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The Fed

Den of Thieves

Free Report
Den of Thieves
How the Federal Reserve Steals the Wealth of
American Citizens Through a Process of Inflation

By Brett Buchanan
May 13, 2009

First Released: May 13, 2009

Last Revised: May 13, 2009

Contact Information: Web-Site; itsnotrealmoney.com


Contact Information: E-Mail; brettbuchanan@yahoo.com
Introduction

If you are reading this report I can safely assume you have some interest
in learning more about this economic crisis and more importantly how it
is we will be affected by it. My own reasons for writing this report are
varied. If I were to narrow it down to the single most important reason
for investing the energy to condense this complex subject into a concise
valuable resource I would have to say it is my desire to share with people
in plain English what I know to be the truth.

What I have come to understand is that as this catastrophe unfolded


there was always a common denominator behind every headline. Like a
thread weaving its way into every swatch of fabric that made up this
crisis – that thread was the Federal Reserve and its needle was the very
money on which our entire economy is based.

Our money, our beloved US dollar in the hands of the central bank that
issues it is in fact the original weapon of mass destruction. When in the
hands of unscrupulous bankers our money can render entire populations
destitute. It can be used to transfer wealth from one economic class to
another, from savers to borrowers, from foreign countries to our own
citizens. It can even be used to steal property. The destructive nature of
our money is on the one hand so difficult to grasp when clouded by the
static of mainstream misrepresentation and misinterpretation, yet so
simple to understand in the end that the mind is repelled upon reaching
that point of knowing the truth. The mind stops dead in its tracks and in
a moment of absolute clarity the disbelieving mind says, “No, this can’t
be. Have we really allowed this to go on?”

I reached such a point in my life. That moment at which I understood


that holding money in my pocket or on deposit in my bank meant that I
owed interest to bankers, and that my wealth could be taken from me
without so much as a warrant or the permission of my agreement. Take
a moment to wrap your mind around the following words.

Holding money means you owe interest to private bankers and they can
and do steal your wealth without your permission.

Bankers do not collect their interest from you directly but rather
indirectly through the Internal Revenue Service. These interest charges
are paid to the bankers in such a way that not one man in a million
understands their scheme. And most egregiously the central bank that
controls all issuance of our currency can and does impose hidden taxes
on you far beyond what the IRS ever collects from your paycheck. The
Fed does it in such a way that we believe their policies are somehow
brilliant, that with all their Ivy League degrees these men must know
more than we do about money. They must
know how to save our fragile economy from itself through the infinite
mystery that is monetary policy.
I am here to tell you these men of the Fed and the US Treasury are no
smarter than a single one of us. Their Harvard degrees mean only that
they passed indoctrination into their money club, nothing more. Their
brilliance is all a façade. It is all a lie. And I will now prove it.

Suggested Reading – Atlas Shrugged by Ayn Rand (Cliff Notes)

Understanding Money – Some basics

What Is Money?

Money is anything that is generally accepted as payment for goods or


services or for the repayment of debts. Shells have been used as
money, as have cattle, stones, precious metals, and even paper has
been used as money – ironically, paper still is.

All modern money is ‘fiat’ money, meaning that it has no intrinsic value
other than an implied value as bestowed on it by its creator – in the
case of the United States that creator is the Federal Reserve. Fiat
money is backed by nothing but more fiat money. It is not backed by
gold. It is not backed by beaver-skins. It is however propped up by
debt, a concept of which we will explore later in this report.

A Brief History of Money

Money was born in the cradle of civilization in Sumer, southern Iraq in


the 6th millennium BC. Sumerians used ‘commodity money’ wherein the
value of the money was the raw material itself.

Commodity money is unique in that the supply of money can expand


only to the extent that the raw material can be had. Gold is perhaps the
most understandable of commodity monies as the supply of money is
limited to the amount of gold that can be mined from the ground.

Almost from the beginning of civilization the issuance of money has


fallen under the control of governments or some central authority. We
will come back to this statement later but for now I want you to consider
these words again – money has always been under the control of
governments or some central authority. Centralized monetary planning
is one of the primary tenets of Marxist Socialism or more specifically,
state socialism or state communism.
Centralized monetary planning runs counterintuitive to even the most basic
tenets of free market capitalism. Centralized monetary planning, especially
in control of private hands as in the case of the Federal Reserve System,
creates a class division defined by those financial institutions included in
the supply chain of money versus those at the consumption end, or more
succinctly of capitalists versus the capitalized.

Money has gone through almost immeasurable incarnations throughout


history. My focus here is not to give you an epic blow-by-blow regarding
every phase of money development over time but rather to apply some
simple logic and expose why money is what it is today.

For a more in depth look at the development of money throughout history


click on the following link. It is an astounding insight into how we came to
this place in history.

Suggested DVD - “The Ascent of Money”

How does modern money come into existence and how does money
affect prices?

Here we will explore the process by which the Fed controls the money
supply. The overall supply of money has a direct (but lagging) impact on
general prices. This section is not meant to be a technical outline of Fed
operations but rather an overview providing enough information so as to
understand how the Fed’s manipulation of the money supply affects prices
and ultimately your wealth. Below are two examples of how the supply of
money relates to prices.

In this first example let’s assume that all things are constant; the supply of
goods, the supply of labor, demand for goods, the supply of raw materials,
the general population itself, and the supply of money in circulation.
Imagine them all to be in fixed quantities in a perfect harmonious world of
equilibrium. In this scenario there would never be a need to add or
subtract any money from overall supply because the system is in perfect
balance. Under such a reality prices would never change.

Now assume those same factors; supply, labor, demand, materials, and
population were all in flux. Some rising at times, others falling, basically a
fluid situation wherein each factor could at times be working against the
other factors and at times in sync – a truly chaotic market wherein all
things were unpredictable. Now here is the strangest thing about money –
this is a reality you must understand before we continue. It is perhaps the
most important concept to grasp regarding money. The reality is that even
with
all these things in flux the supply of money would never have to change.
As a matter of fact the supply of money remaining fixed would act as the
great equalizer to bring things that had fallen out of sync back into
harmony. Prices would change, but never to the extent that any one
sector of the economy could draw so much money away from the other
sectors so as to drive selective prices up to intolerable levels. In other
words, with only so much money to go around price fluctuations would be
restrained by other money requirements in the economy – there would still
exist balance.

A fixed amount of money in a chaotic environment creates equilibrium.

The flipside to the concept above is that when an over-supply of money is


injected into the economy price distortion becomes the norm. One section
of the economy can easily draw a disproportionate amount of money from
the others because there is now too much money to go around. The
money supply is out of equilibrium and has difficulty balancing itself. This
is the perpetual state in which we find ourselves today.

Like our economy, for a ship caught in a raging storm there would exist
the perfect amount of ballast to keep the ship upright and afloat. Add too
much ballast and the ship will list to one side drawing a disproportionate
amount of ballast from the other side until eventually the ship capsizes,
rolls over, and sinks to the bottom. An over-supply of money in an
economy is like a ship overloaded with ballast.

Sadly, the Fed would like us to believe that in a state of chaos where the
basic driving forces of economies; supply, labor, demand, and population
are in a continuous state of flux that they, the Federal Reserve, in their
infinite wisdom can somehow manipulate the supply of money to balance
the chaos. This is utter madness. And the Fed knows it. Manipulating the
supply side of money only adds to the misallocation of resources as newly
created money attempts to settle amidst all the chaos. Hence the
phenomenon of asset bubbles.

All asset bubbles are Fed created.

Below is a graph from the Case/Schiller Real Estate Index. A spike in


asset prices, or prices in general, as seen to the right only occurs in the
wake of three influences; 1) war or national emergency - crisis, 2)
extreme monetary mismanagement by central banks - incompetence, or
3) by design - fraud.

Perhaps the most prescient book regarding this crisis as it relates to asset
bubbles and Fed monetary policies is Peter Schiff’s, Crash Proof. I highly
recommend reading this prophetic work.

Suggested Reading - Crash Proof by Peter Schiff


Money Creation

The two types of money the Fed creates are central bank money and
commercial bank money. Both are loaned into existence.

1.  Central Bank Money

Central bank money is created when the Fed buys collateral from
commercial banks in exchange for newly created dollars. It is also created
when the Federal Reserve funds our government’s fiscal deficits.

Central bank money is most easily explained by reviewing how our


government raises money to fund its budget deficits.

When the US Government is short of funds to pay its expenses it turns to


the US Treasury and requests the sum of money needed. The US Treasury
then issues Treasury Securities, or debt instruments, in the amount
requested. Treasury then sells these securities to the Fed who delivers to
the Treasury Department a Federal Reserve Check (or newly created
dollars) equal to the collateral the Treasury just provided the Fed.
Treasury now has the money to pay government expenses and the Fed has
the collateral that they can now sell on the open market, to let’s say,
China. The new Federal Reserve money was created by the stroke of a
pen (or keyboard entry) and the money is backed by an interest bearing
debt, a US Treasury security of which the ultimate holder of the debt, say
a US bank, or a foreign bank, is owed the interest. Hence, in that
transaction, as in all money creation the money created carries a debt
burden, or interest charge simply for its existence.

The theory goes that the US Treasury would be able to collect enough in
the way of taxes to pay off those debts. And in paying off those debts the
government is in fact ‘retiring’ the Fed Money that had been created and
added to the money supply when the original debt was issued as collateral
in exchange for the new money. In other words money is loaned into
existence, the debt is retired as the loan is repaid, and the private banker
who funded the deal gets to keep the interest.

Below is a flow chart of central bank money creation.

The two basic steps to create new money for government purposes are; 1)
Treasury delivers collateral (a promise to pay) to the Fed, 2) the Fed then writes
a check to the Treasury which the Treasury can deposit in its account and begin
using. Once the Treasury begins writing checks for their expenses to defense
contractors, social security recipients, and so on, the money has then entered
the money supply.
In theory, newly created money by way of federal deficit funding would
ultimately be retired from the money supply when the Government
runs a budget surplus and then repays the principal balance owed on
outstanding US Treasury securities. However, we all know our
government does not run budget surpluses therefore it will never retire
its debt.

The second way the Fed creates new money is through the commercial
banking system. While the Fed does not in fact create money directly
through commercial banks as it does in the case of central bank money
to fund government deficits, the Fed does control the framework under
which commercial banks lend new money into existence.

2. Commercial Bank Money – Fractional Reserve Banking

Commercial bank money is created through Fractional Reserve


Banking. Simply put, when a person deposits money into a bank the
bank can then lend out a percentage of that money. The remainder, a
fraction of the deposit, is held in reserve. Hence the term fractional
reserve banking.

Historically banks have been required to keep as much as 10% of


deposits in reserve. This money is held in the event that a vast
number of depositors would want their money withdrawn all at once.
However, with the blessing of the Federal Reserve, banks devised a
way to circumvent the 10% reserve requirement and for the most part
can now lend out nearly 100% of money they hold on deposit.

Fractional reserve banking is in reality a license to loan money into


existence and then collect interest on that loan. The loan (and
resulting increase to the general money supply) is retired as the
principal balance of the loan is repaid – much like when the
government would use budget surpluses to retire debt it had put up as
collateral for new central bank money. Now here is where the
fractional reserve equation gets really interesting – it’s called the
money-multiplier. The money-multiplier simply means that each new
loan a banker issues begets another loan, and so on, and so on.

When a banker issues a new home loan to a borrower and that


borrower goes out and buys his new house, the seller he bought from
takes his profit and deposits it into a bank, which then makes another
loan against that deposit. Much like a vicious circle of new money
being loaned into existence if left unchecked this whirling circle can
whip up into a tornado with new money being created at such a frantic
pace that everyone seems to be awash in money and equity. The
explosion of credit over the last decade was a direct result of the
fractional reserve requirement having been all but eliminated and the
money-multiplier going parabolic with absolutely no tether whatsoever.
All banks were on the prowl for new channels through
which to lend. There was no restraint whatsoever. It was almost as if banks
dared people to take out loans.

It can be said that the Fed, in tandem with our Government and commercial
banks, creates nothing but debt. They create nothing but a massive extension
of credit on our population and collect interest in the process. Fiat money
when backed by debt is not real money. Real money is gold. When there is a
shortage of real money the end users of money, the common folk, must come
to the banks for an extension of credit. When there is a shortage of real
money, the creators of money can and do anticipate those areas of the
economy where their debt money will pool – as it did in mortgage-backed-
securities. It is in these places where the money creators will congregate and
drive their herd blindly toward the edge of the cliff all the while reaping
gargantuan profits as the herd ironically believes they too are getting rich
when in fact they are getting raped.

Neither the Fed nor the Government possesses the ability to produce income
other than the US Treasury’s ability to collect taxes. On the commercial side,
the Fractional Reserve Banking system is by design a ‘debt paradigm’ or Ponzi
scheme who’s sole aim is to continually leverage against deposits –
a model of which relies on asset values (collateral) continually rising in
order to retire old debts and interest charges.

And if this all weren’t scary enough, we haven’t even touched on the
subject of securitization and Wall Street investment banks. That’s a whole
other story.

If you want to read the most scathing look at the inner-workings of the
Federal Reserve read William Greider’s, Secrets of the Temple – How the
Federal Reserve Runs the Country.

Suggested Reading – Secrets of the Temple

How Does the Fed Regulate Short-Term Money Supply?

Aside from the two main money creation channels of new central bank
money and fractional reserve commercial bank money the Fed also
regulates money on a more short-term basis. Through a process known as
Open Market Operations the Fed either adds money to the money supply or
removes it on a daily basis.

In theory, adding money to the money supply drives spending, spending


on new capital investment, consumer spending, bank lending, etc. The
downside of adding money to the money supply is that the potential of
price distortion as discussed above, and hence, selective price increases
becomes very real. The Fed know this all too well as once they see signs
of general price distortions to the upside they then move to subtract
money from the money supply thereby limiting price distortions, and
hence, counteracting inflation.

The problem is that by the time ‘general price signals’ start going off it’s
already too late. Selective areas of the economy, like housing, could have
already drawn disproportionate amounts of money from the rest of the
economy and thus entered a ‘bubble’ mode.

Simply observing the last two bubbles in the US economy, the NASDAQ
and housing bubbles, should tell you the Fed is growing less and less able
to correct their own mistakes. And even when they do step in to reign in
prices they never pull so much money out of supply to retard GDP growth
because without ever-increasing asset values and general production
growth there would not be enough income or equity to retire old debt.

Money supply that perpetually increases must be matched by perpetually


increasing income and production.
The graph below depicts MZM money supply (Money at Zero Maturity)
versus CPI-AUCNS (Consumer Price Index for All Urban Consumers).
Notice the ever-widening gap between the two indicators. When the
NASDAQ bubble popped post-2000 you can see the CPI line drop off while
the MZM line accelerates in counteraction. However, as prices rebounded
money supply did not decrease, it continued to accelerate. As a matter
of fact money supply never decreases. If it does, it is both short-term
and negligible. Following the two lines further right, to the present, you
can see the Fed is pumping historical amounts of money into our money
supply to counteract the deflationary price signals seen at the bottom
right of the graph. These deflationary price signals are driven largely by
the collapse in real estate asset prices. In other words, by inflating the
money supply the Fed is attempting to recreate the inflationary
environment that facilitated the housing bubble and hence prop up asset
prices. Delving further into the subject of the Fed’s present attempts to
prop up asset prices would take an entire other report, which is not our
aim. Your take-away from this graph should simply be to understand that
no matter what price signals the Fed receives aggregate money supply
increases.
Open Market Operations is the operational term used by the Fed when
executing daily policy, specifically adding or subtracting money from the
money supply. These operations are dictated at the behest of the FOMC, or
Federal Open Market Committee.

The FOMC does not inject or retract money from the US economy directly,
but rather indirectly through the banking system. Moreover, the FOMC,
through the New York Federal Reserve Bank Trading Desk either adds money
to the money supply or subtracts it by buying or selling US Treasury
Securities in coordination with a select group of banks known as Primary
Dealers.

Every business day at about 9:30am, the New York Federal Reserve Bank's
trading desk announces the day's "temporary open market operation".
These are routine transactions in which the NY Fed buys securities from the
group of "primary dealers" together with an agreement to sell them back at
a later time, the familiar "repo" transaction. This is usually the next day,
but can also be 3, 4, 7 or 15 days later. The effect is to add reserves to the
banking system for that corresponding period, that is, to provide liquidity. If
there is an excess of liquidity, the NY Fed may do "reverse repurchase
agreements", selling securities with an arrangement to buy them back, thus
draining some reserves for the day or 2 or 3 during which the transaction is
in force.

Below are graphic representations of the basic flow of collateral and liquidity
between the New York Fed and Primary Dealers both adding and subtracting
money from the money supply.
One of the most cutting-edge articles I read regarding Fed monetary
policy and how it opened the floodgates to this crisis was a piece by
Aaron Krowne on iTulip that was authored in 2006. It is fairly technical
but even skimming the article will provide incredible insight as to how
the Fed completely mismanaged policy and opened Pandora’s box.

Essay by Aaron Krowne - What Really Happened In 1995?

What is inflation and who profits from it?

So far we have focused primarily on the process of money creation.


Understanding the mechanics of this process is essential to
understanding how those who control the issuance of currency through
central banking can and do through a continuing process of inflation
impose a hidden tax on all lower, middle, and most upper class
Americans.

As I wrote in my Introduction the concept of how money creation is used


to usurp wealth from the users of money is “so simple to understand in
the end that the mind is repelled upon reaching that point of knowing the
truth.” You are about to understand this truth.

First, what is inflation? Inflation is simply an increase in the supply of


money.
What is the effect of inflation? The effect of inflation is seen through an
increase in the general prices within an economy.

How does inflation benefit the creator of money by taxing the consumer?
To answer this question is to understand the reasons our founding
fathers fought the Revolutionary War. 

When a central bank requires new money to pay for whatever
expenditure public or private, bailout or stimulus, or to push whatever
economic button it desires, the central bank simply creates it. Their
new money appears out of thin air. They then have the audacity to
charge the public interest for its use. These interest charges go solely
toward private gain.

It can be said that the power to create money is the power to never
incur any cost. Think about it. If you have the ability to create money
from nothing what do you care how much you need to print to pay for
what you want? For you it’s free money. But for the people who can’t
print their own money they are the ones who will bear your cost. All
real cost is passed on to the consumer of money through an increase
in general prices. This is how new money created from thin air is used
for free by its creator and then absorbed into the economy where the
creators folly is paid for by the end users of money who absorb the
inevitable increase in general prices.

Remember, the creator gets to use its newly created money for
whatever it wants. Price is not an issue. Have you ever wondered why
Congress spends money so foolishly? It simply does not matter to
them because for them money has no value. It comes from nowhere,
at least in the minds of our leaders. In reality fiat money only has
value when it enters the economy. And at that point we must absorb
the new money by accepting a lower divisible value of our existing
money.

Here’s an example of what I mean. Picture a man approaching you


with a briefcase full of a million brand new dollars never before used.
The man hands over the case then turns and walks away. You now
have a million dollars. It cost you nothing. No labor, no risk, nothing
whatsoever you simply had no money, then you had a million dollars.
You spend every dime of it immediately. But here’s the catch. A
million new dollars have now entered the economy and nothing was
done to make room for these dollars so they have to squeeze into the
economy with all the other dollars. This creates a greater divisible
value between all previously existing money. Hence, each dollar is now
worth less as it is divided into the economy with all the other dollars.

In a fiat currency system we know that money is created essentially


from nothing. Before it enters the economy fiat money has no value
because it does not exist. Money that does not exist can therefore
have no influence on general prices, as it causes no drag on the value
of existing money. But the moment a central bank issues even one
new dollar all existing money is then worth less. And when a central
bank issues trillions of new dollars, well, you do the math. The value
of your previous dollars just got divisibly hammered by trillions of new
dollars. When your dollar is worth less you
then need more of them at the cash register than you did before. (You
multiply to undo the division).

When the Fed creates new money they are in essence trying to squeeze
more units into a confined space, or the economy as defined by the
overall quantity of goods and services produced, or Gross Domestic
Product (GDP). The Fed hopes that the increase in money will serve to
expand the economy thereby expanding the ‘confined’ economic space,
or GDP, and offsetting the division of value (dilutive effect) caused by the
new money.

The graphic below depicts the economy as a fixed box. The overall
quantity of goods and services (GDP) sit atop the supply of money acting
as a ceiling (or demand cap) on the divisible value of money. On the left
side, Before Inflation, a balanced amount of money exists in relation to
‘demand’ on GDP. However, After Inflation, more money has been
‘squeezed’ into the economic space within the constraints (or demand
cap) of GDP. Hence, each dollar in circulation must then be divided into
GDP with all the other pre-existing money, hence making all money worth
less and prices seemingly higher.
The paradox of inflation is that old money, money that existed prior to
additional new money being added to the money supply, never regains its
full prior value due to the Fed policy of always expanding money supply
beyond the capacity of GDP to grow enough to offset the monetary
expansion. Based on the Fed’s track record of only focusing on the short-
term, that is to expand money supply to wrangle its way out of economic
slumps, it is mathematically impossible. Once old money is diluted it is
diluted forever. The only question is how much? The only course the Fed
could take to counter the inflationary effects (on prices) of monetary
expansion would be to contract the money supply enough so as to pull
GDP all the way back to its pre-monetary expansion level. However, the
Fed can never do this, as they need an ever-expanding GDP (and money
supply) to retire old debt. If they went against this practice it would
mean to take away from the ‘inflation driven’ wealth of the very banking
system the Fed created. And this is how we got to where we are today.

What have we learned?

We’ve learned that by creating money out of thin air (fiat money) there is
no cost to the issuer and first user of new money. Their money is free.
Money is in fact a gift to them. The cost of the gift is only seen when
new money enters the money supply and is put into use by consumers.
It is only then new money reflects the cost of its creation by way of
diminished purchasing power and hence higher prices. This is how
monetary inflation serves the creator. This is the hidden tax of inflation.

We’ve also learned that too much money in the money supply is like too
much ballast on a ship. It can easily list to one side or the other tipping
the scale so to speak causing asset bubbles, erratic price swings, and
distorting entire economies in general – a fact of which the creators of
new money anticipate and capitalize upon.

Finally, we’ve learned that the Federal Reserve in their infinite wisdom is
in fact the cause of inflation and of the general deterioration of the
American standard of living. Thomas Jefferson put it best.

“I believe that banking institutions are more dangerous to our liberties


than standing armies. If the American people ever allow private banks to
control the issue of their currency, first by inflation, then by deflation, the
banks and corporations that will grow up around [the banks] will deprive
the people of all property until their children wake-up homeless on the
continent their fathers conquered. The issuing power should be taken
from the banks and restored to the people, to whom it properly belongs.”

Thomas Jefferson, (Attributed)


3rd president of US (1743 - 1826)
The Proof

So when I made the claim I would prove the brain trust of the
Federal Reserve and the US Treasury are no smarter than a single
one of us, that proof exists in your ability to see through their
scheme. Evidence that the Federal Reserve system uses the hidden
tax of inflation to usurp the wealth of hard working citizens is
conclusive. To argue any different would be absurd.

They create money from nothing – new fiat money is a free gift to
the first user.

The cost of the gift is paid for by the consumer of money (you and I)
through the hidden tax of higher prices resulting from their monetary
inflation. The gift that keeps on taking…

Closing Words by the Venerable Ron Paul – US Congressman

Ron Paul – Paper Money and Tyranny; September 5, 2003 Speech to


the US House of Representatives.

“Alan Greenspan, years before he became Federal Reserve Board


Chairman in charge of flagrantly debasing the U.S. dollar, wrote
about this connection between sound money, prosperity, and
freedom. In his article “Gold and Economic Freedom” (The
Objectivist, July 1966), Greenspan starts by saying: “An almost
hysterical antagonism toward the gold standard is an issue that
unites statists of all persuasions. They seem to sense…that gold and
economic freedom are inseparable.” Further he states that: “Under
the gold standard, a free banking system stands as the protector of
an economy’s stability and balanced growth.” Astoundingly, Mr.
Greenspan’s analysis of the 1929 market crash, and how the Fed
precipitated the crisis, directly parallels current conditions we are
experiencing under his management of the Fed. Greenspan explains:
“The excess credit which the Fed pumped into the economy spilled
over into the stock market- triggering a fantastic speculative boom.”
And, “…By 1929 the speculative imbalances had become
overwhelming and unmanageable by the Fed.” Greenspan concluded
his article by stating: “In the absence of the gold standard, there is
no way to protect savings from confiscation through inflation.” He
explains that the “shabby secret” of the proponents of big
government and paper money is that deficit spending is simply
nothing more than a “scheme for the hidden confiscation of wealth.”
Yet here we are today with a purely fiat monetary system, managed
almost exclusively by Alan Greenspan, who once so correctly
denounced the Fed’s role in the Depression while recognizing the
need for sound money.” 


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