Sunday, December 27, 2009

South East Trip

Heading out to Southeast tomorrow morning: attending the annual AEA (American Economic Association) meeting in Atlanta. My department is hiring...also revisit New Orleans after my last trip in 2003, wondering how Big Easy looks like after the devastating Katrina...and finally meet friends in Orlando, FL.  Have a lot of fun, and a lot of sun.

I will keep posting lightly on the road, most likely some summary piece about year 2009.

Happy New Year!

Saturday, December 26, 2009

Ireland and Greece

WSJ compares the two weakest links in the European economy:

Greece and Ireland face the biggest fiscal problems in Europe. But their responses couldn't be more different. Greece's lack of credibility has cost it dearly in the eyes of ratings companies, the European Commission and the bond market. That means it will have to go even further than Ireland if it is to win back confidence.

Both countries face double-digit deficits this year: 12.7% of gross domestic product in Greece and around 12% in Ireland. Greece's debt-to-GDP ratio is forecast to hit 120% next year; Ireland's headline ratio of 64% would also rise to more than 100% if the bad debt taken on by the government under its bank bailouts is included. The European Commission is demanding both cut their deficits to below 3% of GDP and reduce debt-to-GDP to less than 60%.

Yet both the commission and the rating companies are taking a notably more lenient attitude toward Ireland than Greece. Ireland proposes only to cut its deficit to 10.8% of GDP in 2010, compared to 9.1% in Greece. But Ireland has been given until 2014 to meet the commission's demands, while Greece must achieve its targets by 2013. And Ireland is still rated AA, while Greece has just been downgraded to BBB+, raising fears its bonds may not qualify as European Central Bank collateral in the future. That would push up Greek borrowing costs, making it even harder to restore its fiscal position.

Ireland has won this breathing space partly because it has shown far greater political courage. Its 2010 budget includes clear tangible spending cuts. Public-sector wages are to fall by between 5% and 15%, with the prime minister taking a 20% pay cut. Even child-benefit payments are under the ax. In contrast, Greece's budget relies heavily on one-time policies such as measures aimed at reducing tax evasion. Athens has shown a lack of will to embrace spending cuts beyond a partial freeze in public-sector wages and pensions.

But Ireland's past record earns it a degree of forbearance. Between 1994 and 2006, Dublin cut debt to 24% of GDP from 94%, according to Barclays Capital. Compare that to Greece, which has very little credibility when it comes to making tough political decisions: it cut debt only to 94% of GDP in 1999 from 108% in 1994 ahead of euro entry, before it started rising again. Even now, Dublin enjoys broad public acceptance of its austerity plans. But Greece faced riots last year and renewed clashes this past week.

Still, Athens has little choice but to bite the bullet. The credit default swap market is pricing in an appreciable chance of a Greek default. Most likely, the European Union would provide a rescue package, but this would come with strict fiscal conditions attached. The Irish lesson may be a hard one, but Greece needs to learn it fast.

The state of economic recovery

A nice overview of the current state of the economy, presented in a dashboard.

Thursday, December 24, 2009

Senate Passes Landmark Health Bill

Now America needs to deal with one fundamental problem that Milton Friedman raised many years ago: the rising welfare and free entry of immigrants especially those unskilled. History shows every time after a big crisis policies will have big change... let's just hope the change is for good---America not to become another Europe.
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Monday, December 14, 2009

Paul Samuelson dies at 94

Paul Samuelson, the great American economist, one of the true masters in the history of economics in the 20th century, along with J. M. Keynes, F. Hayek, Milton Friedman, dies at 94 yesterday (Dec. 13th) at his Belmont MA home. Here is eulogy piece from NYT:

Paul A. Samuelson, the first American Nobel laureate in economics and the foremost academic economist of the 20th century, died Sunday at his home in Belmont, Mass. He was 94.

His death was announced by the Massachusetts Institute of Technology, which Mr. Samuelson helped build into one of the world's great centers of graduate education in economics.

In receiving the Nobel Prize in 1970, Mr. Samuelson was credited with transforming his discipline from one that ruminates about economic issues to one that solves problems, answering questions about cause and effect with mathematical rigor and clarity.

When economists "sit down with a piece of paper to calculate or analyze something, you would have to say that no one was more important in providing the tools they use and the ideas that they employ than Paul Samuelson," said Robert M. Solow, a fellow Nobel laureate and colleague of Mr. Samuelson's at M.I.T.


Mr. Samuelson wrote one of the most widely used college textbooks in the history of American education. The book, "Economics," first published in 1948, was the nation's best-selling textbook for nearly 30 years. Translated into 20 languages, it was selling 50,000 copies a year a half century after it first appeared.


A historian could well tell the story of 20th-century public debate over economic policy in America through the jousting between Mr. Samuelson and Milton Friedman, who won the Nobel in 1976. Mr. Samuelson said the two had almost always disagreed with each other but had remained friends. They met in 1933 at the University of Chicago, when Mr. Samuelson was an undergraduate and Mr. Friedman a graduate student.

Unlike the liberal Mr. Samuelson, the conservative Mr. Friedman opposed active government participation in most areas of the economy except national defense and law enforcement. He thought private enterprise and competition could do better and that government controls posed risks to individual freedoms.

Both men were fluid speakers as well as writers, and they debated often in public forums, in testimony before Congressional committees, in op-ed articles and in columns each of them wrote for Newsweek magazine. But Mr. Samuelson said he always had fear in his heart when he prepared for combat with Mr. Friedman, a formidably engaging debater.

"If you looked at a transcript afterward, it might seem clear that you had won the debate on points," he said. "But somehow, with members of the audience, you always seemed to come off as elite, and Milton seemed to have won the day."

Mr. Samuelson said he had never regarded Keynesianism as a religion, and he criticized some of his liberal colleagues for seeming to do so, earning himself, late in life, the label "l'enfant terrible emeritus." The experience of nations in the second half of the century, he said, had diminished his optimism about the ability of government to perform miracles.

If government gets too big, and too great a portion of the nation's income passes through it, he said, government becomes inefficient and unresponsive to the human needs "we do-gooders extol," and thus risks infringing on freedoms.

But, he said, no serious political or economic thinker would reject the fundamental Keynesian idea that a benevolent democratic government must do what it can to avert economic trouble in areas the free markets cannot. Neither government alone nor the markets alone, he said, could serve the public welfare without help from the other.

As nations became locked in global competition, and as the computerization of the workplace created daunting employment problems, he agreed with the economic conservatives in advocating that American corporations must stay lean and efficient and follow the general dictates of the free market.

But he warned that the harshness of the marketplace had to be tempered and that corporate downsizing and the reduction of government programs "must be done with a heart."

Despite his celebrated accomplishments, Mr. Samuelson preached and practiced humility. The M.I.T. economics department became famous for collegiality, in no small part because no one else could play prima donna if Mr. Samuelson refused the role, and, of course, he did. Economists, he told his students, as Churchill said of political colleagues, "have much to be humble about."

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Sunday, December 13, 2009

Something about Joe Stiglitz

A brief yet very interesting piece on economist Joe Stigliz (source: IMF). Here are some excerpts:

Realizing Stiglitz's potential, his professors encouraged him to leave Amherst after his third year and start graduate work elsewhere; they were nevertheless devastated to see him go. "Frankly, seeing Stiglitz leave is like watching the disappearance of one's right arm," one of them wrote. The Massachusetts Institute of Technology (MIT), however, was overjoyed to get him as a student. The institution's admissions committee sent his information to the economics department and asked what the amount of his stipend should be, listing choices ranging from no stipend to $12,000. The professor assessing Stiglitz's application scribbled on the folder: "Offer him Department Head's salary."

In the 1960s, MIT was the center of a revolution in economics. "The department placed mathematics—not philosophy or ideology—at the heart of policy analysis," says Stiglitz, but it sought to bring about "an interface of careful mathematical models and the practical problems of the economic world." Stiglitz went on to excel at this work, so much so that MIT made him an offer right away on his graduation. The job came with strings attached, though. Stiglitz had to agree to sleep in an apartment instead of his office—MIT wanted to see a lease as proof that he had an apartment—and to start wearing shoes around the office. MIT was not able to retain Stiglitz for long—over the next two decades his wanderlust took him to Cambridge, Yale, Oxford, Stanford, and Princeton—but MIT was right about his potential. Stiglitz unleashed an intellectual effort that earned him the 1979 John Bates Clark medal—awarded to the most influential U.S. economist under the age of 40—and made him a shoo-in for a Nobel Prize.


In 1993, Stiglitz abandoned his comfortable perch in academia for the rough-and-tumble of the policy world. He became a member of Clinton's CEA and later its chairman. Alan Blinder, a Princeton professor and a fellow CEA member, describes it as "a gutsy move for a purely academic superstar." Stiglitz was instrumental in pushing through several initiatives, including persuading a somewhat reluctant U.S. Treasury to issue inflation-indexed government debt. But Chait wrote in The American Prospect that Stiglitz's style of argument—making his case publicly even after losing internal debates on issues—led to wintry relationships with other presidential advisors, such as Larry Summers. Blinder says politely that "Joe's behavior . . . might perhaps be considered a little quixotic."

This style grew even more pronounced after Stiglitz moved in 1997 from the White House to become World Bank chief economist. He was critical of the economic advice to the transition economies to carry out a speedy move to markets and capitalism. Stiglitz favored a much more gradual move, with legal and institutional reforms needed to support a market economy preceding the transition to markets. Kenneth Rogoff, a Harvard professor and former chief economist of the IMF, doubts that Stiglitz's approach would have succeeded. He says it is "unlikely that market institutions could have been developed in a laboratory setting and without actually starting the messy transition to the market." Rogoff adds that because the institutions underpinning communism had collapsed, "some new institutions had to be created quickly," and it is inevitable that mistakes were made in this haste. But "institutions take a long time to nurture and the ones that are there today, however imperfect, might well not be there if the effort had not been started" immediately when communism fell.

During the financial crisis of 1997–98, Stiglitz publicly criticized the programs put together by the IMF and the governments of some Asian countries. Stiglitz argued that raising interest rates to defend the currencies in these countries was counterproductive: the high interest rates reduced confidence in the economy by increasing loan defaults and corporate bankruptcies. Not everyone agreed with Stiglitz. The late MIT economist Rudiger Dornbusch defended the high-interest-rate strategy as essential to restoring confidence, adding that "no finance minister will opt for the Stiglitz Clinic of Alternative Medicine. They [will] have the ambulance rush them to the IMF." J. Bradford DeLong, a noted macroeconomist at the University of California, Berkeley, wrote that following "Stiglitz's prescriptions [to] lend more with fewer conditions and have the government print more money to keep interest rates low . . . would have been overwhelmingly likely . . . to end in hyperinflation or in a much larger-scale financial crisis as the falling value of the currency eliminated every firm's and bank's ability to repay its hard [foreign] currency debt."

After exiting the World Bank in 1999, Stiglitz repaired to Columbia University and wrote what became a best-selling book titled Globalization and Its Discontents. Many reviewers of the book noted that its narrative power came from having a clear villain: the IMF. The book's references to the IMF—almost all critical—totaled 340. Tom Dawson, the IMF's external relations head at the time, quipped: "That works out to over one alleged mistake committed by the IMF per page. You'd think by sheer accident we'd have gotten a couple of things right."


Despite the financial crisis, Stiglitz remains optimistic about the future of markets and capitalism. In contrast to "the 19th century owner-operated capitalism, in the 21st century capitalism will be operated by the people," he says. But to make it a success, people have to be more economically literate and there has to be greater civic participation in economic policymaking. With these goals in mind, Stiglitz founded the Initiative for Policy Dialogue (IPD) in 2000—a global network of economists, political scientists, and policymakers that studies complex economic issues and provides policy alternatives to countries. IPD also conducts workshops to enable the media and civil society to participate effectively in policy circles. Dawson applauded the effort: "It's a tough business—you almost have to be a Bono to have an impact on policy."

Indeed, to reach wider audiences, Stiglitz has branched out into film with a documentary called Around the World with Joseph Stiglitz about how the fruits of capitalism can be shared more equally. Will it give filmmaker Michael Moore a run for his money? "No," laughs Stiglitz, "I think Moore is very effective," but "frustration doesn't do any good."

Unlike Moore, Stiglitz says he hasn't lost his "Midwestern optimism" that things improve over the long run. Many people, he says, express their dismay to him that, with the financial crisis barely over, the bankers and their boosters seem to be back calling the shots. But if genuine reform of the financial system is not undertaken, "there is a reasonable risk of another crisis within 10–15 years, and the likelihood that the banks will win the next round is lower." Every crisis provides "an impetus for deeper democratic reform. The game isn't over."

Taking stock

Another chart on 2009 rally in historical perspective:


Best performing stocks, watch Ford, Capital One, AIG, and Bank of America.


(graph courtesy of bespoke)

Oliver Williamson Nobel Speech

Nobel speech by Oliver Williamson. Professor Williamson will be here at Copenhagen Business School on Dec. 15.

Retail sales

Solid retail sales data in November.

(click to enlarge; graph courtesy of calculatedrisk)

Friday, December 11, 2009

What to expect at Copenhagen

Interview of Jacob Kirkegaard, a Danish research fellow at Peterson Institute for International Economics.

Thursday, December 10, 2009

On China's exchange rate policy

Martin Wolf says China must appreciate its currency otherwise the world is heading for train wreck.

Jim O'Neill, Chief Economist at Goldman Sachs, counters that after almost 17% appreciation during the past few years, he is not sure Chinese Yuan is still undervalued. He is asking people to look at the evidence on the ground that China is actively restructuring its economy and China's domestic consumption is fast rising.

Dani Rodrik of Harvard University argues while most people focus on China's exchange rate, nobody is offering China a way out of its currency dilemma, and China is in no position to revalue its currency as demanded, as a large Yuan appreciation, say 25%, will kill China's economic growth by 2%.

The bottom line is China can't rely on export as its sole growth engine in the future; and the rest of the world should not blame all problems to China's currency policy.

Jim Rogers on dollar and gold

Rogers thinks US dollar is due for a short-term rally and that means gold will enter a consolidation stage. His long term prediction of gold price stays firm: it will at least increase to a couple of thousand dollars.

He is a true contrarian investor.

Wednesday, December 09, 2009

Warren: The coming collapse of American middle class

Elizabeth Warren spoke at UC Berkeley's Jefferson Memorial Lecture:

Personally, I think the prediction is over-exaggerated. But it's a refreshing speech.

Firms with job openings

Percentage of firms with job openings:

(click to enlarge)

House flipping, again?

House flipping came back again, in new fashion: the flippers for foreclosed homes. Read this WSJ report.  Here are some exerpts:

Jon Mirmelli, a Phoenix real-estate investor, learned late in the morning of Sept. 28 that a never-occupied custom house on the northern fringes of this Phoenix suburb was going up for auction around noon the same day. The six-bedroom home, built on a three-acre desert plot, has a kitchen with two dishwashers, four ovens, "antibacterial" copper sinks, and a master "spa" bathroom with space for a flat-screen TV visible from the tub.

The minimum bid, as set by a unit of Citigroup Inc., which had a $1.3 million mortgage on the home, was $379,900. After several minutes of bidding among investors and their representatives, some wearing shorts and flip-flops, Mr. Mirmelli won the home for $486,300. A week later, he agreed to sell it for $690,000 to a woman who moved in this month.


Flippers swoop in at public auctions of foreclosed homes, known as trustee or sheriff sales. In many states, the lender sets the minimum bid, and takes possession of the property only if no one bids more. In the past, the minimum generally was about equal to the mortgage balance due. But in today's market, in which many home values have dropped far below the loan balance, lenders wouldn't attract investors if they set the minimum at that level.

Sean O'Toole, chief executive officer of, a research firm, estimates that in November about 21% of homes sold in trustee sales in California went to investors rather than to a foreclosing lender, up from 6% a year earlier. The trend is similar in some other areas with high foreclosure rates, including Phoenix and Miami.


The risk for banks is that if they set the minimum bid too low, the home might end up selling for much less than they could reap if they took ownership of it and sold it themselves. But with some 7.5 million U.S. households behind on their mortgage payments or in foreclosure, many lenders are overwhelmed. They're negotiating with distressed borrowers and figuring out how to sell the growing supply of foreclosed homes.

"The banks are so screwed up," says Mr. Mirmelli, the Phoenix investor, that they don't always have a clear idea of the value of the property they are foreclosing on.

Unemployment snapshot since recession began


December 2007 through October 2009

click to enlarge, Chart via Office of Thrift Supervision

Poll on Climate Change

Americans (at least WSJ readers) simply don't believe human activities are responsible for climate change. An interesting contrast to Europeans. Food for thought for Copenhagen Climate Conference.

(click to enlarge; link to the poll)

Tuesday, December 08, 2009

Bernanke speech on economic recovery

Bernanke spoke to Economic Club in Washington DC. He does not expect the economy to recover rapidly, in other words, he expects anemic economic recovery.

Ten predictions of world economy 2010

Predictions from Global Insights, the Lexington (MA)-based US Economic Forecasting firm, a very reputable one, near where I lived previously.

Is gold in bubble yet?

Not if most common people even don't know what the gold price is today. Bubble needs herding behavior: when everybody is rushing to get in, that's where the gold bubble is about to burst. We are far from there.

Recession most likely ended in mid year

From Robert Hall at Stanford, also member of NBER recession dating committee (source: Bloomberg):

The improving labor market indicates the deepest U.S. recession since the 1930s may have ended, though it is too soon to say precisely what month it stopped, said the head of the group charged with making the call.

Payrolls fell by 11,000 workers in November, less than the most optimistic forecast among economists surveyed by Bloomberg, figures from the Labor Department showed today in Washington. The jobless rate declined to 10 percent.

"Today's report makes it seem that the trough in employment will be around this month," Robert Hall, who heads the National Bureau of Economic Research's Business Cycle Dating Committee, said in an interview. "The trough in output was probably some time in the summer. The committee will need to balance the midyear date for output against the end-of-year date for employment."

Among the top indicators the group uses is payrolls, according to its Web site. In the third quarter, the economy expanded at a 2.8 percent annual pace after a yearlong contraction.

Choosing between the dates "will take some time," Hall said. "We act deliberately."

Harvard University professor Jeffrey Frankel, another member of the committee, said the most likely date for the recession's end would be midyear.

"Mid-summer remains the best candidate for ultimate dating of the trough, probably July, or possibly June," he said.

The recession began in December 2007, the group said in December 2008. It usually takes six to 18 months to confirm a contraction's start or finish, according to the panel.

2001 Recession

Declaring the 2001 downturn over was complicated by continuing job losses. The group took until July 2003 to say that the slump had ended, 20 months after the fact.

Hall said he couldn't rule out a further decline in the economy that would make it harder to date the end of the recession.

The estimates for the low points in unemployment and output "presume that there won't be any new adverse shock," Hall said. "There are some horror-story scenarios that could stand in the way, so I don't see the point of forecasting. We just wait until we are ready."

Frankel said a second leg down for the economy would pose other difficulties for the committee.

"In the hypothetical event that the economy were to tank again in early 2010, would we call that a new recession or part of the same recession?" he said. "Probably the latter. Until we can answer that question the other way, we won't call the trough. So it will be awhile longer."

Zemanta helped me add links & pictures to this email. It can do it for you too.

Monday, December 07, 2009


This is a big week here in Copenhagen for the COP15 climate summit of world leaders.
This hour On Point on America's public opinion toward climate change and global warming.

Pedestrians wait at a crossing opposite a poster reading "Hopenhagen Earth Body Guard" on a building in the center of Copenhagen, Denmark, on Sunday Dec. 6, 2009, one day before the Climate Summit begins. The poster urges people to sign the climate change petition. (AP)

Consumer credit contraction in historical perspective

High unemployment with historical consumer credit contraction ---double whammy for American consumers.

(click to enlarge, graph courtesy of calculatedrisk)

Sunday, December 06, 2009

Fierce battle on gold

The bruising battle between governments and investors over gold, reports WSJ:

One of the fiercest battles in the global financial system is being played out in the gold market. Does Friday's sharp drop in the gold price say much about who will win this fight?

On one side are central banks and governments, which are printing money and running up large fiscal deficits. On the other are investors who think such actions could debase paper currencies, and are buying gold to protect against that outcome.

Looking at Friday's 4% slide, even gold bugs would agree that a correction was to be expected for an asset whose price is up 56% in the past 12 months.

But gold bears might look at the trigger for the rout, a better-than-expected U.S. jobs number, and conclude that the economy is recovering and governments can soon wind down policies that benefit gold.

Clearly, a spell of gold weakness is likely. Not only has the run-up been intense, central bankers recently have sounded slightly tougher on monetary policy.

But the beauty of gold is that it is almost alone in providing protection for scenarios in which government stimulus fails or backfires. If economic weakness returns, the government's default response likely will be cranking out more money and running up bigger deficits. Alternatively, economies may take off too quickly, and high inflation returns. Both outcomes are extremely gold-friendly.

The gold trade gets really interesting if gross domestic product expands, but only sluggishly. If governments are willing to tolerate that, allowing the economy to adjust on its own, gold could suffer. After all, the best way to swat the gold bugs is to let the markets have their way.

Bob Dylan and America


On Point: Douglas Brinkley on Bob Dylan in Rolling Stone

Peter Bernstein on risk

Late Peter Bernstein interview, highly recommend.

Douglass North on 2009 Nobelists

Feldstein on economic outlook

Saturday, December 05, 2009

Is "bubble after bubble" the only way out?

Interview of Ken Rogoff:

Bernanke put

Republican senator, Jim Bunning, strongly opposes the re-nomination of the Fed Chairman, Ben Bernanke. Some of his critique are quite sensible. The Fed's biggest mistake, in my view, is it did not act proactively to stop the housing bubble.

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Not the best decade for stock returns

Stock investing in historical perspective:

(click to enlarge; courtesy of BeSpoke Investments)

China's biggest threats

How Chinese perceive the biggest threats:

(click to enlarge)

Which country is the most desired to receive their education, in Chinese eyes:

whole report is here.

Cost of home ownership

A Great chart on the history of cost of home ownership (courtesy of Visual Economics).

As measured by the percentage of income devoted to mortgage payment, we are at historical low. This is a great time to own a house.

Caution to house speculators: do not hope for a quick price recovery.

(click to enlarge)
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Thursday, December 03, 2009

Andy Xie: China got a "hot money" problem

China is riding a tiger: the prospect of future currency rise and fast economic growth will certainly attract huge inflow of international short-term capital, or the so-called "hot money". This will happen even when Chinese government imposes capital control.

At certain point, these hot money will want to flow out once investors realize their profits or just because it becomes too risky to stay in China. When this happens, China's property market and stock market will face huge downside risk. And that's when the housing market bubble will burst.

Interview of Andie Xie, Part I

Part 2
Part 3

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Wednesday, December 02, 2009

Gold passes $1,200

Gold just passed $1,200 per ounce.

Gold's rise has support from fundamentals, but every time you see parabolic move, the bubble is forming. One of the key lessons for investors is "bubble has legs", it will eventually burst, but nobody knows when.

In 2008, we had "mother of all bubbles" ---oil price shot up to $147 per gallon. In 2009-10, we may well have another greater bubble, the gold bubble: $2,000, anyone?

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Tuesday, December 01, 2009

Anecdotal story on Chinese young consumers

I don't believe this is widespread. But relying on China's relatively poor consumers to "save the word" is ludicrous.

The netbook revolution

This holiday season, have you bought a netbook?
Fortune Magazine reports on Asus' netbook revolution.

Some facts about climate change

Copenhagen climate conference is near.  Here are some facts one should bear in mind.

source: Jørgen Delman

Key variables




Population (million)




Per capita GDP (US$) (PPP)




Energy use per unit of GDP (toe/ thousand US$)




Per capita CO2eq emissions (2003 data; tons)




World gold rush continues...

(click to enlarge)

Obama commits on emission target

Obama pledges that the United States intends to reduce its greenhouse gas emissions in the range of 17 percent below 2005 levels by 2020 and 83 percent by 2050Reports NYT.

Friday, November 27, 2009

Dubai real estate bust

Thursday, November 26, 2009

Bergsten: Yuan to appreciate against dollar slowly

Bergsten of Peterson Institute of International Economics talks about Chinese Yuan:

US Dollar hit 14-year low against Yen

Wednesday, November 25, 2009

Becker: U.S. should not ask China to appreciate its currency

Gary Becker analyzes why he thinks China's currency policy does more good than harm to the US:

By all accounts, President Obama's visit to China last week was pretty much a failure on all the major issues, which include China's contributions to climate change, nuclear weapons, and various aspects of the world economy. I will concentrate my discussion on two of the most important and closely related economic issues: the valuation of the Chinese currency, the renminbi, and the huge assets accumulated by China that are mainly held in the form of US Treasury bills and other US government assets.

The Chinese central bank held the value of the renminbi fixed relative to the US dollar at a little over 8 renminbi per dollar during the 1990s, and until 2005. It then allowed the renminbi to appreciate gradually to less than 7 per dollar until 2008, when it again fixed the rate of exchange between these currencies at about 6.9 renminbi per dollar. This exchange rate is considerably above a free market rate that would be determined in a regime of flexible exchange rates. So there is no doubt that China is intentionally holding the value of its currency below the rate that would equate supply and demand.

The dollar has depreciated substantially relative to other currencies since May of 2009. Since the renminbi is tied again to the dollar, the renminbi has depreciated by the same amounts, including 16% against the euro, 34 % against the Australian dollar, 25% against the Korean won, and 10 % against the Japanese yen. This substantially depreciation of the Chinese currency has made many other countries angry at China's policy of locking it to the US dollar.

President Obama apparently complained to Hu Jintao, President of the People's Republic of China, about the low value of the renminbi, and urged China to allow it to appreciate substantially. The US and other countries worry that the undervaluation of the Chinese currencyi increases the demand for Chinese exports, and reduces China's demand for imports from countries like the US because China keeps the dollar and the currencies of other countries artificially expensive relative to their currency. America and other countries hope that greater demand from China for their exports resulting from a higher value of the renminbi will help these countries resume sizable economic growth as they recover from this severe recession. They especially want to help reduce the high levels of unemployment found in many of these nations.

Indeed, in good part due to the low value of its currency, China has run substantial surpluses on its current trade account as it imports fewer goods and services than it exports. The result is that China has accumulated enormous reserves of assets in foreign currencies, especially in the form of US government assets denominated in dollars. As of September of this year, China had the incredible sum of over 2 trillion dollars in foreign currency reserves, such as US Treasury bills. This is by far the highest reserve in the world, and it amounts to the enormous ratio of more than one quarter of China's GDP of about $8 trillion (purchasing power parity adjusted).

I am dubious about the wisdom of both America's complaints about China's currency policy and of China's responses. On the whole, I believe that most Americans benefit rather than are hurt by China's long standing policy of keeping the renminbi at an artificially low exchange value. For that policy makes the various goods imported from China, such as clothing, furniture, and small electronic devices, much cheaper than they would be if China allowed its currency to appreciate substantially in value. The main beneficiaries of this policy are the poor and lower middle class Americans and those elsewhere who buy Chinese made goods at remarkably cheap prices in stores like Wal-Mart's that cater to families who are cost conscious.

To be sure, US companies that would like to export more to China are hurt by the maintenance of the Chinese currency at an artificially low value relative to the dollar. As a result, employment by these companies is lower than it would be, so that this may contribute a little to the high rate of US unemployment. But I believe the benefits to American consumers far outweigh any loses in jobs, particularly as the US economy continues its recovery, and unemployment rates come back to more normal levels.

Since the opposite effects hold for China, I cannot justify their policies from the viewpoint of their interests. Their consumers and importers are hurt because the cost of foreign goods to them is kept artificially high. Their exporters gain, but as in the US, that gain is likely to be considerably smaller than the negative effects on the wellbeing of the average Chinese family.

I reach similar conclusions about China's accumulation of their excessive reserves. The US has little to complain if China wants to hold such high levels of low interest-bearing US government assets in exchange for selling goods cheaply to the US and other countries. China's willingness to save so much reduces the need for Americans and others to save more, but is not differences in savings rates also part of the international specialization that global markets encourage? To be sure, why China is willing to do this is difficult to understand since they are giving away goods made with hard work and capital for paper assets that carry little returns.

One common answer is that China hopes to increase its influence over economic and geo-political policies by holding so many foreign assets. Yet it seems to me just the opposite is true, that China's huge levels of foreign assets puts China more at the mercy of US and other policies than visa versa. China can threaten to sell large quantities of its US Treasury bills and other US assets, but what will they buy instead? Presumably, they would buy EU or Japanese government bills and bonds. That will put a little upward pressure on interest rates on US governments, but to a considerable extent, the main effect in our integrated world capital market is that sellers to China of euro and yen denominated assets would then hold the US Treasuries sold by China.

On the other hand, the US can threaten to inflate away some of the real value of its dollar denominated assets-not an empty threat because of the large US government fiscal deficits, and the sizable growth in US bank excess reserves. Inflation would lower the exchange value of the dollar, and also of the renminbi, as long as China keeps it tied to the dollar. That would further increase the current account surpluses of China, and thereby induce China to hold more US and other foreign assets, not a very attractive scenario to China.

So my conclusion is that the US in its own interest should not be urging China to appreciate its currency- countries like India have a much greater potential gain from such an appreciation. On the other hand, I see very little sense at this stage of China's development in maintaining a very low value of its currency, and accumulating large quantities of reserves. Paradoxically, President Obama and President Jintao should each have been arguing the others positions on these economic issues.

Sunday, November 22, 2009

China's housing bubble is forming

A classic bubble is forming in China. Prick it, or deal with it after burst? 

A large bubble is forming in China's property market as a result of Beijing's credit-driven stimulus programme, one of the country's most prominent real estate developers warned.

Zhang Xin, chief executive of Soho China, one of the country's most successful privately owned property developers, told the Financial Times the asset bubble was leading to rampant wasteful investment in the sector, undermining the country's long-term growth prospects.

"Real estate prices should only go up because people want to actually use the space, but at the moment we can see more and more empty buildings across the whole country and in every real estate segment," Ms Zhang said. "The rising prices are a direct result of so much money coming from the banks and the Chinese banks should be very worried."

Ms Zhang's assessment was echoed by Fan Gang, a member of the central bank's monetary policy committee, who warned on Wednesday that real estate in cities such as Beijing, Shanghai and Shenzhen was expensive and there was a growing risk of asset price bubbles.

Urban property prices in 70 big and medium-sized Chinese cities rose 3.9 per cent in October from a year earlier, accelerating from September's 2.8 per cent rise, according to government figures.

Price rises in top-tier markets such as Beijing and Shanghai have been much faster. Analysts say the rebound has largely been driven by an unprecedented government-led expansion of bank lending. It is also being driven by government policies, including tax breaks, low interest rates and smaller down-payment requirements. 

Investment in real estate development, a key driver of economic growth, rose 18.9 per cent in the first 10 months of the year on a year earlier, a marked acceleration from 17.7 per cent growth in January-September.

Ms Zhang said the current speculation should be a serious warning for the industry and the general economy.

"In Manhattan, they have vacancy rates of 10-15 per cent and they feel like the sky is falling, but in Pudong [the central business district in Shanghai] vacancy rates are as high as 50 per cent and they are still building new skyscrapers," she said.

"If you look at GDP growth, then China looks like a new engine driving the global economy, but if you look at how growth is being created here by so much wasteful investment you wouldn't be so optimistic."

Source: FT

China's tough road ahead

China got the money.

But don't mistakenly think China will catch up with the US soon. According to estimates by Robert Fogel at University of Chicago (see graphs below), China will catch up the US around 2020 in total GDP, but only until after 2040 will China reach the same living standards, measured by GDP per capita, as the US.

Currently, the GDP per capita in China is a little over $5,000 (in PPP term), way below US average of $45,000.

(click to enlarge; source: Robert Fogel)

China's big problem is it's non-democratic. The implications are 1) China's political system is inherently unstable; 2) Political freedom and free expression of ideas are closely tied to human creativity and innovation, which is the long-term driver for a country's wealth. That's where I worry most about China.

On the optimistic side, we should know political system itself is an evolutionary system. The hope is that as Chinese are getting richer, the current political system will evolve into something similar to western democracy.

Also listen to this NPR report on "While US economy struggles, China rises".

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Warren Buffet: Squanderville vs. Thriftville

Borrow to spend like the debts won't be repaid forever. That's how we got here. That's how the US, the world superpower, jeopardizes its own currency and subjects its national security to foreign trading partners.

Also read Paul Samuelson's warning on the US dollar
and Julian Robertson on "How we put ourselves into this terrible position".

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Saturday, November 21, 2009

Who is paying taxes?

The top 5% income earners in the US bear over 60% of total tax burden.

(source: mint, click to enlarge)

Too tough to save

Mega banks survived because of government bailout and they are believed to be "too big to fail".
What about smaller regional banks, with heavy investment in CRE? It seems that they are too tough to save.

Source: WSJ

For the first time in the credit crisis, the government may have run into a problem that is too tough to bail out: commercial real estate.

The Treasury and the Federal Reserve have spent hundreds of billions of dollars shoring up the residential-mortgage market. By comparison, the government's strategy for dealing with commercial real estate looks slight. And it may have no choice but to step aside and allow an adjustment that could slow the economy and expose banks and bond investors to big losses from the $3.4 trillion outstanding in commercial real-estate debt.


Why is this sector so rescue-resistant? First, helping commercial-mortgage holders doesn't buy votes the way helping homeowners does. Second, look at where commercial real estate lies in the banking sector. In theory, the Troubled Asset Relief Program, or TARP, should have given banks the capital to absorb loan losses, including those on commercial real-estate debt. TARP injections, along with Fed-run stress tests, helped big banks with more than $100 billion in assets. But those lenders held only 29% of the $1.84 trillion of commercial real-estate debt on bank balance sheets in the second quarter, according to Foresight Analytics.

Yes, smaller banks also tapped TARP, but they weren't stress-tested in the same way, and thus are less likely to have raised enough equity to deal with commercial real estate. Banks with $1 billion to $10 billion of assets had $450 billion in commercial real-estate exposure in the second quarter, equivalent to more than 330% of Tier 1 capital. For the largest banks, that ratio was 99%, according to Foresight.

Regulators could encourage smaller banks to stock up on capital for a commercial real-estate meltdown. Yet Treasury figures show the number of banks taking TARP capital has dwindled to a trickle.

Regulators appear to be hoping that a partial recovery in commercial real-estate values could reduce the problem. They recently issued guidelines that make it easier to keep underwater loans out of bad-loan tallies, as well as encourage banks to restructure, rather than foreclose on, problem commercial mortgages. Indeed, Foresight estimates that for commercial real-estate bank loans maturing between 2010 and 2014, a 10% rise in values could cut the proportion underwater from 68% to 37%.

But even if prices did rise, banks likely are to want to pare exposure. They have little motivation to refinance commercial real-estate loans.

And investors shouldn't expect any meaningful revival of the $700 billion market in bonds backed by commercial real-estate loans, even with the Fed providing leverage to buy such securities. While popular during the bubble, these securitizations lack the sort of attributes, like large pools of loans with similar terms, to generate strong demand in saner times, said Joseph Mason of Louisiana State University.

Commercial real estate looks too tough to save.

Bank failures in historical perspective:

(graph courtesy of calculatedrisk)

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Gold rush

Analysis of recent rise of gold price (source: FT)

(click to play the video)

China's auto industry in consolidation

Shakeout in Chinese auto industry (from WSJ):

BEIJING—Changan Automobile Group Co. on said Tuesday it will take over several automobile companies now owned by state-owned conglomerate Aviation Industry Corp. of China, in a restructuring that could indicate that the consolidation of China's fragmented automobile sector is gaining momentum.

AVIC will get a 23% stake in Changan Automobile in exchange for Harbin HF Automobile Industry Group Co., Jiangxi Changhe Auto Co. and Harbin Dongan Auto Engine Co., as well as Chinese joint ventures with Suzuki Motor Corp. and Mitsubishi Motors Corp., Changan Automobile said in a statement.

Changan Automobile's parent, whose name translates as China Weaponry Equipment Group, will own the remaining 77%, it said.

Changan Automobile is already the parent company of Shenzhen-listed Chongqing Changan Automobile Co.

"This is a very reasonable merger," said Yale Zhang, an analyst at automobile-research firm CSM Worldwide. He said the restructuring helps consolidate China's mini-commercial-vehicle segment, in which Chongqing Changan holds the No. 2 spot by sales volume, followed by Changhe Auto and Harbin HF. The segment is led by SAIC-GM-Wuling Automobile Co., a joint venture between General Motors Co., SAIC Motor Corp. and Wuling Automobile Co.

The restructuring could mean consolidation in China's automobile industry, which the government has been trying to promote, is finally gaining some steam.

China currently has more than 80 automobile makers competing for thin slices of the market.

In May, Guangzhou Automobile Group Co. acquired a 29% stake in Hunan Changfeng Motors Co. to become the sport-utility-vehicle maker's biggest shareholder.

A host of other potential transactions are also under discussion in the industry.

The moves come after the central government said earlier this year it planned to encourage consolidation of its automobilemobile companies into a "big four" and "small four," to increase the local industry's competitiveness against established foreign compeition.

As part of the AVIC deal, Changan Automobile will take over Suzuki's automobile-making joint venture in China with Changhe, Jiangxi Changhe Suzuki Automobile Co., and an engine joint venture between Mitsubishi and Dongan.

The restructured group aims to sell more than 2.6 million vehicles by 2012.

It targets sales of five million vehicles by 2020 and to sell own-brand, high-end vehicles, the statement said.

Thursday, November 19, 2009

Is the Fed's independence under threat?

House panel approved auditing on the Fed (source: WSJ)


Becker: Will We Go the Way of Japan?

Gary Becker says no, unless US government policies discourage growth

Japan has had a very slow rate of growth in its GDP since 1991, averaging just a little over 1 percent. Given this slow growth, and the government's continued failed efforts to prop up their economy by running large fiscal deficits, the ratio of government debt to its GDP has risen from only about 50% in 1995 to by far the highest ratio in the developed world, at about 170% in 2008. Estimates indicate that it could rise to over 200% by next year as the budget continues to spill red ink, and may grow even much further during the next decade. Such a large debt ratio has been manageable so far only because interest rates have been very low, at about a little over 1%. But these rates have recently been rising as concern is growing about the fiscal solvency of the Japanese government.

The danger of any explicit default on this debt is minimal since it is all denominated in the Japanese currency, the yen. Any country can reduce the real value of a debt burden in its own currency by printing money to finance a good chunk of its government spending, and thereby create inflation that destroys part of the real burden of the debt. I do not expect that to happen in Japan unless the debt burden becomes intolerable down the road.

All this is background for comparisons between Japan and the US. As Posner indicates, the American ratio of debt to GDP is now about 50%, where Japan was in 1995. It is also rising rapidly as the government continues to increase its spending on banks, the stimulus package, likely also on health care, maybe subsidizing employment of the unemployed, subsidizing mortgages, and in many other ways. The ratio of federal government spending to American GDP was quite stable at about 20% for about 40 decades, but this ratio has been rising rapidly during the past year, and it is beginning to approach 30%. The government debt is not yet a great burden because, as in Japan, interest rates are low, so that annual interest payments on the debt is not a sizable fraction of total government spending.

It is unlikely that US government spending will decline during the next decade, even though some of the short term spending on banks and stimulating the economy will probably fall sharply. Any spending declines from these directions will be more than replaced by much greater spending on Medicare, Medicaid, and other government financed health programs, on social security, and on various other entitlement programs. The direct impact on the debt burden of such budget deficits can be reduced only by higher taxes or inflation. Eventually, I do expect much greater inflation in the US. The Obama administration has also been vocal about its plan to raise taxes, especially on higher income persons, as soon as the recession is clearly over and the economy is growing again. That would be a serious mistake.

The best solution to reducing the real burden of the public debt is neither inflation nor higher taxes, but more rapid growth of the American economy. This involves lower, not higher, taxes on investments and incomes of small and large businesses. It also requires greater concern about the fact that the US is falling behind many other countries in the proportion of its young population, especially males, who receive a higher education. In addition, much greater attention needs to be paid to correcting the depressing statistic that the fraction of boys who drop out of high school has been stuck at about 25% for several decades, even though the economic and other benefits of finishing high school and going to college have risen dramatically. To its credit, the Obama administration has given high priority to improving the K-12 performance of American students, especially those from minority backgrounds.

In effect, the desirable policies to stimulate growth involve a retreat from the anti-business rhetoric that pervades Congressional Democrats and some of the top players in the executive offices, and a more pro-consumer and pro-business mentality. It is necessary to maintain the minimalist anti-trust policy that developed during the 1980s and 1990s under Democratic as well as Republican administrations, to retreat from the policy that banks and other businesses, such as GM, cannot be allowed to fail when they are mismanaged.

Desirable policies also include the elimination of efforts to restore union power in the private sector, and resistance to the desires of some members of Congress to have the US retreat from a free trade policy> They also want to impose onerous regulations on businesses of all kinds, especially the more successful ones. I am perhaps particularly disturbed by the anti-immigration rhetoric of leading members of Congress since immigrants have contributed so much to the dynamism of the American economy and society.

Sizable advances in productivity and the resulting sharp economic growth can ease the burden of growing government spending, and prevent anything like the expanding debt to GDP ratio and stagnation of the Japanese economy. Can the US do it? Certainly! Will the US do it? Not with the present composition of Congress, and with the tendency of the President to allow some of the more destructive members of his political party to get their way.

Wednesday, November 18, 2009

What gold price is telling us

Looking at gold future price, I have become more worried about the US dollar lately. Are we going to have 1971-collapse of US dollar again? The sharp drop of US dollar and China potentially losing a huge chunk of its foreign reserve value remain to be the biggest risk in the system.

Guess I need to be more imaginative in this wildly uncertain world.

(click to enlarge)
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Monday, November 16, 2009

Obama's town hall meeting in China

China and the US: adversaries or friends?

Unfortunately, Obama's speech was censored in China.

Sunday, November 15, 2009

Compare retail sales in recessions

A very nice chart that puts current retail sales in the historical comparative perspective.

(click to enlarge; graph courtesy of bigpicture)

Hawks and doves inside the Fed

FT dissects the Fed:


Janet Yellen, president, San Francisco Federal ReserveVote

Leading dove on the committee. A heavyweight former senior economic adviser in the Clinton White House who recently joined the Group of 30 leading global policymakers. Expects the recovery will "look something like an L with a gradual upward tilt". Believes the output gap exerts the dominant influence on prices and that "economic slack and downward wage pressure are pushing inflation below rates that are consistent with price stability"

Eric Rosengren, president, Boston Fed No vote

Has a special interest in the problem of banks "too big to fail". Thinks the recovery is "quite capable of falling short" of market expectations. Like Ms Yellen, is worried about inflation falling too low and fears premature tightening. Says rate policy should be based on the understanding that, "We need the economy to grow rapidly enough that unemployment falls substantially and inflation settles at a rate near 2 per cent"


Donald Kohn, vice-chair, Federal Reserve boardVote

The most influential figure after chairman Ben Bernanke, Mr Kohn is an anchor against pressure from hawks. Defends the dual mandate, and a focus on core inflation and the output gap, saying the Federal Reserve act requires the Fed to consider the "level of output relative to the economy's potential" alongside the inflation rate. Thinks "the persistence of economic slack" will keep inflation subdued and worries about inflation falling too low

William Dudley, president, New York Fed Vote

Succeeded Tim Geithner as head of the New York Fed, a pivotal position in the system. Sees a recovery "less robust than desired" because of headwinds from the banking sector. Distinguishes sharply between the "how" and "when" of exit strategy, and stresses that the Fed's preferred option is not to sell its portfolio of assets back into the market. Says, "We face meaningful downside risks to inflation over the next year or two"


Ben Bernanke, chairman, Federal Reserve boardVote

The chairman defines the centre of the committee and fashioned the radical "credit-easing" strategy that is now winding down. Shares the doves' belief that there is a large output gap that will put considerable downward pressure on inflation but puts more emphasis on inflation expectations as an autonomous factor. Last year edged the Fed away from an exclusive focus on core inflation; is not indifferent to dollar weakness

Daniel Tarullo, governor, Federal Reserve boardVote

An Obama appointment with close ties to the White House, he is an expert on regulation and leads the Fed's overhaul of financial supervision including bankers' pay. Has not taken sides in the debate over monetary policy. Says pay should be viewed as a "safety and soundness" issue, and wants to avoid a "formulaic approach" to achieving this. Favours stronger capital and liquidity requirements for banks and more co-ordinated bank supervision

Elizabeth Duke, governor, Federal Reserve boardVote

The former banker has remained relatively quiet in public on monetary policy, though she is an influential voice on the banking sector and credit trends. A few months ago she judged that the "decline in lending is not tremendously large relative to the experience of past business cycle downturns" and that the credit crunch was less intense than that of the 1990-91 recession thanks to massive policy interventions

Charles Evans, president, Chicago FedVote

Has gone further than others in putting a time frame on the first rate rise – "most likely to be towards the end of 2010/11" – though that assessment is not set in stone. Gives weight to the output gap and inflation expectations. Says "resource gaps remain substantial today. That's a significant mitigating factor against inflation pressures". Also sees inflation expectations as a "powerful determinant of inflation", the stability of which cannot be taken for granted

Dennis Lockhart, president, Atlanta FedVote

Centrist leaning recently towards the dovish, with fears about the underlying strength of the recovery. Notes that "both the data and anecdotal descriptions of ground-level reality are quite mixed", with foreclosures, unemployment, income and bank failures continuing "to disappoint". Is "particularly concerned about interaction among bank lending, small business employment" and commercial property, with small businesses reliant on credit from troubled banks

Sandra Pianalto, president, Cleveland FedNo vote

A centrist with dovish tendencies, she says: "We have a lot of ground to make up before we even get back to the levels of output seen in 2007". Sees "considerable slack" and "tangible evidence" that this will help keep inflation subdued. But still sees the inflation outlook as "uncertain". Why? Inflation concerns relating to the Fed's swollen balance sheet "must be taken seriously" even if policymakers think these concerns are misplaced

James Bullard, president, St Louis FedNo vote

Centrist leaning towards the hawkish, says uncertainty over inflation is "as high as it has ever been since 1980". Still sees a lingering deflation risk but, beyond that, an inflation risk. An independent thinker, he shares some positions with doves and some with hawks. Has little time for output-gap analysis – thinks the Fed should start tightening as soon as strong job growth resumes. Favours selling assets rather than raising rates to begin with

Narayana Kocherlakota, president, Minneapolis FedNo vote

Newcomer who took office only last month. No policy views yet expressed


Kevin Warsh, governor, Federal Reserve boardVote

The DC Fed's ambassador to Wall Street, he puts more weight than others on the upswing in financial markets as a "forward-looking sign of growth and inflation prospects". Is optimistic about a "positive feedback loop" between market strength and economic activity, but is watching asset prices carefully. Warns against waiting until the economy is back to normal before raising rates and says when the Fed tightens it may have to do so rapidly

Richard Fisher, president, Dallas FedNo vote

Former über-hawk, moving towards the centre. Thinks the recovery will look like "a check mark" with a slope "that is less than desirable and might possibly be repressed by an occasional pause". Worries that businesses will be slow to start hiring again. Says "inflation is likely to remain subdued for a time" but fears Fed guidance on rates may be fuelling the dollar carry trade, which could end in a disorderly adjustment in asset markets


Charles Plosser, president, Philadelphia FedNo vote

Thinks "the good news will increasingly outweigh the bad news" on growth and views unemployment as a "lagging indicator". Sees little near-term risk of inflation but "greater risk of high inflation in the intermediate to long term". Deeply sceptical about output gaps; says the crisis has hit potential output as well as demand. Troubled by the Fed's interventions in private credit markets and wants to get back to more rules-based policy

Jeffrey Lacker, president, Richmond FedVote

Prioritises inflation expectations and is sceptical about output-gap analysis – which he says "greatly underestimated inflation" in the 1970s. Fears ongoing Fed asset purchases will push bank reserves beyond desired levels at which point policy will become much more stimulative. Sees inflation as medium-term risk and wants Fed to tighten "when growth becomes strong enough and well enough established" – but admits it is not certain that this will come in 2010

Thomas Hoenig, president, Kansas City FedNo vote

Was first to raise the need for the Fed to tighten in a timely fashion in June, with the words "as the economy begins to recover, even at a modest pace . . . the current level of monetary accommodation will need to be withdrawn". Concerned about banks "too big to fail". Worries about excess reserves and appears keen to get away from near-zero rates. Says "moving from zero to one per cent, for example, is not tight policy"

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