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A comprehensive guide to understanding today's global economy from the author of the bestselling A Beginner's Guide to the World Economy.

While reporting on today's world, business and mainstream media alike use terms and mention trends that even the savviest consumer may find baffling. In his latest book, Randy Charles Epping uses compelling narratives and insightful analogies to clearly and concisely explain the rapidly changing way business is done in the twenty-first century, without a single chart or graph.

Epping defines key ideas and commonly used words and phrases like:

• Carbon footprint
• Economy of scale
• Outsourcing

Epping also illustrates how central banks help navigate global crises and drive the global economy, discusses the benefits of Green Economics, shows how trade wars can be avoided, and explains the virtual economy, where multimillion dollar transactions take place in the blink of an eye.

Complete with 89 easy-to-master tools for surviving and thriving in the new global marketplace and an extensive glossary, The 21st Century Economy—A Beginner's Guide is essential reading for anyone interested in understanding the complex economy of the world in which we live.



The converging world economy has created a whole new paradigm for the 21st century. Global warming, credit crunches, currency meltdowns, food crises, and trade wars are just a few examples of how our everyday lives are being altered by a myriad of forces, many of which are economic in nature. And like nuclear fusion, which joins together hydrogen molecules and releases enormous amounts of energy in the process, the converging global economy is releasing a lot of new energy-we just need to figure out how to use it.

This new fusion economy brings together forces and reactions in ways that are impossible to understand using normal linear forms of approach. It used to be that we could follow a fairly simple path to arrive at an economic conclusion: A better product or a more efficient company meant more productivity, which meant a higher standard of living for all. But today, things aren't so simple. How can we say that economic growth in China or India is a good thing if it increases global pollution or leads to food scarcity? How can we say that increased access to mortgage financing is a good thing if it entices subprime borrowers to buy houses they can't afford to pay for, leading to failing banks in Europe and the United States, stock market crashes in Asia, and a worldwide credit crisis?

With hundreds of billions of dollars worth of mortgage-backed securities being traded annually, the market for subprime debt became, at one point, bigger than the entire market for U.S. Treasury bonds-the biggest bond market in the world. When banks and mortgage companies realized they could pass on the risk of the mortgages they were issuing, they became more concerned about increasing volume and less concerned about whether the borrowers could pay back their loans. Consequently, credit standards were relaxed and many poor and low-income borrowers were given mortgages to buy homes-leading to ever-increasing home prices. Many borrowers bought homes they knew they couldn't afford, but assumed that rising home prices would cover their loan commitments, allowing them to refinance at a later date, once the house's value had gone up.

When the housing market began to cool, many subprime borrowers were unable to refinance their loans and were unable to make the interest payments on their original loans. Delinquencies-borrowers' failure to make their mortgage payments-began to rise, and the value of the bonds that were based on subprime mortgages began to decline. When large numbers of these subprime borrowers started going bankrupt, the subprime mortgage securities had to be revalued downward.

In the end, the banks and investment houses around the world that had bought these mortgage-backed securities were forced to write off large portions of their debt-up to 80 percent of their original value in some cases-leading to a credit crisis that spread around the world as other banks and investment houses refused to provide the cash that the world's companies and financial institutions need to keep running. Banks around the world had to be rescued by cash-strapped governments. In the United States, Lehman Brothers, one of the largest investment banks in the country, was forced into bankruptcy, and another investment bank, Bear Stearns, had to be sold off with help from the U.S. Federal Reserve-for a fraction of its previous value. AIG, the largest insurance company in the world, also had to be bailed out by the Federal Reserve. Once the financial meltdown had started it was impossible to stop.

In addition to financial meltdowns, even cataclysmic events such as hurricanes and global warming are influenced by the expanding 21st-century economy, which is bringing forces to bear that are making it impossible to predict what will happen in the future. For example, the destruction of the Amazon rain forest, primarily for economic reasons, has led to a sharp increase in the release of carbon dioxide into the atmosphere. And industrial pollution in the United States, Europe, and China has contributed to the shrinking of the Arctic ice cap and an unprecedented melting of the permafrost, releasing even more carbon dioxide and methane gas into the atmosphere, leading to even more global warming. This greenhouse effect has led to ever higher temperatures-literally a “meltdown” in some parts of the world. And no one seems to know where it will all end.

Even efforts to reduce global warming, such as the promotion of biofuels, have led to unintended and unforeseen consequences. In addition to the use of massive amounts of water to produce sugar-or corn-based biofuels, the reduction of farmland for the production of food for human consumption led to rising shortages of rice, corn, and wheat on the world markets, resulting in riots in some countries and calls for increased protectionism in others.

The converging global economy is also shaking up traditional patterns of trade and investing. Before the 21st century, for example, people tended to limit their investments to purchases of domestic stocks and bonds. They then waited patiently for their investments to increase in value or provide a safe, fixed income over time. But in today's fusion economy, our money is being invested-whether we're aware of it or not-in pension funds, governments, and banks that buy an increasingly complex array of securities and investment vehicles.

The 21st-century economy has brought strange new correlations between investors and between markets. And the results can be catastrophic. Investors who are losing money in one sector tend to sell investments in another sector-or another part of the world-to pay their debts. When stocks fall sharply in the United States and Europe, for example, emerging-market funds from Brazil to Bangladesh can decline sharply as investors sell their shares abroad in order to raise cash to pay for losses at home. Currencies in previously healthy economies around the world often crash as speculators rush to safe haven currencies such as dollars and yen.

It has been said that a butterfly flapping its wings over Tokyo could cause a rainstorm over New York's Central Park several days later. The 21st-century economy has taken this linear correlation to another level. Causes and effects are converging, fusing together in a complex web that no one-not even the experts-are able to fully understand. Just as Metcalfe's Law, which says that the value of a network is proportional to the square of the number of its users, the expanding global economy is growing and expanding in ways we are unable to control.

And the speed of change is increasing exponentially. In today's modern economy, events have an almost immediate effect. If stocks fall sharply in China, markets around the world plunge instantly. Political events, such as an assassination or an unexpected election result-or even random events such as earthquakes or terrorist attacks-can cause the “invisible hand” of the marketplace to buy or sell precipitiously.

Like the aforementioned butterfly flapping its wings over Tokyo, even small investment decisions can affect the global marketplace. With China holding more than a trillion dollars of U.S. government securities, any sign that the dollar could lose value in the years ahead-a decision by the U.S. Federal Reserve to lower interest rates, for example, or a move in Congress to force China to revalue its currency-may set in motion political and economic changes that could end up dethroning the dollar as the world's preferred reserve currency.

At the beginning of the 21st century, the euro had already begun supplanting the dollar as the world's currency of choice-there are now more euro notes and coins in circulation than dollars. And the international bond markets have begun issuing more euro-denominated securities than dollar-denominated securities. Many countries are now accounting for their purchases and sales of commodities and other goods on the international marketplace in euros instead of the almighty greenback-leading to an eventual decline in value of the dollar as countries sell the U.S. currency to buy others to use in the global marketplace.

In many ways, old paradigms have become obsolete and a new world order has been established. Asia's export boom at the beginning of the 21st century, for example, was mainly based on sales of products to U.S. consumers. Without them, it was assumed, the booming Asian economies would slow, engendering economic and political turmoil. In order to keep the U.S. economy afloat-and in part to ensure the safety of the foreign reserves sitting in Asian central banks' vaults-Asian nations became the United States' biggest creditor.

Trillions of dollars of U.S. government securities have been sold to mercantilist Asian and oil-rich Middle East nations, allowing the United States to fund its huge budget and trade deficits. The decision by foreign investment funds and central banks to subsidize the U.S. economy-providing the credit to fuel the U.S. housing bubble, leading eventually to a worldwide financial meltdown affecting even the cash-rich economies in Asia and the Middle East-shows how much the balance of power has shifted and how interconnected the world has become.

In one of the biggest economic revolutions in history, the expanding 21st-century economy has begun shifting power from the developed world to the developing world-with Brazil, Russia, India, and China, the so-called BRIC countries, leading the way. Adjusting for purchasing power, the economies of the emerging markets have surpassed the economic output of the developed world. Their economic machine is already consuming over half of the world's energy, and they have been responsible for 80 percent of the increase in oil consumption during the first years of the 21st century. The export-oriented powerhouses of the developing world have been able to acquire more than three-quarters of the world's foreign currency reserves and increase the stock market valuations of their companies enormously. This led fund managers to invest even more money in the emerging markets, leading to even more growth and even more consumption of the world's resources.

Where will it all end? With economic and political events occurring around the world at a dizzying pace-from credit meltdowns to terrorist attacks-the ability of any one country to control or significantly influence the maelstrom of forces buffeting the economic landscape will be increasingly limited in the years to come.


Economics is an art as much as it is a science. And economics in the 21st century, the art form and the science, is being transformed significantly. It used to be that economists limited themselves to looking at the behavior of governments, firms, and individuals in a carefully defined framework. Inflation, unemployment, and interest rates-the traditional components of macroeconomics-were the main areas of interest, with very little else occupying the limelight.

Now there is a whole new horde of players clamoring to be center stage. Hedge funds, subprime mortgage securities, black markets, outsourcing, pollution rights, and carbon footprints are just as much a part of the world economy as the behavior of firms and individuals when interest rates rise or fall or when taxes are slashed.

The study of the global economy is essentially a macroeconomic survey, but there is a constant interplay between the world at large and the role we all play in it. When we go to the store and buy foreign-grown bananas, fill up our gas tank with imported oil, or watch a foreign-made music video on TV or on the Web, we're participating in the world economy. And it is not only as consumers of imported goods or services that we are part of the world economy. The money that our pension funds or college endowments invest in foreign markets helps pay for our retirement or for a new dormitory on campus. In fact, foreign investment in our home economy-and foreign purchases of our government debt-provide needed capital and jobs, making our lives better.

Unfortunately, it's not just the legal activities that make up the new 21st-century global economy. If we buy drugs-or if we join in the fight against illegal drugs by helping Latin American farmers substitute food crops for coca-we are also participating in the world of international trade and finance. Even economic sanctions against foreign regimes that abuse human rights or destroy the environment make us part of the world economy. Basically, buying anything that crosses an international border, from an illegal music download to imported hashish, integrates us into the ever-expanding global economy.

How do we size up a country's economy? Mainly, by putting a value on every good and service produced in an economy. Gross domestic product (GDP) and gross national product (GNP) are the terms economists use to describe the total amount of goods and services produced by a country in any given year.

Sometimes GNP is bigger than GDP and sometimes it's the other way around. Countries like Ireland, which have a large portion of domestic companies in foreigners' hands, have a smaller GNP than GDP because the payments to foreign stockholders are deducted from the GDP figures. On the other hand, British, U.S., and Swiss residents own a lot of companies abroad, so their GNP is usually larger than their GDP because it includes income from foreign production that is not included in the “domestic” summary.

How do you compare GDP among countries with different currencies? One way is to translate the various figures into a common currency, such as the U.S. dollar.

Unfortunately, official exchange rates give a skewed view of the size of a country's economy if the cost of goods and services isn't the same in every country. In India and China, for example, everything from meat to movie tickets is much cheaper than in wealthier countries like the United States and France-so the GDP often ends up looking much smaller than it really is. That is why economists have come up with a “real-world” exchange rate called purchasing power parity, or PPP. This is arrived at by using a basket of goods and services in each country that allows GDP to be compared across borders.

The way it works is simple: One country, such as the United States, is chosen as the base country. The GDP of the other countries is adjusted to take into account the comparable “real” value of the goods and services that make up the country's economy and not what the exchange rates provide. The cheap cost of haircuts or shoes in China, for example, would be adjusted upward to give them equivalent value to the haircuts and shoes in the United States. The “basket” of goods and services that is used to determine purchasing power parity includes a wide variety of everyday items such as rent, food, and transportation.
Randy Charles Epping|Author Q&A

About Randy Charles Epping

Randy Charles Epping - The 21st Century Economy--A Beginner's Guide

Photo © Stephen Inggs

Randy Charles Epping, based in Zurich, Switzerland and São Paulo, Brazil, has worked in International Finance for over 25 years, holding management positions in European and American investment banks in London, Geneva, and Zurich. He has a master's degree in International Relations from Yale University, in addition to degrees from the University of Notre Dame and the University of Paris-La Sorbonne. He is currently the manager of IFS Project Management AG, a Switzerland-based international consulting company. He is also the president of the Central Europe Foundation, which provides assistance to students and economic organizations in Central and Eastern Europe. In addition to several other books on the world economy, he has written a novel, Trust, a financial thriller based in Zurich and Budapest. Mr. Epping holds dual U.S. and Swiss citizenship and is fluent in six languages: English, French, German, Italian, Portuguese, and Spanish.

Author Q&A


Q: Credit crises, trade wars, sub-prime debt, currency meltdowns. What's going on in today's global economy?
A: We're experiencing a totally new world order, or disorder. I refer to it as “fusion economics.” Essentially, because of changes in technology, communication, and new structures for global trade and finance, the world economy of the 21st century is interconnected in ways that would have been impossible to imagine just a few decades ago.

Q: Why are things so different now?
A: In today's fusion economy, money and goods are flowing around the world with such speed and ease, what happens on the other side of the world has a powerful and immediate effect on our daily lives. Just look at how the global financial crisis has spread, like wildfire, from New York to Tokyo to London, from China to Iceland to Russia. The impending collapse of the Eastern European economies, for example, not only threatens the Western European banks that have loaned substantially in that region, but the entire global financial system. The proverbial butterfly flapping its wings over Tokyo can very well end up causing financial storms from New York to Moscow to São Paulo. Unfortunately, no one knows when and where the next financial meltdown will strike. But if we're going to be able to prepare for it properly, we're going to have to understand how “fusion economics” works-which means learning how to look at the world economy in entirely new ways.

Q: What exactly do you mean by “fusion economics”?
A: Like a fusion reaction-where hydrogen molecules are joined together to produce enormous amounts of new energy-the converging global economy is interacting in entirely new ways and releasing a lot of new energy in the process. It used to be that we could understand the world economy by using normal linear forms of approach. By following a fairly simple path, we could arrive at a clear economic conclusion: a better product or a more efficient company meant more productivity, which meant a higher standard of living for all. But today, things aren't so simple. How can we say that economic growth in China or India is a good thing if it increases global pollution or leads to food scarcity? How can we say that increased access to mortgage financing is a good thing if it entices subprime borrowers to buy houses they can't afford to pay for-leading to failing banks in Europe and the United States, stock market crashes in Asia, and a worldwide credit crisis?

Q: Is it possible for anyone to understand what's going on in today's global economy?
A: It's not only possible, it's essential. If we're going to be effective investors, consumers and voters, we're going to have to become economically literate. Essentially, we all have a role to play-it's not just the lobbyists or the special-interest groups who should be deciding how we live and work in the century ahead. And it's certainly not the bankers and politicians who got us into the mess we're in today.

Q: How do we become economically literate?
A: In THE 21st CENTURY ECONOMY-A Beginner's Guide, I show how we can use everyday examples to understand the complex economic concepts we're confronting in our everyday lives. A Stock Index is not all that different from a farmer going out into the field and checking on the progress of a few selected plants to see how the crop as a whole is doing. Federal Reserve funding, like that being used to pay for part of Obama's recent stimulus package, is based on Central Banks' ability to create money-just like the bank in a Monopoly game being used to inject funds into the “economy” at large, by giving players $200 or more for passing “Go.” Every day, we're hearing more about economics in the news, on the web, and in our daily lives. Credit crunch, mortgage backed securities, economic bailouts-these are terms that we're all going to have to understand if we want to have any chance to thrive in the new 21st century economy.

Q: Speaking of economic bailouts, trillions of dollars are being spent by governments around the world, with much more probably to come. Why is it so important to save everyone from banks to carmakers to insurance companies?
A: Actually, it's not so important to save individual companies. Many would go under anyway, even during normal times. Inefficient carmakers, for example, are eventually replaced by the ones that know better how to efficiently produce vehicles that the public wants to buy. But banks and major insurance companies, like AIG, because they provide the liquidity and stability to the economy at large, need to be treated as special cases. It's not a coincidence that the first round of government bailouts was directed at propping up the banking system. Without the money that banks provide in the form of loans and credit, the economy would grind to a halt.

Q: But which ones do we save and which ones should be allowed to fail?
A: The major banks can't be allowed to fail-especially not after seeing how the credit markets froze up after Lehman Brothers went bankrupt. The question is: how to save them. Many politicians and economists have begun calling for nationalization of banks and major industries. It's already happening in Europe, including that freemarket bastion, Britain.

Q: How would nationalization work?
A: A government can simply take control of a bank-or any company-by acquiring a majority of the voting shares. The government can then use its controlling shares do whatever is necessary to bring the bank back to health. Firing management or cleaning up the bank's toxic assets, for example, so the bank can start lending again to stimulate economic growth in the economy at large. When things have settled down, the government can then reprivatize the bank by selling its shares back to the public, and hopefully not lose too much money in the process. An alternative solution would be to put the bank's toxic assets, basically those that are unsellable in the current market, into a government-controlled “bad bank” which would be responsible to manage the assets until they could be sold-hopefully at a profit, at one point in the future. This is somewhat similar to what happened during the Savings & Loan bailout in the late 20th century, when the government took charge of the problem mortgages-which kept the financial system from going under.

Q: What, in your opinion, is the best way to solve the problem?
A: Actually, neither of the options I described above is going to solve the current crisis completely, or cheaply. The problem with both plans is that many of the major banks in the United States have a significant overhang of bad assets, not just mortgage-backed securities that we're hearing about. There are a lot of other bad assets out there-credit card and other consumer loans, for example. Even commercial property is headed south. We've only seen the tip of the iceberg. The “zombie” banks of the 21st century economy, if allowed to continue as they are, are surely going to go from bad to worse. In the end, it's going to take enormous amounts of money to save the world's banks and insurance companies.

Q: Where will all this money come from?
A: In the United States, it comes from two primary sources: the U.S. Treasury and the Federal Reserve. In the end, of course, it's coming out of our pockets. By issuing Treasury bills and bonds, the government “borrows” money from the markets that can then be used to stimulate the economy at large. Since the money comes mostly from domestic savers and foreign investors, treasury borrowing tends to “crowd out” the market, leaving less available money for non-governmental borrowers such as individuals and private businesses. All these bills and bonds need to be paid back at one point, theoretically, so it's the taxpayers who ultimately foot the bill.The other main source of funding for the bailout programs comes from the Federal Reserve. By having unlimited power to tap into its “black hole” of credit, the Fed can, essentially, “create” money. It does this by buying assets in the economy at large-government bonds, mostly-crediting the sellers' accounts at the Fed, which frees up money that can be used in the economy at large.

Q: Many politicians have argued that free market, neo-liberalism ideas are dead. Are the ideas from the Reagan/Thatcher era still relevant?
A: The idea that markets can be allowed to regulate themselves has been pretty much debunked by the current financial meltdown. The banks and rating agencies that allowed trillions of dollars to be invested in sub-prime loans to borrowers who had no ability to pay off their mortgages is a scandal of epic proportions. Foreign investors, especially, believed that what they were buying was of AAA quality, equivalent to the credit worthiness of the world's healthiest lenders.They've been burned so badly that it'll be a long time before they trust the markets to “do the right The rush to put money into government assets, such as U.S. Treasury Bills, demonstrates the radical turn away from market-based investment-at least in the short term.

Q: More government control and government regulation-will it create a bigger state? Or a more effective one?
A: Unfortunately, the turn away from neo-liberalism means a much bigger role for governments in business and financial markets-which doesn't have the best track record of running an efficient economy. We only need to look at the economic disaster of the former Soviet empire, or Venezuela, or Iran to see that turning your back on free-market capitalism, “savage capitalism” as described by Venezuela's Chavez, doesn't always provide the prosperity that people hope for. What is needed is a healthy dose of government oversight without unhealthy interference of governments in global markets. It's going to be hard to balance the two, however. Especially during a financial meltdown like the one we're now experiencing.

Q: In your new book, you write a lot about free trade. Many unemployed workers complain about jobs moving somewhere else, and growing deficits with China can make Americans and Europeans more concerned about free trade. Do you think isolationism can have a surge in the coming years?
A: We're seeing it right now. The U.S. Congress has insisted on keeping “buy American” provisions in the recent stimulus package. And the French government has put isolationist conditions on its bailout of domestic carmakers. Even the Swiss are encouraging domestic banks to loan to locals. The reasoning is simple: cash-strapped governments are asking themselves, “Why should we spend domestic funds to prop up foreign companies and encourage foreign competition when what we need to do is protect jobs at home?” The problem is that by putting up barriers, you end up hurting yourself even more in the long run. U.S. steel producers, for example, may benefit from isolationist government policies, but the companies that earn their money from exports are hurt in the process. The end result is even more jobs being lost and consumers having to pay more for inefficientlyproduced domestic products. We only have to look back at the disastrous results of isolationism during the Great Depression. Trade wars are easy to start but extremely difficult to stop. Once the momentum builds for “beggar thy neighbor” economic policy, it's a global free-for-all, where the ones being hurt, in the end, are the workers. Without access to foreign markets, many farms and factories-in the developing world especially-will have to close down, leading to massive job layoffs.

Q: In “Rage against the machine”, you write about the fuss over globalization. Do you think the next decade will be a less globalized one, with more barriers among the countries? Or is globalization unstoppable?
A: Globalization is not unstoppable. During financial and economic crises, the first thing many investors and companies do is retrench. In the developing countries, we're seeing this happening right now. When rich-country investors lost a bundle in U.S. and European markets during the 2008 market meltdown, the first thing they did was pull out money from the developing world to cover their losses. This led to catastrophic drops in markets from India to Russia to Brazil. To make things even worse, by converting their investments to U.S. dollars, to the tune of hundreds of billions of dollars exchanged during the crisis peak, currencies around the developing world plummeted as well. The irony is that the United States market was responsible for the crisis, but it was the developing world that suffered the most.

Q: How do you expect emerging markets will do in the years to come? What are the prospects for the BRIC countries, for example?
A: At the present time, there are no really “safe” bets for investors. Even the Chinese are at a loss to find a safe place to put their enormous foreign currency reserves. That being said, I would still keep investing money in the developing world economy, absolutely. They're on their way to economic superstar status-in some cases, they already are. In today's “fusion economy” the developing countries already contribute greatly to world economic growth. While Europe and the United States economies are in decline-with negative growth projected for the next year or two at least-countries like China and Brazil are still growing at a rapid clip. Not as much as before, but growing nonetheless. In addition, their purchases of developed country debt-China already has acquired more than a trillion dollars in U.S. government securities, for example-is paying for many rich countries' budget deficits. Somehow, it all needs to be coordinated.The G7, which used to make all economic decisions alone, is increasingly turning to the G-20, which includes the economic powerhouses of the developing world, to find solutions to today's problems. An example: already more than 40 percent of all foreign reserves are held by the four so-called BRIC countries (Brazil, Russia, India and China) which, in many ways, is what's keeping the world economy afloat by providing the funds for increased government borrowing-in the U.S. especially.

Q: But are developing country markets a safe bet for investors?
A: No market is safe these days, but in many ways, the major developing economies have what it takes to succeed in the new 21st century economy where goods, services, and money flow around the world in the blink of an eye. With the exception of Russia, they also have the advantage of enormously youthful populations-eager to learn, to work and to spend.We simply need to give them a stable investment (and trade) environment, and the sky is the limit. The problem is that all this new growth can bring concomitant social and environmental problems.

Q: A propos the environment, until recently, poverty was a major issue-until Al Gore turned the environment into the new black. Now, with the financial crisis, do you think the eradication of poverty and the green economy are being put on the back burner? How can they return to being top priorities?
A: Currently, the major concern of developed-world leaders is solving the present crisis, to “jump-start” economic growth within their home countries. But we're seeing signs that environmental protection and eradicating world poverty are coming back on the radar screen of world leaders. One of President Obama's big priorities-or so he says-is to make the U.S. economy more environmentally friendly.This can be achieved in economically-friendly ways, by making large infrastructure investments in green areas such as solar power and mass transit and by spending less money on traditional polluting industries. Interestingly, the new economic bailout plan in the U.S. includes massive amounts of money to be spent to find new ways of producing and distributing energy. President Obama also proposes to expand the use of renewable energy sources such as hydroelectric power, solar energy and biofuels. Hopefully, the new solutions won't do more harm than good. Some corn-based biofuels produced in the American midwest, for example, have actually caused a net increase in greenhouse gas emissions and have used up valuable farmland that could better be used in the fight against world hunger. In the end, fusion economics means paying attention to all aspects of our economic decisions-not just the ones that first meet the eye.

  • The 21st Century Economy--A Beginner's Guide by Randy Charles Epping
  • April 07, 2009
  • Business & Economics
  • Vintage
  • $15.95
  • 9780307387905

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