Maintaing Liquidity Through Crisis and Beyond

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Maintaing Liquidity Through Crisis and Beyond

One of the predominant riddles occupying my mind this last year is how am I going to preserve hard-earned purchasing power through a full-blown economic/national crisis? Specifically I want to determine the best strategy to maintain what little wealth I have into the post-crisis world, and logically wealth=liquidity in a crisis situation. To illustrate some of the difficulties that may lie ahead I want to cite Stoneleigh's article "Welcome to the Perfect Financial Storm". The three traditional vehicles for maintaining liquidity in a deleveraging crisis are: Short term T-bills, Physical Cash, and Hard Assets.

Regarding Short-Term T-bills Stoneleigh proposed this scenario:

What is coming, I think, is a nominal short term interest rate that is moderately negative - an official Fed rate rather than a market rate as at present (as the Fed follows the market). This means people will be paying to own t-bills, but this will still be one of the best options available for short term capital preservation. The capital will be far less likely to be lost there than in a bank, and the return OF capital is the important thing. Despite a negative nominal rate, the real rate (the nominal rate minus negative inflation) will still be high as deleveraging continues and accelerates. 

It won't be as high as it would have been at a nominal rate of zero, but there would still be a real return on top of greater capital security than most other options. I think a lot of investors will be happy to buy t-bills even where the nominal rate is negative. The US dollar appreciation relative to other currencies will be a significant bonus as well.

....

For T-bills the main risk is that the government could convert short term debt instruments into long term ones, and then default on them later like Argentina did. I think the risk of that for domestic investors is higher than for foreign, as it is foreign bond market participants that the government will not want to rattle, for fear of losing access to international debt financing. 

The domestic ones could be strung a line about it being their patriotic duty to invest in their country. I don't think the risk is high at the moment, which is why I still recommend them for the next couple of years. The risk is non-zero, but lower than for almost anything else in a high risk environment.


So the risk of holding short-term T-bills is that in a funding crisis the government may convert all domestically owned T-bills to longer-term vehicles and then default on them down the road. Potential loss of purchasing power= 0-100%

Regarding Holding Physical Cash:

Of course cash on hand would be an even better option in terms of return, because that would have a nominal rate higher than zero, and therefore a higher real rate as well. The real rate will apply even outside a bank, reflecting the greater domestic purchasing power of liquidity. It isn't practical to hold really large sums of money in cash though. The main risk for cash is reissuance of the currency in a different form. 

In the US they wouldn't need to make conversion difficult as they did in Russia, because there's not that much cash under the nation's beds (unlike in Russia where there was a chronic mistrust of banks). Requiring people to convert would require them to reveal what they had though, and this would probably result in windfall tax bills (i.e. extortion) for those who had been foresighted.

A reissuance of the currency sounds like a win-win for the government: devaluation and a tax hay day all in one. Not to mention the problem of holding significant amounts of cash through a lawless environment. Potential loss of purchasing power: 0-100%

Regarding Holding Hard Assets:

Eventually one will want to get into hard assets, even if asset prices still have further to fall. Liquidity can be as hard to hang on to as it sounds, and is therefore not a long term bet. A couple of years should be enough to ride out the worst of an asset price collapse while still being in a relatively low risk position regarding liquidity.

So here is the option that most people here, as well as myself, think is the best option: gold and silver bullion. But this option also has its drawbacks:

Holding physical bullion securely during chaos might be difficult. I can't pay taxes (property) directly with PMs, so that means I would have to convert PMs to FRNs to pay taxes in the worst case scenarios. Depending on the situation, this conversion could mean a significant loss of purchasing power for a variety of reasons. Like all financial assets, gold and silver could sustain significant drops in $ value during the crisis ( and specifically when I might need their purchasing power the most). If there is a reissuing of currency, converting my PMs to the new currency post-crisis may negate some of my purchasing power. Confiscation and/or a high tax rate is a possibility as well.

So I estimate the potential loss of purchasing power using PMs as the vehicle also from 0- 100%. Of course all of these vehicles should gain some purchasing power from the fact that they represent some form of liquidity in a market and economy where liquidity is the most desired asset. Perhaps this would offset some or all of the potential losses of purchasing power that each of these vehicles face. I simply don't know at this point.

I'm assuming that its going to take active management of one's wealth to and from each of these vehicles to minimize the potential loss of purchasing power and liquidity. One thing is for sure, the markets, government, and living environment are going to do everything possible to make this as difficult as possible.

Anyone have any other strategies to maintain liquidity through a crisis? I have excluded real estate (productive land) from this analysis because its not likely to be a very liquid asset in the absence of a financial system, despite its obvious inherit value to survival.

Thanks for your input....Jeff

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Re: Maintaing Liquidity Through Crisis and Beyond

Sorry for the bold type-face, it was not intended on my part.

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Re: Maintaing Liquidity Through Crisis and Beyond

The only thing you haven't discussed (other than productive land) that I can think of as a 'liquid asset' during a crisis (or tumultuous times) would be to own a selection of things that are basic goods people would want/need but might not be able to procure easily during upheaval.  Such goodies as liquor, seeds, batteries (there are any number of lists folks have put up here in the forums), could be extremely useful in a barter-type situation, but that posits a pretty full-scale economic crisis -- and I think you're wondering out loud about things that could hold value while the economic world is just Really Danged Wobbly.  

Viva -- Sager

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Welcome to the perfect financial storm

From Automatic Earth

Link to JAG's reference.

Lots of good stuff in this one.

January 28 2010: Welcome to the perfect financial storm

http://theautomaticearth.blogspot.com/2010/01/january-28-2010-welcome-to-perfect.html

Holding physical bullion securely during chaos might be difficult.
I've thought about this one a lot myself. Obviously you can put it in a safe but when you get a gun put you head or a loved ones head the safe opens up pretty easily. Maybe a safe deposit box in a credit union.
I can't pay taxes (property) directly with PMs, so that means I would have to convert PMs to FRNs to pay taxes in the worst case scenarios. Depending on the situation, this conversion could mean a significant loss of purchasing power for a variety of reasons.
Depending on how high your taxes are you maybe able to pay them with FRN that you aquire thru work or other means and just hang onto the PM's.
Like all financial assets, gold and silver could sustain significant drops in $ value during the crisis ( and specifically when I might need their purchasing power the most).
But any other form of wealth will do this also. So PM's are probably the best bet.
If there is a reissuing of currency, converting my PMs to the new currency post-crisis may negate some of my purchasing power.
I don't know about that one. I've heard it said that getting out of PM's is the real problem, not getting in. Once one fiat currency collapse I can't really see and eager populace waiting to put their faith in a new one. There would have to be some lag time there for you to make the conversion if you decided to.
Confiscation and/or a high tax rate is a possibility as well.

This one is always on my mind and I think both seem likely. The issue is to what degree? Confiscation of just gold or silver too? They have tried in the past to confiscate silver but there is just too much of it, compared to gold, and it is used in too many industries so silver, i think, is the best bet. PM's could be taxed but how heavily and for how long. Keep in mind that the bankers will really be pushing to get a new fiat currency going so that they can start their robbing again. I don't think the bankers are going to want to stay in a PM backed system any longer than they have to.

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Re: Maintaing Liquidity Through Crisis and Beyond

JAG,

I very much understand your consternation concerning PM's.  Unfortunately, if you're speaking "liquid" assets, I don't see a better one at this time to lock in value of LARGER amounts.  Land is a great asset but really how liquid is it?  And in all reality if this country goes the direction that I feel it will, the state will compensate much of your liquidity in land as well.

As has been stated before, the industrial metals are the ones that the gov't would have a very hard time confiscating, taxing, limiting value, destroying black market values.  These include:  Silver, Nickel, Platinum, Palladium.....I'm sure there are others but, you get the gist.  

I've thought about the same dilemma many, many times.  I still buy Au, but have transferred most of my purchasing to the other 4 at this time.  I've also included many much used ammo, liquor, cigs (vacuum wrapped) and some collectibles.  I've also been buying better quality French Wines that have a shelf life of 15yrs or more (been doing this for about 10 years).  Most of the wines that I've bought have increased in value by over 70% within 5-6 years and 25% in 2-3yrs.  Yes, you have to have storage but that's really not very difficult if you have a basement or you can store them in a local wine storage facility for minimal cost.  I've been able to sell any wine that I've wanted within 2-3 days for the going rate.  And due to the fact that most upper income persons still have money and aren't afraid to spend, the market has not decreased at all.  In fact it's gotten better over the past 2 years.  

Same with Ammo.  Pick an ammo that's hard to get now and it will be worth AT LEAST what you paid for it more than likely.  And with the rise in commodity prices it will just get worse.  

I'm in the process of doing a spread sheet on everyday items in the grocery store that I started about 2 months ago.  I buy the exact same 15 items once a week (things I use) at the same store and mark it down.  I started this when 4 of my items increased by 20% in a 2 day period of time in Nov.  at the 3 month stage I'll post it here.  Inflation at its most disgusting. 

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Re: Maintaing Liquidity Through Crisis and Beyond
JAG wrote:
I can't pay taxes (property) directly with PMs, so that means I would have to convert PMs to FRNs to pay taxes in the worst case scenarios. Depending on the situation, this conversion could mean a significant loss of purchasing power for a variety of reasons.

Of course maybe we'll end up with the Roman solution. They demanded taxes be paid in gold, but only provdided debased currency to the populace. State employees (like the army) were paid in gold. So for common folk to pay taxes, they had to convert their steadily eroding debased currency to gold. Is our goverment so smart?

But here's a whole different slant: WWWSD (What Would Wall Street Do)? Maybe the best thing to be in is whatever the big boys are holding, because you know they will protect their wealth buy 'guiding'  Congress, the FED, an the market. The trick is to know what they are doing.  I have found the only way to keep up is to trade the market. It's so manipulated that I've given up any hope of long term investing. I don't like it, it's risky, and it provides no value to the country, but I think it's what the big money is doing.

 

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Re: Maintaing Liquidity Through Crisis and Beyond
LogansRun wrote:

I'm in the process of doing a spread sheet on everyday items in the grocery store that I started about 2 months ago.  I buy the exact same 15 items once a week (things I use) at the same store and mark it down.  I started this when 4 of my items increased by 20% in a 2 day period of time in Nov.  at the 3 month stage I'll post it here.  Inflation at its most disgusting. 

I will very much be looking forward to seeing what you've discovered, Logan....

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Re: Maintaing Liquidity Through Crisis and Beyond
SagerXX wrote:
LogansRun wrote:

I'm in the process of doing a spread sheet on everyday items in the grocery store that I started about 2 months ago.  I buy the exact same 15 items once a week (things I use) at the same store and mark it down.  I started this when 4 of my items increased by 20% in a 2 day period of time in Nov.  at the 3 month stage I'll post it here.  Inflation at its most disgusting. 

I will very much be looking forward to seeing what you've discovered, Logan....

Darn Tootin' !   T

That's a great idea....I'm gonna keep track too! 

 

 

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Re: Maintaing Liquidity Through Crisis and Beyond

For the time being I'm sticking with cash in hand and gold and silver for my liquid assets.  Though I don't have a large amount of wealth in the first place, and if I did I'd probably have to use other options as well.

My risk estimate for cash in hand is pretty low (as of now anyway).  I'm reasonably sure that any reissuance of currency or other funny business would be preceded by some warning signs visible to anyone paying attention.  This is countered though, by the increased risk of loss due to robbery or theft.  I've taken a number of steps to mitigate that, however, so the overall risk IMO is still pretty low.

I assign a higher risk to gold and silver, though still feel it's lower than most alternatives besides than cash in hand.  Addressing each of Jeff's points on bullion:

- Holding physical bullion securely during chaos might be difficult.

True, but that would apply to just about every other physical asset too (cars, cash, firearms, food, etc).  One advantage physical bullion has is that it's readily portable, and that may be very helpful in a chaotic situation that requires evacuation.

- I can't pay taxes (property) directly with PMs, so that means I would have to convert PMs to FRNs to pay taxes in the worst case scenarios. Depending on the situation, this conversion could mean a significant loss of purchasing power for a variety of reasons.

An inconvenience, but not a huge obstacle. My PM dealer is closeby and doesn't gouge us, and confiscation or no there will always be a buyer somewhere.  Besides, I mitigate that risk by also holding enough cash to cover several months of expenses, so at least I won't have to cash in PMs as a result of near-term difficulties.

- Like all financial assets, gold and silver could sustain significant drops in $ value during the crisis ( and specifically when I might need their purchasing power the most).

A significant risk, but as above this can be mitigated by holding a healthy cash reserve.  And as JO says it's not much different in that respect than anything else, and given the current circumstances I see less risk of that than in most other assets.  At least until we're put on the path to a sound fiscal policy, and sadly that's not something I see happening anytime soon Wink

- If there is a reissuing of currency, converting my PMs to the new currency post-crisis may negate some of my purchasing power.

It doesn't seem to me like this possibility is limited to PMs.  And even then it only seems likely if the government 'officially fixed' the price of gold to some X number of dollars.  At which point there won't be much 'official' transactions in gold, but plenty of the other kind calling for far more than the 'official price'.

- Confiscation and/or a high tax rate is a possibility as well.

At the current time I see these risks as very low; there's bigger pools of wealth for Uncle Sugar to loot.  At some future point though (2-10 years maybe?) I do expect this will be a much higher risk.  As before though, there will always be a buyer regardless, and there is likely to be some warning sign before it happens.  Mitigate the risk by having a plan of action in event of a substantial warning sign... removing your PMs from safety deposit boxes, a quick trip to a safety deposit box in Canada or other convenient foreign country, etc.  I see excessive taxation as being the bigger risk, but there will always be options to sell under-the-table or overseas.  Whether or not one feels that is the right or wrong thing to do in the face of excessive taxation is something they have to decide for themselves; I'm not advocating any such action, I'm just stating all likely possibilities.

- Nickbert

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Re: Maintaing Liquidity Through Crisis and Beyond
LogansRun wrote:

I'm in the process of doing a spread sheet on everyday items in the grocery store that I started about 2 months ago.  I buy the exact same 15 items once a week (things I use) at the same store and mark it down.  I started this when 4 of my items increased by 20% in a 2 day period of time in Nov.  at the 3 month stage I'll post it here.  Inflation at its most disgusting. 

If the items sell by weight or volume, check these, too. Reductions of quantity sold at the old price also represent price inflation.

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Re: Maintaing Liquidity Through Crisis and Beyond

LR,

Re the personal CPI, I have been keeping track of my grocery purchases via an iPhone app since the fall of 2008 and with the exception of a few items, and seasonal price variations on produce, I have experienced no rise in grocery prices. Unfortunately an unable to export this data from my iPhone to share here.

There have been a few changes in product sizing. The toilet paper that I buy was resized to 84% of the original sq. ft while the price remained the same, but I have switched brands to achieve roughly the same price per square foot as before. 

Overall, my expenses (outside of groceries) have stayed the same over the last year and a half as well.

I like the idea of diversifying into other metals, and wine. I'll have to look into these possibilities some more. Thanks for the suggestions.

I'm pretty sure that eventually most of my physical cash will end up in PM's, but it is the timing of this transaction that is critical to preservation of purchasing power IMO. 

Thanks for the input.

 

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Re: Maintaing Liquidity Through Crisis and Beyond

Thanks for mentioning that!  In my mind I knew this but I didn't put it into my calculations.  I'll have to go back a bit and take a look.

FWIW:  We've had 2 major grocery stores close branches in the area this past week.  They're both E Coast chains, and each branch was over 15k sqft.  One had been open for 14 months, the other 18 months....both in BRAND NEW strip malls in which they were the primary merchant.  I would imagine all the other small businesses that have opened in these malls are pretty much toast.  I live in an affluent neighborhood in N. VA so needless to say, not good.  I WAS able to stop by this afternoon at one and pick up $120 worth of stuff for 75% off!  Yipee!   

I'll post the results around the end of Feb.  

 

Stan Robertson wrote:
LogansRun wrote:

I'm in the process of doing a spread sheet on everyday items in the grocery store that I started about 2 months ago.  I buy the exact same 15 items once a week (things I use) at the same store and mark it down.  I started this when 4 of my items increased by 20% in a 2 day period of time in Nov.  at the 3 month stage I'll post it here.  Inflation at its most disgusting. 

If the items sell by weight or volume, check these, too. Reductions of quantity sold at the old price also represent price inflation.

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Re: Maintaing Liquidity Through Crisis and Beyond
JAG wrote:

 The toilet paper that I buy was resized to 84% of the original sq. ft while the price remained the same, but I have switched brands to achieve roughly the same price per square foot as before. 

You buy TP by the square foot? Isn't that really paper towels?

Perhaps you should encorporate a bit more fibre into your grocery trips.

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Re: Maintaing Liquidity Through Crisis and Beyond

LOL Rog!

I'm afraid of what that implies about the size of my bottom end! Too funny.

Just to be clear....I divide the Total Sq. Feet (as indicated on the packaging) by the price to determine the price per common unit of measure.

ButtfaceKiss

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Re: Maintaing Liquidity Through Crisis and Beyond

Another option that I don't think is on your list above is securing safe stores of wealth offshore.  Despite the media hype, Switzerland remains the safest, as long as you have paid the IRS on the money you put there. 

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Re: Maintaing Liquidity Through Crisis and Beyond

Oh, gosh, so glad there is this thread.  What the heck do folks think is going on with gold?  Is there a bursting bubble?  Is it time to sell/buy?  Many thanks for your feedback.   Jan Jee

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Re: Maintaing Liquidity Through Crisis and Beyond
strabes wrote:

Another option that I don't think is on your list above is securing safe stores of wealth offshore.  Despite the media hype, Switzerland remains the safest, as long as you have paid the IRS on the money you put there. 

The only problem with this action is that it paints a big red bullseye on your butt, regardless of your level of compliance with tax laws.  TPTB in this country do not want you putting your wealth offshore and people like Carl Levin and company are doing their darnedest to make it as difficult as possible for you to do so and come away unscathed.  I've considered it many times but there's been a steady escalation of action against those who do so, even if you are completely legal in all your actions.  I've heard increasing chatter about TPTB making it difficult for you to repatriate your wealth without significant penalty.  Seems like they're tightening the screws in all directions. 

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Re: Maintaing Liquidity Through Crisis and Beyond

ao, I think that's correct, but at least you have flexibility with certain Swiss assets to move between currencies and gold without risk of confiscation and other things the US might do.  So you can ride out whatever emergencies happen, hopefully being in the right asset class at the right time, and then have a lot more to repatriate when you want to than you will have if broad confiscation, consolidation, devaluation happens in the US.

In terms of a big red bullseye, you've already got it on your back if you're an American with any assets.

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Re: Maintaing Liquidity Through Crisis and Beyond

Diversify.  don't  just hold one or the other. I would go with 20-30 percent PM 50percent cash(maybe a tbill or 2 if you are that rich -- I'm not).  the rest in staple supplies/comodities. (especially Charmin extra strong)

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Re: Maintaing Liquidity Through Crisis and Beyond

Personally i would not stock up on Charmin. I would use water.

That would free up more $ for "essentials"

V

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Re: Maintaing Liquidity Through Crisis and Beyond

The price of gold is manipulated by the bullion banks which are major players in the market maintaining liquidity. This has been going on for years and at one time involved Barrick Gold, a major producer, which was fined for price manipulation. Last year Barrick closed out its forward hedge book by buying about $3 billion of gold futures. This tells you what the company thinks about where the price is eventually going.

I'm not sure exactly what George Soros said this past week at Davos. It has been reported as "gold is the final asset bubble" which I believe is true as it will be the final hard asset to show an incredible rise in price. However maybe he said "gold is now a bubble" which some analysts believe means that he has shorted gold and is trying to talk it down,

The bullion banks are holding large short positions in gold and silver and some believe they are anxious to reduce these positions, especially silver where they are short much of the world's annual production. If you look at this past week's trading the rapid price declines are said to be due to the market makers suddenly pulling their bids so that sellers are selling into a hole. The bullion banks can then buy carefully at the lower price.

http://www.kitco.com/charts/livegold.html

What happens in the short term is a matter of conjecture. You might find the following site helpful.

http://www.gata.org/

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Re: Maintaing Liquidity Through Crisis and Beyond
strabes wrote:

ao, I think that's correct, but at least you have flexibility with certain Swiss assets to move between currencies and gold without risk of confiscation and other things the US might do.  So you can ride out whatever emergencies happen, hopefully being in the right asset class at the right time, and then have a lot more to repatriate when you want to than you will have if broad confiscation, consolidation, devaluation happens in the US.

In terms of a big red bullseye, you've already got it on your back if you're an American with any assets.

Valid points.  I hope the Swiss stick to their guns (literally and figuratively).  They've started to capitulate in ways I never thought they would. 

My personal hope is that if things ever get to the point that you mention, the American public rises up and paints big red bullseyes on the butts of those who have acquired inordinate quantities of assets by virtue of dishonestly stripping others of their honestly acquired assets and then uses those bullseyes for the purpose for which they were intended.   

 

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Sprott Goodness

Eric Sprott On How Central Banks Are Setting The Stage For The Next Big Move In Gold

Gold bull markets are unique in that buying becomes driven by both fear and greed. Gold is quickly moving into the hands of those who are unwilling to gamble on fiat currencies or bonds as a store a value. The new owners of gold are unconcerned with its lack of yield but instead are focused on its historic ability to preserve wealth and its unquestionable value. Given the difficulty we have valuing paper money, it becomes extremely difficult to come up with a reasoned price target for gold. Today’s gold market is significantly different from the gold market of the 1970s for two reasons: 1) Central Banks are more likely to be buyers of gold today and 2) They clearly have little ability to dramatically raise interest rates with the massive increases in government issued debt. Thus, it is easy to envision a similar twenty-five fold increase in the gold price that was seen between 1970 and 1980, which would result in a gold price today above $6,000 per ounce. We expect the often quoted “1980 inflation adjusted high” of approximately $2,200 to be achieved in short order. These targets may well prove to be irrelevant, however, as the quality of our lives will be more greatly impacted by the continued evolution of our money and how the general public chooses to value it, or not. - Eric Sprott

Its hard to argue with the Sprott.

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Re: Maintaing Liquidity Through Crisis and Beyond

Yes JAG.  Even if gold hits 6000 an ounce, what's the use if you can't use it or easily trade it?  I have evolved over the past few months from a gold bug to more of chris' point of invest in your community.  Don't plan on hiding out in the hills.  I do still play the gold markets, but it is just as a side bet -- not my main investment.  Invest in yourself and a sustainable lifestyle and community first.

 

 

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Re: Maintaing Liquidity Through Crisis and Beyond

Thanks JAG!

What a fantastic article.

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