[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]



 
                    THE PRICE OF MONEY: CONSEQUENCES
                     OF THE FEDERAL RESERVE'S ZERO
                          INTEREST RATE POLICY

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON

                        DOMESTIC MONETARY POLICY

                             AND TECHNOLOGY

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 21, 2012

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-160


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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                   SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice          BARNEY FRANK, Massachusetts, 
    Chairman                             Ranking Member
PETER T. KING, New York              MAXINE WATERS, California
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois               BRAD SHERMAN, California
GARY G. MILLER, California           GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            JOE BACA, California
MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
KEVIN McCARTHY, California           BRAD MILLER, North Carolina
STEVAN PEARCE, New Mexico            DAVID SCOTT, Georgia
BILL POSEY, Florida                  AL GREEN, Texas
MICHAEL G. FITZPATRICK,              EMANUEL CLEAVER, Missouri
    Pennsylvania                     GWEN MOORE, Wisconsin
LYNN A. WESTMORELAND, Georgia        KEITH ELLISON, Minnesota
BLAINE LUETKEMEYER, Missouri         ED PERLMUTTER, Colorado
BILL HUIZENGA, Michigan              JOE DONNELLY, Indiana
SEAN P. DUFFY, Wisconsin             ANDRE CARSON, Indiana
NAN A. S. HAYWORTH, New York         JAMES A. HIMES, Connecticut
JAMES B. RENACCI, Ohio               GARY C. PETERS, Michigan
ROBERT HURT, Virginia                JOHN C. CARNEY, Jr., Delaware
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO R. CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee
FRANK C. GUINTA, New Hampshire

           James H. Clinger, Staff Director and Chief Counsel
        Subcommittee on Domestic Monetary Policy and Technology

                       RON PAUL, Texas, Chairman

WALTER B. JONES, North Carolina,     WM. LACY CLAY, Missouri, Ranking 
    Vice Chairman                        Member
FRANK D. LUCAS, Oklahoma             CAROLYN B. MALONEY, New York
PATRICK T. McHENRY, North Carolina   GREGORY W. MEEKS, New York
BLAINE LUETKEMEYER, Missouri         AL GREEN, Texas
BILL HUIZENGA, Michigan              EMANUEL CLEAVER, Missouri
NAN A. S. HAYWORTH, New York         GARY C. PETERS, Michigan
DAVID SCHWEIKERT, Arizona


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    September 21, 2012...........................................     1
Appendix:
    September 21, 2012...........................................    19

                               WITNESSES
                       Friday, September 21, 2012

Grant, James, Editor, Grant's Interest Rate Observer.............     5
Lehrman, Lewis E., Chairman, The Lehrman Institute...............     6

                                APPENDIX

Prepared statements:
    Paul, Hon. Ron...............................................    20
    Grant, James.................................................    22
    Lehrman, Lewis E.............................................    27


                    THE PRICE OF MONEY: CONSEQUENCES
                     OF THE FEDERAL RESERVE'S ZERO
                          INTEREST RATE POLICY

                              ----------                              


                       Friday, September 21, 2012

             U.S. House of Representatives,
                  Subcommittee on Domestic Monetary
                             Policy and Technology,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 9:33 a.m., in 
room 2128, Rayburn House Office Building, Hon. Ron Paul 
[chairman of the subcommittee] presiding.
    Members present: Representatives Paul, Jones, Lucas, 
Luetkemeyer, Huizenga, and Schweikert.
    Chairman Paul. This hearing will come to order. And without 
objection, all Members' opening statements will be made a part 
of the record.
    I want to welcome our two witnesses here today, and I will 
now recognize myself for 5 minutes to make an opening 
statement.
    Today, we are emphasizing the importance of interest rates. 
In a free market, interest rates are crucial. It is a crucial 
bit of information that tells a lot of people what to do, 
whether it is the investors, the savers, the spenders, 
consumers, whatever.
    But once it is interfered with and interest rates are 
artificial, it tends to mess things up.
    We talk a lot about monetary policy and the soundness of 
the dollar and the spending and monetizing of debt. Today, we 
are more or less concentrating on that aspect of monetary 
policy that deals with interest rates--how important is it--and 
has that whole emphasis on interest rates and this concession 
through the Federal Reserve (the Fed) that they have a duty and 
sometimes an unregulated duty to pretend they know what the 
interest rates should be.
    This opens up a lot of questions. Who benefits and who 
suffers from this? Has it done any good? Is it a worthy effort 
even to try to pretend that we know what interest rates should 
be? And figure out exactly how much difficulty it has caused.
    From my viewpoint, I think that, from the viewpoint of the 
marketplace--just as all prices, I want the market to set these 
prices. And we have been living now with a Federal Reserve for 
100 years, and early on, they were manipulating interest rates.
    It is hard to manipulate the supply of money or be the 
lender of last resort without getting involved in interest 
rates. And it is usually done with either trying to prevent a 
problem or to solve a problem.
    But if we look at history, especially in our last 100 
years, we have had a lot of ups and downs. It hasn't been 
smooth sailing. The Federal Reserve is supposed to be providing 
for a sound dollar and making sure that prices are stable and 
that there is high employment.
    And yet the results that we see today, because they have 
pursued this almost obsession on believing that they can leap 
over into a central economic planning through the manipulation 
of money and credit, and in particular interest rates, we have 
ended up with some pretty poor results.
    So I am working under the assumption that we are in a 
period of time probably unparalleled in our history, possibly 
unparalleled in the history of the world, because we have never 
had quite the global economy involved like we have today and we 
have never had a single fiat currency for 30, 40 years being 
used as the reserve currency of the world. So I think the 
distortions now are so great.
    And if it is indeed true that the concentration on interest 
rates might be the culprit, it would be good to get it exposed, 
so that when the time comes when it becomes an absolute 
necessity to try to correct this problem, we might be able to 
put a better system together.
    So I am delighted today that we have been able to bring two 
individuals who are very well-versed on this subject to talk 
about this, and other members of the committee, to emphasize 
the importance of price fixing of money.
    Some people don't like to call it price fixing and they 
refer to it as something in interest. But in a way, it is easy 
to understand it is a price fixing.
    Price fixing is bad when we have wage and price controls. 
Not many people are advocating wage and price controls at the 
moment, even though there is a lot of that going on in a subtle 
way, if money is one-half, the currency is one-half of every 
transaction and you have some price fixing involved in the 
price of money, it can be a fairly significant event that 
should be exposed, and we certainly ought to recognize that as 
we move into that period of time when there is a necessity for 
monetary reform.
    So I am delighted that we have had this opportunity to 
further this discussion.
    I would now like to yield 5 minutes to the gentleman from 
North Carolina, Walter Jones.
    Mr. Jones. Mr. Chairman, thank you. And I won't take but 1 
or 2 minutes. I want to thank you again for your national 
leadership on this area of monetary policy and concerns of 
where this country is going.
    And to our witnesses today, thank you very much. I look 
forward to listening to your comments.
    I don't think there is a better time, when we are going 
home for the next 5 weeks, all of us in the United States 
Congress, to be with the people. And knowing that I am from 
eastern North Carolina and the concern about the actions of the 
Federal Reserve, I think the topic today is absolutely 
fascinating and critical.
    So I just want to say to you, Mr. Chairman, thank you very 
much for holding this hearing, and I look forward to listening 
to the witnesses and thank them for being here. And just thank 
you for your service to our Nation.
    I yield back.
    Chairman Paul. I thank the gentleman.
    I now yield time to Mr. Lucas from Oklahoma.
    Mr. Lucas. Thank you, Mr. Chairman. And as all of the 
hearings that you have called in your tenure as a subcommittee 
chairman reflect, this is an important subject matter and 
something on which we all need to focus. Perhaps not quite as 
exciting to the membership, as one can tell, as it should be, 
but nonetheless it cuts to the very basis of how our free 
market system works in this country.
    That said, let me reminisce for just a moment, since this 
session of Congress is beginning to wind down, and there is 
always a possibility this might be the last hearing of this 
subcommittee. I suspect we might be around after Election Day, 
but a lame duck session is to be avoided if it is humanly 
possible.
    I would just simply note that--having sat next to you on 
this dais on the full committee and served on your subcommittee 
for almost a decade now--we have had many a good policy 
discussion, and not just monetary policy, but we have discussed 
the intricacies of farm policy, agricultural economics.
    It might surprise some of you to know that Dr. Paul and I, 
while we agree on many, many, many things, we are not exactly 
in sync on agricultural economics. But we have had some lovely, 
very thoughtful, to-the-point discussions, and you have opened 
my mind in an area or two, and I appreciate that. And I hope 
perhaps even on an occasion or two, I have offered a thought 
for you to think about. But you have just been a pleasure.
    And if Congress is about free elections, and an open and 
thoughtful debate process where policies can be formulated in 
the best interest of the country, then I think you have done 
more than your part, and we will all be ever so appreciative of 
that for many, many years to come.
    And with that, thank you, Mr. Chairman.
    Chairman Paul. I thank the gentleman.
    And now, I yield time to Mr. Luetkemeyer from Missouri.
    Mr. Luetkemeyer. Thank you, Mr. Chairman. I add my 
congratulations and empathies from Chairman Lucas as well. It 
has been an honor to serve with you these past 2 years.
    The subject we have today I think is extremely important 
from the standpoint that the Fed continues to tinker around 
with our economy through the money supply, and, from all things 
that I see, it is having minimal success. I am concerned about 
the direction that they are going, the situation that they are 
putting us in.
    If you look at the global situation, other entities, 
central banks around the world, they are struggling. And is 
this the proper path to take? I don't know, I am not an 
economist, and I think there is a general disagreement even 
with good economists on whether it is a good policy or a bad 
policy.
    But I think that the discussion is pertinent, extremely 
important to today's economic welfare from the standpoint that 
we are in an economic stagnation period here, and how we get 
out of this is everybody's concern.
    And I think monetary policy by the Fed and their money-
supply policy is an extremely important subject to discuss.
    So with that, I thank you for the subject today, Mr. 
Chairman, and I yield back.
    Chairman Paul. I thank the gentleman.
    Now, I yield time to Mr. Schweikert from Arizona.
    Mr. Schweikert. Thank you, Mr. Chairman. I will be very 
quick.
    You do realize that you letting me on this subcommittee has 
really screwed up my subjects of reading over the last 2 years. 
All of a sudden, I find myself reading more about monetary 
policy than I ever thought I would want to touch. And I have 
learned a lot. I have also worked through a series of things 
that I realize are just sort of complete folklore out there.
    And, Mr. Chairman, I am hoping also in our testimony and in 
some of the discussion, I am one of those who is absolutely 
fixated on the concept that interest rates ultimately are the 
pricing of risk and where interest rates and capital flows, and 
then that interest rate charged to where that capital flowed is 
sort of an allocation and a management of risk.
    Do you end up moving large amounts of capital, or even 
sometimes, us as individuals, capital to places that it 
shouldn't be because it is misallocated and mispriced? And what 
are the ultimate consequences for what we have done here when 
we have basically destroyed what should have been the 
historical pricing mechanism or risk mitigation, risk analysis 
system, which is interest rates and our economy.
    And with that, Mr. Chairman, I look forward to the 
testimony.
    Chairman Paul. I thank the gentleman.
    We will now proceed to our witnesses.
    First, Mr. James Grant is a noted investor and founder and 
editor of Grant's Interest Rate Observer, a widely circulated 
bimonthly newsletter on finance that accurately foresaw the 
financial crisis.
    A former columnist from Barron's, he is the author of five 
books on finance and financial history. Mr. Grant has appeared 
on television programs such as ``60 Minutes'' and ``The Charlie 
Rose Show'' to share his expert knowledge of finance, and his 
journalism has been featured in numerous publications, 
including The Wall Street Journal, the Financial Times, and 
Foreign Affairs.
    Second, Mr. Lewis Lehrman is a senior partner of the 
investment firm L.E. Lehrman & Co., and is chairman of the 
Lehrman Institute, a public policy organization he founded in 
1972, where he heads up the Gold Standard Now Project.
    As a member of President Ronald Reagan's Gold Commission, 
Mr. Lehrman helped write the Commission's minority report 
entitled, ``The Case for Gold.''
    Over the years, he has written widely about economic and 
monetary policies and has been featured in Harper's, The 
Washington Post, and The New York Times, among others.
    Without objection, your written statements will be made a 
part of the record. You will each now be recognized for a 5-
minute summary of your testimony.
    Mr. Grant?

    STATEMENT OF JAMES GRANT, EDITOR, GRANT'S INTEREST RATE 
                            OBSERVER

    Mr. Grant. Mr. Chairman, and members of the subcommittee, 
good morning. It is an honor and a pleasure, and may I 
underscore honor to be here.
    The price mechanism is our indispensable contrivance, and 
without it, the store shelves would be stocked with things we 
don't want, if they would be stocked at all. Our economy is 
wondrously complex, and what coordinates the moving parts is 
Adam Smith's invisible hand.
    For a superb critique of the perils of price control, look 
no further than Ben Bernanke's own lectures last March to the 
students of George Washington University. ``As you know,'' the 
chairman reminded his charges, ``prices are the thermostat of 
an economy; they are the mechanism by which an economy 
functions. So putting controls on wages and prices,'' here Mr. 
Bernanke was referring to the disastrous Nixon experiment of 
the early 1970s, ``meant that there were all kinds of shortages 
and other problems throughout the economy.''
    Yet this same observant critic is today leading the Fed in 
a policy of financial price control, to call the thing by its 
name. Interest rates are, after all, prices. They convey 
information, or are intended to. Market-determined interest 
rates are the prices that balance the supply of savings with 
the demand for savings.
    These, however, are not our interest rates. Actually, we 
hardly have any. They are so small you can hardly see them. 
They are tiny. Today, the Federal Reserve imposes interest 
rates, and those rates it does not impose, it heavily 
influences.
    Mr. Bernanke's bank fixes at zero percent the basic money 
market interest rates called the Federal funds rate that 
manipulates the alignment of rates over time, the yield curve, 
and it has its fingerprints all over the relationship between 
government yields on the one hand, and the yields attached to 
private claims on the other.
    The Federal Reserve has decreed that ultra-low interest 
rates are a necessary if not sufficient condition for economic 
recovery. It says that miniature interest rates will boost 
hiring and another aspiration of the central bank, keep 
consumer prices rising by just enough; ``a decent minimum, say, 
of 2 percent a year,'' so says the Fed.
    Now, every market intervention has consequences, but not 
necessarily the consequences that the intervening authority 
intended. In the nature of things, there can be no predicting 
exactly what will come of today's radical and indeed 
unprecedented monetary policies.
    Mr. Bernanke himself makes no bones about it in his widely 
scrutinized speech at Jackson Hole, Wyoming, on August 31st. He 
used the phrase, ``learning by doing.'' Indubitably the Fed is 
doing, nobody can doubt its manic energies, but it seems not to 
be learning.
    Artificially low interest rates must inevitably subsidize 
speculation at the expense of saving. It must raise up the 
prices of stocks and commodities, but only temporarily. It must 
enrich the asset holders and inadvertently punish the wage 
earner. It must advantage one class of financial institutions--
say, banks--over another--say, life insurance companies. It 
must disturb the currency markets, and therefore interfere with 
international trade, and it must conflate our understanding of 
the strength of the Treasury's own finances.
    This year, in the just-ending fiscal year--or the soon to 
end--the interest cost in the debt will run to an estimated 
$125 billion. That happens to be slightly lower than the outlay 
the Treasury bore in 2006 when the debt was 58 percent smaller 
than it is today, but when the average interest rate was a 
towering 4.8 percent as opposed to the current average of 2.1 
percent.
    Ultra-low rates flatter the Nation's credit profile, yet 
that credit profile remains the same.
    Mr. Chairman, millions of Americans are earning nothing on 
their savings. Having nowhere else to turn, they are investing 
in richly priced corporate debt, some of that speculative 
grade. The Fed author of this interest-rate famine of ours has 
inadvertently created a paradox that would be funny if it 
weren't dangerous.
    Mr. Bernanke's bank has created a high-yield bond market, 
junk bonds to the cognoscenti, but a market lacking one 
customary attribute of high-yield security. That is, the Fed 
has created a high-yield bond market without the yield.
    I thank you.
    [The prepared statement of Mr. Grant can be found on page 
22 of the appendix.]
    Chairman Paul. Mr. Lehrman, go ahead.

 STATEMENT OF LEWIS E. LEHRMAN, CHAIRMAN, THE LEHRMAN INSTITUTE

    Mr. Lehrman. So, Mr. Grant and I like to switch one 
sentence to express how much we honor the extraordinary record 
of the chairman in his 30 years plus, perhaps, service in the 
Congress. It has been a heroic effort on behalf of the 
authentic Constitution, and on behalf of the liberties which we 
have inherited from our forefathers, and of course, for sound 
money.
    Now, Mr. Grant is about six feet, five inches tall. I am 
only five feet, 10 inches tall, and he determined the protocol 
of our presentation. So, he established that he would focus on 
the problem, and I should spend a moment or two on the 
solution.
    Indeed, Jim has described the consequences of Federal 
Reserve quantitative easing and interest rate manipulation and 
suppression.
    From Mr. Grant's analysis, one concludes that the Fed's 
unlimited power to purchase Treasury debt and financial market 
securities not only funds the Treasury deficit with newly 
printed money, but the Fed's market intervention process also 
makes of the financial class a special interest group of 
privileged investors and speculators, because of their special 
access to subsidized funds at near zero interest rates, while 
middle-income families depend upon their credit card balances 
and pay upwards of 20 percent or more.
    A well-connected financial class subsidized by the Federal 
Reserve is a crucial cause of increasing inequality of wealth 
in America. In this regard, I would cite only one fact for the 
Monetary Policy Subcommittee to contemplate. Since the 
termination of dollar convertibility to gold in 1971, a mere 
generation, the financial sector has doubled in size as a share 
of the American economy, but the manufacturing sector has been 
cut in half.
    Only comprehensive reform of the Fed and termination of the 
Reserve currency role of the dollar will arrest this trend. For 
example in 2002, Mr. Bernanke described the Fed's extraordinary 
power to create new money and credit in our present financial 
regime of inconvertible paper money and inconvertible bank 
deposit money.
    I quote Mr. Bernanke, ``Under a fiat paper-money system, a 
government, the central bank in cooperation with other 
agencies, should always be able to generate increased nominal 
spending and inflation. Even when the short-term nominal 
interest rate is at zero, the U.S. Government has a 
technology,'' Bernanke continues, ``called a printing press, or 
today its electronic equivalent that allows it to produce as 
many U.S. dollars as it wishes at essentially no cost.''
    Reading this, I don't know whether to laugh or to cry. In 
effect, as James Grant wrote elsewhere, ``The Fed is not only 
the American central bank, but with this exalted power to print 
money, the Fed is now the government's central planner.''
    During the Volcker years, from 1979 to 1987, Fed interest 
rate manipulation was justified as the means to end inflation. 
By 1994, employment as a Fed target had all but disappeared 
from the minutes of Fed meetings.
    Now, in 2012, despite inflation being again on the rise, 
employment is as a practical matter the sole target of 
quantitative easing. The Fed and its apologists in the media 
and the academy justify quantitative easing and its unlimited 
scope and duration as the way to restore economic growth--
surely, an extra-Constitutional form of fiscal spending through 
Federal Reserve capital allocation reserved for the Congress of 
the United States.
    But as soon as one examines that Federal Reserve balance 
sheet, which if I may say so, few politicians do, one sees that 
the Fed primarily buys Treasury securities and mortgage-backed 
securities. In effect, a subsidy by which to finance the 
government deficit, and to refinance bank balance sheets that 
is to say the promotion of more financial and consumption 
sector growth. In a word, quantitative easing is the most 
pernicious form of trickle-down economics.
    Now, the problem of the American economy is neither under-
consumption nor is it under-banking. The problem is the lack of 
rapidly growing investment in domestic production and 
manufacturing.
    The investment is the necessary means by which to enable 
our producers to lead in both domestic and global markets. It 
is rapidly increasing investment and production growth which 
begets employment growth and with it healthy unsubsidized 
consumption growth, not by means of transfer payments.
    It is a truth of economic theory and practice that rising 
personal and family real income grows from increasing per 
capita investment in innovative businesses; new plant, new 
equipment. So the question is, in reforming the Fed, how can 
our runaway central bank be harnessed by the financial markets 
to target the goal of economic growth through increased 
productive investment, not the promotion of consumption and 
Treasury deficit financing by means of interest rate 
manipulation and quantitative easing?
    The answer, I believe, is transparent. The Congress of the 
United States has the exclusive constitutional power under 
Article I, Sections 8 and 10, not only to establish the 
definition of the dollar, but Congress also has the power to 
define by statute the eligible collateral that the Federal 
Reserve may buy and hold against the issue of new money and 
credit.
    Thus, a simple congressional statute defining sound 
commercial loans as the primary eligible collateral for 
discounts and new credit from the Fed would have two primary 
defects. First, it should rule out Fed purchases of Treasuries, 
thus requiring the government to finance its deficits not with 
newly printed Fed money, but instead in the open market away 
from the banks.
    Second, the Fed would then become a growth-oriented central 
bank by which to finance productive business loans, encouraging 
thereby commercial banks themselves to make banks to solvent 
businesses in order to sustain economic and employment growth.
    Now, why is this the case? Commercial banks would focus on 
production and commercial loans because solvent loans, instead 
of Treasury debt, could then be used by commercial banks as the 
primary eligible collateral by which to secure credit from the 
Fed as the lender of last resort. In a word, Treasury subsidies 
by the Fed should be displaced by productive business loans 
oriented toward economic and employment growth.
    Mr. Chairman, this simple proposed reform of Fed operations 
was the very monetary policy insisted upon by Carter Glass, a 
leading Democrat who was the chief sponsor of the Federal 
Reserve Act of 1913. The congressional legislative leaders who 
created, indeed founded, the Federal Reserve System of 1913 
designed the Fed by law to enable steady commercial investment 
and employment growth.
    The Federal Reserve Act was also designed explicitly to 
uphold and maintain dollar convertible to gold in order to 
maintain a reasonably stable general price level. Now, such a 
congressional Federal Reserve reform today, consistent with the 
original Federal Reserve Act, would require no further 
legislative mandate to sustain employment growth and to rule 
out systemic inflation and deflation.
    Just a word more--so today, the Fed reiterates at every 
meeting that it, the central bank, must manage and manipulate 
interest rates to fulfill a congressional mandate to maintain 
reasonable price stability and reasonably full employment. But 
the best way to do this is to remobilize the express intent and 
the techniques of the original Federal Reserve Act, namely the 
statutory requirement that the Fed uphold the classical gold 
standard and, as was intended by the original Federal Reserve 
Act, to substitute commercial market credit for Treasury debt 
as the primary eligible collateral for bank loans from the 
lender of last resort, the Federal Reserve System.
    Mr. Chairman, may I say with respect, Congress has 
defaulted to the Federal Reserve System its sole and solemn 
constitutional authority to define and to regulate the value of 
the dollar and to define the vital economic use of eligible 
collateral by which to obtain productive business loans from 
the Federal Reserve System. It does not have to be this way.
    Thank you very much.
    [The prepared statement of Mr. Lehrman can be found on page 
27 of the appendix.]
    Chairman Paul. Thank you.
    We will go into the questioning session right now. I yield 
myself 5 minutes.
    I want to ask both of you the same question. In 1979, and 
the 1980s, we had a bit of a crisis, quite different than we 
have today because interest rates were very, very high and even 
made higher. At that time, as I recall, not too many people 
were happy and claiming they were getting benefits from the 
higher interest rates. I don't think the markets--the higher 
the rates went, I don't think the markets were saying 
``wonderful, wonderful.''
    But today, even with this most recent announcement of the 
accelerated quantitative easing, there is almost an immediate 
response--as a matter of fact, instantaneous response. We are 
going to print a lot more money and those individuals who are 
holding stocks seem to be delighted with that and bonds rally.
    My question is: Under today's circumstances, with this 
constant effort to keep lowering interest rates, now that they 
are down to essentially zero, below zero when you talk about 
real interest rates, who benefits from this? Who is really 
benefiting? And who are the people who are suffering? Can you 
divide it up and find out if there are some groups who have no 
benefit whatsoever and some people actually get punished? And 
other people are rewarded, whether it is temporary or not, at 
least they think they are being rewarded.
    And if there is a case where somebody benefits, and 
somebody else is hurt, is this done on purpose? Or would you 
want to make a stab at it to say is this sort of a consequence 
of just bad policy? Or what might be the motivation here if 
there are winners and losers?
    Mr. Grant?
    Mr. Grant. Mr. Chairman, the great French economist 
Frederic Bastiat talked about that which is seen and that which 
is not seen. There are many obvious beneficiaries. There are 
many obvious victims. Let me suggest a subtler distortion that 
these policies are responsible for, and then I will touch on 
some of the ones that are perhaps as important or more so.
    Capitalism is a little like the forest floor. There is 
life. There is death. There is regeneration. There is movement. 
The famous phrase ``creative destruction'' defines the 
inevitable ebbing of economic power that was once constructive 
and now has passed its prime.
    One of the consequences of these subsidized interest rates 
is that organizations that perhaps ought not to be around are 
given new life. The financial markets on Wall Street are 
increasingly welcoming to the most marginal credits because 
there is a stampede for interest income. People are starving 
for it and Wall Street is providing for it.
    When nearly anyone can get a new loan--when nearly anyone 
can get a pass in the public market that means there are not 
enough bankruptcies. It is a problem, albeit a paradoxical one. 
We need new enterprise and we need the exit of unprofitable or 
over-the-sell-by date enterprise; so ultra-low interest rates 
perpetuate the status quo.
    Interest rates, as someone mentioned, are among other 
things, great sources of information. When interest rates are 
pressed to the floor, the credit markets provide less and less 
information. The information is there, but it is not to be 
intuited by prices.
    So, as to the other beneficiaries and losers, some of them 
are painfully obvious. The Fed talks more or less nonstop about 
inflation, but then I think is troubled by the lack of it. It 
wants to see more of it. Well, one department of American 
finance in which there is rampant inflation is the cost of 
obtaining a dollar of income. One might say the cost of 
retirement is in a terrific inflationary crisis.
    A friend of mine and of Lew's, a Wall Street figure of 
wonderful renown and of some mordant future, said a while ago, 
before he passed away, ``You know,'' he said, in all 
seriousness, ``you really can't get by today without $100 
million.''
    The point survives the exaggeration. You need more and more 
capital to maintain a decent income as a saver. That, to me, is 
not the least of the cost of these policies.
    Chairman Bernanke, in Jackson Hole, spoke to try to put our 
collective minds at ease about the unintended consequences of 
quantitative easing. And he said, ``I can enumerate four 
possible pitfalls''--four. There are 400,000 possible pitfalls.
    The Chairman, I think, is in error when he implicitly tells 
us that for every monetary cause A, there is a predictable 
monetary effect B. There are effect B, C, D, N, Z, and myriad 
effects that are so weird that no proper letter in the English 
language can describe them.
    What we are now embarked on is one of the great monetary 
experiments of all times and, Mr. Chairman, we are the lab 
rats.
    Chairman Paul. Mr. Lehrman?
    Mr. Lehrman. Mr. Chairman, you mentioned the period of 
1979, 1980--that period of high interest rates over which Mr. 
Volcker presided. I was there and I remember it, just as you 
do. One of the remarkable things about a review of the history 
of the Federal Reserve System from 1914 until the present is 
that the techniques that have been used either to suppress 
interest rates or the use of vaulting interest rates to bring 
about changes in economic activity has seen no reform.
    That is to say, Paul Volcker, you will remember in 1979, 
said his goal was to target the bank reserves; that is to say, 
to control the stock of money in circulation. This was another 
new experiment on interest rate manipulation, of course, with a 
noble intent.
    But this was just another form of interest rate 
manipulation which ultimately wound up putting the prime rate 
at 21 percent and market rates for a long-term Treasury at the 
highest level that they would been in American history, 
approximately 15 percent.
    It is forgotten in the dreamlike remembrance of that period 
that from 1979 to 1982 the American economy was in recession, 
the unemployment rate in New York State in 1982 in November--I 
remember that date very well for personal reason--was 11.2 
percent, higher even than the unemployment rate at the peak of 
the ``Great Recession,'' which we have undergone since 2008.
    It was not a halcyon period. President Reagan's first years 
of the Administration were almost impeached economically 
because of that.
    So as the French say, the more it changes, the more it is 
the same way; that is to say, Federal Reserve interest rate 
manipulation and management for one purpose or another.
    Who benefits and who suffers? In each period, under each of 
the Federal Reserve Chairmen who exercised this extraordinary 
power, it was different.
    Today, I want to point out only in response to the question 
the technique and its effect by which the Federal Reserve 
actually does operate in open market operations at the New York 
Federal Reserve System and has done so since the First World 
War.
    The Federal Reserve enters the market and purchases 
outright or on a match sale or on a repurchase agreement 
Treasury securities from the market against which they issue 
new money.
    That new money is made available only to the banks 
because--or the today 16 authorized dealers. So their 
portfolios are reduced and substituted with new money, which 
they then are in a position either to lend out to dealers and 
brokers or speculators or Wall Street investors who can post 
collateral, liquid collateral, by which they then can satisfy 
the lend that they can repay the loan.
    So the very first effect and the dominant effect, the 
generalized effect is commodity dealers and equity dealers who 
have first access to the money which is created anew by the 
purchase of Treasuries, which themselves cannot be repaid as 
they are refinanced with renewal bills.
    This is a prescription and has been in effect for a very 
long time, but especially since the end of the Second World War 
and even more dynamically since the end of Bretton Woods in 
1971, to enrich the investor class.
    I cannot incriminate them because to a certain extent I am 
a member of that class, but one does not have to be a rocket 
scientist to see that the Federal Reserve's process of 
monetizing the U.S. Treasury debt, providing new credit to the 
banking system to lend to their preferred clients divorces 
supply from demand, creating a monetary demand unassociated 
with the production of new goods and services.
    When total monetary demand exceeds supply, which is the 
prescription and the technique of the Federal Reserve, 
inflation must get under way.
    Now, that inflationary process today is hidden by the vast 
unemployed resources which we now have. And as a result, the 
new credit money immediately goes into the commodity and equity 
markets as well as into speculative vehicles like farmland, for 
example, which is the most exotic investment today of a sort of 
inside Wall Street investors.
    No change can occur in such a process without a full reform 
of the Federal Reserve System and a reform of the monetary 
system.
    Chairman Paul. Thank you very much.
    I now recognize Mr. Luetkemeyer for 5 minutes.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    I appreciate your comments, Mr. Lehrman. They are 
interesting. You called farmland an ``exotic'' investment.
    I am looking to try and buy the farm next to mine, and I 
wouldn't think it would be an exotic investment. But I 
understand where you are coming from.
    I am just kind of curious, if the Fed would not purchase 
all of the government's debt, would there actually be a market 
out there, in your judgment, for our debt because of the size 
of the debt that we have, the amount of money that it would 
take to service that debt? Is there enough capital out there to 
service that debt? Is there enough capital out there to 
purchase that if we don't run the printing presses here at the 
debt and pick it up, in your judgment?
    Mr. Lehrman. May I first say, Congressman, that I am the 
owner of a 1,600-acre farm--corn, soybeans. And it is exotic 
from the standpoint of speculators who have never set foot in a 
cornfield, but certainly not from those--
    Mr. Luetkemeyer. That is who I am bidding against on the 
farm right now, are those guys.
    Mr. Lehrman. So then you understand what--
    Mr. Luetkemeyer. Yes, I do.
    Mr. Lehrman. --I was getting at.
    Mr. Luetkemeyer. But to me, it is not exotic. I would like 
to buy my neighboring farm, but to those folks, it brings the 
price up. I understand, but go ahead.
    Mr. Lehrman. So the question is: What would happen if, as 
the founders of the Federal Reserve System intended, the 
Congress of the United States and the budget of the Treasury 
were not able to finance its deficit by selling securities 
ultimately to the Federal Reserve System? Is the open market 
substantial enough to accommodate the vast sums presently 
required by the Treasury in order to finance its current 
spending?
    The answer to that is we would find that out, and it would 
be the ultimate discipline, which would require Congress on 
notice to the public that the financing of the Treasury was 
forcing interest rates higher and higher and excluding 
businesses and commercial firms from access to the credit 
markets because at the present level of deficits--let us call 
it all in about $1.5 trillion, including the credit financing 
bank--it would absorb almost all the net national savings 
available in the market, which gets right to the point of this 
hearing. What is the effect of the suppression of interest 
rates and their manipulation and the financing of 77 percent of 
the Federal Reserve's budget deficit in Fiscal Year 2011; what 
is the effect of that?
    It disguises from the public, the sovereign people, the 
effects of the fact that only 60 percent of the revenues which 
Congress decides to spend are financed through taxes, and 40 
percent of them through printed money either through the banks, 
the commercial banks, for foreign central banks.
    Mr. Luetkemeyer. I think there is another point to be made 
here too, which is the fact that because they are driving rates 
so low they are also disguising or hiding the fact--the 
exposure that we have when you go to $16 trillion worth of debt 
in just--an additional $4 trillion, $5 trillion, $6 trillion in 
the last 3 or 4 years--the amount of exposure we have to 
interest rate fluctuation. Right now, the cost of interest to 
our government is rather low compared to what it has been in 
the past because of driving interest rates down.
    If that would not happen the rates would go back--it would 
be very easy to double or triple the rates, because they are so 
low right now. Imagine what it would do to our budget if you 
doubled or tripled our cost of funds.
    Mr. Lehrman. We dealt with that issue at the last hearing, 
Congressman. We dealt with that issue. And were you to 
normalize the long-term interest rates--let us say for 30-year 
Treasury bonds--were you to normalize them consistent with the 
past history of the generation and given the scale of the 
direct debt of Treasury right now at $16 trillion, the total 
amount of the Federal budget devoted to interest payments could 
rise to as high as $800 billion, even towards a $1 trillion if 
the deficit were to continue.
    That puts, I think, a number on the effect.
    Mr. Luetkemeyer. Very good.
    Very quickly, how do we unwind this? What happens when we 
unwind this thing?
    Mr. Grant?
    Mr. Grant. We don't know. The Fed is--
    Mr. Luetkemeyer. We are still going to be a laboratory even 
for that.
    Mr. Grant. Yes. That, too, will be a learning-by-doing 
experience.
    Mr. Luetkemeyer. How painful will it be, do you think?
    Mr. Grant. Sorry?
    Mr. Luetkemeyer. How painful do you think it will be? 
Because--until interest rates rise, will inflation take place 
or will we go into a depression? Will it be runaway glory, 
everything going to be hunky-dory here? Or where are we going? 
If the Fed has to unwind this thing and get rid of the 2-point 
whatever--$8 trillion now--
    Mr. Grant. Congressman, we can rule out hunky-dory.
    As for the rest, we will see.
    Imagine a day in which the Treasury, to finance another 
$1.5 trillion deficit is raising, say, $15 billion in 2-year 
notes in the morning; and in the afternoon the Fed is holding a 
special auction to liquidate the remaining excess portion of 
those balance sheets. So they will be one auction on top of 
another.
    We simply don't know the outcome, but we do know, I think, 
that the Fed's assurances must be discounted. The Fed is 
remarkably complacent with regard to its capacity to form 
financial judgments. This is the outfit that panicked in front 
of the prices of computer clocks in 1999--neglected to see or 
to take due measure of the speculative mania in technology 
stocks that ended in the early aughts. And that positively saw 
not one aspect of the greatest credit crisis in three 
generations looming before it in the mid-2000s.
    And we are meant to believe that the perspicacity of the 
judgment of the Fed will now help them anticipate the end of 
the necessity for this Q.E. and to unburden themselves of the 
excess security.
    So I don't doubt that they mean to have the techniques to 
affect the exit. What I do doubt--and I think there is evidence 
in support of doubt--is that they have the judgment to mark the 
time and the need.
    Mr. Lehrman. May I say a word on that question, Mr. 
Chairman?
    Every Thursday, at about 4 p.m., the Federal Reserve System 
publishes its balance sheet. That balance sheet as of Thursday 
night, last night--I looked at it--shows that to do it in round 
numbers, the Fed owns approximately $3 trillion of securities, 
primarily Treasury securities and mortgage securities, 
mortgage-backed securities and agency bonds.
    If you look further into the detail and the footnotes you 
will observe that the largest fraction of the balance sheet of 
the Federal Reserve System is in long-term securities.
    The historic practices of central banks during long periods 
of stable prices was only to own short-term securities so that 
were inflation to arise, they could, to use your phrase, unwind 
their portfolios selling securities, or letting them run off 
into the market in order to reduce the quantity of money and 
credit in circulation and stabilize the price level.
    The Federal Reserve is now faced not only with the daunting 
task of unwinding the enormous monetization of Treasury and 
mortgage-backed securities, but they have encumbered the 
balance sheet with long-term securities which will not run off 
on a regular basis the way short-term commercial bills do with 
90-day maturities.
    They have the largest fraction of--far and away the 
dominant fraction in 10-to-30-year securities. So the only way 
they can get rid of them is to sell them into the open market.
    If the economy is running full-tilt at full employment, and 
let us say the employment rate might be at 5 percent, it could 
have nothing less than, as you implied, a very dynamic effect 
on interest rates in general, not just in the United States, 
but worldwide in as much as the United States dollar is the 
world reserve currency.
    Mr. Luetkemeyer. Thank you.
    I yield back. Thank you, Mr. Chairman.
    Chairman Paul. Thank you.
    We are going to a second round now of questioning.
    The first question I have I would like to get sort of a 
short answer for, because I have another question that follows 
and we will be voting on the Floor pretty soon. But what is 
your concept of the current situation now and whether or not we 
have a bubble? Most of us recognize a NASDAQ bubble. Others 
recognize the housing bubble. Do you see a bubble right now 
that could suddenly change and change the markets and all 
perceptions?
    Mr. Grant?
    Mr. Grant. Yes, Mr. Chairman, I do. I see a bubble in 
Treasury securities. I see a bubble in sovereign debts 
worldwide. The world has come to believe that the promises to 
pay of sovereign governments are intrinsically safe--not 
everyone--but Northern European governments are meant to be 
intrinsically safe. Australia, I think there are seven or eight 
AAA-rated governments left on the face of the Earth. People are 
crowding into the claims of these governments, not least into 
our own.
    These are interest rates that have not been seen in modern 
times in Northern Europe. There are plenty of governments 
borrowing at negative interest rates. And as was the case in 
every single market bubble in history, there are wonderfully 
persuasive stories circulated to rationalize what on the face 
of it is an abuse of common sense.
    So I nominate bonds themselves as our looming bubble.
    Chairman Paul. Mr. Lehrman, any additional comments?
    Mr. Lehrman. The number of bubbles--even with vast 
unemployed resources in nations around the world, not just in 
the United States--is legion. And Jim has just mentioned some, 
but the Congressman and I were talking about farmland.
    The value of farmland, as one vehicle for speculation, not 
only among well-positioned farmers, but I mean to say the 
investor class, the price of farmland, high-quality, let us say 
160-bushel-per-acre, non-irrigated farmland from Central 
Pennsylvania all the way to the foothills of the Rockies, that 
is to say the great corn belt, has doubled just in the past 4 
years.
    This has never been experienced at quite this rate of 
change; or I should say this bubble has never occurred on this 
scale in the past. It is one more example.
    Chairman Paul. My follow-up question is to you, Mr. 
Lehrman. I would like Mr. Grant to comment as well. You talked 
about a long-term solution, more about the monetary reform and 
the use of gold. I want to concentrate more on that shorter-
range solution or something you suggest that could help. And 
that is to look to the original Federal Reserve Act and not to 
allow the Fed to buy Treasury bills, but to allow the Fed to be 
the lender of last resort to sound commercial loans.
    Did I state that correctly?
    Mr. Lehrman. Exactly.
    Chairman Paul. Okay. If the Fed buys a commercial loan, 
they could buy this with money creation. Would this be 
expanding the money supply? Would this be monetizing a debt? 
And could it lead to a problem as well? Or would you argue that 
this is not monetary inflation?
    Mr. Lehrman. I would argue it would not be monetary 
inflation. The difference is profound. The purchase of 
commercial bills for the purpose of production by the Federal 
Reserve or by commercial banks against the issue of new money 
goes to solvent firms who, in the process of production, then 
sell their output and they repay the loans.
    And as a result, the new credit which has been advanced 
against the commercial bill or against the productive loan 
expands the money supply during that particular market 
interval. But 90 days later or 120 days later, the goods that 
were produced as a result of that financing realize their value 
and then those loans are liquidated, restoring equilibrium to 
the money market.
    Chairman Paul. So do you separate this from being the 
lender of last resort? Or would you put it in that category?
    Mr. Lehrman. I use the phrase ``lender of last resort'' 
because that is, of course, the rationalization that everybody 
uses to give the Fed the privileges to create money without 
limit. As the lender of last resort, the Fed would have the 
possibilities of buying solvent commercial loans in the open 
market, which themselves would be liquidated in a windup 
naturally in the course of economic activity.
    Whereas, in the case of the Treasury, the Treasury is never 
able, under present circumstances, and has not been since 
pretty much the end of the Second World War, to liquidate the 
bills or the bonds which they are selling. And it leads to a 
permanent expansion of the money supply never to be unwound by 
the natural course of production.
    Chairman Paul. Would doing this interfere with interest 
rates?
    Mr. Lehrman. In the case of commercial bills or productive 
loans, which the Fed would then discount when they were offered 
by the commercial banks against the desire for new credit, this 
would, in the same sense, lead to a rise in interest rates when 
credit demands were higher, and a fall in interest rates when 
the commercial loans were being repaid to the commercial banks, 
and the commercial banks repaying the central bank for the 
loans that they obtained against commercial lending collateral.
    Chairman Paul. Okay. And our voting has started, but I 
would like to get Mr. Grant to make a comment on that, if he 
could.
    Mr. Grant. I would vote. I am with Lew.
    Chairman Paul. Pardon me?
    Mr. Grant. I said I would go vote; I am with Lew on this. I 
can't add to this or shouldn't take your time in adding to it.
    Chairman Paul. Okay. Mr. Huizenga from Michigan, would you 
like to ask some questions?
    Mr. Huizenga. I would. Also, Mr. Chairman, I want to say 
thank you for your service to our country and your time here in 
Congress, as well as your service to the philosophy, the battle 
that we have going on.
    And the question I have is, I am curious if we can touch on 
the dual mandate of the Fed and what you believe that may have 
done to get us in the current situation. And would you suggest 
us changing that dual mandate of having them pursue low 
inflation and high employment? And any time I have, I would 
like to give back to the Chair if he so desires to do a follow 
up.
    Mr. Grant. Congressman, I think that one might, again, go 
back to the founding precepts of the Fed. The Fed got into 
business, if you read the opening paragraphs of the Federal 
Reserve Act, the Fed was to create a market in commercial bills 
and to exchange paper for gold in such a way as to support the 
working of the gold standard.
    And the phrase added was, ``and for other purposes''--
pregnantly, it was added. But I would keep the mandate even 
simpler than one. I would say that the Fed ought to be in 
business to support an objective definition of the value of the 
dollar.
    In this day and age, we could not have anything resembling 
industrial commerce as we know it without the most precise 
specifications of material weights and measures. And somehow, 
we have neglected this in money.
    Money is what someone thinks it should be in some 
particular public institution like a central bank or a Treasury 
Department. The lead article of the Financial Times this 
morning was a plaint by the finance minister of Brazil against 
quantitative easing on the grounds that the willful 
depreciation of the dollar--or I might say the willful 
redefinition of the dollar--would certainly lead to the 
interruption of trade and to frictions that did not exist 
previously.
    The gentleman to my left has written a fabulous book on 
this, and I think it is his view as well that what is wanted is 
the restoration of objective value in the dollar. And if the 
Fed could do that and maintain it, it seems to me that good 
things would follow.
    As it is, we have arrived at the most peculiar point in 
which people have come to think that if the Fed can raise up 
the value of stocks, bonds, farmland and commodities, somehow 
prosperity will follow. It seems to me that is a very peculiar 
horse in front of a very odd cart.
    Mr. Huizenga. I appreciate that.
    And Mr. Chairman, I am happy to yield my time to you.
    Chairman Paul. I thank you.
    I will recognize Mr. Luetkemeyer.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    Just very quickly, I only have a couple of questions.
    Mr. Grant, what do you believe would be the ideal interest 
rate or the ideal range that the Fed should shoot for, that our 
rates should be for, say, our T-bills or Fed funds rates or 
home loans or somewhere in there? Use some of those figures.
    Mr. Grant. Sir, I think the Fed should not be shooting at 
those rates. I think that they should be determined in the 
marketplace. If you look back on history, kind of a normal 
mortgage rate was 4.5 to 5 percent; T-bill rate, maybe 3 to 4 
percent; long-dated securities, yielding perhaps 6, 7 percent 
depending on the credit; and higher with regard to junk or 
speculative grade credits.
    But I would let the wonderfully invisible forces of the 
marketplace into this line of work and let them do their 
thing--
    Mr. Luetkemeyer. Okay, if that is the case then, do you get 
rid of the Fed, or do you think there is a place for it?
    Mr. Grant. Sir?
    Mr. Luetkemeyer. Would you get rid of the Fed then or do 
you believe there is a place for it?
    Mr. Grant. I believe that the Fed ought to be doing much 
less than what it is doing, and it could do with many fewer 
economists. They could be doing with a much narrower mission 
statement and as long as we are talking about reforming this 
outfit, we should not fail to institute the Fed's first office 
of unintended consequences.
    Mr. Luetkemeyer. Mr. Lehrman, would you like to comment on 
that?
    Do you believe we need to have a Fed or do you believe--
    Mr. Lehrman. I have made the case in my book and in 
previous books that if we are going to have a Federal Reserve 
system--for it should be said it is not an indispensable 
necessity--but if we are going to have a mere agency of the 
Congress maybe with the stature, so to speak, of the Interstate 
Commerce Commission or the Federal Communication Commission, 
then it must be circumscribed by very careful rules, whereby it 
conducts its policy such that it is consistent with the 
activities of a free market and a free people.
    So, that yes, I can embrace the Federal Reserve Act of 
1913, and the very few moments in which it conducted itself 
according to Article I of the Constitution, Sections 8 and 10, 
namely, to define the value of the dollar, regulate the--
    Mr. Luetkemeyer. So you could live with it as long as it 
went back to its original intentions and functions?
    Mr. Lehrman. I think we can go forward. We can't go 
backward, but I think we can go forward to a restoration of a 
Federal Reserve System which operates with some restraints 
imposed by Congress, the definition of the collateral, which is 
eligible at the Federal Reserve for discount against new money 
to encourage economic growth as opposed to encourage Treasury 
budget deficit.
    Mr. Luetkemeyer. Thank you.
    Mr. Chairman, I yield back.
    Chairman Paul. Thank you.
    I wanted to thank our Members who are here today, and our 
witnesses. And I appreciate very much you being here.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for Members to submit written questions to these 
witnesses and to place their responses in the record.
    This hearing is now adjourned.
    [Whereupon, at 10:36 a.m., the hearing was adjourned.]



                            A P P E N D I X



                           September 21, 2012


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