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    The Economy Is Cooked

    The growth cycle has peaked
    by Adam Taggart

    Saturday, April 21, 2018, 12:04 AM

Hours ago, European Central Bank chief Mario Dragho conceded: "The growth cycle may have peaked"

Of course, those paying attention to the data already knew this. Our politicians and central planers have been peddling to us the fantasy that the global economy is strengthening, finally ready to fire on all cylinders after nearly ten years of dependence on monetary stimulus.

That just ain't so.

The Federal Reserve of Atlanta's GDPNow measure, which gives a forecast of Q1 2018's expected GDP, is currently coming in at 2.0%, down from the much more vigorous 5.4% growth predicted as recently as early February:

Generating this growth, meager as it is, has required a tremendous amount of new debt. So much more so that the US will soon have a worse debt-to-GDP ratio than perennial fiscal basket-case Italy:

U.S. Debt Load Seen Worse Than Italy's by 2023, IMF Predicts (Bloomberg)

In five years, the U.S. government is forecast to have a bleaker debt profile than Italy, the perennial poor man of the Group of Seven industrial nations.

The U.S. debt-to-GDP ratio is projected widen to 116.9 percent by 2023 while Italy’s is seen narrowing to 116.6 percent, according to the latest data from the International Monetary Fund. The U.S. will also place ahead of both Mozambique and Burundi in terms of the weight of its fiscal burden.

The numbers put renewed focus on the U.S. deteriorating budget after the enactment in December of $1.5 trillion in tax cuts, and the passage more recently of $300 billion in new spending. President Donald Trump’s administration argues that the tax overhaul combined with deregulation will help the economy accelerate, which in turn will generate enough extra revenue to avoid any fiscal fallout.

Officials with the Federal Reserve and Congressional Budget Office are skeptical about those expectations, as they forecast long-term economic growth will fall short of expansion rates needed to fund tax cuts. The central bank’s most recent forecasts show a median estimate of 2.7 percent for this year’s expansion slowing to 2 percent in 2020, while the CBO sees GDP growth slowing from 3.3 percent this year to 1.8 percent in 2020.

Looking back across the past 50 years, we can clearly see that the 2008 Great Financial Crisis was a turning point. That was the moment where our addiction to exponentially increasing our debts began to have real consequences.

The chart below clearly shows that, since then, we've been in an era of diminishing returns in exchanging debt for growth:

What can ride to the rescue at this point? Not much.

Our 'recovery' since 2008 is now one of the longest on record; another recession will occur sooner or later (Fannie Mae head economist Doug Duncan thinks one will likely arrive by next year).

Rising interest rates will only accelerate the advance of a recession. And interest rates are indeed on the rise, with 10-year Treasury yields having nearly doubled since July 2016:

10-YEAR TREASURY YIELD (%)

And with the arrival of recession, what will our leadership do? The only thing it knows how: print, borrow and deficit spend in attempt to boost 'growth'. Except the debt will be even more expensive this time, and it's ability to generate incremental growth per unit of new debt even weaker.

The Bigger Predicament

But sadly, as prodigious as it will be, our growing pile of debt isn't going to be the primary limiter of growth in the coming decades.

Instead, it will be Energy.

Oil prices are on the rise again, as the world is waking up to the fact that annual demand will exceed supply for decades to come and that the US shale 'miracle' will be a short-lived mirage. All while new oil field discoveries are the worst since World War 2.

With increasingly expensive energy — and increasing global competition for it — the economy will find itself increasingly constrained. We will be faced with a future of doing less.

This is not fear-mongering; it's science. Specifically, our destiny is in the hands of the Laws of Thermodynamics. Without a surfeit of new, plentiful, BTU-dense and affordable energy sources (which we simply don't see on the horizon), economic growth cannot be sustained.

One of the best explanations I've read on this is the report my fellow Peak Prosperity co-founder, Chris Martenson, wrote upon finishing the book version of The Crash Course. It remains to this day one of his most seminal warnings of the global predicament we a species face on this finite planet.

In Part 2: Energy Is The Non-Negotiable Element Defining Our Future, we re-publish this report in full, which is even more relevant and important to heed today then when Chris wrote it eight years ago — as our economy specifically, and humanity in general, are totally unprepared for a future of even slightly less energy.

Everything is tuned to grow exponentially. There is no "plan B".

We have no models yet for how to manage in a world of de-growth, so we will blindly slam into this crisis head-on. But as painful as they will be, the economic woes at that time will be the least of our worries.

Click here to read Part 2 of this report (free executive summary, enrollment required for full access)

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27 Comments

  • Fri, Apr 20, 2018 - 6:07pm

    #1

    Mark_BC

    Status Bronze Member (Offline)

    Joined: Apr 30 2010

    Posts: 275

    In all the discussion in

    In all the discussion in Canada and BC on this Kinder Morgan pipeline to get Alberta oil sand crude out to the Pacific, not one person has even raised the question of how much oil there is left and how long this reserve would feed the world for. Nothing; it is all superficial talk about oil spills and GHG emissions etc. Which are all valid issues of course, but they aren’t the main pressing issue right now that could cause TEOTWAWKI. Another failure for the MSM.

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  • Fri, Apr 20, 2018 - 6:42pm

    #2
    cowtown2011

    cowtown2011

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    Posts: 32

    Debt Levels

    Is there any reason to believe the US cannot leverage up to the same levels as Japan. They seem to be prime example of how a country who can print it’s own currency can leverage up all it wants. There seems to be no consequences for this behaviour. A podcaster I respect, named J. David Stein, Money for the Rest of US, believes that the US can continue to run massive deficits as long as it doesn’t destroy the private sector. It’s an interesting argument. I think you could point to Venezuela as an example of a country who can print it’s own currency yet failed. Did they destroy their private sector? Maybe? Would love to hear your views on this Chris and even hear an interview between you both. It’s never a good thing to debate things with people who always agree with you. That applies to all areas, including health. I’ve tried to get Peak to interview Dr. Michael Greger but no luck. Thanks.

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  • Sat, Apr 21, 2018 - 7:06am

    #3
    richcabot

    richcabot

    Status Bronze Member (Offline)

    Joined: Apr 05 2011

    Posts: 180

    It depends on faith

    Money printing depends on people believing that the money has value.  At the moment most people really don’t understand how money works.  They think it will be worth something in the future so they accept it.  Certainly the US is the best horse in the glue factory right now but it probably won’t stay that way.  Our military’s main function is to keep dissent in line and maintain the strength of the dollar.  We want to destroy Russia because they have a fundamentally healthy economic system that poses an alternative to us.  They have almost no debt, lots of natural resources, very intelligent people and a strong enough military to defend it all.  Unlike China, their population is a reasonable size for their resources.  

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  • Sun, Apr 22, 2018 - 2:40am

    #4
    pat the rat

    pat the rat

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    Posts: 108

    bigger stores

    Bigger stores are becoming corporation foods only ,no more store brands do you think this is going to cost food to go down wrong!

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  • Sun, Apr 22, 2018 - 6:13am

    #5

    LesPhelps

    Status Silver Member (Offline)

    Joined: Apr 30 2009

    Posts: 456

    The Economy is Cooked and the Books are Fabricated

    Regarding the “Debt to GDP” chart, I wonder if all the other countries on the chart fudge their reported analytics, as does the US?
    A real comparison might be even more enlightening.

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  • Sun, Apr 22, 2018 - 8:10am

    Reply to #1

    davefairtex

    Status Diamond Member (Offline)

    Joined: Sep 03 2008

    Posts: 3082

    alberta oil sands

    Mark_BC-
    So the wiki entry about the oil sands suggests there are 170 years of reserves up there in Athabasca.
    https://en.wikipedia.org/wiki/Athabasca_oil_sands
    Is the wiki entry wrong?
    Certainly, the side effects of production – lots of cancer causing chemicals leak into the environment – seem pretty terrible if you live near by, but the reserves seem as though they’ll last for a very, very long time.

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  • Sun, Apr 22, 2018 - 9:29am

    #6

    Snydeman

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    Posts: 477

    Anyone know?

    Does anyone know the real EROEI of the Alberta field? Tar sand oil is, what, like 4:1?

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  • Sun, Apr 22, 2018 - 9:44am

    Reply to #6

    cmartenson

    Status Platinum Member (Online)

    Joined: Jun 07 2007

    Posts: 4469

    EROEI of Alberta tar sands

    Snydeman wrote:

    Does anyone know the real EROEI of the Alberta field? Tar sand oil is, what, like 4:1?

    I sure don’t.  
    I’m positive that the process of strip mining, trucking, and then using NG to boil the residue off of the sand is an unviable strategy.  It all depends on having lots and lots of ‘captive’ NG that doesn’t have a better use to drive this process.
    But I’ve read more encouraging reports about the SAGD method where steam is injected underground and then the bitumen is collected by pipes after it melts and flows to collection zones.  But not every deposit is amenable to that process as it requires a certain depth of tar sand, and appropriate geology to contain/assist with the collection process.  
    But all I have to go on so far are company reports and those are always glowing and making claims that I’d feel better about if verified independently.
    So, nope, I don’t know except to say that regardless of the method, the EROEI yields on bitumen laden sand is far less than conventional oil, and almost certainly less than shale oil.  So bottom of the barrel kind of stuff.  

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  • Sun, Apr 22, 2018 - 10:32am

    Reply to #6
    DennisC

    DennisC

    Status Bronze Member (Offline)

    Joined: Mar 19 2011

    Posts: 101

    Sustainabilty Report

    This may be of interest, 2015 version appears to be the latest, check out page 27, Performance Data chart.
    http://www.syncrude.ca/assets/pdf/sustainability-reports/SCL-2015-Sustai
    also: http://www.syncrude.ca/environment/sustainability-reports/ for other reports.
     
     

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  • Sun, Apr 22, 2018 - 11:16am

    Reply to #6

    cmartenson

    Status Platinum Member (Online)

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    Posts: 4469

    Good find!

    DennisC wrote:

    This may be of interest, 2015 version appears to be the latest, check out page 27, Performance Data chart.
    http://www.syncrude.ca/assets/pdf/sustainability-reports/SCL-2015-Sustai
    also: http://www.syncrude.ca/environment/sustainability-reports/ for other reports.

    So according to their report the EROEI for the tar sands strip mining process is ~ 4:1

    I’m going to bet that this is just for the process itself.  I don’t know that for sure, but it’s probable that Syncrude has not factored in the wider externalities of their efforts including (but not limited to):
    The energy required to make the heavy equipment involved (excavators, dump trucks, etc)
    The embedded energy in the operating plant
    The energy used to feed, transport and train their workers
    The energy costs of reclaiming the land
    The embedded energy costs of the capital that generates electricity and NG used in their processes 

    All told, this process is probably a lot less than 4:1.  Maybe even 3:1
    You can’t run a modern society on that.  All you can do is pretend you can for a little longer.

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  • Sun, Apr 22, 2018 - 12:26pm

    #7
    dkengelen

    dkengelen

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    GDP Minus Debt

    The comment of using John Williams data is absolutely correct. And, if you superimpose the M2 velocity graph it becomes more apparent that our economy is now a place where money certainly goes to die.

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  • Sun, Apr 22, 2018 - 4:03pm

    Reply to #1

    Mark_BC

    Status Bronze Member (Offline)

    Joined: Apr 30 2010

    Posts: 275

    davefairtex

    davefairtex wrote:

    Mark_BC-
    So the wiki entry about the oil sands suggests there are 170 years of reserves up there in Athabasca.
    https://en.wikipedia.org/wiki/Athabasca_oil_sands
    Is the wiki entry wrong?
    Certainly, the side effects of production – lots of cancer causing chemicals leak into the environment – seem pretty terrible if you live near by, but the reserves seem as though they’ll last for a very, very long time.

    That seems about right. 180 billion barrels recoverable is 6 years of global oil consumption. I’ve seen estimates that twice as much as that is ultimately recoverable given price increases and technological development (and by externalizing environmental and social costs, wink wink). 
    I looked into eroei and I found similar numbers to the above comments. Interesting that it is not increasing over the years. 
     
     

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  • Mon, Apr 23, 2018 - 6:03am

    Reply to #6

    Snydeman

    Status Member (Online)

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    Posts: 477

    cmartenson wrote: You can't

    cmartenson wrote:

    You can’t run a modern society on that.  All you can do is pretend you can for a little longer.

    Hopium​, Stupidium ​and Ignorium. Now those are resources we are not in danger of running out of.
     
    Thanks for the breakdown on the EROEI equation. My gut told me that if there was that much oil sitting up there, and we knew about it this long, there had to be a reason we didn’t tap it sooner. Turns out it’s the bad stuff. I swear, the more I use the analogy of monkeys climbing trees to get fruit as a way to explain peak oil, the more it makes perfect sense. We’re only willing to expend energy to get this energy because there is no more fruit on the lower or middle branches.
     
    -S

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  • Mon, Apr 23, 2018 - 7:01am

    Reply to #6

    Waterdog14

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    Posts: 125

    Snydeman's Monkeys?

    Snydeman wrote:

    …the more I use the analogy of monkeys climbing trees to get fruit as a way to explain peak oil, the more it makes perfect sense. We’re only willing to expend energy to get this energy because there is no more fruit on the lower or middle branches.

    If you accept Gail Tverberg’s view that Peak Oil will be manifest as falling demand, resulting in lower prices rather than higher prices because the world cannot afford high energy costs, then an analogy of monkeys climbing trees for fruit (energy) can be construed as follows:
    Monkeys climb trees to gather and eat all the fruit on the lower branches.  Once the low-hanging fruit is gone, the monkeys have to climb higher (and expend more energy) to get the fruit energy.  But it’s a lot of work to climb that high, and takes a lot of energy to climb to the upper branches. Monkeys get tired of making the effort, so they stop climbing as often.  Since they are not climbing, they actually need less energy for a while.  Demand for fruit energy decreases, and there appears to be enough fruit to meet demand.  Until they starve.
    Clearly this analogy leaves debt out of the equation.   

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  • Mon, Apr 23, 2018 - 7:35am

    Reply to #6

    Snydeman

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    Posts: 477

    Waterdog14 wrote: If you

    Waterdog14 wrote:

    If you accept Gail Tverberg’s view that Peak Oil will be manifest as falling demand, resulting in lower prices rather than higher prices because the world cannot afford high energy costs, then an analogy of monkeys climbing trees for fruit (energy) can be construed as follows:
    Monkeys climb trees to gather and eat all the fruit on the lower branches.  Once the low-hanging fruit is gone, the monkeys have to climb higher (and expend more energy) to get the fruit energy.  But it’s a lot of work to climb that high, and takes a lot of energy to climb to the upper branches. Monkeys get tired of making the effort, so they stop climbing as often.  Since they are not climbing, they actually need less energy for a while.  Demand for fruit energy decreases, and there appears to be enough fruit to meet demand.  Until they starve.
    Clearly this analogy leaves debt out of the equation.   

    I’ll admit I’m still figuring out where I stand on Gail Tverberg’s view about Peak Oil, so you may be right in your analogy (which is a good one, if Gail’s premise is added to it). Either way, it’s not good for the monkeys.

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  • Mon, Apr 23, 2018 - 8:11am

    #8

    davefairtex

    Status Diamond Member (Offline)

    Joined: Sep 03 2008

    Posts: 3082

    marginal barrels

    So something we shouldn’t forget is the effect of the marginal barrel on price in the oil market.
    If most of the production is relatively cheap, and the marginal barrel is relatively costly to produce, the market will (roughly) price the marginal barrel at or near the cost of production.  While society can’t be run on tar sands, it can be run on mostly conventional production supplemented by tar sands.
    Without the tar sands, we’d lose 3 mbpd, and price immediately jumps to $150/bbl.  So that 3 mbpd is really critical to keeping price in control – more critical than it would otherwise seem.
    Put numerically, losing 3% of global production would result in a 120% increase in price.
     

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  • Mon, Apr 23, 2018 - 8:21am

    Reply to #8

    Snydeman

    Status Member (Online)

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    Posts: 477

    davefairtex wrote: So

    davefairtex wrote:

    So something we shouldn’t forget is the effect of the marginal barrel on price in the oil market.
    If most of the production is relatively cheap, and the marginal barrel is relatively costly to produce, the market will (roughly) price the marginal barrel at or near the cost of production.  While society can’t be run on tar sands, it can be run on mostly conventional production supplemented by tar sands.
    Without the tar sands, we’d lose 3 mbpd, and price immediately jumps to $150/bbl.  So that 3 mbpd is really critical to keeping price in control – more critical than it would otherwise seem.
    Put numerically, losing 3% of global production would result in a 120% increase in price.
     

    Wouldn’t that mean we’ll have to extract increasing amounts of tar and other low-EROEI projects, given that the production of cheaper oil is already in decline? At what point does that cost of production get tipped by a decreasing proportion of high-EROEI to low-EROEI oil sources? Meaning, sooner or later there’s too much high-cost oil in the market relative to low-cost oil, right?
     
    I don’t know, by the way. I’m asking!

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  • Mon, Apr 23, 2018 - 11:23am

    Reply to #8

    Mark_BC

    Status Bronze Member (Offline)

    Joined: Apr 30 2010

    Posts: 275

    Right but $150 oil will kill

    Right but $150 oil will kill demand so it would find some equilibrium probably aroun $100. End result – production goes down but price goes up. Exactly as peak oilers have been predicting for decades but were ignored by the mainstream. 

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  • Mon, Apr 23, 2018 - 1:44pm

    Reply to #3
    Wantingtoretire

    Wantingtoretire

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    Posts: 5

    At the moment most people really don't understand how money work

    I agree fully with this statement. Unfortunately, this covers most of the worlds’ population.

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  • Tue, Apr 24, 2018 - 5:56am

    #9

    Snydeman

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    Posts: 477

    10 years just popped 3%

    DaveF,
    So, the 3% just got breached. We’ll see if that’s a flash in the pan and drops back into the 2s, or continues its upward move.
    You’re the detail guy with a penchant for watching trends and market movements, so if you are willing could you highlight any reactionary moves/trends you see today as a result? 
     
    -S

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  • Tue, Apr 24, 2018 - 8:25am

    #10

    Snydeman

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    Posts: 477

    Boink

    And there goes both the price of oil and U.S. equity markets.
     
    Could be blood on the floor when this day ends!

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  • Tue, Apr 24, 2018 - 11:03am

    #11

    dcm

    Status Bronze Member (Offline)

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    Posts: 104

    analogies

    and a barrel of monkeys would be my analogy to those making energy policy
     

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  • Tue, Apr 24, 2018 - 11:12am

    Reply to #11

    Snydeman

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    Posts: 477

    dcm wrote: and a barrel of

    dcm wrote:

    and a barrel of monkeys would be my analogy to those making energy policy
     

    I dunno. That may be a tremendous insult to the monkeys.
     
    😉

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  • Tue, Apr 24, 2018 - 12:32pm

    #12

    thc0655

    Status Platinum Member (Online)

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    Posts: 1423

    Wait! What?

    There’s someone making energy policy?  This isn’t unmanaged chaos?

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  • Thu, Apr 26, 2018 - 5:21am

    #13

    KugsCheese

    Status Gold Member (Offline)

    Joined: Jan 01 2010

    Posts: 814

    Ford Canceling NA Sedans

    Subject tells you all you need to know.  Dumb is Dumb is Dumb.

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  • Thu, Apr 26, 2018 - 5:24am

    Reply to #2

    KugsCheese

    Status Gold Member (Offline)

    Joined: Jan 01 2010

    Posts: 814

    cowtown2011 wrote: Is there

    cowtown2011 wrote:

    Is there any reason to believe the US cannot leverage up to the same levels as Japan. They seem to be prime example of how a country who can print it’s own currency can leverage up all it wants. There seems to be no consequences for this behaviour. A podcaster I respect, named J. David Stein, Money for the Rest of US, believes that the US can continue to run massive deficits as long as it doesn’t destroy the private sector. It’s an interesting argument. I think you could point to Venezuela as an example of a country who can print it’s own currency yet failed. Did they destroy their private sector? Maybe? Would love to hear your views on this Chris and even hear an interview between you both. It’s never a good thing to debate things with people who always agree with you. That applies to all areas, including health. I’ve tried to get Peak to interview Dr. Michael Greger but no luck. Thanks.

     
    Japan is tied to the $.   Japan got a pass when QE arrived.

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  • Mon, Apr 30, 2018 - 8:08pm

    #14
    pgp

    pgp

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    Agreed. But....

    You can reduce the demand for energy by reducing the population.  Energy demand is a function of population size.  In other words while the heart of the problem is clearly in the energy supply chain as applied to an infinite growth economic model the cause is “too many people”. 
    Overpopulation is not a consequence of economic policy it is a cultural problem, rooted in our instinct for greed, that economic policy simply exploits.

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