Will We Have Hyperinflation In America?

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Sat, 10/02/2010 - 13:51 | 621023 Lux Fiat
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Aside from the mechanics of hyperinflation, why does it happen? Why do they keep printing? Aren’t the central bankers and politicians smart enough to understand what is happening? The answer to that last question is, in those countries, apparently, no.

In every modern case of hyperinflation the decision to inflate was a political one, not an economic one. In almost every case hyperinflation followed a war or a coup or some massive political change such as the end of the Soviet empire or the rise of a dictator or a populist-socialist takeover, and other political unrest.

Western developed economies have the demographic and fiscal equivalent of "the perfect political storm" that will hit in less than 15 years.  In reality, it will likely hit much sooner because of rising awareness of the problem.  Declining demographics, horrendous social obligations cooked up when fertility rates were much higher and lifespans much lower, and a huge debt overhang combined make for one nasty social and political brew the longer it simmers.  Tack on ever more restrictive nanny state policies that further impede real growth when it is most needed.

When almost all of the major contributors to global growth start going down the drain in close proximity to one another (Japan, US, EU), it may not be possible to "Arrange for massive foreign support of the dollar and Treasurys."  China has already decreased holdings by 10% year over year, and Japan will soon not be in a position to buy more US debt as it will need to start liquidating holdings to meet retirement payments to citizens. If the EU is struggling to stay afloat, who exactly is going to be able to throw a lifeline to the US should it be needed?  Who is going to throw good money after bad, particularly if there is no real effort to signficantly rein in spending.

If I understood the author's viewpoint correctly, hyperinflation occurs when a government starts running the printing presses and refuses to stop.  Will developed country gov'ts keep running the presses to "fund" various old-age welfare programs when revenues are clearly insufficient?  Since politicians in both major parties have a long history of supporting "entitlement" program growth (both in scope of benefits and scope of eligibility), will they have the political courage to pull the ink cartridges?  I hope so.  But I'm not sure that the will power is there, either on the part of politicians, or the electorate.   Ditto for state-level financial crises that are starting to playout.  Deflation will wreak havoc with our ability to repay federal debt, so I understand Bernanke's desire to achieve and maintain a certain level of inflation.  However, I doubt that he will be able to take his foot off the gas in time.

Perhaps if we get a lot more Chris Christies in statehouses and Congress, then we might have a shot at getting back onto a sounder footing with only a minor vs. major calamity.  But I'm not as optimistic as you, much as I want to believe.  As others have already said, "It's the debt, stupid."  And what are we doing to shrink that millstone from around our neck?  Nada.

 

Sat, 10/02/2010 - 12:07 | 620861 Pampalona
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There is alot of speculation about the likelyhood of deflation and/or inflation, and the difference between inflation and hyperinflation, but what about the fourth possibility: hyper-deflation? which differs as sharply from deflation as hyper-inflation does from inflation.

Sat, 10/02/2010 - 13:17 | 620976 chopper read
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or 'biflation':  food and precious metals rapidly rising in price while cars and houses rapidly drop in price, when reasons for buying go from vanity towards scarcity/necessity.  everyone is going to want to trade their cars for food, and silver and gold coins, because everyone has 3 cars, nobody needs anymore, and not nearly everybody has silver and gold coins to trade for food.  just how many cars will they take in trade at the farmers market before they have plenty?

Sat, 10/02/2010 - 11:58 | 620845 socalbeach
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John Hussman is not in the hyperinflation camp, as he's emphasized in 2 recent commentaries,

http://www.hussmanfunds.com/wmc/wmc100906.htm

For instance, my view that quantitative easing will trigger a "jump depreciation" in the dollar has evidently placed me among analysts warning of hyperinflation and Treasury default (a club whose card is nowhere in my wallet).

http://www.hussmanfunds.com/wmc/wmc100920.htm

Hyperinflation is a much different story, and as I've said before, I am not in that camp. This doesn't exclude the possibility that enough policy mistakes will change that, but for now, my inflation outlook is flat for several years and then accelerating in the second half of this decade.

Sat, 10/02/2010 - 09:24 | 620689 Just_Another_User
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inflation is economics.

hyperinflation psychology.

when inflation gets to the point where your dollar wont buy you a piece of penny candy, your paper currency is worth more to you as a source of warmth.

Sat, 10/02/2010 - 08:06 | 620647 Ned Zeppelin
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One of the big "steps" to hyperinflation is simply wrong. There is no way politicians will increase the tax burden from 30% to 45% of GDP. Now look at the steps. Monetization occurs much faster, and as for the supposed solutions to hyperinflation, there is only one, forgiveness or default on a vast scale. 

 

Another fault - you assume the purchase of Treasuries from the PD network results in cash reaching the middle class. False. This has already been proven ineffective.  So I don't see it as a pathway to an "inflation" style hyperinflation, i.e. prices for all goods increasing, but rather a currency collapse that begins with sovereign debt being refused by the usual buyers, and the Treasuries purchases from the PDs leading to their investment in commodities as opposed to equities or bonds. Stagflation, then hperinflation.  

Sat, 10/02/2010 - 06:54 | 620618 BigDuke6
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The bit about what Obama would have to do regarding high pay for union workers and public servants is exactly what that nut tony blair and his socialists did to the UK.

They had so many extra non-jobs created - eg 'street football co-ordinator' that they had 1/3 of the voting populace working for them and another 1/5 immigrated there under their tenure - open door to deliberately allow more future socialist voters....

to destroy a country within 12 years. 

Sat, 10/02/2010 - 04:16 | 620521 revolutionnot
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(double comment submit)

Sat, 10/02/2010 - 04:18 | 620520 revolutionnot
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Given that our money is loaned into existence, I'd say hyper-inflation is more a matter of when than if.  Even if interest rates went sky high and the money printing presses were turned off, we are already past the point of debt saturation.  Printing more money only increases debt burden when your money is debt.

 

IOW, we are damned if we do and damned if we don't.

Sat, 10/02/2010 - 01:55 | 620453 laosuwan
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once the fed becomes the main holder of treasuries, which is happening, isn't it possible (likely) the government will pass a law forgiving repayment of the bonds to the treasury for bonds held by the fed, thus wiping out much of the federal debt and allowing the board to be reset? i think this is their end game. Assuming they have one. Which they must.

Sat, 10/02/2010 - 01:25 | 620424 gloomboomdoom
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we have already enough "inflation" in the system to have a "Zimbabwe Event" in every country on this earth. Enough "inflation" is already in there, once interest rates go nuts you will see a TOTAL WIPE OUT of the entire financial system. Everything will go to ZERO overnight, almost...

Hyper-Inflation is rather short lived. The minute the system crashes, (and it really cannot take very many more blows, we missed hyper-inflation by a millisecond last time).
Without TARP, the system would be gone now, all liquidity in the hands of the people will immediately rush into "things you need". Because the panic of "collapse" is imminent, everyone else will have no choice because of the risk of shortages. Thus, Everyone broke? So stay broke? Print even a slight amount, it gets spend immediately- as gone as quick as you need/consume/value ur toilet paper. Literally (think about it).

What does it matter what you call it? Everyone across the board will loose at the very VERY least 50% of their wealth overnight. YES, OVERNIGHT. Devaluation will happen which is deflationary, but if a sudden price change is realized how does that resonate in the minds of the average Joe?

Does a violent price collapse inspire confidence even if one's savings in FIAT became instantaneously more valuable overnight?

Violent price swings UP and/or DOWN seems odd to the average Joe... If this continues to happen, will our behavior change? Controlled Deflation at these levels with Reserve Currency status, seem impossible when one factors exponents and credit aggregates....

Now this is just the US. Remember we still have the Euro Zone, the YEN (JAPAN), Britain (UK).
Because of our currency agreement, a Hyper-Inflationary "event" would result if any of these countries were to experience the "event". It would not stay contained to single currency/Country.
"Event", "Event", "Event:"

 

Fri, 10/08/2010 - 21:51 | 637093 laosuwan
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everything you are saying makes sense but I can remember people have been predicting this since I was in high school a long, long time ago. anyone listening then would be waiting a long time for this coming crash. what's different now? 

Fri, 10/01/2010 - 22:40 | 620175 gwar5
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Well, there we are on the hyperinflation causation chart ----------> Socialist Regime Collapse.  That would be us.

Fri, 10/01/2010 - 21:52 | 620096 gloomboomdoom
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we have already enough "inflation" in the system to have a "Zimbabwe Event" in every country on this earth. Enough "inflation" is already in there, once interest rates go nuts you will see a TOTAL WIPE OUT of the entire financial system. Everything will go to ZERO overnight, almost...

Hyper-Inflation is rather short lived. The minute the system crashes, (and it really cannot take very many more blows, we missed hyper-inflation by a millisecond last time).
Without TARP, the system would be gone now, all liquidity in the hands of the people will immediately rush into "things you need". Because the panic of "collapse" is imminent, everyone else will have no choice because of the risk of shortages. Thus, Everyone broke? So stay broke? Print even a slight amount, it gets spend immediately- as gone as quick as you need/consume/value ur toilet paper. Literally (think about it).

What does it matter what you call it? Everyone across the board will loose at the very VERY least 50% of their wealth overnight. YES, OVERNIGHT. Devaluation will happen which is deflationary, but if a sudden price change is realized how does that resonate in the minds of the average Joe?

Does a violent price collapse inspire confidence even if one's savings in FIAT became instantaneously more valuable overnight?

Violent price swings UP and/or DOWN seems odd to the average Joe... If this continues to happen, will our behavior change? Controlled Deflation at these levels with Reserve Currency status, seem impossible when one factors exponents and credit aggregates....

Now this is just the US. Remember we still have the Euro Zone, the YEN (JAPAN), Britain (UK).
Because of our currency agreement, a Hyper-Inflationary "event" would result if any of these countries were to experience the "event". It would not stay contained to single currency/Country.
"Event", "Event", "Event:"

 

Sat, 10/02/2010 - 02:12 | 620470 Econophile
Econophile's picture

Why then would interest rates go up?

Fri, 10/01/2010 - 21:14 | 619993 kaiserhoff
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Thank you for a thoughtful and well reasoned article.  The history review was a little canned, but still a good start.

The best argument for high inflation leading to hyper-inflation is that so many institutions in the whole western world simply can't pay their debts.  They will try moderate inflation to work out of the mess, but it will get away from them.  The experience of the seventies shows how contagious inflation can be.

I agree that nothing we are doing now leads there any time soon.  When the government prints money and spends it, as during the Vietnam War, all bets are off, but money now is simply flowing into the black hole of busted loans.

Don't like that answer, because it could lead to Japan style lost decades, but I think that's where we are. 

Fri, 10/01/2010 - 19:39 | 619783 Duck
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Econophile,

Finally a well-reasoned analysis of the possibility of hyperinflation on ZH.  Good to see some pragmatic rational analysis.

Fri, 10/01/2010 - 19:28 | 619738 grunk
grunk's picture

I wish we could have a Radio Zero debate between the hyperinflation-yes folks and the hyperinflation-no folks. Otherwise, let's have a steel cage death match. That lady running for Senate in Connecticut could promote it. This argument is getting tedious.

Sat, 10/02/2010 - 17:54 | 621341 RockyRacoon
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Oh, great, a CNBC octabox of blabbing that gets nothing resolved.

Fri, 10/01/2010 - 19:22 | 619722 tom
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The sequence I can see possibly leading to hyperinflation is QE monetization of the deficit, accelerating inflation, and then the government being unable to roll over outstanding debt. If the government reacted by stepping up QE monetization, that would be hyperinflationary. But it's hard for me to imagine why any set of US politicians would choose hyperinflation over default, when default is so much less destructive and so much more politically palatable.

I also see a one-off real devaluation of the dollar, especially against the labor of other countries, less so against commodities, as plummeting global demand for commodities will at least partly balance the decline of US buying power.

Fri, 10/01/2010 - 19:35 | 619763 Matto
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The US has never defaulted (technically) - who really wants to be the first?

Fri, 10/01/2010 - 19:48 | 619813 Shameful
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What do you call closing the gold window in 71?

Fri, 10/01/2010 - 20:13 | 619875 Glaucus
Fri, 10/01/2010 - 19:57 | 619846 Matto
Matto's picture

Thats what the 'technically' reference was for. they will inflate but not 'default'

Fri, 10/01/2010 - 19:12 | 619712 dot_bust
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The author of this article is mistaken. What will create hyperinflation is the massive dumping of U.S. Treasuries by China, which is not at all happy about QE II.

Fri, 10/01/2010 - 19:10 | 619705 Jasper M
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Excellent article. 

Those "fighting the last war" can't let go of inflationary expectations, and their rush to be proved right makes them cast their chosen terror as right around the corner. 

patience

Fri, 10/01/2010 - 18:33 | 619614 TheDavidRicardo
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Econophile miss the point of inflation.  Inflation is an expansion of credit due to future expectations of productivity increases.  Everything else is just currency debasement.

 

Also missing from this article is the physiological expectations of a population.  If a population expects their currency to buy less in the future, they will buy necessities today, forcing up prices in a classic postive (or is it really a negative) feedback loop.

 

 

Fri, 10/01/2010 - 18:26 | 619588 tunaman4u2
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I was HOPING this guy would have a reasonable article but I was VERY mistaken! Theres so many holes, its not even worth getting into. TRASH! 

Fri, 10/01/2010 - 18:21 | 619570 medicalstudent
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is it possible to have selective loss of confidence in digital dollars but not paper dollars?

 

 

Fri, 10/01/2010 - 18:47 | 619639 Shameful
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The problem is digital dollars are promises for real dollars.  If you follow the promise chain up you hit the Fed, the Bid Daddy Printer.  So while the collapse unfolds paper dollars might work for a while while the digital ones are not accepted, with the rational that the counter party might not deliver in a timly manner which kills the value.  However the chain reaction will also kill paper dollars, as the only choice the Fed will have is crank the presses into over drive to convert the digital money supply into a paper money supply.

Fri, 10/01/2010 - 19:11 | 619707 medicalstudent
medicalstudent's picture

makes sense.

then they add zeroes in ink, not pixels.

if we were limited to larger paper bills, the psychology for the layman may be a bit different.

another modern marvel to conveniently evade the masses' detection.

 

Sat, 10/02/2010 - 09:25 | 620690 Glaucus
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Exactly.  It's the central bank chasing physical currency, not digital, because that's what the people are chasing.  Sure, the central bank's money-printing might have caused the people's loss of confidence in the currency, but hyperinflation doesn't kick in until, for whatever reason, that confidence is lost.

And that is when the paper chase takes off.

Sat, 10/02/2010 - 17:52 | 621335 RockyRacoon
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Don't discount the fact that the money has already been printed and is sitting in idling trucks -- waiting.  The gambit being that if cash can hit the streets fast enough a panic can be averted.  Sure thing.  Right.

Fri, 10/01/2010 - 19:26 | 619739 Shameful
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That is not to say have no fun bux sitting around.  I have decent sized stash in bills and coins in case that happens.  Sure I may lose purchasing power but I also might REALLY need to buy something then to.  When the first balloon goes up I don't want to start liquidating PMs there.

Sat, 10/02/2010 - 03:46 | 620507 StychoKiller
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PMs should only be used as a last resort, or after grass has started growing the bomb craters.

Fri, 10/01/2010 - 18:35 | 619616 Matto
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Not sure, id presume one would lead to the nother. The first would be shown by a run on the banks, which isnt supported by the underlying currency so that would probably lead to a bank holiday and the FED printing enough to support all the banks, hence debasing the currency base to the point that the paper is now worthless too, once the multiplying of the banking system started to come back into place (provided paper confidence is maintained thoughout) 

Fri, 10/01/2010 - 18:37 | 619620 Matto
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fk does that sense? sorry.

Fri, 10/01/2010 - 18:31 | 619565 Matto
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As Niall Ferguson points out, the only time in history that austerity has worked once a government reaches critical debt levels was the UK going through the industrial revolution, and it took about 100 years. Every other time its either via inflation or default with a bit of austerity layered on top.

Governments simply dont pay off debt with austerity, it'd take endless hardship for generations and result in electoral failure at the first instance.

The US Govt has proved an unwillingness to make the hard decisions, particularly over the last year. So as the economy hasnt lifted and everything including the kitchen sink has been thrown at it, expect the printing to hit a new level - massive increases in taxation are not likely to have much effect simply because the economy at this point could not sustain it.

When the printing fails to lift the economy and confidence is lost in the underlying currency it is exchanged for anything useful as soon as it is recieved (as it is no longer a store of value) hence velocity up on an expanded monetary base - and voila! hyperinflation.

Fri, 10/01/2010 - 18:19 | 619562 medicalstudent
medicalstudent's picture

inflation = increase in currency supply

hyperinflation = decrease in currency demand

in both cases the demand for money increases.

currency dne money.

Fri, 10/01/2010 - 18:11 | 619545 danpar
danpar's picture

"For purposes of this discussion, I think the Republicans would be better than the Democrats. With the political sentiment shifting to a more fiscally responsible government,"

 

Republicans and Democrats; both are fiscally inresposable.

Spend, spend ,spend is their motto.

Sat, 10/02/2010 - 00:08 | 620319 chopper read
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in other words, i have a strong conviction that a politician will win every election in November.  

 

1-very-unique-1-in-a-million (Ron Paul) will seek to vote himself out of a job (term limits) while the other 'lawmakers' continue trying to 'fix the problem' 'for the good of the people'.

Fri, 10/01/2010 - 18:20 | 619569 wintermute
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100%.

The Republicans only want to cut $100 billion off the annual budget. This is like an alcoholic cutting down from 12 to 11 drinks per day.

Unfortunately the amount of cutting required is far beyond what even the Republican party can stomach.

Fri, 10/01/2010 - 18:41 | 619624 akak
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And while the Republicans might cut the alcoholic's daily intake from 12 to 11 drinks, they will merely be substituting slightly stronger beverages to maintain his daily intake (deflation of the alcohol supply), while simultaneously picking his right pocket instead of his left one --- before marching him off to some new and completely unnecessary war.  All for his own good, of course.

(I hear the brain-damaged make just as good cannon fodder as the young and naive.)

Fri, 10/01/2010 - 18:05 | 619527 win
win's picture

Wow

Well, this article in itself is the best explanation for why we will not have hyperinflation. That explanation is based on the idea that "few people know what hyperinflation is and most that think they do imagine it to be inflation on steroids"

Both the a) "not knowing" and the b) "imagining that it is the exaggeration of something beneficial" tend to dampen hyperinflationary behavior because they prevent "loss of confidence in currency".

 

Fri, 10/01/2010 - 18:05 | 619525 MGA_1
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I could very well see the US having a currency crisis which will most likely be quite unpleasant.  During Argentina's currency crisis, the value of the peso dropped from 1 to 1 to 4 to 1 within several months.  The economy was already in trouble, but this really crashed things.

I've been wondering how we could have a true hyperinflation here in the US (like 10,000% inflation per year).  I didn't think it was possible for a hyperinflation because I didn't think any sane person could pursue such policies, but the more things progress, the more I think Mr Bernanke may be caught in the money printing trap - if he doesn't print money, the economy crashes down.  If he does print, then he produces inflation, but it's less troublesome than the crash of the economy.  We'll have to see how 2011 progresses.

Fri, 10/01/2010 - 18:29 | 619599 Matto
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The hyperinflation comes in from the lack of confidence in the currency, lifting the transactions (velocity) of the underlying currency as it is exchanged ASAP once received, lifting the money supply in use far beyond the monetary base.

At that point its either embraced through further printing and bigger note denominations ala Mugabe, or wheel barrows become the latest shopping accessory ala Austria/Germany.

 

Fri, 10/01/2010 - 19:09 | 619703 MGA_1
MGA_1's picture

Again, a currency crisis and a rolling hyperinflation are two different animals.  There is no need to expand the money supply for a currency crisis.  If china decides to sell all their US bonds, and then get rid of the cash from the procedes, we'll have a currency crisis.

For a rolling hyperinflation such as weimer or zimbabwe, but govt has to print money - i.e. monetize debt of some type to increase the supply of money in the economy.  The reason Japan didn't have a hyperinflation is becaues it's citizens bought the govt bonds themselves.

Anyway, I'm believe a currency crisis is quite likely for the US over the next couple years.

 

Fri, 10/01/2010 - 19:38 | 619775 Matto
Matto's picture

Who is going to buy the debt? Continued moneterization is virtually ineviable. Which leads to confidence crisis then hyperinflation.

Fri, 10/01/2010 - 17:57 | 619506 wintermute
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The "War" category can include spending for a war even if it not fully executed.

http://www.warresisters.org/pages/piechart.htm

This source would likely illustrate the upper limit of the real level of US defense spending. Including all defense items it is arguably 54% of the budget. Remember that the budget is less than 50% tax funded (the rest is via debt.)

So ALL the government's real income is being consumed by "war" related items. Right now in 2010.

Fri, 10/01/2010 - 23:59 | 620307 chopper read
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hey, i think bin laden is in the gobi desert.  lets invade mongolia.  

 

...the military industrial complex has children in desperate need of braces and private schooling. 

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