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rich or poor country

Posted on 2011-02-15
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there are poor countries where people are struggling for good and basic needs. there are then devolping countries where they are getting more of what the folks in the developed nations get.

now, even the developed nations are told to have trillions of debt. what is the point- the debt does not determine which country is rich or poor?

thanks
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Question by:anushahanna
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knightEknight earned 22 total points
ID: 34902019
I saw a political cartoon recently.  It was a snapshot of a busy city corner.  It pictured various people walking or driving, going about their business.

Above each person was a "bubble" text showing their net worth.  One businessman man had a net worth of minus -$325,000 because of his mortgage.  A fancy fashionable woman carrying shopping bags from Macey's had a net worth of minus -$17,000 due to her credit card expenses.  A taxi driver had a large debt due to several car loans.  Several other people with debt were pictured.

Sitting on the corner of an alley was a homeless "bum", holding up a tin can.  His net worth was +$0.35.

(This is a general picture of how I remember it, the actual figures may have differed.)

I don't really have a point to make, just thought I would share this because it seems appropriate to your topic.  :)
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by:anushahanna
ID: 34903145
>>I don't really have a point to make, just thought I would share this because it seems appropriate to your topic.

maybe you have the point.. the businessman still is floating in the 325k mansion.. the fancy lady still is the 'owner' of the 17k worth of cosmetics. taxi driver is the owner of business and a fleet of vehicles.. and the homeless person enjoys 0.35 waiting for a few more cents to go and get something..

is the first 3 representing the developed and developing countries and the last one showcases the 10/40 window - the poorest of the poor among us..

but with respect to countries their loans are way more than 325k,17k etc. At least the businessman may pay it off in 30+ years - the lady may take a few years and pay off her load too.. then at least they are free.. but we can't say the same with trillions of dollars, can we ?
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by:BigRat
BigRat earned 21 total points
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>>now, even the developed nations are told to have trillions of debt

Not exactly. Their GOVERMENTS have the debt. The country on the whole is wealthy. If this were NOT the case then America would be bankrupt, nobody would lend any money nor want to sell any goods there. A poor country is one which cannot borrow because it has no assets. Selling anything there means that you get some money in some currency, but what can you do with it, if the country has no assets? Your businessman has the mansion as an asset.
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by:knightEknight
knightEknight earned 22 total points
ID: 34906884
Rightly or wrongly, the world places more value on productivity than on net financial worth.  That is why in the cartoon the businessman enjoys a higher standard of living even though he is in debt.  No one would loan him the money if they didn't think they would get a return on their investment, measured in his case by his expected productivity over his lifetime.  The woman is busy spending someone else's money - I'm not going there, so don't kill the messenger, that's what I saw.  :p
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by:anushahanna
ID: 34907373
>>Their GOVERMENTS have the debt.

how long will it take for the gov to pay the trillions back? what will its impact be on the citizens?
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by:BigRat
BigRat earned 21 total points
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>>how long will it take for the gov to pay the trillions back?

Probably never, since there is no need. With 250 million Americans paying one dollar a year results in 250 million dollars or 1/4 of a billion. Four thousand times more and you've got your trillion. So if every American gave up 4000 dollars a year, the trillion would be achieved. That would be by direct taxation. There is indirect taxation, which is less obvious and less political, there is also inflation, ie: one allows the dollar inflation rate to exceed the bond interest rate. Most third world countries inflate their debt away in this manner. However servicing the debt at say 5% costs 1/20 of this namely 200 dollars per person per year. Now spread that over thr rich and the poor alike and the poor might only need to pay 2 dollars a year. And that is no problem to the economy, so paying it all back would take more money out of the American ecomony that servicing the debt. So the debt will probably never be paid and might even be inflated out of existance.

>>what will its impact be on the citizens?

Higher taxation, in one form or another.
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by:anushahanna
ID: 34910172
BigRat, do you believe, at the same rate things are happening, at one point, that (increasing) taxation itself can break the equation?
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by:macuser777
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ID: 34910202
BigRat,

There are some who say America is actually bankrupt. One article as an example,

http://www.bloomberg.com/news/2010-08-11/u-s-is-bankrupt-and-we-don-t-even-know-commentary-by-laurence-kotlikoff.html

...delve deeper, and you will find that the IMF has effectively pronounced the U.S. bankrupt.
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by:BigRat
BigRat earned 21 total points
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Taking both your comments together: Somebody, a corporation or a government is bankrupt when, and only when, it is in debt and cannot borrow more money. That is nobody will lend it any more money because a lender BELIEVES that he will neither get the money back nor the interest due. This condition DOES NOT apply to the United States, which continues to borrow money on the international markets at low interest rates (unlike for example Ireland or Greece)

There are a fair number of people who would like to see the dollar (or effectively US Bonds) fall in the market. They are the speculators who'll borrow in dollars convert to say Euros, make the dollar fall and repay the dollar loan at a reduced rate, and doing so make a handsome profit. That is exactly the strategy they tried first against Greece and then Ireland, hoping that the Euro would fall against the dollar. In fact that did happen at first, but the Euro rose again because there is intrinsically nothing wrong with the Euro. Those that didn't get out fast made a loss, but those who did - which was the majority - made a killing.

The United States is a country of almost 300 million people, has a GDP a bit less than the EEC, has a very flexible labour market (contrast EEC), a high degree of education in the workforce (contrast China) and a very innovative industry and commerce (much more than China and somewhat better than the EEC). The problems are an excessive military spending ABROAD, which puts dollars outside the country, and a taxation system at home which deprives the government of cash by pandying to the rich. The other worrying problem for investors is the political instability - namely that whatever policies are proposed somebody somewhere seems to be able to block them, so one does not know what will happen next - and planning is important for investment and growth.

What is interesting in the Laurence Kotlikoff article is his insistance in "getting real" and then says : "What it can and must do is radically simplify its tax, health-care, retirement and financial systems, each of which is a complete mess." meaing of course "What WE must do" which in the current tea-partying climate is totally illusory. He then goes on to quote the IMF by saying "“The U.S. fiscal gap associated with today’s federal fiscal policy is huge for plausible discount rates.” ignoring the fact that the United States gets indeed very good discount rates. And the question is of course why? The answer is of course is that the US has a very resilient ecomony. The main problem is that the US has to learn, what the Europeans have lernt, to change as traditional industry breaks away. It is all very well giving tax cuts, but if they're spend on foreign imports they're counter productive. The US has been living these last ten years with a negative balance of payments problem. Better to raise taxes and reduce debt than continuing in this line. That is better than unless some way is found - across party lines - to put Americans back in jobs and make things that then world will buy.
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by:knightEknight
knightEknight earned 22 total points
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>> Better to raise taxes and reduce debt than continuing in this line.

At this time that would be exactly the wrong thing to do to reduce the debt.  With a weak economy and a flat (at best) job market with relatively high unemployment, raising taxes will only slow the economy further, losing more jobs and further thinning the tax base.  Better to grow the economy, get people back to work, thereby expanding the tax base, and therefore revenues.  

BUT ... this only works if government borrowing and spending is reduced, or at least held in check, relative to the GDP.  Historically the U.S. congress has failed miserably to ever do so.  Nevertheless, this is the proper remedy: keep tax rates at their current reduced levels until the tax base expands, and reduce the annual deficit by cutting government borrowing and spending, until the debt level is manageable again.
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by:satsumo
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Rightly or wrongly, the world places more value on productivity than on net financial worth
That's obviously not true, if that was the case there wouldn't be a recession.  The productivity of financial markets is approximately zero.  Facebook is not productive, but its fictional value is enormous.

I was going to write 'we wouldn't be in a recession', except I can't see how I (or many other people) have anything to do with it.  I don't have any debt.  Most people's debt is through a mortgage and the price of a house is some number made up by markets.  The woman with $17,000 of debt is an idiot, but its not her that caused this recession, that's just distraction.
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by:BigRat
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knightEknight: Your position is illusory. You have had eight years of Bush and two years of Obama running the same low taxation rates, especially for the well off. The result is that the US has had at least ten years of balance of payments problems and government expenditure and borrowing have increased - in particular to bail out banks and save car companies. You somehow expect that the government can magically drop its expenditure without any major repercussions and that serendipitously the economy, and hence the tax base, will grow. Well it won't.

What the country - in particular the tea-partyists - won't accept is the truth of the situation. And that is whilst the debt is manageable, since the US enjoys very confortable discount rates, the solution should be applied now and not when the debt becomes unmanageable, ie: when like Ireland and Greece the discount rates become impossible. The British seem to have understood this, considering Cameron's austerity program introduced BEFORE the pound got into difficulties. And the solution involves RAISING taxation, especially for the better off, reducing or removing social secuity and similar payouts, especially for the well off, a reduction in military spending - espectially abroad, and cutting all non-essential government services - like the UKs foreign office. It also requires looking at the taxation base to see if there are any exceptions, given out to special groups in the past, that ought to be closed or normalised. It is also necessary to tackle these things fairly, so that everybody contributes what he can, that the burden is equally and fairly shared, which will make the recovery faster.

The current administrations maintainance of the "Bush tax cuts" is seen abroad as a weakness, that the current administration cannot tackle the long term problems. Whether Obama manages a second term is beside the point. Sooner or later the problems will have to be tackled - there is no magic on the horizon - and it is every American's interest that it happens sooner. Unfortunately we see no chance of that.
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by:knightEknight
knightEknight earned 22 total points
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BigRat, you have correctly identified the main problem as expenditure's beyond our means.  But you missed a key phrase in my post: "At this time...".  Raising taxes on the economy AT THIS TIME - given the current state of the economy and jobs market - would only make things worse, both in the short term and in the long term.  The rest of your reply seems to ignore the current facts on the ground.  Therefore I stand by my post.
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by:BigRat
BigRat earned 21 total points
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I am not "ignoring fact on the ground" - quite the opposite. The evidence shows that the tax cuts for the well off just go on foreign imports. The reaction to similar situations in other countries is to raise taxation, both direct and indirect, cut social programs, reduce government departments and cut military spending. Give me one good reason why America should be different?
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by:knightEknight
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It has nothing to do with "America", it is a simple economic principle.  It is simply a fact that increasing taxes on the job creators (e.g. "the rich" corporations) in a weak economy will slow the recovery and retard the job market, thereby thinning the tax base, thereby exacerbating the deficit/debt problem.  I agree that spending cuts on all the programs you cited will be necessary as well.
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by:BigRat
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>>It is simply a fact that increasing taxes on the job creators

That's a complete myth. The Bush tax benefits were not completely to "corporations" and furthermore corporations are able to invest their profits rather than declare them in such a way as to avoid taxation almost completely. It is the usual fat cats who run these corporations who spread such myths to avoid having their "take home pay" cut. And once again what makes this "simple economic principle" apply in America whilst it is obviously not being applied in Ireland, Greece and the UK (amongst others)?
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by:knightEknight
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Who's talking about more tax cuts?  The "simple fact" I was talking about is that INCREASING taxes would stifle growth in a weak economy.  I think I've been very clear about that.

I never suggested that tax cuts that happened ten years ago went only to corporations or rich individuals, so not sure why you are bringing that up.

Are you suggesting that INCREASING taxes at this time would have a positive affect (or even no effect) on the economy?
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by:anushahanna
ID: 34935803
>>The reaction to similar situations in other countries is to raise taxation

which countries have taken that path are OK for doing that, especially if the economy is weak anyways? do you have some examples.
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by:BigRat
ID: 34941567
>>which countries have taken that path are OK for doing that, especially if the economy is weak anyways? do you have some examples.

Britain, Ireland and Greece have already followed this path. I expect Portugal, Spain and also Italy to follow sometime this year. May I also remind you that Germany raised its value added tax

KnigthEKnight is failing to understand that the US has been living on borrowed money for years - right through the Bush terms and now well into that of Obama. Certainly the excessive borrowing over the last three years is due to the crisis in the banks, but let us not forget who exactly caused the crisis in the first place - by lending money to those who could not repay for properties which were overvalued.

The demand to "cut government spending" is one one hears often but has no substance because most of the spending is not discresionary - that is, it is committed spending. To cut such spending requires an electorial mandate to do so, and in fact, most of the opposition must also be convinced that things will have to change. This requires above all a consensus. In places like Greece, Ireland and the UK, there is such a concensus of opinion which makes things easier. What is also important, for universal acceptability, is that the cuts must be see to be fair - that is why taxation for the better off is raised.

There is no consensus in the US and until people like kEk and the tea-party wake up to the fact that they must also contribute, the Democratic left will defend the social security spending to the last man.

The US economy is weak, but far worse the economy is not making the goods which foreigners will buy, which is why the US has a balance of payments problem for ten years. The external debt is so large it is unlikely that the Reagan trick of borrowing one's way out of the recession will work again - in any event that'll cost even more in the long term. It is also wishful thinking that somehow the government can cause jobs to be created, jobs which will in fact create wealth instead of service jobs which disappear as soon as the economy dips again.

There is only one solution, that of overhauling government spending and raising taxation for the well off. That's the sort of thing which will convince the international community that America is willing to put its house in order and will ensue confidence in investors, because, like I said previously, the American labor market has a lot of advantages over many, many others.
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by:knightEknight
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>> KnigthEKnight is failing to understand that the US has been living on borrowed money for years - right through the Bush terms and now well into that of Obama. Certainly the excessive borrowing over the last three years is due to the crisis in the banks, but let us not forget who exactly caused the crisis in the first place - by lending money to those who could not repay for properties which were overvalued.

failing to understand?  Have you not read anything I've posted above?

>> The demand to "cut government spending" is one one hears often but has no substance because most of the spending is not discresionary.

I meant it more generically than that, so apparently it is you that is failing to understand me.

>> There is no consensus in the US and until people like kEk and the tea-party wake up to the fact that they must also contribute, the Democratic left will defend the social security spending to the last man.

In all the threads you and I have substantively participated in, you have a very annoying habit of attributing to me thoughts that I never expressed, opinions that I do not hold, and words that I never said.  

As for the remainder of your thoughts above, I agree with some things and not with others, but it's beside the point I was making.  What ever you or I may agree or disagree about on the structuring of a long-term debt solution, it is still a fact that raising taxes at this time will stifle economic growth and job creation, which in no scenario would be good for the debt problem.


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by:BigRat
ID: 34944425
>> it is still a fact that raising taxes at this time will stifle economic growth and job creation, which in no scenario would be good for the debt problem.

It is not a fact. Where is the evidence that raising taxation on those who can well aford it will "stifle economic growth and job creation"? What actually makes America attractive for investment? heavy debt and balance of payments problems suggests loss of value for the dollar.
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by:knightEknight
ID: 34945023
specifically define "those who can well aford (sic) it".
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by:macuser777
ID: 34945390
Can I just throw into the above to and from a book called "The Shock Doctrine" by Naomi Klein that goes into some depth and very interestingly into the two views of stimulus versus cutting, particularly in times of economic hardship.

http://www.amazon.com/Shock-Doctrine-Rise-Disaster-Capitalism/dp/0805079831
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by:BigRat
ID: 34951071
>>specifically define "those who can well aford (sic) it"

Ask Obama - he did not rescind the Bush tax cuts.

macuser777: She's quite right. Although I am not in favour of more government, I firmly believe that the government must be the referee on the pitch, the policeman on the street. I detest the way in which government (ie: public officials) get involved with industry and commerce - it distorts the market place and preferentially favors certain people.
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by:knightEknight
ID: 34957656
Well, I really don't want to make assumptions about your position.  At least you finally challenged the notion that raising taxes now would not stifle economic growth.  

>> Where is the evidence that raising taxation on those who can well aford it will "stifle economic growth and job creation"?

Where is the evidence that making any significant change (up or down) in taxation has little or no affect on the economy?  You are clearly well read on this subject generally, so I assume this principle from economics 101 class has not escaped you.  

I acknowledge that there are times when tax rates can be raised and the impact mitigated -- specifically when the economy has significant growth momentum to absorb the impact.  But generally I think that tax rates should not be used as a tool for steering the economy.  To summarize:  when changing tax rates - "do no harm" (or as little as possible).

There is concrete evidence from historical trends that significant changes in tax rates can indeed affect the economy, in addition to the self-evident nature of the principle.  But this is why I ask you to well define who you think should have their taxes raised (assuming you intend no significant impact on economic growth).  I suppose if you choose a specific segment of the taxable population, you may be able to raise their taxes with minimal economic affect -- but it's hard to see how doing so would significantly help the debt problem, since this group would necessarily be very small (again assuming no significant economic impact).

Do you mean people with high incomes?  If so, how high?
Do you mean corporations?  If so, do you mean only ones with large profit margins?
Do you mean multi-millionaires who live on the interest income?




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by:BigRat
ID: 34959588
>>Where is the evidence that making any significant change (up or down) in taxation has little or no affect on the economy?

I never suggested that raising taxation would have "little or no affect on the economy". Quite the reverse. I claimed, like the IMF, that raising taxation AS PART of an austerity program to bring government expenditure and income into balance WILL have an effeect - namely - to bring government and expenditure into balance, which in turn will make the ecomony attractive to investment and growth. The continual reliance on borrowing and unfair - and to the population unacceptable - social welfare cuts (which the US has been unable to implement for years) will not solve the problem, only make it worse, and besides the cuts have always been non-specific.

>>But generally I think that tax rates should not be used as a tool for steering the economy

It is a mistake to believe that a government CAN steer the ecomony, particularly in these days of globalisation and common currency. In the old days one could inflate the currency at an acceptable rate of domestic inflation. The foreign investor lost out. These days that is no longer so simple - as the Chinese have already made clear to the US. What is important is that a government provides those services which the nation requires - and no more than that - and raises enough income to maintain those services, with the proviso that, in these days of welfare states, any extra will be put away for future contingencies.

>> But this is why I ask you to well define who you think should have their taxes raised (assuming you intend no significant impact on economic growth).

Well there is no or little ecomonic growth. This is the usual idea that somehow by economic growth, financed by borrowing, we will be able to pay back when the good times arrive. There is virtually no historical example for this Keynsian idea - practiced first in the thirties by Rooseveld and repeated by Reagan, none of this debt was repaid. It was mostly inflated away - hence the worries of the current holders of dollar bonds.

Now I have little experience of the US tax laws and economic regulations, since my main interest is in Europe, but the senario runs basically like this (which may not apply in detail, but definitely applies in spirit) :-

1. Raise sales tax  by a couple of points
2. Raise the income taxation on the top third of payers proportionately
3. Raise most fees for government services
   (This needs to be looked at on a case to case basis, since some fees are already large, others ridiculously low)
4. Remove social welfare payments to people on higher incomes
   Example in Britain no child benefit is payable to people with combined taxable incomes over 40,000 pounds.
5. Remove medical payments to pensioners who are over some limit (eg: the medicaid/medicare program)
6. Increase retirement age
7. Review and possible cut civil service pay and pension plans and of course pensionable age.
and a host of other minor things, which come up only when one undertakes a real;ly thorough review (for example flowers, farmer's tractor fuel, books etc.. have a reduced VAT (sales tax). Why such exceptions?

These things will cause intense lobbying on behalf of the loosers which is why consensus is important. In fact this week in Greece there will be a general strike due to such cuts. Once again the Greek government has probably not made the rich suffer enough to placate the poor. But that's their country and so long as they put government expenditure and income back on the rails so that the currency, which is the Euro, remains stable it's not my concern.

What exactly should be done in the US is their concern. Obama has announced a few cuts, but they don't amount to much and, as one can see, aren't controversial. The real horse trading has to come, and you won't get by without increasing government income and reducing government expenditure.
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by:knightEknight
knightEknight earned 22 total points
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>>  I claimed, like the IMF, that raising taxation AS PART of an austerity program to bring government expenditure and income into balance WILL have an effeect - namely - to bring government and expenditure into balance, which in turn will make the ecomony attractive to investment and growth. The continual reliance on borrowing and unfair - and to the population unacceptable - social welfare cuts (which the US has been unable to implement for years) will not solve the problem, only make it worse, and besides the cuts have always been non-specific.

Ah, now we find common ground then.  Our difference is mostly just a matter of timing.  I maintain that in the shorter term, raising taxes on a weak economy would be counter-productive to this goal.  Best to reduce government borrowing and spending now (across the board), and wait until the economy has enough momentum to absorb the impact of tax increases - if they are necessary at all - which would depend on revenues generated by an expanded tax base.

But you are not entirely correct about the affects of the Reagan tax cuts.  They can substantively be credited with creating many millions of jobs and a corresponding increase in government revenues, but he unfortunately failed to control massive increases in government spending at the same time, thereby missing the best opportunity to make the debt manageable.  Yes, inflation was also a factor, but this was true before the Reagan tax cuts.

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by:anushahanna
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thank you for your well thought out points.
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