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Does Mises's Regression Theorem Require a Minimum Population Size?

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Micah71381 Posted: Fri, Apr 8 2011 5:48 PM

Mises's regression theorem suggests that a good has to first have value outside of a medium of exchange before it can become a medium of exchange.  Is there a minimum population size of people who value that good in order for it to become a medium of exchange?

Let's say there is a rock collector.  He collects any rocks that have a certain shape to them.  No one else cares for these rocks but this one guy will trade food he grows for these rocks.  Is it possible for these special rocks, which are only valued initially by one individual, to become a medium of exchange?

Could I not trade these special rocks to the tailor in exchange for cloths because the tailor knows he can use the rocks to purchase food?  Would these rocks now be considered a medium of exchange?

http://mises.org/humanaction/chap17sec4.asp: First sentence:

As soon as an economic good is demanded not only by those who want to use it for consumption or production, but also by people who want to keep it as a medium of exchange and to give it away at need in a later act of exchange, the demand for it increases. A new employment for this good has emerged and creates an additional demand for it.

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Giant_Joe replied on Fri, Apr 8 2011 5:59 PM

I'm guessing it's 2 people.

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Micah71381 replied on Fri, Apr 8 2011 6:05 PM

Why 2 instead of 1 (as in the rock collector example)?

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Ricky James Moore II replied on Fri, Apr 8 2011 6:07 PM

All actions are exchanges but money is a product of catallactic exchange, it doesn't exist in an autistic exchange. There is no medium of exchange for the autistic actor, only want-satisfaction.

I will break in the doors of hell and smash the bolts; there will be confusion of people, those above with those from the lower depths. I shall bring up the dead to eat food like the living; and the hosts of dead will outnumber the living.
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Tex2002ans replied on Fri, Apr 8 2011 6:10 PM

It's definitely not one person, there is no indirect exchange.  I am not too sure with two people, I will have to give it slightly more thought.  And definitely three or more people would work because of indirect exchange (the tailor taking rocks from Person A so then he can exchange them for food from Person B).

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Micah71381 replied on Fri, Apr 8 2011 6:17 PM

If I know that the rock collector wants rocks I could go out and search for/mine/harvest rocks that he will like because I know I can trade them for food.  In this case only the rock collector values the rocks outside of a medium of exchange but I now value them because they have exchange value for food.

What makes this example fall apart?  Why couldn't I start accepting rocks for cloths (from the tailor who also doesn't value the rocks outside of a medium of exchange) knowing that I can later trade them to the rock collector for food?  What stops the rock collector trading rocks for cloths to the tailor because the tailor knows that I will accept rocks for my shoes because I want to trade the rocks back to the rock collector for food?

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Micah71381 replied on Fri, Apr 8 2011 6:20 PM

Ricky James Moore II:

All actions are exchanges but money is a product of catallactic exchange, it doesn't exist in an autistic exchange. There is no medium of exchange for the autistic actor, only want-satisfaction.

I am not sure what this has to do with the minimum population size required for the regression theorem to be valid.  Can you please explain how this statement ties into the original question?

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Tex2002ans replied on Fri, Apr 8 2011 6:22 PM

You cannot then introduce a worthless paper and have everyone begin trading it for food, the paper HAS NO VALUE.  The people would continue to trade in rocks.  Now what the government forces people to accept the worthless paper because they say "this worthless paper is equal to one rock".  Key thing to note is that the paper HAS TO BE TIED TO SOMETHING OF VALUE, or people will not accept it.

People will begin to value the paper because of its tie to rocks.  Over generations, the government cuts ties to rocks, so you have a completely fiat money.  They then continue to use force to enforce the fiat money.  This did not arise out of voluntary interations, and only succeeds through force.

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Micah71381 replied on Fri, Apr 8 2011 6:22 PM

I just realized that my question may have caused some confusion.  I specifically want to know the minimum population size of the people who value a good for non-exchange reasons.  I am not interested in the minimum population size of the market that is exchanging the good, only the population size of the people who value the good (which is a subset of the market population).

In my rock example there is only a single person (population size: 1) who values the rocks for non-exchange reasons.  The market size in my example is 3 (rock collector, me and the tailor) but I am uninterested in that number.

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Tex2002ans replied on Fri, Apr 8 2011 6:25 PM

The minimum amount of people needed for indirect exchange = 3:

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Micah71381 replied on Fri, Apr 8 2011 6:27 PM

Tex2002ans:

You cannot then introduce a worthless paper and have everyone begin trading it for food, the paper HAS NO VALUE.

I am not suggesting a worthless piece of paper, I am suggesting a valuable rock.  In my example the rock is only valued by one person so my question is, does the regression theorem require a minimum number of people who value the good outside of exchange value for it to become a medium of exchange?

Obviously the minimum is less than the market population size because in a barter economy mediums of exchange will arise that have no value to some actors but will have value to other actors (i.e.: gold/silver).

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Micah71381 replied on Fri, Apr 8 2011 6:28 PM

Tex2002ans:

The minimum amount of people needed for indirect exchange = 3:

As I mentioned in a follow-up reply, it seems my original question was misinterpreted.  I am not interested in the market size required for indirect exchange, I am interested in the minimum number of people who value a good for non-exchange purposes in order for it to become a medium of exchange.

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Tex2002ans replied on Fri, Apr 8 2011 6:47 PM

Micah71381:
I am not interested in the market size required for indirect exchange, I am interested in the minimum number of people who value a good for non-exchange purposes in order for it to become a medium of exchange.

Two people have to value it for consumption, and at least one has to accept it as a medium for exchange.  Person A and Person B both enjoy rocks.  Person C would be willing to take rocks to trade to Person A or B for whatever goods they need.

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Micah71381 replied on Fri, Apr 8 2011 6:53 PM

Can you elaborate on why 2 people need to value it for consumption?  What about my rock collector example (only 1 person valued the rocks for consumption) creates a problem?

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Tex2002ans replied on Fri, Apr 8 2011 7:05 PM

This is what happens when I type examples out too quickly. My logic was flawed, and while I was reediting I refreshed to see your new post. :D

Let us step back to what a medium of exchange is.  A medium of exchange can only arise through indirect exchange (the case of adding in Person C).  This means that there has to be a minimum of three people, because in the case of just two people, there is no medium of exchange, only direct barter.

Now, only one has to value the rocks as a consumption (not two as I originally stated... my mistake).  Person B and Person C would then be willing to collect rocks, and would be willing to trade to eachother for goods, because they then know they can give person A the rocks in exchange for goods they want.

Minimum of 3 people (in order for indirect exchange), and at least one of the people has to value the rocks for consumption.

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Micah71381 replied on Fri, Apr 8 2011 7:15 PM

OK, so a minimum market size of 3 actors and a minimum of 1 actor must value the good outside of exchange.  This seems reasonable to me.

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Neodoxy replied on Fri, Apr 8 2011 11:21 PM

In theory it could work, yes.. With a single individual there can be no medium of exchange, but if there are only two people then you could still have a money but it would be a very bizarre case because of the fact that the person buying the shells then will not buy anything with the money. It is a one way money, but it still works. If you add more than two people though the entire system becomes more plausible because two people could exchange the stones because of the value they gain for what the stone-lover will give for them.

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Tex2002ans replied on Fri, Apr 8 2011 11:29 PM

Neodoxy:
but if there are only two people then you could still have a money but it would be a very bizarre case because of the fact that the person buying the shells then will not buy anything with the money.

Its just called direct exchange.  Person A trades fish for the rock, Person B traded the rock for the fish. There is no money involved with two people.

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Neodoxy replied on Fri, Apr 8 2011 11:44 PM

If the person just valued rocks and had a set exchange rate for how he valued things then there is no reason why this could not result in prices and money.

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Tex2002ans replied on Fri, Apr 8 2011 11:50 PM

Yes, two people have their own subjective preferences, and they could trade goods with eachother which would result in prices, but not a money (which can only arise through indirect exchange).

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Aristippus replied on Fri, Apr 8 2011 11:52 PM

A random thought I had - with two people:

One person (A) produces shiny red rocks, the other person (B) produces shiny blue rocks.  Both of them also consume their product and wish to continue to consume their product.  They also produce other products.

They engage in direct exchange with eachother for eachother's products.  Now A anticipates that for some reason B's blue rock mine will be depleted and so he will be unable to produce shiny blue rocks.  For this reason, A stocks up on shiny blue rocks by trading with B.  Then, when the source of blue rocks is cut off, A sells them back to B in exchange for other products B can produce.

Does this qualify?

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Tex2002ans replied on Fri, Apr 8 2011 11:59 PM

Do more thinking.

Is this direct exchange or indirect exchange?

What I see is that I think you are just trying to substitute a different definition of "indirect" in that Person A trying to anticipate how Person B will value the rocks in the future, thus "indirectly" stockpiling rocks to trade for potential future goods with Person B.

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Micah71381 replied on Sat, Apr 9 2011 12:08 AM

I am with Tex on this one in that it is still a direct exchange.  No goods are changing hands where the recipient of the goods has no intention of consuming them but rather using them later in another exchange.  Since stockpiling doesn't involve an exchange, the guy hording blue rocks isn't using them as money but rather just stockpiling something he believes will have an increased future value.  The same way I may stockpile food and water so I can sell it to my neighbors during the zombie apocolypse.  I am not using food/water as a medium of exchange, just as a store of value.

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Aristippus replied on Sat, Apr 9 2011 12:11 AM

"No goods are changing hands where the recipient of the goods has no intention of consuming them but rather using them later in another exchange."

What?  That is exactly what A is doing with the shiny blue rocks.

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Tex2002ans replied on Sat, Apr 9 2011 12:21 AM

Aristippus:
One person (A) produces shiny red rocks, the other person (B) produces shiny blue rocks.  Both of them also consume their product and wish to continue to consume their product.

So both of them enjoy their own rocks, and enjoy the other person's rocks.  There will be a point where they would stop trading the rocks with eachother.  Person B will reach a point where he would not trade away any more of his blue rocks.... unless the price changes (which would most likely occur when Person A begins digging up more and more red rocks).  But this would just lead to another direct exchange between the both of them until both are satisfied (equilibrium).

Aristippus:
They also produce other products.

This makes it slightly more complex, but the logic is still the same.  I would recommend going back and reading on the basics just make sure you have the logic down correctly.  I believe Bob Murphy does a pretty good job of this in "Lessons For The Young Economist":

Aristippus:
Now A anticipates that for some reason B's blue rock mine will be depleted and so he will be unable to produce shiny blue rocks.  For this reason, A stocks up on shiny blue rocks by trading with B.  Then, when the source of blue rocks is cut off, A sells them back to B in exchange for other products B can produce.

As I mentioned above, this is just the prices changing, and I think a little bit of substituting or confusing definitions of indirect (as I mentioned in my previous post).

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Micah71381 replied on Sat, Apr 9 2011 12:25 AM

At the point of that exchange it's a direct exchange, not an indirect exchange.  A is collecting blue rocks and consuming red rocks.  A then exchanges blue rocks to B, this is a direct exchange.  The only point I am making here is that there is no indirect exchange, only direct exchanges.

That being said, it would be an indirect exchange if A purchased blue rocks from B so he could sell those blue rocks to B later.  The first exchange would be indirect, the second direct.

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Aristippus replied on Sat, Apr 9 2011 12:29 AM

"That being said, it would be an indirect exchange if A purchased blue rocks from B so he could sell those blue rocks to B later."

That's what I said...

EDIT: Perhaps the answer is that there must be >1 persons, >1 of which can offer >1 good/service for trade.

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Tex2002ans replied on Sat, Apr 9 2011 1:03 AM

Micah71381:
That being said, it would be an indirect exchange if A purchased blue rocks from B so he could sell those blue rocks to B later.  The first exchange would be indirect, the second direct.

No, even you are confusing definitions of indirect.  The first exchange would be a direct exchange:

Person A trades rocks to Person B.  Let us say we both have 100 rocks.  We both trade 50 to eachother.  Now Person A digs up more red rocks.  He trades again with Person B at some other exchange rate (depending on how much Person B prefers red rocks to blue rocks).  They will continue trading until they are satisfied, Person A will dig more red rocks, they will trade again until they are satisfied, and on and on and on.

There will reach a point where Person B likes his remaining blue rocks more than all the red rocks Person A has (or to look at it another way, the Oppurtunity Cost for Person A will become so large it would not be worth it to dig more).  At this point there would be no more benefit in trading red/blue rocks, and they would move on to trading other goods.

You are imagining multiple direct trades over time, and (potentially) changes in preference.  This is just changing of prices (over a period of time), and NOT indirect exchange.

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Micah71381 replied on Sat, Apr 9 2011 1:26 AM

The idea was that A wants red rocks and B wants blue rocks.  A has no desire to collect blue rocks and B has no desire to collect red rocks.  This means that anytime A accepts blue rocks (something he has no desire for) it is solely for the purpose of future purchasing power (medium of exchange).  The inverse is true for B accepting red rocks (which he has no desire for outside a medium of exchange).

I will admit, this scenario is a bit contrived but I think technically, it would be an indirect exchange if A accepted blue rocks or B accepted red rocks since part of the exchange consists of a good the receiver has no value of beyond a medium of exchange.

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Aristippus replied on Sat, Apr 9 2011 1:35 AM

Rothbard: "The tremendous difficulties of direct exchange can be overcome only by indirect exchange, where an individual buys a commodity in exchange, not as a consumers’ good for the direct satisfaction of his wants or for the production of a consumers’ good, but simply to exchange again for another commodity that he does desire for consumption or for production."

In my scenario person A buys a certain quantity of blue rocks, not as a consumer's good for the direct satisfaction of his wants or for the production of a consumers’ good, but simply to exchange again for another commodity that he does desire for consumption or for production.

EDIT:  Tex, I'm not sure at what your other criticisms are aimed - all that matters is that A trades red rocks for blue rocks so that he can then trade blue rocks for another good.  I brought up that B would lose his supply of blue rocks (due to the closure of his mine and his own consumption of the rocks) to give an explanation of why A might buy blue rocks for indirect exchange.  I added other elements (e.g. that they both consume each kind of rock and trade with eachother for eachother's product) so that was less contrived.

Also, I agree the problem is in the definition.  Going on what Rothbard says there, my scenario contains indirect exchange - but perhaps it cannot be said to have a common medium of exchange, since only A uses the blue rocks for indirect exchange.  I'm still not sure.

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Neodoxy replied on Sat, Apr 9 2011 1:05 PM

"Yes, two people have their own subjective preferences, and they could trade goods with eachother which would result in prices, but not a money (which can only arise through indirect exchange)."

I would agree with you but the only purpose to the trader to own the rocks is to exchange them. They become a medium of exchange and therefore can be considered a money.

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bbnet replied on Sun, Apr 10 2011 1:28 AM

Will work with one rock lover, will work better with many rock lovers.

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Seraiah replied on Thu, Jun 28 2012 1:59 PM

Micah71381:
I will admit, this scenario is a bit contrived but I think technically, it would be an indirect exchange if A accepted blue rocks or B accepted red rocks since part of the exchange consists of a good the receiver has no value of beyond a medium of exchange.

This is all well and good, but the definition itself implies three actors. If I could horde an item of anothers to trade back to him at a later date, I could also mine his type of rocks solely for the purpose of trading.

If that's indirect exchange, then there is no direct exchange.

You need at least three actors or the term just isn't useful.

And Mises' Regression Theorem could be applied to any currency whose purchasing power far exceeds what it would be expected to achieve if introduced into a free market absent any tampering. Since "excessive" subjective valuations can't occur between two people, nor can currency exist, at least three people must be involved to apply the Regression Theorem.

"...Bitcoin [may] already [be] the world's premiere currency, if we take ratio of exchange to commodity value as a measure of success ... because the better that ratio the more valuable purely as money that thing must be" -Anenome
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Nielsio replied on Thu, Jun 28 2012 5:24 PM

Menger versus Mises and Rothbard on how money works

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Smiling Dave replied on Thu, Jun 28 2012 6:24 PM

Neilsio,

What makes you think Mises and R. forgot about legal tender laws? Mises mentions them in 6 places in HA, Rothbard in one. [I'm going by the indexes to their books].

Are you saying that the added value a money has, besides its intrinsic value, only stems from legal tender laws?

I offer wampum as a counterexample. Wikipedia seems to be saying its value was not dependent on legal tender laws always and only:

Currency

When Europeans came to the Americas, they realized the importance of wampum to Native people. While the Native people did not use it as money, the New England colonies used it as a medium of exchange. Soon, they were trading with the native peoples of New England and New York using wampum. The New England colonies demonetized wampum in 1663.[9] Meanwhile it continued as currency in New York at the rate of eight white or four black wampum equalling one stuiver until 1673. The colonial government issued a proclamation setting the rate at six white or three black to one penny. This proclamation also applied in New Jersey and Delaware.[10] The black shells were considered worth more than the white shells, which led people to dye the latter, and diluted the value of the shells. The ultimate basis for their value was their redeemability for pelts from the Native Americans. As Native Americans became reluctant to exchange pelts for the shells, the shells lost value.[11]

Their use as common currency was phased out in New York by the early 18th century. Shinnecock oral history ascribed the wampum market demise to a deadly red tide that decimated the whelk and quahog populations.

With stone tools, the process to make wampum was labor intensive. Only the coastal nations had sufficient access to the basic shells to make wampum. These factors increased its scarcity and consequent value among the European traders. Dutch colonists began to manufacture wampum and eventually the primary source of wampum was that manufactured by colonists, a market the Dutch glutted.

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Smiling Dave replied on Thu, Jun 28 2012 6:27 PM

And Mises' Regression Theorem could be applied to any currency whose purchasing power far exceeds what it would be expected to achieve if introduced into a free market absent any tampering. Since "excessive" subjective valuations can't occur between two people, nor can currency exist, at least three people must be involved to apply the Regression Theorem.

So many errors in one little paragraph.

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Nielsio replied on Thu, Jun 28 2012 6:50 PM

Smiling Dave,

>What makes you think Mises and R. forgot about legal tender laws?

They forgot about them in relation to valuations in indirect exchange. The fact that they think they need to answer the question of 'regression' (of circularity) at all means they're not thinking in terms of speculation on direct use, which is where you would describe the power of legal tender laws.

>I offer wampum as a counterexample. Wikipedia seems to be saying its value was not dependent on legal tender laws always and only:

What you quoted is riddled with legislation. On top of that, Wikipedia says: "Wampum are traditional sacred shell beads". To consider something sacred means you value it as a consumer.

And then it says: "As Native Americans became reluctant to exchange pelts for the shells, the shells lost value". If anything, all this seems to illustrate my (and what I think is) Menger's theory.

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Smiling Dave replied on Thu, Jun 28 2012 7:40 PM

What you quoted is riddled with legislation.

A Swiss cheese is riddled with holes, but it's not 100% holes. The story of wampum is riddled with legislation, but it served as money when there was no legislation, too. Thus legal tender laws can't explain those parts.

On top of that, Wikipedia says: "Wampum are traditional sacred shell beads". To consider something sacred means you value it as a consumer.

As a consumer to consume, but the article says explicitly that the Indians did not use it as a medium of exchange with each other. After all, Mises posits, [unlike what the bitcoin crowd seems to think he said], that all money has to begin with value to consumers. So there is no contradiction to Mises there. And of course, I doubt the Dutch settlers would give it any value as a sacred bead, as consumers. They had other sacred knick knacks. And yest, as time went on, those things started being worth something to the Dutch as well, even when there were no legal tender laws about them.

And then it says: "As Native Americans became reluctant to exchange pelts for the shells, the shells lost value". If anything, all this seems to illustrate my (and what I think is) Menger's theory.

Not sure what you see here. It conforms to Mises' theory as well. If anything, it might contradict your theory, if the legal tender laws where still in effect when this happened.

Maybe I'm missing something. I understood your theory to be that money starts off as a commodity, then acquires more value when legal tender laws give it usefulness. I've heard Austrians [=Peter Schiff] say that legal tender laws give value to otherwise useless stuff, if only because you need some of it to pay your taxes. So the way i see it, Mises would agree that legal tender laws have a part in giving stuff exchange value above and beyond their intrinsic, industrial value.

But he seems to say that legal tender laws are sufficient, but not neccesary, to do that. The extra value can arise with no legal tender laws at all, merely because the commodity became popular as a medium of exchange. And my understanding is that you disagree with that. No legal tender laws, no washee. Andthe history of wampum seems to deny that.

I wonder also about cigarettes in prisons, which it seems is used as money there. Maybe some unfortunate with experience can tell us if the value of cigarettes was more in prison than in the outside world. If yes, they would also be a counterexample.

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gotlucky replied on Thu, Jun 28 2012 7:44 PM

Smiling Dave:

A Swiss cheese is riddled with holes, but it's not 100% holes. The story of wampum is riddled with legislation, but it served as money when there was no legislation, too. Thus legal tender laws can't explain those parts.

Best. Counter. Ever.

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Seraiah replied on Thu, Jun 28 2012 8:06 PM

Dave:
So many errors in one little paragraph.

You seem to be actively trying to destroy your own credibility in this subject matter.

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