Volcker

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Volcker

Post by boglerdude » Tue Oct 20, 2020 5:58 am

How would the PP do under another Tall Paul? https://www.youtube.com/watch?v=9hAwOOh-QAs

Trying to come to terms with earning nothing on bonds.
https://www.bogleheads.org/forum/viewto ... 0&t=326051
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Re: Volcker

Post by jhogue » Tue Oct 20, 2020 11:15 am

I remember how Volcker crushed inflation with high interest rates. It was great if you were saving dollars. Not so good if you were trying to take out a long term mortgage on a house.

I got my first money market fund from Dreyfus about 1979-1980. At its height, I think I was getting 20-21% on my monthly MMF statements. The dollar shot up in foreign exchange markets too.The Deutsche Mark/Dollar rate went from 2.0/1 to 3.0/1. Except for the Cold War, it was a nice time to be an American living in West Germany.
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Re: Volcker

Post by vnatale » Tue Oct 20, 2020 1:01 pm

jhogue wrote:
Tue Oct 20, 2020 11:15 am
I remember how Volcker crushed inflation with high interest rates. It was great if you were saving dollars. Not so good if you were trying to take out a long term mortgage on a house.

I got my first money market fund from Dreyfus about 1979-1980. At its height, I think I was getting 20-21% on my monthly MMF statements. The dollar shot up in foreign exchange markets too.The Deutsche Mark/Dollar rate went from 2.0/1 to 3.0/1. Except for the Cold War, it was a nice time to be an American living in West Germany.
At the time I taking the daily receipts for our business and then writing a check to a money market fund. That only lasted for a few weeks as two of our bankers took me out to lunch to explain to me that I was technically "kiting" since I was writing checks against deposits that had not yet become available.

Vinny
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Re: Volcker

Post by boglerdude » Wed Oct 21, 2020 9:44 pm

What mechanism did he use to raise rates
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Re: Volcker

Post by vnatale » Wed Oct 21, 2020 10:53 pm

boglerdude wrote:
Wed Oct 21, 2020 9:44 pm
What mechanism did he use to raise rates
Paul A. Volcker, Fed chairman who curbed inflation by raising interest rates, dies at 92


https://www.washingtonpost.com/local/ob ... story.html



Putting brakes on inflation
In 1979, when President Jimmy Carter was looking for a new Fed chairman, prices were spiraling upward, almost out of control.

A vicious cycle was underway: Because prices had been rising rapidly in the recent past, workers demanded ever-higher wages.

As the nation’s central bank, the Federal Reserve was the agency best positioned to try to end that demoralizing cycle, but it would exact a cost.

To reduce inflation, the Fed would need to raise interest rates to choke off the flow of money into the economy, probably prompting much higher unemployment. For that reason, the previous two men in the job, Arthur F. Burns and G. William Miller, had moved only timidly in trying to combat inflation. Miller left the job after a single ineffective year as Fed chair.

AD

As Carter and his aides spoke with people in financial circles about potential nominees, Mr. Volcker’s name came up repeatedly. The president appointed Mr. Volcker, a decision that had been judged well by history but may well have cost Carter reelection in 1980.

Taking the job came at a personal cost for Mr. Volcker. He would have to take a 50 percent pay cut from his salary as New York Fed president, and his wife had to return to bookkeeping work to afford both their New York co-op and the small Foggy Bottom apartment. Mr. Volcker commuted back to New York on the weekends.

Just two months after taking office, Mr. Volcker was ready to make the boldest move of his tenure. He called his Fed colleagues from across the country to Washington for a secret, emergency policy meeting on a Saturday. After hours of argument and debate, he steered the Federal Open Market Committee to change the entire framework the Fed would use to control the nation’s money supply.

The Fed then, and now, set a target for short-term interest rates and then bought and sold securities to ensure that interest rates actually settled at that level. When the Fed wants to slow the economy and choke off inflation, it raises its interest rate target. Mr. Volcker concluded in October 1979 that the Fed needed to change strategies and start targeting the actual amount of money floating around in the economy.

Angry reaction

The media called it the “Saturday Night Special,” and it most certainly put a bullet in the U.S. economy. The unemployment rate that month was 6 percent. By the time Mr. Volcker’s campaign of monetary tightening was done, in 1982, joblessness would peak at 10.8 percent.

This, understandably, led to intense pressure on Mr. Volcker and the Fed to relent, to hold off on the tight-money policies that had caused the deepest recession since World War II.

With interest rates over 20 percent, home-building activity practically came to a halt. People who worked in construction trades mailed two-by-four pieces of lumber to Mr. Volcker in protest. Auto dealers mailed keys to the cars for which there were no buyers. Farmers drove their tractors around the white marble Fed building.

A man with a sawed-off shotgun and other weapons, who later told police he was angry about high interest rates, charged past guards at the Fed’s building and nearly made it to the boardroom of the central bank before a guard tackled him. (After the incident, Mr. Volcker was assigned a full-time security detail for the first time.)

Mr. Volcker’s routine appearances on Capitol Hill became an exercise in lawmakers of both parties attacking him. The economic downturn caused by Mr. Volcker’s tight-money policies was surely a significant factor in former California governor Ronald Reagan’s landslide victory over Carter in the 1980 presidential election. Both Reagan and Carter expressed public support for the policies, even as many of their aides assailed them behind the scenes.

But Mr. Volcker, confident in his analysis that this was the only way to rid the nation of double-digit inflation for good, ignored the calls. It was successful: Inflation was about 12 percent over the 12 months before Mr. Volcker became Fed chairman. By 1986, it was down to around 2 percent.

Once that vicious cycle of out-of-control inflation expectations was ended, Mr. Volcker relented and cut rates, unleashing an economic boom that would continue with few interruptions for more than a quarter century.
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Re: Volcker

Post by pp4me » Thu Oct 22, 2020 3:13 pm

Volcker helped my parents double their retirement nest egg in the course of only a few years just by keeping their money in CD's. Since they continued following that same strategy until the very end they were pretty fortunate that this happened because I'm sure they would have ended up running out of money a lot sooner than they did.

On the other end of the spectrum I moved to Florida with my family in 1981 and buying a house was close to impossible. We ended up buying a new double-wide in a mobile home park and the interest rate on the loan was 19.5%.

I'd have to say those were probably the bleakest economic times I've seen in my lifetime.
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Re: Volcker

Post by vnatale » Thu Oct 22, 2020 5:51 pm

pp4me wrote:
Thu Oct 22, 2020 3:13 pm
Volcker helped my parents double their retirement nest egg in the course of only a few years just by keeping their money in CD's. Since they continued following that same strategy until the very end they were pretty fortunate that this happened because I'm sure they would have ended up running out of money a lot sooner than they did.

On the other end of the spectrum I moved to Florida with my family in 1981 and buying a house was close to impossible. We ended up buying a new double-wide in a mobile home park and the interest rate on the loan was 19.5%.

I'd have to say those were probably the bleakest economic times I've seen in my lifetime.
Two things I remember from all those times.

In the midst of it I took a month's vacation wherein I actually went somewhere, which about equals the amount of time I've done the same since.

Inflation had been so rampant for long a time we were trying to come up with new accounting measures to do financial accounting as the old style accounting no longer seemed to be telling an accurate story. However those discussions came to an end once Volcker completed his job.

Vinny
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Re: Volcker

Post by ppnewbie » Fri Feb 26, 2021 2:30 am

I think even Volcker commented that there was no way rates could be raised like they were. The federal budget to service the debt would destroy the government. The market crash would potentially leave seventy million people retiring in abject poverty with an epic stock market crash (401ks and pensions would be finished). Anyone with variable rate mortgages would go bankrupt. The 1.5 million California shack would once again be priced like an actual shack. Every zombie overly levered company would die.

Also I think Volcker had to do several bouts of radical interest rate hikes before he could tame inflation.

That’s is some serious doom porn!
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Re: Volcker

Post by jalanlong » Mon Mar 01, 2021 6:47 pm

ppnewbie wrote:
Fri Feb 26, 2021 2:30 am
I think even Volcker commented that there was no way rates could be raised like they were. The federal budget to service the debt would destroy the government. The market crash would potentially leave seventy million people retiring in abject poverty with an epic stock market crash (401ks and pensions would be finished). Anyone with variable rate mortgages would go bankrupt. The 1.5 million California shack would once again be priced like an actual shack. Every zombie overly levered company would die.

Also I think Volcker had to do several bouts of radical interest rate hikes before he could tame inflation.

That’s is some serious doom porn!
So do we have “cheap money” forever? How does it end?
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Re: Volcker

Post by ppnewbie » Mon Mar 01, 2021 7:10 pm

Here is a good one:

https://www.youtube.com/watch?v=E7r7nTVmdLc

I think Mike Maloney first published this little gem a few years ago in his Hidden Secrets of Money series.
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Re: Volcker

Post by Mark Leavy » Mon Mar 01, 2021 7:15 pm

jalanlong wrote:
Mon Mar 01, 2021 6:47 pm
ppnewbie wrote:
Fri Feb 26, 2021 2:30 am
I think even Volcker commented that there was no way rates could be raised like they were. The federal budget to service the debt would destroy the government. The market crash would potentially leave seventy million people retiring in abject poverty with an epic stock market crash (401ks and pensions would be finished). Anyone with variable rate mortgages would go bankrupt. The 1.5 million California shack would once again be priced like an actual shack. Every zombie overly levered company would die.

Also I think Volcker had to do several bouts of radical interest rate hikes before he could tame inflation.

That’s is some serious doom porn!
So do we have “cheap money” forever? How does it end?
What am I missing? It seems like inflation is the only way out.

1) Inflation reduces the effective debt.
2) Printing money is essentially a wealth tax that hasn't hit the general consciousness yet. So - cheap easy way to handle government spending.

Given that, I do understand that there is enormous pressure to keep rates low. I just don't know how to reconcile it.
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Re: Volcker

Post by Tortoise » Mon Mar 01, 2021 7:44 pm

If the Fed buys enough Treasury bonds with printed money, won't that keep rates low even if inflation is high?

I suppose if the Fed does that in the midst of high inflation, eventually they'll be buying almost all of the Treasury bonds since all other potential buyers would demand much higher yields, right?

How would that likely play out in the broader bond market and other financial markets? I'll keep thinking about it, but the logical conclusion of the entire sequence of events isn't yet obvious to me.
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Re: Volcker

Post by Mark Leavy » Mon Mar 01, 2021 7:53 pm

Tortoise wrote:
Mon Mar 01, 2021 7:44 pm
If the Fed buys enough Treasury bonds with printed money, won't that keep rates low even if inflation is high?

... and other good points ...
Thank you. I keep forgetting about both sides of the scale.
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Re: Volcker

Post by Kbg » Tue Mar 02, 2021 11:47 am

Mark Leavy wrote:
Mon Mar 01, 2021 7:15 pm
What am I missing? It seems like inflation is the only way out.

1) Inflation reduces the effective debt.
2) Printing money is essentially a wealth tax that hasn't hit the general consciousness yet. So - cheap easy way to handle government spending.

Given that, I do understand that there is enormous pressure to keep rates low. I just don't know how to reconcile it.
We live in interesting times. Sometimes I think we make things overly complex. Let's assume, though unpopular to do so on the board, we just take the Fed at their word and by that I mean they are targeting 2% annual inflation. Just using those numbers in real terms, the government pays back 55% of anything it borrows for 30 years. In real terms, time is always on the borrower's side with a fixed rate loan. With interest rate suppression, which is clearly going on, the Fed is making the deal even better for the USG.

By definition, real assets are INFLATING at that same 2% and by extension any derivatives of real assets are HIGHLY LIKELY to be inflating at the same 2% rate.

Now to be clear the above is a big averaging exercise and applies at the macroeconomic level. Therefore, there will be micro deviations from the macro.

If you are playing long ball then the strategy of how to deal with this is pretty straight forward...hold real assets. This is pretty much why gold has held purchasing power very consistently over centuries (huge short term variations notwithstanding). It's a real asset. If one is hugely concerned with inflation then of the PP elements stocks and gold are where its at. Outside the PP, real estate, commodities, collectibles etc. should appreciate (inflate) along with whatever the inflation rate ends up being over a long timeframe.
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Re: Volcker

Post by doodle » Tue Mar 02, 2021 10:12 pm

Kbg wrote:
Tue Mar 02, 2021 11:47 am
Mark Leavy wrote:
Mon Mar 01, 2021 7:15 pm
What am I missing? It seems like inflation is the only way out.

1) Inflation reduces the effective debt.
2) Printing money is essentially a wealth tax that hasn't hit the general consciousness yet. So - cheap easy way to handle government spending.

Given that, I do understand that there is enormous pressure to keep rates low. I just don't know how to reconcile it.
We live in interesting times. Sometimes I think we make things overly complex. Let's assume, though unpopular to do so on the board, we just take the Fed at their word and by that I mean they are targeting 2% annual inflation. Just using those numbers in real terms, the government pays back 55% of anything it borrows for 30 years. In real terms, time is always on the borrower's side with a fixed rate loan. With interest rate suppression, which is clearly going on, the Fed is making the deal even better for the USG.

By definition, real assets are INFLATING at that same 2% and by extension any derivatives of real assets are HIGHLY LIKELY to be inflating at the same 2% rate.

Now to be clear the above is a big averaging exercise and applies at the macroeconomic level. Therefore, there will be micro deviations from the macro.

If you are playing long ball then the strategy of how to deal with this is pretty straight forward...hold real assets. This is pretty much why gold has held purchasing power very consistently over centuries (huge short term variations notwithstanding). It's a real asset. If one is hugely concerned with inflation then of the PP elements stocks and gold are where its at. Outside the PP, real estate, commodities, collectibles etc. should appreciate (inflate) along with whatever the inflation rate ends up being over a long timeframe.
I just wonder how you get inflation without rising wages...yes, I know they are talking 15 an hour minimum wage...we'll see if that passes.Even still, at 15 an hour once you back social security, medicare, health insurance, fed and state taxes out you are left with just enough to rent a small apartment, food on table, and maybe have a car. And if 15 an hour does pass you can guarantee that the robotification/automation of the labor force will go into full swing as well as reduced hiring especially among small and medium business...more deflationary pressure to add to our already deflationary demographic trends and a stock market and real estate market that is looking toppy combined with savings that yield nothing and a post covid environment where many small and mid sized business will go under.

I'm not convinced we are going to see inflation anytime soon.
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Re: Volcker

Post by doodle » Tue Mar 02, 2021 11:13 pm

I'll add that we find ourselves in a weird time because we have a system that through technology is massively deflationary, while at the same time having an economic system that is based around consistent inflation. It's like the two don't mix very well and in many ways trying to force the square peg into the round hole is exacerbating social economic issues. All of the money printing that is happening for example in an effort to induce inflation is driving up asset prices which is increasing wealth disparity even more. Rising housing and land prices don't make us better off anymore than rising clothing and food prices do.

In fact, it's the same with jobs. Ideally we are creating all this efficient technology so we can work less...yet everyone is fixated on having more jobs and more work. I don't get it.
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Re: Volcker

Post by Kriegsspiel » Wed Mar 03, 2021 7:35 am

doodle wrote:
Tue Mar 02, 2021 10:12 pm

I just wonder how you get inflation without rising wages...yes, I know they are talking 15 an hour minimum wage...we'll see if that passes.Even still, at 15 an hour once you back social security, medicare, health insurance, fed and state taxes out you are left with just enough to rent a small apartment, food on table, and maybe have a car. And if 15 an hour does pass you can guarantee that the robotification/automation of the labor force will go into full swing as well as reduced hiring especially among small and medium business...more deflationary pressure to add to our already deflationary demographic trends and a stock market and real estate market that is looking toppy combined with savings that yield nothing and a post covid environment where many small and mid sized business will go under.

I'm not convinced we are going to see inflation anytime soon.
doodle wrote:
Tue Mar 02, 2021 11:13 pm
I'll add that we find ourselves in a weird time because we have a system that through technology is massively deflationary, while at the same time having an economic system that is based around consistent inflation. It's like the two don't mix very well and in many ways trying to force the square peg into the round hole is exacerbating social economic issues. All of the money printing that is happening for example in an effort to induce inflation is driving up asset prices which is increasing wealth disparity even more. Rising housing and land prices don't make us better off anymore than rising clothing and food prices do.
You could have inflation without rising wages with UBI/welfare state. For a short time, I guess, because I doubt people will keep lending money to our government to keep that scheme going. It would seem to me that the owners of productive companies would capture all of that, but people who's productivity didn't match the increased money supply (and therefore, their wages remained stagnant) would see their standard of living decline, Iron Law-style.
In fact, it's the same with jobs. Ideally we are creating all this efficient technology so we can work less...yet everyone is fixated on having more jobs and more work. I don't get it.
As long as there are scarce goods, we'll have a way of determining who gets them. I think Keynes was spot on though. If people want to live at an early-20th century technological level, they don't have to work more than 15 hours a week.
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Re: Volcker

Post by Kbg » Wed Mar 03, 2021 8:36 am

I've posted many times on the board, monetarily inflation requires both the amount money and velocity (turnover) of money to be moving in the right directions to create inflation. For whatever reasons velocity has been going down the entire time thus, no inflation. It takes actual real scarcity of tangible goods to create hyperinflation.

I'm very HB in that I don't think I can predict, but I can observe and see what is going on.

Right now we don't have much inflation going on (though housing does seem to be going pretty crazy as of late in many places...and at least where I live that is due to actual scarcity. There is a huge deficit of housing to need.)

I've also stated I think there is a Nobel Prize in Economics to the current/future historian who figures out and explains what is going on right now.

My pet theory is general population decline, but I've no clue.
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Re: Volcker

Post by whatchamacallit » Wed Mar 03, 2021 9:28 am

I think you are right about needing scarcity to have inflation.

The CPI isn't necessarily measuring scarce assets.

There is plenty of inflation in assets that are scarce and desired.

Now that basic needs are pretty easy to meet, desired assets are things that are perceived to provide future income.

So while there is deflation in basic needs by technology advances.

There is inflation in scarce luxuries including income generating assets.
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Re: Volcker

Post by I Shrugged » Wed Mar 03, 2021 9:35 am

doodle wrote:
Tue Mar 02, 2021 11:13 pm
I'll add that we find ourselves in a weird time because we have a system that through technology is massively deflationary, while at the same time having an economic system that is based around consistent inflation. It's like the two don't mix very well and in many ways trying to force the square peg into the round hole is exacerbating social economic issues. All of the money printing that is happening for example in an effort to induce inflation is driving up asset prices which is increasing wealth disparity even more. Rising housing and land prices don't make us better off anymore than rising clothing and food prices do.

In fact, it's the same with jobs. Ideally we are creating all this efficient technology so we can work less...yet everyone is fixated on having more jobs and more work. I don't get it.
Very good points.
It’s not too hard to imagine some kind of big crash. And upheaval.
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Re: Volcker

Post by sophie » Wed Mar 03, 2021 10:16 am

A big factor in inflation is wage increases.

A cornerstone of Democratic Party policy is to throw the borders wide open and grant citizenship to something on the order of 20M people already in the US illegally. Whether this is on purpose I don't know, but it is bound to result in a large oversupply of unskilled labor at the low echelons of the wage scale. This is going to depress the entire wage scale up to middle class levels, at least. The $15 minimum wage won't affect this trend, as it will result in reduction of available jobs at that level, which means fewer opportunities to advance to higher wages - making things even worse.

Depressed wages and job reduction limit how far prices can increase before demand drops below supply, right?? There are other, inflationary effects of the above policies (like, increased state/local taxes and health care costs), so I don't know which of these forces is going to win and thus whether we will see an inflation or not.

So buy bonds along with your gold!
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Re: Volcker

Post by vincent_c » Wed Mar 03, 2021 10:54 am

Kbg wrote:
Wed Mar 03, 2021 8:36 am
For whatever reasons velocity has been going down the entire time thus, no inflation.
Recently I came across an argument for low velocity because of low bond yields and higher velocity will come with higher bond yields.

At first it seemed to go against my understanding, but what I think the argument was pointing to is that higher bond yields is a symptom of the underlying rise in velocity of money. Basically the demand for bonds fall vs supply as people spend money rather than hoard it.

This reason was the explanation given to why Japan was able to print so much money but yet had deflation.

What do you guys make of this?
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Re: Volcker

Post by vincent_c » Wed Mar 03, 2021 11:00 am

doodle wrote:
Tue Mar 02, 2021 11:13 pm
technology is massively deflationary
I used to take this as a given as well, and I pointed to Moore's law as an underlying reason for this. But Moore's law is hitting a physical boundary and so at least from computing power technology we can start to see a ceiling.

Of course, improvements in efficiency in doing anything will increase productivity and thus improve the quality of life for everyone in the long run, but I'm starting to question the premise that technology is massively deflationary at least in terms of being able to drive bond yields lower in the long run.
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Re: Volcker

Post by vnatale » Wed Mar 03, 2021 12:09 pm

vincent_c wrote:
Wed Mar 03, 2021 11:00 am

doodle wrote:
Tue Mar 02, 2021 11:13 pm

technology is massively deflationary


I used to take this as a given as well, and I pointed to Moore's law as an underlying reason for this. But Moore's law is hitting a physical boundary and so at least from computing power technology we can start to see a ceiling.

Of course, improvements in efficiency in doing anything will increase productivity and thus improve the quality of life for everyone in the long run, but I'm starting to question the premise that technology is massively deflationary at least in terms of being able to drive bond yields lower in the long run.


Finally? I thought I'd been reading almost forever that the boundary would soon be hit.
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Re: Volcker

Post by Xan » Wed Mar 03, 2021 12:11 pm

vnatale wrote:
Wed Mar 03, 2021 12:09 pm
vincent_c wrote:
Wed Mar 03, 2021 11:00 am
doodle wrote:
Tue Mar 02, 2021 11:13 pm
technology is massively deflationary
I used to take this as a given as well, and I pointed to Moore's law as an underlying reason for this. But Moore's law is hitting a physical boundary and so at least from computing power technology we can start to see a ceiling.

Of course, improvements in efficiency in doing anything will increase productivity and thus improve the quality of life for everyone in the long run, but I'm starting to question the premise that technology is massively deflationary at least in terms of being able to drive bond yields lower in the long run.
Finally? I thought I'd been reading almost forever that the boundary would soon be hit.
If true, it's probably more like approaching an asymptote than "hitting" a boundary.
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