Who really holds the gun?
By Darius Guppy
In two essays published elsewhere, I have attempted to show that the way in which bankers make money is conceptually identical to that employed by a man I befriended back in 1994, a master-counterfeiter to whom I have referred as "Tommy". [1]
While the counterfeiter manufactures money out of ink and paper, the banker does so out of thin air, an ability that has been bestowed on him by a key design feature of the financial system: fractional reserve banking, which enables banks to lend out many times more than they hold in reserves and, in addition, to charge interest on their virtual, newly invented money.
However, unknown to probably the great majority of people from whom the reality is deliberately withheld, while the ability of the counterfeiter to manufacture money is minimal next to that of the banks, the same can also be said of our so-called "sovereign" governments which create at most a mere 3% of the money - (the "legal tender") - currently in circulation.
While vast amounts of money are lent into existence by the banks by means of the fractional reserve system and then destroyed when (and if) loans are repaid, the interest on this newly created money remains un-destroyed, accumulating at a compounded rate that can never be matched by economic growth in the real world which by definition is constrained at a certain point by the Earth's physical limits.
Eventually a parallel virtual economy supplants the real one until the connection between money and what it is supposed to represent, namely society's wealth, is severed and the system implodes. In the interim the very few benefit at the expense of the very many. So too environmental and cultural despoliation ensue - sure indicators of economic malfunction and the degeneracy of a society which makes the creation of money (most often simply for the repayment of debt) its core value.
The remedies that have been put forward to deal with the financial crisis by Western governments in particular have not the slightest prospect of success, precisely because of their failure to address this, the most critical, the most overlooked flaw in our monetary system and the number one cause of our problems - capitalism's "invisible wrecking machine", as it has been called by the economic historian John King.
Nevertheless, "experts" attempt to placate the public by referring to a mythical "toolbox" from which can be drawn a variety of devices to avert disaster and keep what they argue is essentially a sound system intact, to the benefit of us all.
Needless to say, the expertise of those who, in Britain for example, include the current prime minister and the leader of the opposition; every member of the cabinet and shadow cabinet, together with every single politician; the governor of the Bank of England and the heads of all the large banks; the Financial Times and the Economist; financial gurus such as Richard Branson and Alan Sugar; the London School of Economics, the International Monetary Fund, the Organization for Economic Cooperation and Development and so on, should be considered with skepticism when we remember their collective failure to foresee the advent of perhaps the greatest economic tsunami to have hit humanity, right up until it struck.
Perhaps the chief problem has been that in the intensely closeted and theoretical world of such experts who have all basically been indoctrinated with the same economic theory, whether at school, university or in their professional lives, the limits implied by a universe in which there is order are not recognized, a sin which, ironically, an otherworldly monk, schooled in medieval times, but recognizing scale and proportion, could never have committed.
And what intellectual incoherence to argue as they do that the money supply should be constrained because the alternative is the inevitable dilution of the community's wealth, whilst simultaneously allowing the banking sector, where the money is actually created, to indulge in Caligulan orgy.
But the prognosis becomes even more depressing when we examine some of the tools which their "toolbox" contains.
Principally, there is "growth" - a non-starter when we appreciate that in the real world for non-ending exponential growth to compete with exponentially increasing indebtedness on computer screens is an impossibility.
The environmentalist Margrit Kennedy, for example, has described how a single penny invested at the birth of Christ at an interest rate of 4% would have bought a ball of gold equal to the weight of the earth by 1750 and 8,190 such balls by 1990. But with the interest rate increased only slightly, to 5%, then by 1990 it could have bought 2,200 billion of them.
Clearly, some form of massive debt repudiation will be required. Were Greece, for example, to privatize everything she possesses down to the country's last shoelace she could raise at most only a fraction of the amount she owes.
In fact, it is even more fundamental than this. For even if our governments were in possession of a magic wand that could wave away every single cent of debt, but the mechanism were to remain in place whereby the substantial majority of the world's money is manufactured by the banks, then we would rapidly find ourselves straight back at square one and we would need the wand again.
Moreover, there is a strong argument that what has been categorized as "growth" in the past few decades has not really been growth at all in any meaningful sense - especially if we peg such a concept to an improvement in the quality of our lives - but rather a cannibalizing of our assets, mis-described as profitability.
Next, are the low and declining interest rates - now zero in certain jurisdictions - that have constituted the ultimate get-out-of-jail card for roughly the past 25 years (during a bull market in bonds) and which have enabled insolvent governments and financial institutions to roll over the capital amount outstanding on their debts, thereby deferring the evil hour.
By this mechanism, debt is not re-paid; it is simply shifted as it accumulates in ever larger quantities from one balance sheet to another - in a game of Enron-style pass the parcel.
Thus, shortly before its collapse, Lehman Brothers is discovered attempting to shunt its debt into a shadow bank a few days prior to reporting its earnings with the intention of taking that debt back onto its books once reporting has occurred. AIG moves its derivatives onto the books of banks like Societe Generale; JPMorgan puts its debts onto the books of the Federal Reserve, which then transfers them to the books of the Bank of International Settlements in Switzerland, which then passes them round to other banks; likewise debts are washed through the balance sheets not just of such financial institutions but between these institutions and countries like Greece and France, and so on and so forth.
Effectively, governments become appendages of the banks.
Now, when we bear in mind that the US government is considered virtually insolvent with an indebtedness of some US$15 trillion but that according to the Bank of International Settlements, as at June 2009 there were $604 trillion in outstanding derivative contracts swimming around the banking system and that a mere 10% default in those contracts would equal world gross domestic product, then the truth is clear: try as governments and the banks may, their dirty laundry can no longer be hidden.
In a nutshell, while very low or zero per cent interest rates may well provide short-term liquidity, in the long run they will solve nothing because it was precisely a boom in credit that got us into the mess in the first place.
Finally, an even less effective tool - austerity - a chisel with which to chip away at the mountain, but dug instead into the sides of the man on the street.
The difficulty with austerity measures as a strategy rests in the fact that in a non-growth scenario - as now - it is highly improbable that any increases in exports and private sector demand could ever offset cuts, which means that these cuts are likely to exacerbate economic contraction rather than counter it.
As citizens have less to spend and fewer of them are in employment, more and more loans are defaulted upon, asset values decline rendering borrowing even more problematic, governments are forced to bail out the banks, tax revenues fall and a vicious circle of decline ensues.
By Darius Guppy
In two essays published elsewhere, I have attempted to show that the way in which bankers make money is conceptually identical to that employed by a man I befriended back in 1994, a master-counterfeiter to whom I have referred as "Tommy". [1]
While the counterfeiter manufactures money out of ink and paper, the banker does so out of thin air, an ability that has been bestowed on him by a key design feature of the financial system: fractional reserve banking, which enables banks to lend out many times more than they hold in reserves and, in addition, to charge interest on their virtual, newly invented money.
However, unknown to probably the great majority of people from whom the reality is deliberately withheld, while the ability of the counterfeiter to manufacture money is minimal next to that of the banks, the same can also be said of our so-called "sovereign" governments which create at most a mere 3% of the money - (the "legal tender") - currently in circulation.
While vast amounts of money are lent into existence by the banks by means of the fractional reserve system and then destroyed when (and if) loans are repaid, the interest on this newly created money remains un-destroyed, accumulating at a compounded rate that can never be matched by economic growth in the real world which by definition is constrained at a certain point by the Earth's physical limits.
Eventually a parallel virtual economy supplants the real one until the connection between money and what it is supposed to represent, namely society's wealth, is severed and the system implodes. In the interim the very few benefit at the expense of the very many. So too environmental and cultural despoliation ensue - sure indicators of economic malfunction and the degeneracy of a society which makes the creation of money (most often simply for the repayment of debt) its core value.
The remedies that have been put forward to deal with the financial crisis by Western governments in particular have not the slightest prospect of success, precisely because of their failure to address this, the most critical, the most overlooked flaw in our monetary system and the number one cause of our problems - capitalism's "invisible wrecking machine", as it has been called by the economic historian John King.
Nevertheless, "experts" attempt to placate the public by referring to a mythical "toolbox" from which can be drawn a variety of devices to avert disaster and keep what they argue is essentially a sound system intact, to the benefit of us all.
Needless to say, the expertise of those who, in Britain for example, include the current prime minister and the leader of the opposition; every member of the cabinet and shadow cabinet, together with every single politician; the governor of the Bank of England and the heads of all the large banks; the Financial Times and the Economist; financial gurus such as Richard Branson and Alan Sugar; the London School of Economics, the International Monetary Fund, the Organization for Economic Cooperation and Development and so on, should be considered with skepticism when we remember their collective failure to foresee the advent of perhaps the greatest economic tsunami to have hit humanity, right up until it struck.
Perhaps the chief problem has been that in the intensely closeted and theoretical world of such experts who have all basically been indoctrinated with the same economic theory, whether at school, university or in their professional lives, the limits implied by a universe in which there is order are not recognized, a sin which, ironically, an otherworldly monk, schooled in medieval times, but recognizing scale and proportion, could never have committed.
And what intellectual incoherence to argue as they do that the money supply should be constrained because the alternative is the inevitable dilution of the community's wealth, whilst simultaneously allowing the banking sector, where the money is actually created, to indulge in Caligulan orgy.
But the prognosis becomes even more depressing when we examine some of the tools which their "toolbox" contains.
Principally, there is "growth" - a non-starter when we appreciate that in the real world for non-ending exponential growth to compete with exponentially increasing indebtedness on computer screens is an impossibility.
The environmentalist Margrit Kennedy, for example, has described how a single penny invested at the birth of Christ at an interest rate of 4% would have bought a ball of gold equal to the weight of the earth by 1750 and 8,190 such balls by 1990. But with the interest rate increased only slightly, to 5%, then by 1990 it could have bought 2,200 billion of them.
Clearly, some form of massive debt repudiation will be required. Were Greece, for example, to privatize everything she possesses down to the country's last shoelace she could raise at most only a fraction of the amount she owes.
In fact, it is even more fundamental than this. For even if our governments were in possession of a magic wand that could wave away every single cent of debt, but the mechanism were to remain in place whereby the substantial majority of the world's money is manufactured by the banks, then we would rapidly find ourselves straight back at square one and we would need the wand again.
Moreover, there is a strong argument that what has been categorized as "growth" in the past few decades has not really been growth at all in any meaningful sense - especially if we peg such a concept to an improvement in the quality of our lives - but rather a cannibalizing of our assets, mis-described as profitability.
Next, are the low and declining interest rates - now zero in certain jurisdictions - that have constituted the ultimate get-out-of-jail card for roughly the past 25 years (during a bull market in bonds) and which have enabled insolvent governments and financial institutions to roll over the capital amount outstanding on their debts, thereby deferring the evil hour.
By this mechanism, debt is not re-paid; it is simply shifted as it accumulates in ever larger quantities from one balance sheet to another - in a game of Enron-style pass the parcel.
Thus, shortly before its collapse, Lehman Brothers is discovered attempting to shunt its debt into a shadow bank a few days prior to reporting its earnings with the intention of taking that debt back onto its books once reporting has occurred. AIG moves its derivatives onto the books of banks like Societe Generale; JPMorgan puts its debts onto the books of the Federal Reserve, which then transfers them to the books of the Bank of International Settlements in Switzerland, which then passes them round to other banks; likewise debts are washed through the balance sheets not just of such financial institutions but between these institutions and countries like Greece and France, and so on and so forth.
Effectively, governments become appendages of the banks.
Now, when we bear in mind that the US government is considered virtually insolvent with an indebtedness of some US$15 trillion but that according to the Bank of International Settlements, as at June 2009 there were $604 trillion in outstanding derivative contracts swimming around the banking system and that a mere 10% default in those contracts would equal world gross domestic product, then the truth is clear: try as governments and the banks may, their dirty laundry can no longer be hidden.
In a nutshell, while very low or zero per cent interest rates may well provide short-term liquidity, in the long run they will solve nothing because it was precisely a boom in credit that got us into the mess in the first place.
Finally, an even less effective tool - austerity - a chisel with which to chip away at the mountain, but dug instead into the sides of the man on the street.
The difficulty with austerity measures as a strategy rests in the fact that in a non-growth scenario - as now - it is highly improbable that any increases in exports and private sector demand could ever offset cuts, which means that these cuts are likely to exacerbate economic contraction rather than counter it.
As citizens have less to spend and fewer of them are in employment, more and more loans are defaulted upon, asset values decline rendering borrowing even more problematic, governments are forced to bail out the banks, tax revenues fall and a vicious circle of decline ensues.
Not surprisingly, they revolt.
But movements such as Occupy Wall Street can go only so far. Currently, apart from the odd ineffective riot or encampment at some monument, the protestor is armed with only one weapon: to strike. Not surprisingly he feels weak.
However, the beast is more vulnerable than he imagines, for the very alchemy which gives it so much power - to make money from air - is in fact what will kill it.
Thus, because of the fractional reserve system, if the banks lend out more than 10 times what they actually hold in reserves it follows that the critical level of default required to break them will be much lower (under 10% in value terms) than if reserve requirements were set at 100%.
Instead of thinking in terms of not working, therefore, our protestor should think in terms of not paying.
If, for example, well under 10% of mortgage holders in terms of value were simply to refuse to service the debts on their homes, the mortgage market would collapse and monetary reform would be far more likely to be brought about. Moreover, this collapse would occur within a very short period, since banks have to balance their books at the end of each working day.
To co-ordinate such defaults a mechanism would be required. I envisage the creation of debtors' unions.
Imagine therefore if we begin with a district in a Midlands town in England for example or its equivalent in any other European country such as Greece - preferably a district in which negative equity in homes is frequent and where people are struggling to fund their mortgages. A handful of banks and building societies will be the mortgage holders for the majority of the residential properties in question. Now imagine the population of this district coming together in a debtors' union to default on thousands of mortgages, en masse.
If, in the United States, where the national average of foreclosures on residential properties is 2%, virtual financial Armageddon has been the result - and it was precisely here, in America's housing market, that the financial system began its implosion - then think what a choreographed default of 10% could achieve. The banks could not re-possess more than a minuscule fraction of the properties against which they have lent without wiping out their security and thereby bringing about their own destruction.
And what could the authorities do, especially in a country like Britain where there is still a social welfare system in place? Expel thousands of families from their homes only to have to pay to re-house them elsewhere? Moreover, there would be a domino effect with other districts replicating the process.
If workers can club together and refuse to work I see no reason why debtors cannot club together and refuse to pay, and it is exactly along these lines that they should begin to organize themselves.
Now imagine such action occurring throughout the nation in question - not by means of a general strike but rather a general default - a default which, to repeat, would require the participation of only a small percentage of the population because of the high level of the banks' leverage - a general default not just on mortgages either but on all manner of loans including credit card debt.
Or think of students who, instead of rioting in the streets, now study diligently and refuse, in unison, to pay back the loans that funded formerly state-funded educations. In such a scenario, the principal accounting sleight of hand to which the banks have had recourse over the years vanishes. Bad or dubious debts can no longer be described on the banks' books as "assets" and rolled over. Their balance sheets are annihilated and the system collapses - and all within the blink of an eye.
In short, as the old saying goes: owe the bank a pound and the bank owns you, owe it a million pounds and you own the bank.
Moreover, the general default referred to above need occur in the first instance for only a 24-hour period and the effect would be devastating. At last the powers to be would realize who it is that really holds the gun: not the creditors, but the debtors.
The simple threat of further default would, on its own, catapult our experts out of their dreamworld.
Realizing that the banks' greatest strength - the multiplier effect of the fractional reserve system - was now their greatest weakness, governments would have no choice but to end this mechanism and to re-align money once more with the real. Fractional reserve banking would become a thing of the past and the power to create money would be re-vested where it belongs: in the state and therefore, in theory at least, with us.
Furthermore, with a union there is a structure - a structure that has a juridical personality of its own.
As these debtors' unions default therefore, simultaneously they must bring legal actions against their governments and the banks.
For this some sort of legal hook will be required on which to hang these cases. I am no barrister but it seems to me that strong cases for all manner of fraud could be mounted - including trading while insolvent, a serious criminal offence which would capture the large majority of the Western world's banks.
And, there would be numerous benefits to attaching legal actions to co-ordinated defaults as I have proposed.
First, it would buy the debtors' unions a lot of time before creditors, namely the banks, could enforce judgements (if indeed they ever obtained them). The "squatters" of Dale Farm in the United Kingdom, for example, were able to delay eviction for some 10 years. But it would never come to this. Because of the way in which they report their finances, the banks and by extension their governments would not have 10 weeks, let alone 10 years.
Second, we would be spared the sickening spectacle of delinquent politicians lecturing us about "unacceptable behavior". The approach I have suggested is entirely non-violent. No damage to property or individuals is required. People would be exercising their rights to seek recourse in the courts and no-one would be sent to jail because they had called for people to default on Facebook.
Third, it would allow the whole issue of who exactly manufactures our money and how they do so to be scrutinized by the courts. In my view, the judiciary would very quickly grasp the conceptual similarities between the practices of counterfeiters and the banks. Moreover, a defense that relied upon the argument that at least the banker, unlike the counterfeiter, has a license for his activities, would beg far more questions than it answers.
In short, the debate would quickly morph from a strictly legal question into a constitutional one. And, with the media spotlight upon this debate, the public would at last be educated about the massive swindle that has been perpetrated against it.
In this regard, Article 105a of the Treaty on European Union (the Maastricht Treaty) is interesting.
It reads: "The ECB (European Central Bank) shall have the exclusive right to authorize the issue of bank notes within the Community. The ECB and the national central banks may issue such notes. The bank notes issued by the ECB and the national central banks shall be the only such notes to have the status of legal tender within the Community."
An action brought in Europe that was hung on this particular legal hook, therefore, would put the European Court in a very invidious position it seems to me. For it would bring into focus the distinction between "legal tender" and "money" as a whole, highlighting how the ECB's role in the creation of money within the Community is in fact far smaller than that of the banks.
If the court found that the banks had acted un-constitutionally, it would spell the end of banking as it is currently practiced within the European Union. But if, through casuistic reasoning, it found that the banks had acted within the terms of the Maastricht Treaty and of the broader European Union constitution - on the narrow grounds that while they were indeed responsible for lending the vast majority of the Union's money into existence, strictly speaking they had created no "bank notes" - then this too would have profound implications. The floodgates would be open for anyone or any institution to create money in the manner of the banks.
In recent papers written for the Foundation for the Economics of Sustainability in Ireland, the brilliant (and recently departed) economist Richard Douthwaite has explored the possibility of parallel currencies by which debt-free money could be injected into the financial system, on a national and on a local level.
Briefly, the government in question would pay a portion of its wage and social welfare costs in the newly created currency to cover its deficit. Being entirely electronic, individuals and companies would transfer funds in the new currency to each other by means of mobile telephone, Internet and telephone banking.
Companies would earn the new money by supplying goods and services to prospective customers, informing them what proportion of payment they would be prepared to accept in this new money. Likewise, employers and employees would negotiate the proportion of wages to be paid in the new money.
Limitations of space make it impossible to cover the details of such a system in its entirety but permutations would include the government monitoring the velocity with which the new currency circulated and adding new units of the currency to accounts with the greatest velocity and withdrawing them from accounts with the lowest velocity in order to maintain the new money's value.
Now while some may consider my suggestions too radical, the alternative - to keep adding to the debt pile and to continue in our destruction of societies and the environment to fund that pile - is far more radical.
Actually, the moment to effect genuine change has never been more propitious because if the system in its current format were to collapse, such a collapse has rarely been less likely to lead to food shortages or any of the other dire consequences that one associates with economic hardship for the simple reason that the current crisis is one that affects the virtual economy far more than the real one.
It is not as if there would suddenly be fewer crops in our fields or natural resources in the ground. Nor would people lose their homes - in fact, under my proposals they would be far less likely to do so.
It is the current configuration of economic power that would be threatened, not the amount of goods in circulation, nor the efficiency with which we exploit resources.
If the banking system were to implode, huge debt write-offs were to occur (so that effectively we all owed less), the creation of money were to revert to the state, and the banks now had 100% reserves-to-loans ratios, would we all necessarily suffer as we are being told? Quite the reverse, it seems to me.
How far the debtors' unions would seek to push things would be up to them, (although it seems to me that, whatever the final details, the end of fractional reserve banking in conjunction with the use of debt-free money would be the fundamental components of a new order).
Workers' unions do not necessarily wish to destroy the companies that employ them. What they wish for is sufficient bargaining power to ensure that they are not completely sold down the river. My hypothesis is that, as debtors, potentially we have enormous bargaining power.
But there is an obvious retort:
Why force the issue?
Why not just allow the system to crumble under its own weight since this is what is bound to occur sooner or later?
First, because it offends against the concept of free will - that crucial element which separates human beings from other creatures - and without which, notions such as "freedom" and "democracy" are illusory. (If we are cattle and all our actions are pre-determined, then our "freedom" and our "votes" are meaningless).
And second, because it constitutes the ultimate irresponsibility, coinciding perfectly with the mindset of our politicians: to kick the can down the street and to delay the evil hour for future generations. But the longer you put off evil hours the more evil their inevitable advent.
There will be many, not least among the middle classes, who would fear the idea of a global collapse of the banking system. But they must understand: sooner or later this will happen in any case and the essence of my argument is that since the gun is in fact in their hands - if only they knew - they can have far more say in the new dispensation than if they simply allow things to unravel on their own.
It is a fallacy - pushed by our experts - for the middle classes to imagine that they have a vested interest in maintaining the current order.
Writing in the mid 1990s, Margrit Kennedy showed how the first 80% of the German population paid out more interest than it received, with the next 10% receiving slightly more than it paid out and the final 10% receiving twice as much, a trend which has intensified throughout the world. Only very recently, for instance, in the United States the Congressional Budget Office Report regarding household income distribution in America from 1997-2007 has demonstrated how the income earned by the top 1% of the population rose dramatically at the expense of the remaining 99%.
In other words, our financial system comprises an upward redistribution mechanism that acts to the detriment of nearly all of us. In sitting back and doing nothing, the great part of our population will not be "all right". Income gaps will increase while living standards decline.
Nor should we be fooled by the argument that "education, education, education" will protect our children from the snare that has been set for them - a falsehood demonstrated by the fact that an increasing proportion of Britain's two-and-a-half million unemployed have graduated from university. Unless we alter radically the manner in which money is manufactured and circulated within the community, then in a generation Britain will be like Egypt, a nation of taxi drivers with PhDs.
But how about if certain people reading this essay were in the enviable position of being able to opt out in some way? To sell assets, pay off their debts and conduct all their future transactions in cash? Surely in such a scenario they would be freed from the debt trap and they could afford to sit back and relax?
Again, this argument is false because interest on ever-increasing indebtedness is included in all the prices we pay, whether or not as individuals we have one penny of debt. Herein the evil - there is no opt out.
In the bar of soap, in the property, or in the car we buy, a huge proportion of the price is made up by interest compounded over time and which the manufacturer has had to pass on to us. Which is precisely why the creation of money out of nothing and the charging of interest on that money is the root cause of inflation and a devaluation of our purchasing power - an inflation that is deliberately disguised by omitting crucial factors such as house prices, food prices and household energy prices in its computation.
And if we do not act now, we will miss the perfect opportunity to effect genuine change as did the South American debtor nations when they blinked and "re-structured" their debts in 1982 instead of clubbing together and defaulting en masse. And all because they failed to realize that it was they who held the gun and not their creditors.
In such a scenario, as occurred in 1982, the same "re-structuring" or "re-capitalizing" remedy, currently being engineered by our experts, and by which the payment of debt is simply forestalled by extending its term and adding to the amount outstanding, will be the outcome - the ultimate head-in-the-sand strategy.
Effectively, when something becomes "too big to fail" but is in fact just about to fail, its demise is delayed and the agony prolonged by making it ... even bigger!
In this way, to prevent their collapse the banks will be made even larger and even more powerful before, inevitably, they fail, to the detriment of our descendants. Taken to its logical extreme one could even envisage an Orwellian nightmare of complete, global financial integration.
In conclusion, to subscribe to the arguments I have laid out there is no requirement to be some Trotsky-ite or even "anti-capitalist". One need only appreciate the distinction between productive capitalism and parasitical capitalism.
It is perfectly possible therefore to support the principle that those who actually produce wealth should be rewarded for their endeavors and that their rewards should be made flesh in private property that is protected by law, whilst recognizing that the greatest threat to such a principle is no longer a frightening Soviet-style system but in fact parasitical capitalism, by which we become not owners of wealth but slaves of debt.
It is time for the middle classes to un-learn what has been indoctrinated into them.
For the evidence shows that, contrary to the orthodoxy, they have not been subsidizing a lazy and undeserving underclass; they have been subsidizing a parasitical and undeserving financial class.
Note:
1. For essays referred to, see here and here.
Darius Guppy is the author of Roll the Dice, (1996) Blake Publishing.
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