Mirabile Dictu! Economists Agree All the Fed Has Done is Goose Financial Markets!

You heard it first in the blogopshere. From the New York Times:

The Federal Reserve’s experimental effort to spur a recovery by purchasing vast quantities of federal debt has pumped up the stock market, reduced the cost of American exports and allowed companies to borrow money at lower interest rates.

But most Americans are not feeling the difference, in part because those benefits have been surprisingly small. The latest estimates from economists, in fact, suggest that the pace of recovery from the global financial crisis has flagged since November, when the Fed started buying $600 billion in Treasury securities to push private dollars into investments that create jobs….

A study published in February found that interest rates decreased, but only for companies with top credit ratings. “Rates that are highly relevant for households and many corporations — mortgage rates and rates on lower-grade corporate bonds — were largely unaffected by the policy,” wrote Arvind Krishnamurthy and Annette Vissing-Jorgensen, both finance professors at Northwestern University.

Another indication of its limited success: Borrowing has not grown significantly, suggesting that corporations — which are sitting on record piles of cash — are not yet seeing opportunities for new investments. Until they do, some economists argue that the Fed is pushing on a string.

“What has it done? It has eased credit conditions, it has pumped up the stock market, it has suppressed the dollar,” said Mickey Levy, Bank of America’s chief economist. “But does the Fed think that buying Treasuries and bloating its balance sheet is really going to create permanent job increases?”

We’ve argued repeatedly, as have others, that well targeted fiscal stimulus and more private sector debt restructuring were the right medicine. But Obama and his bankster friendly advisors had no stomach for much of either remedy.

For what it’s worth, QE and QE2 have gotten a barrage of criticism. Jim Hamilton looked at the much bigger first round of QE and concluded that it lowered long bond yield by only 17 basis points. Paul Volcker thought making a fuss over the program was silly, since the Fed used to buy bonds as a matter of course. And as Marshall Auerback has pointed out, the idea of a fixed dollar amount of purchases was bizarre. There was no way of knowing what if anything it would accomplish. It would have made more sense for the central bank to set a rate target (say for whatever longer-dated maturity it chose to target) and buy whatever it took to keep that level.

You could argue that the big impact of the QEs was psychological, that it was tangible proof that the Bernanke put was the Greenspan put on steroids. And you have thegeneral concern, that the more the Fed meddles in rates, the more it creates economic distortions, which are very likely to be speculation rather than real economy investment.

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  1. attempter

    the Fed started buying $600 billion in Treasury securities to push private dollars into investments that create jobs

    1. That was never the Fed’s intention. (That’s a literally standard NYT lie, where the proclaimed intentions of elites are systematically represented as reported facts.)

    2. If a government truly wanted to create jobs, imagine what $600 billion in direct stimulus could do. (Obama’s corporatist version was mostly just a bailout by other means.)

    You will the end, you will the means. Since this government never wills anything but corporatist means which are proven failures at anything other than robbery, it follows that corporate robbery is the end it intends. QE and the rest of the Bailout are the ultimate proof.

    1. Jim Haygood

      The Federal Reserve’s experimental effort … has … reduced the cost of American exports

      Gotta love the way the MSM’s PR flacks spin the positive. Instead of focusing on exports, which concern few Americans other than farmers, the NYT stenographer could have written that ‘the Federal Reserve’s goofball experiment has blown gasoline prices to over $4.00 a gallon.’

      But then El Barbudo (The Bernank) would be unhappy. And it’s not every day that you get a client who can print the money to pay his bills.

      Naturally the incurious NYT never explores the question of why a bank cartel should be licensed to counterfeit currency.

      1. alex

        “exports, which concern few Americans other than farmers”

        Exports ought to concern a lot of Americans other than farmers. They affect jobs, both directly and indirectly, and economic stability. Driving down the exchange rate of the USD would be the one positive effect of QE and QE2. Nobody, including me, likes rising gas prices, but to the extent they’re the result of a falling dollar they’re a necessary evil, as are rising import prices in general.

        For even longer than the housing bubble went on we’ve had an import bubble as a result of a dollar bubble. It’s destroyed much of our manufacturing (you know, the kind of industries that produce useful things rather than shifting debt and playing con games). Inevitably those bubbles will burst, as historically they always have. Better to start deflating them now under somewhat controlled conditions rather than wait for the big bang. You saw how the big bang approach to deflating the housing and debt bubbles went. Do you want to see an encore?

        And far from being the wrong time to start correcting this, its the best time. Having the exchange rate of your currency drop increases exports and jobs.

          1. alex

            I didn’t say QE and QE2 were sufficient to straighten out the exchange rate problem, or even the best mechanism for it. We have to address things like the dollar-yuan quasi-peg and various foreign manipulations of the US dollar.

        1. KnotRP

          The devaluing dollar is not going to equalize globalization pressures, and cannot begin to touch the differences in
          globalized work week and environmental standards.

          So when we’ve devalued or completely destroyed the dollar,
          our unit of *savings* here in the US, and find that we’ve
          accomplished too little to change the globalization game,
          but now we’re all able to buy less with what we’ve managed
          to save, what will you say then?

          The Dollar Devaluation game depends upon the concept
          that the US will accept the global lifestyle….which is a seriously bad miscalculation. We’ll have riots and burning
          banks first…

          1. alex

            “The devaluing dollar is not going to equalize globalization pressures”

            That’s tantamount to saying that price doesn’t matter. There are plenty of products made in China, for example, because it’s 10% cheaper. Drop the yuan/dollar ratio by 10% and it’s a wash, drop it 20% and we have the cost advantage.

            Of course there are plenty of low value added labor intensive products where the US just can’t compete, but as Yves and others have detailed, there are quite a few skill and capital intensive products where the US can be quite competitive. How do you think the Germans do it? Germany is hardly a cheap labor country and they’re a major exporter.

            There’s a big difference between sewing together T-shirts on a $300 sewing machine and making computer chips in a $3B fab.

          2. KnotRP

            (I cannot place this reply to alex’s comment below, so I’m putting it here.)

            It’s safe to say that US labor standards (work week, safety, age limits) and environmental standards would not drop to globalized “standards” (or lack thereof, really) *before* the social fabric of the country would come apart, first. “Low prices” cannot make up for being able to externalize costs on the labor force and the local environment…

    2. eric anderson

      “If a government truly wanted to create jobs, imagine what $600 billion in direct stimulus could do.”

      LOL. The answer of course is that it would create another $600 billion in federal debt for taxpayers and their children and their children’s children to be paying interest on.

      It would employ people temporarily in some form of malinvestment. Perhaps some beautiful infrastructure like the $15 million walking path/bridge to nowhere a mile north of my house.

      Just imagine. I don’t have to imagine. I’ve seen how government spends what it borrows. No, thank you.

      1. attempter

        Pay closer attention to what you read. I think you ought to be familiar enough with me that when I say “jobs” I mean real jobs. A government that truly wanted to create jobs would be a government radically different from the one that exists. I obviously don’t refer to this government, and I’ve never done anything but condemn it, as I do in this comment.

        Your comment still refers to the existing government, and is therefore non-responsive to mine.

        On the other hand, I recall your support for the corporate wars. So you do indeed have a record of supporting not just big, aggressive government in principle, but this particular big, aggressive government in practice.

  2. Skippy

    Chasing price does not fix the underlining value issue…so 101…

    Skippy…maturity’s et al are an expectation, not written in stone, gifted by the universe…self inflicted illusions of valueless electrons pretending as societal value cuz the master of price decree it, will end like all false positives.

  3. foosion

    Lowering unemployment just raises labor costs, which is bad for corporate profits. No one in power supports that.

    Higher equity markets, on the other hand, put money into the pockets of those who run things.

    The public elected Republicans last November, an obvious endorsement of these policies.

    1. Francois T

      “The public elected Republicans last November, an obvious endorsement of these policies.”

      Obvious? Far from it when one look at the participation rate by demographic. In a nutshell, About the same number of Republicans voted in 2010 than in 2006. The big difference is that the Democrats were far less numerous in 2010 than in 2006.

      Endorsement it was not.

  4. Three Wickets

    Most of the second round of easing has either helped the Treasury finance its deficit or helped corporations buy back stock with the easy borrowing rather than invest in growth. Looks almost as if the government and the corporations aren’t sure what they should be investing in. So the loose cash ends up in the stock market, or overseas, or at internet startups. Seems there is no strategy. What’s up with that Council on Competitiveness and Jobs that Immelt is leading.

    1. alex

      “What’s up with that Council on Competitiveness and Jobs that Immelt is leading.”

      What else would be up with anything Immelt is involved in. Putting Immelt on an American jobs commission is like putting Benedict Arnold in charge of 4th of July celebrations.

      The answer for Immelt is always to ship more jobs and productive investments to China, but the question is how to convince Americans that that will help them. Or do they even care anymore about feeding us peasants a plausible line of bull?

      1. skippy

        LOL@”Putting Immelt on an American jobs commission is like putting Benedict Arnold in charge of 4th of July celebrations.”


        Born in Connecticut, Arnold was a merchant operating ships on the Atlantic Ocean when the war broke out in 1775. After joining the growing army outside Boston, he distinguished himself through acts of cunning and bravery. His actions included the Capture of Fort Ticonderoga in 1775, defensive and delaying tactics despite losing the Battle of Valcour Island on Lake Champlain in 1776, the Battle of Ridgefield, Connecticut (after which he was promoted to major general), operations in relief of the Siege of Fort Stanwix, and key actions during the pivotal Battles of Saratoga in 1777, in which he suffered leg injuries that ended his combat career for several years.

        In spite of successes, Arnold was passed over for promotion by the Continental Congress while other officers claimed credit for some of his accomplishments.[3] Adversaries in military and political circles brought charges of corruption or other malfeasance, but he was acquitted in most formal inquiries. Congress investigated his accounts, and found that he owed it money after he had spent much of his own money on the war effort. Frustrated and bitter, Arnold decided to change sides in 1779, and opened secret negotiations with the British. In July 1780, he sought and obtained command of West Point in order to surrender it to the British. Arnold’s scheme was exposed when American forces captured British Major John André carrying papers that revealed the plot.


        Skippy…if only we had more.

        1. alex

          Ok, so I was being too nice to Immelt in comparing him to Benedict Arnold. I was trying to tone it down from my original simile that Immelt on an American jobs committee is like Stalin on a human rights committee. But I still don’t think Arnold would be the right choice to plan a Fourth of July celebration.

  5. Middle Seaman

    The surprise is that economists, in this case in Fed and many others, are completely clueless about what it takes to push the economy forward. One would think that the majority of experts will realize that the huge individual debt and the lack of jobs is what suppresses the recovery.

    Obama and his lust to help the banksters is way less of a surprise. A guy created and pushed by Wall Street and who lacks vision and ability will of course make his creators rich.

  6. Mat Albert5416

    Recall John Hussman’s response to Bernanke’s Op-Ed in the Washington Post, where Hussman said that Bernanke’s comments were “undoubtedly among the most ignorant remarks ever made by a central banker”.

    “…the markets launched into a speculative rampage in response to an Op-Ed piece by Bernanke that was published Thursday morning in the Washington Post. In it, Bernanke suggested that QE2 would help the economy essentially by propping up the stock market, corporate bonds, and other types of risky securities, resulting in a “virtuous circle” of economic activity.

    Let’s do the math.

    Historically, a 1% increase in the S&P 500 has been associated with a corresponding change in GDP of 0.042% in the same year, 0.035% the next year, and has negative correlations with GDP growth thereafter (sufficient to eliminate any effect on the long-run level of GDP). Now, even if one assumes – counter to reasonable analysis – that the GDP changes are caused by the stock market changes (rather than stocks responding to the economy), the potential benefit to the economy of even a 10% market advance would be to increment GDP growth by less than half of one percent for a two year period.

    Now, as of last week, the total capitalization of the U.S. stock market was at about the same as the level as nominal GDP ($14.7 trillion). So a market advance of say, 10% – again, even assuming that stock prices cause GDP – would result in $1.47 trillion of market value, and a cumulative but temporary increment to GDP that works out to $11.3 billion dollars divided over two years. Moreover, even if profits as a share of GDP were to hold at a record high of 8%, and these profits were entirely deliverable to shareholders, the resulting one-time benefit to corporate shareholders would amount to a lump sum of $904 million dollars.

    In effect, Ben Bernanke is arguing that investors should value a one-time payout of $904 million dollars at $1.47 trillion. Virtuous circle indeed.”


    But of course the goal of QE2 was never to help the economy or Main Street, its’ purpose was to help banksters loot the economy.

    What the attempter said about Larry Summers also applies to Bernanke: “He’s been not only one of the most important, but one of the most typical cadres of kleptocracy.”

  7. ambrit

    It’s another example of the Law of Unexpected Consequences. The main result of QE and QE2 looks to be, from down here in the trenches, a deep reinforcement of the publics natural distrust of “those in power.” This is exploitable, but is a most dangerous double edged sword. Notice how everyone is talking about ‘Obamas Wars’ and ‘Obamas Economy,’ the reality of their true origins notwithstanding?

    1. eric anderson

      Obama always embraced the Afghan war. And he owns it now, having done a thorough review, drafting a new roadmap. (See Obama’s War by Bob Woodward) But there are no other Obama wars. Only a new “kinetic military action.” (howls of derisive laughter)

      As for the economy, Obama grasped the steering wheel of the kleptocracy, and drove it faster in the direction it was already going. Tell me why he does not deserve to own whatever happens to the economy from here on? Man, I remember the time he wouldn’t vote to extend the debt ceiling. What a difference a few years makes. I remember when he said he wasn’t elected to serve a bunch of fat cat bankers. If that doesn’t make the contents of your stomach start to rise to the back of your throat, I don’t know what…

      1. skippy

        Economic and conflict herpes do get around.

        Skippy…political sheaths are not 100% protection…eh.

  8. 70 and Out

    Please excuse my non-financial-world(automotive engineer)-probably-simplistic question, but aren’t the purchases of Treasuries by the Fed facilitated by a broker (likely TBTF investment banks)? And those brokers hold the treasuries for the Fed resulting in a big plus on their balance sheet? And the balance sheet plus allows them (or an allied hedge fund) to manipulate equity and commodity markets resulting in additional balance sheet “improvement” and the appearance of a “turn around? Sorry for entering in, but I couldn’t resist an longer; I’ll go back to being a reader only

    1. alex

      I’m not a financial expert either but I’m pretty sure the brokers don’t hold the treasuries on their balance sheets for the Fed. The Fed’s balance sheet is its own. Not to say the brokers don’t get some cut from brokering, maybe a little extra info about the right buy/sell time for treasuries or a better price for the treasuries they have lying around as the Fed drives the price up, but the brokers don’t hold treasuries on their balance sheet on the Fed’s behalf.

    2. don

      I’d say you are correct. The intent of QE2 was as much propping up the monopoly bank finance system as it was propping up asset prices. Monetization creates the appearance of economic stability and growth — in effect to underscored the illusion that what is good for Wall Street is good for Main Street. This reflects the almost religious belief that market prices dictate the reality of production and consumption, rather than the reverse.

      Now that we have entered the austerity phase of “recovery”, we can assume that the combination of monetization with fiscal stimulus has run it course. The CB bailed out high finance and the government propped up consumption (however temporarily) by running up a deficit. Now we’re now being told that public debt is the crisis and it must be addressed by accepting the downsizing of the working/middle class. Yes there exist class warfare, and we know who is winning.

      The CB believed that real economic recovery would by now be an accomplished fact. Since a real recovery has proven illusive, its plan to withdrawal the “injections” of liquidity from the patient must be kept on hold, as it keeps with its central aim of propping up the mega-banks. The CB/high finance are essentially now in their own liquidity trap, while the real economy remains hostage to said high finance.

      As the US and global economy remains mired in stagnation (after an expected bounce off dramatic lows), public and private debt levels prevent a renewed global stimulus while the Fed has little to no room to further monetize (other than QE3, which after QE2 may not be realistic unless it comes as a response to a renewed crisis). It could also turn out, in the very short term, that the US CB’s QE program has created price inflation in commodities that contain its own demand destruction. Inflation is ultimately deflationary. In this way the CB’s claim that these prices are transitory is correct, though for the reasons other than what it assumes.

    3. Yves Smith Post author

      The Fed has its own trading desks at the NY Fed and trades bonds and currencies. It does not need to execute the transactions through the Street (there was an article at the NY Times on how the Fed was executing QE, so they may indeed have elected to use the dealers, which would strike me as not accomplishing much, since everyone knows the Fed is in the market and the usual value of spreading out an order among dealers is to hide your moves. But I can’t find the article to see what it said about that aspect).

      Treasury bond auctions are different, here the dealers are placing orders for their own inventory and on behalf of customers.

  9. mario

    Some inflation and dollar devaluation wouldn’t hurt the main street. It’s hard to find a black cat in a dark room, especially if there’s no cat…

  10. rd

    The QE’s have coincided with a massive increase in credit card interest rates: http://money.cnn.com/2011/01/28/pf/credit_cards_interest_rates/index.htm

    The increase is actually due to the banks response to legislation about credit cards, so it just further exemplifies how Bernanke’s QE policies are completely untethered to the real world of consumers and business.

    Bernanke can QE all he wants, but if the end result is higher credit card interest rates, dropping house prices without significant mortgage rate and property tax reductions, increasing gas and food prices, and little change in unemployment, then there is no way in hell that he is going to get American consumers and domestic business off the mat.

    Instead, we are getting this propaganda war going on about how important it is to maintain low taxes on the wealthy, especially the financial sector (e.g. carried interest tax policies for fee income). If I recall, Hoover and Mellon reduced the top income tax rate to 24% from over 70% back in about 1929 – that worked out well for everyone I believe.

    Bernanke is sowing the seeds of the next financial crisis as he is pumping wads of money into speculative frenzies that are not based on real economic activity. I think in the next financial crisis, we should permit the financial sector to experience capitalism at its finest – we need to allow them to fail, probably through nationalizing the firms temporarily to prevent a disorderly Lehman type of bankruptcy.

    We have been watching all of those quaint scenes from the Middle East with thousands of people marching in the streets over unemplyment and inflation, occasionally getting machine gunned by their governments. It is important to remember that it took similar events in 1932, like the military rousting the Bonus Army, to create the evnironment where Glass-Steagal could be passed. By that point, even the remaining wealthy knew that something had to change. I hope that out politicans do not have to create a repeat of 1931-1933 in order to get rational policy making back on track, but I am not optimistic.

    1. alex

      Bernanke is sowing the seeds of the next financial crisis as he is pumping wads of money into speculative frenzies that are not based on real economic activity. I think in the next financial crisis, we should permit the financial sector to experience capitalism at its finest – we need to allow them to fail, probably through nationalizing the firms temporarily to prevent a disorderly Lehman type of bankruptcy.

      Hear, hear!

      Capitalism for the “capitalists” (a term various parasites flatter themselves with) is a great idea.

    2. YankeeFrank

      Theoretically, nationalization of the major banks with replacement of all upper management with honest business people (an oxymoron today?) combined with real reform should be enough. Apparently such rational behavior is not possible in our society without a total collapse, so its a truism to say that without total collapse of the financial system there is zero chance of reform and recovery.

  11. Eric

    The kind of easing we really need is a dose of financial salts and a toilet that flushes into space.

  12. Fat Tom Cat

    What are you talking about!? QE2 worked wonders for me. I got 50 billion interest free, with which I kick started my Grand Strategy of buying up the entire state of Michigan. That money was instrumental in helping defund Detroit’s public schools and foreclosing on all the deadbeats whose property I wanted, 5000 houses in total. It also helped me finance the closure of 25 more manufacturing plants, and the outsourcing of 32,000 jobs to China. I also contributed 10 million of it to my favorite Tea Party governors’ Swiss bank accounts for the good work they have been doing for me. Finally, I used 500 million of it to fund my FatCat Foundation so that my and my children’s interests aree looked after in perpetuity. So I don’t want to hear another bad word about QE2 or MY Fed, MY Bernanke, MY Geithner, MY government, and MY USA. This is MY country now — you’re all just tenants here. Got that?!

    Fat Tom Cat

  13. confused

    “The Federal Reserve’s experimental effort to spur a recovery by purchasing vast quantities of federal debt has pumped up the stock market, reduced the cost of American exports and allowed companies to borrow money at lower interest rates.”

    I’m sorry, I don’t get the connection.

    FED buys Treasury bonds (ie loans THE Treasury money). From where did the FED get the money to loan to “THE Treasury — an agency of the Federal Government”? From its savings? From its member banks? From its printing press? but, I digress…

    Anyway, now the Federal Government has some money to fund “Banks” (or some other entities) that lend to companies? I don’t think that companies can apply to THE Treasury directly for a loan, can they?

    No, I am pretty sure that THE Treasury’s money is distributed to the various Federal Agencies (DOD, DOE, DOI, DOEd, DOC, DOHHS, DOHS, DOHUD, DOJ…etc.) to pay their various contractors and consultants plus a few direct employees and their overhead probably according to the plan spelled out in the Federal budget.

    An area of confusion that I have is understanding the mechanism that ties the various QEs to the Federal budget.

    By shoveling money into the agencies’ contract and consulting firms, who then buy from various parts of the US economy to fulfill their government contracts, the FED will indirectly stimulate the economy and pump up corporations’ dividends and stock values. At the same time, it seems, that all of this new money will have some effect on the debasement of the currency, eventually.

    Still don’t understand the mechanism that allows “companies to borrow money at lower interest rates”. Could someone connect those dots for me?

    1. Cedric Regula

      It’s Crowding Out Theory in reverse. The Fed bought(monetized with the printing press, for whatever the term of the bond is… they get the money back and can throw it away when the bond matures) an amount that equates to about the entire USG deficit. It’s large, the Treasury is only collecting about half the annual Federal budget in taxes.

      The government would have had to sell that to either domestic or foreign buyers, which include banks and foreign central banks. That would have put some upward pressure on rates. Jim Hamilton figured 17 basis points effect(down) for QE1 , but that was during a deflationary, flight to safety period, when everyone wants to buy Treasuries.

      Until the markets and foreign investors cry foul of course. Then the game doesn’t work anymore. China just started making noises again about “diversifying” out of 2 trillion of their 3 trillion in Treasury holdings. We have to wait and see if they are just blowing smoke again. But PIMCO sold all theirs already. Some signs Japan may reduce their large holdings too.

  14. Jackrabbit

    And as Marshall Auerback has pointed out, the idea of a fixed dollar amount of purchases was bizarre. There was no way of knowing what if anything it would accomplish. It would have made more sense for the central bank to set a rate target (say for whatever longer-dated maturity it chose to target) and buy whatever it took to keep that level.

    But a rate target would’ve meant that anyone holding Treasuries could sell them to the Fed at historically low rates. Imagine China selling $1T T-Bonds to the Fed (shorting or executing swaps as necessary).

    Furthermore, the Fed could not tighten any longer, and even driving down medium-term rates by 50bp (a VERY costly endeavor) would not have helped much. A better strategy – which I believe QE2 is based on – was to raise interest rates so that banks have a greater incentive to lend.

    Thus, as structured, QE2 *IS* “printing money” but it comes with a promise to mop up the excess in the future (as the bonds mature, or via unwinding before maturity). While disingenuously talking DOWN yields, the Bernanke’s QE2 was _bound_ to hike them. Further, while more loans would be better for the economy (especially if it sparked a RE recovery), the banks would benefit regardless of the effects on the real economy. (Aside: I think the Fed and Tsy are hot for bank equity offerings before the 2012 elections. Nothing says “healthy banking sector” like a successful equity offering)”

    I think the above best explains a) why QE2 is “only” $600b, b) why the Fed did not target a rate, and c) why rates rose dramatically after QE2 began. It also dovetails with the concerns, expressed well before QE2, regarding low bank lending volume and Geithner’s focus on increased bank capital as the best protection against TBTF systemic risk.

    Bernanke had to give a compelling reason for QE2 and he chose to say that it would increase employment via lower rates (note: some pointed out at the time that rates were already at historic lows but jobs were, nevertheless, hard come by) because it was politically inconvenient to tell the truth: that QE2 was designed to incentivize bank lending by giving them a higher return on the loans they make.

    QE2 might’ve worked better if the robosigning/MERS scandal had not occurred. We may see QE3 if: a) stocks and T-yields fall after QE2 (a return to pre-QE2 conditions); and/or b) mortgage market uncertainties are resolved.

  15. political economist

    I have a question on terminology. Why do you call this the “Bernanke put” when the Fed is buying bonds not options to sell?

    1. Cedric Regula

      It’s just a loose analogy to options trading. It means the Fed comes to the rescue. The Greenspan Put was Greenspan slashing rates whenever anything bad happened anywhere in the world. Benrnanke likes buying anything that remotely resembles a credit instrument. Someday, Janet Yellen will be buying bad loans on Somalian pirate ships off Citi’s balance sheet.

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