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[Editor's note: below is the video and transcript of a panel discussion featuring Steve Moore of the Wall Street Journal, Rep. Ed Royce and author David Newton. The discussion was part of the David Horowitz Freedom Center's annual Restoration Weekend, held Nov. 18-21, 2010 in Palm Beach, Florida.]
For Part II of the video, click here.
Introduction: There’s a pretty vigorous debate going on about not only stimulus and bailout and deficit spending, but about the Fed’s printing of money and quantitative easing. We have a superb panel to offer some clear thinking about both fiscal and monetary policy, about spending, federal and state budget deficits, and hopefully a new policy path aimed at economic growth and recovery and job creation with a Republican House of Representatives.
The people in this room follow closely unemployment statistics, inflation data, interest rates, trade deficits, your tax rates, and especially housing figures, and equities and bonds, including municipal bonds potentially at risk; the price of gold. Who knows what the price of gold is? About half of you do, yeah. And business and consumer confidence numbers are closely watched, too.
So whither Obamanomics, what can we expect from the Fed, and how will the GOP House impact the economy? Let’s start with one of America’s leading economists — very popular, very articulate. Steven Moore is a member of The Wall Street Journal editorial board. He has a BA from the University of Illinois with a Master’s from George Mason University — our friend, Steven Moore.
Steven Moore: Morning, folks. It is a pleasure to be here. You know, I haven’t been able to stop smiling since Election Day. I’ve just been in the best mood. And I want to thank David Horowitz for bringing me to this conference.
Just one story about the election. You know, I was over at Fox News that night, just having a lot of fun watching the returns coming, and about 10 o’clock — I’m from Chicago, and so I couldn’t resist — as the returns from the East Coast were coming in, I called my mom, who still lives in Chicago. I said, “Mom! It’s a great night here on the East Coast. It looks like everything’s turning red and Republican.” And my mom said, “Yeah, Steve, here in Chicago, it’s such a good night, even the dead people are voting Republican.” That is a good election.
Let me just cut right to the chase here. I think that everything that we have done in Washington over the last two years to deal with the economic crisis has been exactly the wrong thing to do. In other words, they’re batting a thousand. And we have made this recession much deeper and much longer than it would’ve been if we had done nothing, let alone done the right thing.
And that’s, I think, the real tragedy of the last two years is, you know, if you compare this business cycle with the Reagan business cycle, when we cut tax rates in 1981. At this stage of the economic cycle, we have this measly, pathetic 1.6 to two percent growth. At this stage of the business cycle after the Reagan tax cuts — which, by the way, was a deeper recession than what we faced in 2008 — the economic growth rate was 8.2 percent.
So when you talk about reducing the debt — and reducing the debt requires a lot of economic growth– we’re just not getting that. At 1.6 to two percent growth, you’re not even creating enough jobs to keep up with the pace of the labor force. So we’re going to need about 250,000 to 300,000 jobs a month for just the next three years just to get the unemployment rate down to eight percent. So we’ve got a huge rebuilding job to do.
And to put it in perspective about what’s happened — and by the way, I’m not making a partisan point here. Because actually, some of the initial mistakes that were made in terms of dealing with the crisis were done in the last months of the Bush Administration. I have an editorial that’s coming out next week that I’ll give you a sneak preview of, where I just added up all the cost of all these programs that we’ve done — every dingbat program that we’ve seen in the last two years, starting with, you know, the $700 billion TARP program. And then, of course, we had the $800 billion stimulus plan, and then we had the bailout of GM and Chrysler, and then we had the Cash for Clunkers program, and then we had the mortgage modification program.
We’ve paid people about $200 billion in terms of renegotiating their mortgages. I have this wonderful bumper sticker on my car that says “Honk if I paid your mortgage,” and people are just honking at me everywhere I go.
If you add up all of the cost of these programs, it’s about $2 trillion. $2 trillion. Now, to put that number in perspective — with $2 trillion, George Bush, two years ago — because this is about the two-year anniversary of the economic crisis — could’ve suspended the personal income tax for two years.
Now, think about that. Think about where the economy would be today if we had declared as a nation that no business and no worker has to pay income tax until we’re out of this economic crisis. We wouldn’t be anywhere near a 10 percent unemployment rate if that had happened. And that’s the real tragedy of this. It’s not to me that we spent $2 trillion; it’s that we spent $2 trillion and we’ve got nothing in return for it, except, you know, windmills and solar paneling and, you know, high-speed rail systems that have almost zero long-term payoff.
Did you see that Joe Biden — I’m not making this up — about three or four weeks ago, said that the economic stimulus plan has worked “beyond his wildest dreams?” I saw about three weeks ago this great cartoon where President Obama is carrying Joe Biden around like he’s a piece of lumber. And he goes up to this window, and it says “Cash for Clunkers.” That’s the way I feel about Joe Biden.
But in any case, if you look at all these programs — and then you have to ask yourself the question, why didn’t it work? If we’ve learned anything in the last two years, right, it’s that Keynesian economics doesn’t work. We tried this in the 1930s; it didn’t work then either. After 10 years of government spending, the unemployment rate was still at 12 percent in 1940.
And so then the question becomes — that I just want to spend a couple minutes with you on — is why doesn’t it work? Why is it that all of these economists in Washington believe in this fairy tale that when government spends money it creates wealth? And the answer is, to put it real simply — Milton Friedman taught us this—that all economics comes down to this one insight. Remember, Milton Friedman taught us this — there’s no such thing as a free lunch. Right? There’s no such thing as a free lunch.
What does that mean? What that means is — and I think there’s not any kids in this room, so I can say this to an adult audience — there’s no tooth fairy out there. Right? If the government spends a dollar, the dollar has to come from somewhere.
So let’s discuss how the government can get money to spend it. There are three ways the government can get money to spend it. What’s the first way it can get money to spend it? It can tax us, right? It can literally reach into my wallet. It can take out this $20 bill, and it can give it to you.
So now you have the $20, right? And the government says this is wonderful, because there’s going to be a multiplier effect. You’ve heard this — you know, the term, there’s a multiplier effect. You’ve got the $20. You can go out and spend it. And you can take it to McDonald’s, or you can go to Wal-mart, or get your nails done, or whatever it is you want to do with that $20. And those McDonald’s workers have money. And for every dollar that they take from me and give to you, there’s maybe $3 of economic activity. That’s the idea here.
Now, where does it go wrong? What are they leaving out of the equation? Well, I’m $20 poorer, and he’s $20 richer. Right? So can you see, at best, this is a zero-sum game? There’s no additive to the economy. In fact, I would make the case that under this scenario, it’s a negative-sum game. Because I worked to get the money, and he stole it from me. Right? And that’s not a way to create wealth. I will take the $20 back now. I need that to get home.
So what’s the second way they can get the money? They can borrow it, right? They can borrow it. And in fact, the federal debt now is about $13 trillion. In the last two years, we’ve added $3 trillion to the debt. And now you have to ask the question, does that add to wealth? And does that add to job creation when the government borrows?
Well, yes, we put money into the economy. But guess what? What are they leaving out of the equation? Somebody has to buy the bonds. Right? There’s no additive to the economy. If the federal government puts $3 trillion into the economy by borrowing, you’re taking $3 trillion out because people have to buy $3 trillion of bonds. Does that make sense?
And so that — and by the way, do you know who owns the most bonds of any entity in the world? China does. And you know what China’s doing right now? They’re selling bonds; they’re not buying them. In fact, China has reduced its portfolio. Then you have to ask the question, if China isn’t going to borrow them, who? If China isn’t going to lend us $10 trillion over the next 10 years, which is the amount that we’re expected to borrow, where’s that money going to come from?
And I am a big believer — the one prediction I’ll make to you today, just as an economist — interest rates and inflation are going up. There just almost no question about it because of this insane fiscal policy.
And then of course, the third way they can get the money is by printing it. And of course, that’s what’s happening in spades right now. That’s what QE2 is all about. QE2 is just a fancy word for saying that what we’re doing right now is we’re monetizing our debt. Right? We’re basically having — the Treasury Department is issuing debt, and the Federal Reserve Bank is now buying the debt. And how does the Federal Reserve Bank get the money to buy the debt? They print it.
And so this is, I think, one of the scariest things. I call this, you know, the Argentina, Bolivia and Mexico model of economic development, right? Because that’s what those countries do — they print money every time they get into this kind of crisis.
So I’m very nervous about this. And I would say that the reason people aren’t even angrier than they are is because the numbers are so gigantic now we can’t even comprehend them.
You know, when I was at one of the Tea Party rallies this year, somebody made the case — somebody had this bumper sticker on their car. And it said, “Thank God Barack Obama doesn’t know what comes after a trillion.” And I thought, you know, whew! Thank God he doesn’t know what comes after. What is it, a gazillion? I don’t know. He’ll probably be using these numbers in the budget soon. And so these are really frightening numbers.
Another bumper sticker — another guy who was at one of these Tea Party movements, the Glenn Beck rally — he had a baby stroller with a little three-year-old girl in the stroller. And she had a little sign around her neck, and it said, “Do I look like I have $4 trillion?” I don’t think she does.
And so, the point is, these numbers are just absolutely gigantic. By the way, a trillion dollars — anybody know how many zeros there are in a trillion?
Unidentified Speaker: Twelve.
Steven Moore: Right. Twelve zeros. $1 trillion is a million million dollars. We will borrow more money in the next 10 years — you heard Sen. Jeff Sessions talk about this last night — that $10 trillion we’re expected to borrow under the Pelosi budget — that’s more money than the United States government borrowed from 1776 through 2005. That’s pretty frightening, isn’t it?
So these are gigantic problems. But the solution to this is very clear. We have to grow the economy much more rapidly, and we have to cut the spending. And of course, it goes without saying, we have got the three most important words in Washington — repeal Obama Care. Right? Repeal Obamacare. We can’t make any headway on this without that.
A word on the tax bill — I think right now we’re in a kind of fragile economic recovery. You know, two percent is pretty measly; it beats, you know, not growing at all. But I will say this — first of all, what Nancy Pelosi did when she left to campaign without telling any American worker, any American ambassador or any American business what the tax rates are going to be starting on January 1st, that was — I’ve been in Washington for 28 years — I think that’s maybe the most irresponsible thing I’ve ever seen. Would you agree with that? I mean, it’s unbelievable.
And we’re talking about not just individual income tax rates going up. We’re not talking about, you know, the personal rates which would go up from 35 to 41 percent. By the way, we shouldn’t even call them personal income tax rates. What these are really are small business profit taxes. And so we’re going to take a lot of money out of the backs of the small businesses.
But then capital gains goes up from 15 to 20 percent. And by the way, it’s not just 15 to 20. I don’t know how many of you followed this, but in the God-awful healthcare bill that we passed nine months ago — one of the ways we paid for that was a 3.8 percent investment tax surcharge. How many of you are aware that that’s in the bill? I didn’t even realize it was in the bill until after it passed. That means capital gains don’t go, from 15 to 20; they go 15, 20, 23.8 percent. That’s a 60 percent increase in the capital gains tax.
Now, you don’t have to be an economic genius to know that when you raise the capital gains tax, what does that do to the value of assets? They fall. Right? I mean, think about if these guys talked about putting 100 percent capital gains tax, what would happen to the value of stocks. You know, they’d fall to zero. So this will definitely depress the stock market.
And then, of course, you see the same thing with dividends. Dividends are going to go from 15 to 41, plus the 3.8 percent — so 15 to 41 to 45 percent. Can you think of anything dumber to do right now than that?
And then, of course, the other big one — are any of you following what’s happening with the death tax on January 1st? I mean, this is a big one. I mean, right now, we are — we just celebrated the 320th day of zero death tax in America. Right? You know what happens on January 1? All the way from zero to 55 percent, with only a $1 million exemption. Can you — first of all, can you imagine what nursing homes are going to be like for the next month? People literally are going to be throwing grandma out the window.
So you know, this is a kind of scary situation. We on the East Coast always say that George Steinbrenner picked a good year to die. But that’s a really serious one, too. Because the estate tax falls most heavily on small and family-owned businesses. So we’ve got to do something about that. I would favor — if I could wave a wand and just be the economic czar, what I would do is put in place the Steve Forbes flat tax. You want to see America get competitive? Do that.
Two other quick things, and then I’ll turn it over to the next panelist. One of the things we haven’t talked a lot about — because it seems like a problem that’s passed us by, but it hasn’t — is this Cap and Trade bill. And I’m very worried about what might happen in two weeks on Cap and Trade. It’s already passed the House. I could see them sneaking that through the Senate.
And by the way, I don’t want to be quoted on this publicly, but I’ll just say this, for this audience — I think that global warming is the greatest hoax of the last 100 years. And so, this is something that — they know [this]. This is not about reducing — but look, some of my best friends, some of the smartest people I know, do believe in global warming. So even if you’re one of those people, you know, who does think that this is a crisis, it doesn’t matter. Because Cap and Trade will do absolutely zero to reduce global temperatures.
And the reason it won’t is because — you know what I call Cap and Trade? The India and China Full Employment Act. Right? Because all that will happen is jobs will leave the United States, and they’ll go to these other countries, which is why — how many of you are from California in this room? What in the world were you people thinking? I mean, California actually passed its own Cap and Trade bill, so that they’re going to put a major energy tax on everything that’s produced in California? All that’s going to do is lead to jobs, you know, even leaving faster to places like Nevada and Tennessee and Washington State. So that’s a really bad one.
The last thing I’m going to say — because I think I’ve used up all my time — and this is the most important thing, that I do believe that the number-one issue for our country long term — what we have to be focusing on as a nation is this issue about what country is going to be the global economic superpower, you know, over the next 10 and 20 and 50 years.
For everyone in this room’s lifetime, there’s no question that the global economic superpower has been the United States. And we have been a force for good in this world. We’ve led in technology, we’ve led in, you know, job creation and innovation, but now we have for the first time in our lifetimes, an honest-to-goodness rival in China.
And some of you have heard me tell this story, but I want to tell it again. Because it’s an important one — it tells a lot about where we’re headed. It was about meeting with the Economic Minister of China. And this guy’s a big muckety-muck. He’s like the number four in the chain of command in Beijing. And one of the fun things about working at the Wall Street Journal is we have these interviews, these editorial board interviews, with these muckety-mucks from all these countries.
And so he came in, and he’s talking about, you know, all the incredible things that are happening in China. And by the way, what’s happened in China in the last 25 years is one of the great miracles of human history. I mean, this is a country that for thousands of years couldn’t even feed itself — starved to death 200 million people. Now, you know, they’re growing at 12 percent, they’re doubling their standard of living every 15 years. It’s just an amazing success story. And they’re not a completely capitalist country, as you just heard. But they are moving in a capitalist direction and a free market direction.
So anyway, the Chinese Minister said to us — he said that by the end of this year, 2010 — he said, We are going to surpass Japan. And we’re going to be the second-largest economy in the world.
By the way, did you all see that happen a few weeks ago, that China is now officially the second-largest economy in the world? To me, that’s the biggest economic story of the last five years. We better start paying attention to these people, right?
And so then he said something that really stuck in my craw. He said, basically — by our economic models — he said within 18 years, China is going to surpass the United States. He said, We’re going to catch you. And then he said, in a kind of haughty way — he said, Once we catch you people, we’re just going to speed by you and leave you in a cloud of dust. We’re just going to look at you through the rearview mirror as we speed right by you.
And you all don’t know me very well. But if you cut me, I bleed red, white and blue. So I couldn’t take this much longer. So I finally said, Sir, you know, what you’ve accomplished in China is a great miracle, and I really want to salute this. But not in my lifetime is China going to surpass the United States. And sir, the reason that’s not going to happen is because our Chinese are so much smarter than your Chinese. He didn’t like that very much.
One of the reasons we will remain number one is we are a much more innovative country than they are.
And so — but the reason I mention that story — and this is the last thing I’m going to say — the reason I mention I mention that story is, I actually left that room very frightened. Because China is focused like a laser beam on competitiveness. That’s all they think about. They are hyper-obsessed with how can they be number one in every single industry, whether it’s manufacturing, or aeronautics, or defense industries, or — you know, you just go on down the line — the information age — all of these things — they are strategically thinking about how they can be number one.
And the fault that I have with our political class in Washington — and, I’m sorry to say, this goes for both parties — is nobody is thinking strategically about what we have to do to fix the things that are broken to make sure that we’re number one. Yes, we have to fix our taxes, and we can’t go on with the highest corporate tax rate in the world. Yes, we have to fix our liabilities. Yes, we have to have an education system that’s world-class, where we’re graduating people with world-class educations, which we’re not doing. We have to fix all of these things, and do it soon.
And on an optimistic note, I will say this — we are going to fix these problems. Because what the American people said in this election is it ain’t working. Right? I mean, people didn’t — the American voters — didn’t fall in love with Republicans. Right? They just basically said, Whatever you guys are doing in Washington, it’s not working.
And I think we’re going to see — over the next five years, we’re going to see reforms in all of these institutions. And when we do we’re going to see the biggest economic boom you ever saw.
Moderator: Just on the California point, for one second — the reason some of us have longer faces than usual –the nation’s biggest and best state, the eighth-largest economy in the world, did choose the opposite tack. There were candidates talking about tax rates and job growth, and they got wiped out.
So there’s a movie being made in Los Angeles called “Battle LA.” And it is being made in not Los Angeles –but Shreveport, Louisiana. So Southern California’s in trouble.
From Southern California, our next speaker is Congressman Ed Royce, who’s a longtime principled conservative, representing the 40th District base in Orange County. He and his lovely wife, Marie, are longtime residents of Fullerton.
Royce’s priorities in Congress are protecting our homeland, supporting our troops and veterans, providing meaningful tax relief for workers, protecting the budget, and cutting excessive government spending. You’re ready?
Let me say one more thing about him. The Wall Street Journal editorialized this week as follows about Congressman Ed Royce — “We think the best choice to run Financial Service is California Republican Ed Royce, who was right all along about Fannie and Freddie.”
Congressman Ed Royce: Thank you.
I recently had the opportunity to co-chair our effort in the House with Battleground to fire Nancy Pelosi. And we criss-crossed the country, me and two others. We recruited candidates, and we raised money for this effort, trying to replace Nancy Pelosi’s votes with a new generation of Republicans who would be principled and would help us turn this country around.
And I wanted to share with you — we had a large sign that I would take with me that said, “Fire Pelosi now.” But Marie said she was conflicted. During the Democratic decision to pick their new leader, she had changed, I noticed, that sign to “Hire Pelosi now.” And we are not disappointed with the decision made by the Democratic — our Democratic colleagues. We’re not disappointed.
Because I think this is a time for us to philosophically lay out how we got here, and how we’re going to get out of this. And I think the clear ideological differences between people like Nancy Pelosi and Barney Frank — we now have the opportunity, with oversight, to look into the issues of how we got to where we are.
And I want to start just by observing that all spending bills originate in the House. I remember four years ago, when Pelosi became Speaker of the House. I thought we had a problem then, as a deficit hawk. We had a $162 billion deficit that year. Four years later, four years later, under her leadership, every spending bill originating in the House, we’re at roughly 10 times that level for the budget deficits.
And those deficits going forward are unsustainable. And part of this, of course, is the result not just of additional discretionary spending, which has been wildly enthusiastic — eight and a half percent increases a year on the Democrat side — but the stimulus bill, the new healthcare bill, will add $1 trillion going forward.
And the question, I think for us — and this is the question that our former Fed chairman, Alan Greenspan, asks — we are either going to get some control over this spending and bring it down, and show a glide path towards a balanced budget — we’re either going to do that now, or we’re going to face that bond crisis. And it is going to be very, very difficult, once we get into the crisis — as you can see in Greece or Ireland — to pull back out again.
And so, this is why we do need the leadership right now in the House to drive solutions. And this is why a lot of this has to be messaging. We must get out and explain to the American public how we got to where we are, and how we’re going to get out of it.
You’ve heard me, in the past, rail a lot against Fannie and Freddie in terms of the policies that were enacted in Washington. But I think one of the real questions is, how did those policies originally get put into place? And in that, I think we’re indebted to National Review and to the employees over at Fannie Mae, who are now telling us how ACORN helped change the underwriting standards in the United States.
National Review had a good piece going back to 1995, to Chicago, Illinois, when the individual in charge of training and in charge of the Annenberg Challenge, the Chicago Annenberg Challenge, was Barack Obama. And he was in charge of funding an effort at that time. In ’95, there was an article in the paper — Are you making dog food wages? Have you gone through bankruptcy? Don’t despair. There’s a way for you to own a house. And that way was to approach ACORN. And ACORN would get you into housing.
And at that time, in ’95, Barack Obama was heading up an effort — and I wanted to share with you the tactics used by ACORN at this time. They would flood bank lobbies with ACORN activists in order to get the point across to banks that they should lower their lending standards. They would show up at a banker’s home, on the front yard, to intimidate his family.
But banks were routinely explaining to them, We can only do so much. Because the secondary market is controlled by Fannie and Freddie. And they have this requirement of 20 percent down. So you want us to do zero-down payment loans, five percent-down payment loans? We just can’t do that.
By the way, the reaction of the Democrats was different to this than the reaction of the Republicans. Milt Martinez had 10 of these ACORN people show up on his front yard. And he said, Well, Monday, why don’t you come down to my office? Give me your information, give me your name. Course, he ran that by security. And Monday, when the 10 of them showed up, four of them he had arrested for the outstanding warrants.
But here’s what the Democrats did in Illinois. They went to Senator Dixon of Illinois. They said, We need to change the underwriting standards in the US, and Fannie and Freddie are standing in the way.
And as a consequence of those hearings, and as a consequence of actions by the Clinton Administration, they were able, over time, to get what they desired — zero-down payment loans here in the United States. And at the same time, of course, the Democrats, working with senior management or executives at Fannie Mae and Freddie Mac, were able to change a system so that they could be involved in arbitrage, overleveraging 100 to one here in the United States.
Now, there were a number of mistakes that the regulators made. And some of them you know — setting the interest rates too low in ’03, ’04, ’05. By the way, Ben Bernanke advanced that argument within the Fed that they should be lower. Because he was worried about deflation, which is the same argument he’s making now about QE2. Turns out he was wrong, and it caused an asset bubble in housing, as many economists had predicted, just as now we’re worried about that asset bubble in commodities and the stocks, right?
But the reality is this — one thing that the Fed did see coming was the systemic risk that had been created. One thing they did forecast was the collapse of the housing market. And they said it’s not just a collapse of the housing market we’re worried about. We’re concerned about the systemic risk to the wider financial system around the world. Because if housing goes down in the United States, with the way in which these portfolios are over-leveraged, with the fact that — well, it was groups like ACORN that went to the Clinton Administration and said, We want 30 percent of the portfolio to be in things like subprime. Well, what they wanted, actually, was low-income loans to people who couldn’t, you know, come up with a down payment.
But the reality was, what the administration came up with as an alternative to that was a system in which 50 percent of the portfolio basically was subprime and Alt A loans. $1.7 trillion, eventually, was guaranteed by Fannie and Freddie. And here was the worry of the Federal Reserve chairman — that that would all become worthless, that the investments that people had in Fannie and Freddie, including the banks’ investments, including the insurance — AIG had the insurance on these mortgage-backed securities — that all that would collapse. So it would be far more than just the collapse of the housing market in the United States and the collapse of Fannie and Freddie. It would be, in addition to that, the wider collapse in the financial system.
So you had the bubble. But on top of it, you had removed all market discipline. Going forward, we have to change this system from one of private profit — because it was very much in the interest of the executives — of people like Raines over at Fannie Mae and Freddie Mac — to take these risks. Because it was private profits and public losses.
The other issue that we have to confront going forward is the fact, as I say — the spending is unsustainable. And the beneficiary of the spending, for those of you who presume that it might be infrastructure — less than five percent of the stimulus bill went into infrastructure spending. The Greens were able to block that in the Congress. That is why you had so many moderate Democrats on transportation that refused to vote for the stimulus bill. Because that stimulus bill did one thing — it grew government. Just about every government agency, every government department — salaries and benefits went up as a consequence of that legislation.
So going forward, we’ve got a challenge. And what we have to begin with is repealing and replacing that healthcare bill. What we have to begin with is reversing course in terms of the budgets and take us back to where we were in ’08. And then we have to pass a long-term plan that puts us back to a glide path towards a balanced budget.
And I will add this — when Peter Orzog, Director of Office of Management and Budget in the Obama Administration, says after resigning from his position, do not raise taxes in a recession, it is time to listen to one of Obama’s former advisors. I concur. You cannot right now raise taxes on capital and investment in the United States and not expect it to have a very adverse effect. So that’s another action we have to take, and quickly, in order to make certain that those tax rates do not go up in January.
These are some of the issues that we’re going to have to face, and face them soon. But we need to move along with our panel. So thank you, again, very much for this conference.
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