investment banks, hedge funds and institutional investors intentionally put themselves in a position to benefit from sovereign debt defaults, like the one about to overwhelm the people of Greece.

The Rigged House Never Loses

Financial market speculation has been compared to a casino, but the comparison doesn’t stand up. In a game of roulette or blackjack, the odds are stacked against the punter; these are games of pure chance. In the financial markets, the game is rigged in favour of speculators, who, through their financial power, are able to influence events so they win every time. The beneficiaries of speculative investment get wealthier, not because they work hard (or at all), but because financial wizards have devised ways for the rich to further enrich themselves at the expense of the rest of us. If you accept speculation as an intrinsic and therefore legitimate part of the economic system it becomes hard to find grounds for regulating it. Given that it serves no useful economic purpose, perhaps it’s time we realised the world would be a better place without it.

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Mark Braund Is a freelance writer with a specific interest in the prospects for transformative social change towards a more just, inclusive and sustainable society. He also is regular contributor to the Guardian and lives with his family in London. His website is www.markbraund.com.

http://www.renegadeeconomist.com/blog/speculate-accumulate-and-derail-the-economy.html

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Land Rent – the Genesis of the British Class System

Land rent is one of several sources of unearned wealth that bestow privileges on a minority of citizens while biasing the economy against the interests of the majority.

by Mark Braund

Renegade Economist (July 13 2011)

In classical economics, each of the three factors of production – land, labour and capital – earns a share of the wealth generated through enterprise: land earns rent, labour earns wages, and capital earns profit.

There are various determinants of how much each factor earns, but what distinguishes rent from the other two, is that rent just happens. Wages are earned by people who give their labour effort; profits are earned by entrepreneurs who make judicious use of their capital, but rents fall into the laps of landowners without their having to do anything to earn it, besides having their name on the title deed.

Entrenched Privilege vs the Jobless Underclass

Land ownership bestows considerable economic power. In Britain today, seventy per cent of the land is owned by just one per cent of the population. Most land is owned by a few wealthy individuals and a handful of large corporations. The major beneficiaries of landownership are people who are already rich. The steady rise in the value of their land has nothing to do with effort, ability or merit. Simply put, wealth begets wealth. As well as holding an asset that automatically increases in value, they can charge for the use of their land, and they are able to leverage the means to additional wealth through borrowing, using their land as collateral.

David Ricardo first described how the rightful earnings of labour and capital are appropriated by landowners in his famous law of rent. Much of the wealth that should be paid out in wages to people who work, or as profits to the entrepreneurs who employ them, currently ends up on the balance sheets of landowners who get richer at the expense of the rest of us, especially the poorest, who own no land.

As more wealth becomes locked into land values, less is available for investment and consumption; both key drivers of economic growth. And when land ownership is concentrated in the hands of so few people, the majority are denied viable economic opportunities because they have no land to farm, or can’t afford premises from which to run a business.

Unexamined Assumptions and Injustice

This state of affairs may have existed since humans first conceived of private property in land, ten thousand years ago, but historical precedent doesn’t absolve present injustice. We succeeded in abolishing slavery, women won the right to vote, apartheid was overthrown; so why hasn’t our growing moral awareness led to a reassessment of the entitlements of land ownership?

Justice demands a more equal distribution of land and the benefits of land ownership. Obliging landowners to pay at least a portion of their unearned wealth over to the state via a tax on land values would make a real difference: It would curtail the enjoyment of unearned wealth by the landowning minority; it would provide an alternative stream of public revenue to fund investment in public infrastructure; it would enable a reduction in other, disincentivising, taxes; it would bring about a more equitable distribution of both land and economic opportunities; and it would help create an economy in which everyone receives a fair reward for their work.

Next Week …

I shall look at the pernicious role of speculative investment in promoting a divisive and unjust economy.

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Mark Braund Is a freelance writer with a specific interest in the prospects for transformative social change towards a more just, inclusive and sustainable society. He also is regular contributor to the Guardian and lives with his family in London. His website is www.markbraund.com.

http://www.renegadeeconomist.com/blog/the-genesis-of-the-british-class-system.html

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The bipartisan con about the debt ceiling

2011/07/30 1 comment

by Dean Baker, Counterpunch

Undernews (July 28 2011)

At the beginning of 2008 the Congressional Budget Office, the country’s most respected official forecasting agency, projected that the budget deficit in 2009 would be just 1.4 percent of GDP. The reason that the deficit exploded from 1.4 percent of GDP to 10.0 percent had nothing to do with wild new spending programs or excessive tax cuts. This enormous increase in the size of the deficit was entirely the result of the fallout from the housing bubble.

Remarkably, both Republicans in Congress and President Obama have sought to conceal this simple reality. The Republicans like to tell a story of out-of-control government spending …

It might be expected that President Obama would be anxious to correct the misconception about the budget, but this would not fit his agenda either. President Obama is relying on substantial campaign contributions from the business community to finance his re-election campaign. Many business people are anxious to see the major government social programs (Social Security, Medicare, and Medicaid) rolled back. They see the crisis created around the raising of the debt ceiling as a unique opportunity to accomplish this goal.

In order to advance their agenda, President Obama also has an interest in promoting the idea of the deficit as being a chronic problem. Plus, it gives him an opportunity to blame the deficit on the fiscal choices of his predecessor, President Bush …

The crisis over the debt ceiling is the answer to the prayers of many people in the business community. They desperately want to roll back the size of the country’s welfare state, but they know that there is almost no political support for this position. The crisis over the debt ceiling gives them an opportunity to impose cutbacks in the welfare state by getting the leadership of both political parties to sign on to the deal, leaving the opponents of cuts with no plausible political options.

To advance this agenda they will do everything in their power to advance the perception of crisis. This includes having the bond-rating agencies threaten to downgrade US debt if there is not an agreement on major cuts to the welfare state …

The battle over the debt ceiling is an elaborate charade that is threatening the country’s most important social welfare programs. There is no real issue of the country’s creditworthiness of its ability to finance its debt and deficits any time in the foreseeable future. Rather, this is about the business community in general, and the finance sector in particular, taking advantage of a crisis that they themselves created to scale back the country’s social welfare system. They may well succeed.

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Undernews is the online report of the Progressive Review, edited by Sam Smith, who covered Washington during nine of America’s presidencies and who has edited alternative journals since 1964. The Review, which has been on the web since 1995, is now published from Freeport, Maine.

http://prorevnews.blogspot.com/2011/07/bipartisan-con-about-debt-ceiling.html

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We don’t discuss Unearned Wealth

A topic that gets virtually no coverage in mainstream economics is unearned wealth, yet it is both a cause and a symptom of our continuing economic malaise.

by  Mark Braund

Renegade Economist (July 06 2011)

Some eminent thinkers have recently tried to conflate wealth with wellbeing, suggesting we should measure wealth not simply in economic or monetary terms, but in terms of other indicators: happiness is the latest buzzword. But happiness is impossible without a minimum level of economic security. Wellbeing cannot be achieved simply by convincing ourselves we are happy regardless of our economic circumstances. It’s difficult to avoid the conclusion that the happiness debate is a tactic employed by politicians to deflect attention from the ongoing failure of the economic system to provide sufficient economic opportunities, and thus condemn millions to poverty.

What is Wealth?

Happiness is a noble, if rather nebulous, goal; but any definition of wealth must emphasise the primacy of economic security. I would define wealth as “the ability to purchase in the market place those goods and services which are essential to wellbeing, along with others which, though not essential, nonetheless enhance quality of life”. Under this definition the economy must, at the very least, be arranged so that all citizens can secure their essential needs. Currently it fails in this respect to the tune of at least a billion people worldwide.

Wealth, then, is the ability, or capacity, to satisfy our needs and desires. Most of us, assuming we are fortunate enough to have a job, or enterprising enough to carve out a niche in the uncertain world of self-employment, earn a living by exchanging our labour effort for a wage. Whatever work we do, it generally involves playing a role in the process through which the factors of production – land, labour and capital – are combined to create goods and services. We are paid in money which gives us purchasing power in the market place where the goods and services we produce are traded. But for a small minority, the greater proportion of their wealth is acquired not through work, but by other means.

Over the coming weeks I shall investigate the sources of unearned wealth; who benefits and why; how the economy came to be configured to allow some people to derive this wholly unjust advantage; and the consequences for those of us who have to work to live, and for the millions of people who are denied this basic human right. I hope to demonstrate how the mechanisms through which a minority derives unearned wealth are also responsible for denying viable economic opportunities to a quarter of the world’s people, and ensuring the rest of us live in a state of perpetual insecurity.

Next Week

First, we will look at land rent: the wealth derived by landowners not as a result of  their labour effort, but from the collective efforts of wider society. Then, wealth derived from speculative investments that have no connection with the real economy. Next, interest; wealth derived by charging for the use of money, and the wider problems caused by the way money is issued. Then, the complex problem of profit: where it comes from, and the uses, legitimate and illegitimate, to which it can be put. Finally, inheritance, and the issue of genetic advantage, and what George Bernard Shaw termed the ‘rent of ability’.

The series will conclude with discussions about the impact of unearned wealth in terms of consolidating elite power and maintaining the status quo; the obstacles to implementing the requisite changes to economic structures and institutions; the need for change to be effected globally through a democratically derived consensus; the idea of creating a fair market in place of the current so-called free market, the (much reduced) role of the state in an equitable society, and finally, an imaginary sketch of  a more just, inclusive and stable global society in which unearned wealth has become a thing of the past.

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Mark Braund Is a freelance writer with a specific interest in the prospects for transformative social change towards a more just, inclusive and sustainable society. He also is regular contributor to the Guardian and lives with his family in London. His website is www.markbraund.com.

http://www.renegadeeconomist.com/blog/we-dont-discuss-unearned-wealth.html

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Tax property, not people, for a fairer society

Levies on land values do not depress or distort wealth creation and are easy to assess, cheap to collect and hard to avoid

by  Philip Inman

The Guardian (May 02 2011)

Amid all the talk of rebalancing the economy, there is little mention of the most powerful lever the government could pull to generate growth, which involves a switch from taxing income to taxing wealth.

It is a subject that tends to get little coverage, mainly because its supporters are considered on the fringes of the political spectrum. Ultra-lefties support wealth taxes for obvious reasons. Ultra-capitalists support them because they understand that allowing the rich to ring-fence much of the nation’s assets and protect the mechanisms that allow values to increase without any serious government interference robs their children, and everyone else’s, of any incentive to work harder.

And now it is not just the aristocrats who accumulate serious wealth but also increasing numbers of middle income babyboomers – senior teachers, BT engineers, BA airline pilots and local council middle managers. With their million pound homes and million pound pensions, the problem is even bigger.

For an ultra-capitalist, the rapid accumulation of wealth over the last fifteen years, which in property terms amounts to about GBP 2.5 trillion, is making us fat and lazy. Only a wealth tax can sort it out.

Yet the debate has broadened in recent years with more mainstream groups taking up the cudgels. The OECD, the rich nation’s thinktank, has joined the ranks of supporters. Liberal Democrats Chris Huhne and Vince Cable, in their pre-coalition careers, also voiced some sympathy. Andy Burnham adopted the scheme in his pitch for the Labour leadership. Many mainstream economists have also argued the case.

Social unrest

The OECD and the orange book Lib Dems, though mostly concerned with making capitalism work better, are also concerned about the potential for social unrest. As the full impact of the financial crisis hits, they can see radical solutions are necessary. They argue for a fairer society because they understand that mature capitalism is becoming sclerotic. Without some fundamental changes those groups with little to lose will turn to protest and violence.

Burnham, who has evidently been doing more thinking than most in the Labour party, can see the potential for an alliance across the political divide that allows him to give the keys of wealth creation and accumulation back to a younger generation too poor to save and with no option but to rent.

What they are all talking about is the adoption of a land value tax. Purists would abolish all current taxes and replace them with an LVT that asked for a payment in line with the value of land under ownership.

Someone earning GBP 40,000 a year would stop paying around GBP 7,000 in income tax, GBP 1,000 to GBP 2,000 in VAT, GBP 1,600 council tax and any of the transaction charges that fill the exchequer’s coffers. No more capital gains tax or stamp duty on property sales or the sale of shares. Instead they would pay a fixed annual sum, to be paid monthly, on the value of their land, which could have a wide range, depending on how much the land is worth.

Move out of town and work locally, and your overall tax bill could be a fraction of its current total. Buy an expensive piece of real estate in the city centre and you would probably pay more.

There are many consequences of following this path that are positive for wealth creation. The worker keeps all his income and there is a 100% gain for every extra hour worked. If you develop your property, it has only limited effect on the value of the land, giving you every incentive to modernise and improve the property.

Under the proper working of the council tax, increases in property values, as opposed to land values, lead to higher taxes, which is a disincentive to carry out those improvements in the first place.

Mark Wadsworth is an economist, blogger, sometime Tory Bow Group adviser and campaigner for land value taxes. He recently told Economic Voice website:

I’m an economist not a politician, and I can only repeat what all the great economists have said down the centuries: taxes on land values are the least bad taxes because they do not depress or distort economic activity, ie wealth creation. Land value tax is easy to assess, cheap to collect and impossible to evade.

Not only that, LVT is an entirely voluntary tax: you decide how much you are willing to pay and you choose a house or a flat within that price range. Only, instead of handing over all the rent or purchase price to the current owner, the location value would go to the government.

What he means by this last sentence is that property prices would necessarily settle at a lower level because a buyer will deduct the location value, knowing they must send it to the exchequer in the form of a tax.

Fred Harrison, the doyen of LVT proponents, adds that the effects are broader and longer term. In his 2005 book Boom and Bust, he points out that landowners who aggressively accumulate land for property speculation in prime parts of the country would face a huge tax bill. Idle land would be brought into use, subject to planning permission.

Property wealth

So not only do we get a tax that is easy and cheap to collect, it would be difficult for the super rich to avoid with their offshore trusts and company ownership structures, and it would also lower the value of the asset that is stifling social mobility – property.

As the economist Martin Weale has argued, the accumulation of property wealth is in effect an act of theft perpetrated on the younger generation who must pay the exhorbitant prices demanded by baby boomers or rent.

The OECD argues against taking a purist line. It fully supports tackling taxes on the gains people have made through their businesses activities. These are taxes on entrepreneurialism or plain hard work. (Don’t think of the City fat cat, but the Labour-voting JCB driver who works twenty hours overtime only to find he has crossed into the forty percent higher tax bracket. The party of higher income taxes is not helping him.)

However, abolition is a step too far. In a series of documents over the last couple of years the OECD has argued for a shift away from income taxes on individuals and businesses to a land value tax and VAT.

It wants to retain VAT for several reasons. There is the simple advice never to put all your eggs in a single basket. But more importantly, in an age of consumerism and potential environmental degradation, government’s need to influence consumer behaviour and sales taxes are another tool. VAT is embedded in European tax raising and, like LVT, is hard to avoid.

Despite all these advantages, there are many powerful forces ready to dismiss LVT as fanciful, not least the property-owning classes who have an entrenched view that their house price is a just reward for their labour.

But what LVT campaigners have shown is that the average taxpayer will be no worse off – they will simply pay less income tax and a higher wealth tax.

guardian.co.uk (c) Guardian News and Media Limited 2011

http://www.guardian.co.uk/business/2011/may/02/land-value-tax-oecd-comment

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Renegade Economics

by Mark Braund

http://www.markbraund.com (July 16 2011)

I’m now penning a weekly column for the excellent Renegade Economist website {1}. This is a new(ish) initiative by a bunch of young and creative individuals who, in a nutshell, want to change the world.

I’m especially pleased to write for them, because, as you will know if you’ve been following my scribblings on this site, or over at The Guardian {2}, I, like millions of others worldwide, share that simple aspiration.

My first contribution consists of a ten-part series on the theme of Unearned Wealth: the basis of minority power and privilege, the flip side of which is the appalling poverty and hardship suffered by upwards of a billion people, and the chronic insecurity endured by many of the rest, even in the developed countries.

I hope to demonstrate the link between unearned wealth at the top, and the denial of viable economic opportunities at the bottom. The mechanisms by which the wealthy consolidate their position are an intrinsic part of an economic system that has emerged, and continues to evolve, largely in response to grossly unequal power relations in society.

Historically, those relations were defined by aggressive warfare, colonial conquest, slavery, the subjugation of women and many other injustices which, as we celebrate the achievements of modernity, we are proud to boast have been condemned to the dustbin of history.

Except they haven’t, really: there’s still no shortage or warring, much of it connected to the desire for greater economic power on the part of the already economically powerful, as it always was. Traditional forms of colonial conquest are now frowned upon, but it’s okay if you seek the same outcomes through an economic system which is heavily biased in favour of the rich countries, and, specifically, the richest people within those countries.

Slavery is a thing of the past, we are pleased to console ourselves, except it is estimated that there are up to 27 million slaves in the world today {3}, people who slip through the safety net through which we try to regulate an economic system that eschews all considerations of value except financial ones, and certainly has no time to consider the value of human life. And, while in many countries, women have a better deal than their mother’s or grandmother’s generations, statistics abound that show the struggle for genuine equality to be far from over.

Doom and gloom it may all be, and while it’s important to be realistic, it is still possible to be optimistic. The transformation in levels of moral awareness and understanding over the last century is unprecedented: more people today express a strong preference for a different kind of world, and a firm belief in the possibility of improvement than would even have considered the question a hundred years ago.

We now have to find a way to channel that growing collective aspiration for a better world into concrete, coordinated action. And for me, that begins with spreading the word about the constraints placed on our moral aspirations by an economic system whose motives are diametrically opposed.

I’m well used to accusations of utopian idealism, of people saying it’ll never happen. But as I pointed out in my book, The Possibility of Progress (2005), one of the biggest obstacles to creating an inclusive and just economic order is the pessimistic belief that nothing can be done. Of course it can be done, if enough people want it to happen and believe in its possibility.

To this end, over at the Renegade Economist, I shall be examining the various sources of unearned wealth; the way they are connected through our archaic system of money issue; possible fixes to tackle unearned wealth as both a cause and a symptom of the current crisis through changes to the tax, financial and monetary systems; and the prospects for achieving these objectives through the existing institutions of democracy.

The first, introductory, piece in the series, is at {4}, and this week’s piece, looking and land rent, is at {5}. A new article will be published each Wednesday, and next week’s will examine the pernicious effects of speculative investment.

Links:

{1} http://www.renegadeeconomist.com/blog/mark-braund.html

{2} http://www.guardian.co.uk/profile/markbraund

{3} http://www.newint.org/features/2001/08/05/facts/

{4} http://www.renegadeeconomist.com/blog/we-dont-discuss-unearned-wealth.html

{5} http://www.renegadeeconomist.com/blog/the-genesis-of-the-british-class-system.html

http://www.markbraund.com/

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