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Aep: It's 1932 In America

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http://www.telegraph.co.uk/finance/comment/rogerbootle/7871485/We-must-not-be-seduced-by-apparent-attractiveness-of-a-strong-pound.html

With the US trapped in depression, this really is starting to feel like 1932

The US workforce shrank by 652,000 in June, one of the sharpest contractions ever. The rate of hourly earnings fell 0.1pc. Wages are flirting with deflation.

By Ambrose Evans-Pritchard

Published: 9:33PM BST 04 Jul 2010

"The economy is still in the gravitational pull of the Great Recession," said Robert Reich, former US labour secretary. "All the booster rockets for getting us beyond it are failing."

"Home sales are down. Retail sales are down. Factory orders in May suffered their biggest tumble since March of last year. So what are we doing about it? Less than nothing," he said.

California is tightening faster than Greece. State workers have seen a 14pc fall in earnings this year due to forced furloughs. Governor Arnold Schwarzenegger is cutting pay for 200,000 state workers to the minimum wage of $7.25 an hour to cover his $19bn (£15bn) deficit.

Can Illinois be far behind? The state has a deficit of $12bn and is $5bn in arrears to schools, nursing homes, child care centres, and prisons. "It is getting worse every single day," said state comptroller Daniel Hynes. "We are not paying bills for absolutely essential services. That is obscene."

Roughly a million Americans have dropped out of the jobs market altogether over the past two months. That is the only reason why the headline unemployment rate is not exploding to a post-war high.

Let us be honest. The US is still trapped in depression a full 18 months into zero interest rates, quantitative easing (QE), and fiscal stimulus that has pushed the budget deficit above 10pc of GDP.

The share of the US working-age population with jobs in June actually fell from 58.7pc to 58.5pc. This is the real stress indicator. The ratio was 63pc three years ago. Eight million jobs have been lost.

The average time needed to find a job has risen to a record 35.2 weeks. Nothing like this has been seen before in the post-war era. Jeff Weniger, of Harris Private Bank, said this compares with a peak of 21.2 weeks in the Volcker recession of the early 1980s.

"Legions of individuals have been left with stale skills, and little prospect of finding meaningful work, and benefits that are being exhausted. By our math the crop of people who are unemployed but not receiving a check amounts to 9.2m."

Republicans on Capitol Hill are filibustering a bill to extend the dole for up to 1.2m jobless facing an imminent cut-off. Dean Heller from Vermont called them "hobos". This really is starting to feel like 1932.

Washington's fiscal stimulus is draining away. It peaked in the first quarter, yet even then the economy eked out a growth rate of just 2.7pc. This compares with 5.1pc, 9.3pc, 8.1pc and 8.5pc in the four quarters coming off recession in the early 1980s.

The housing market is already crumbling as government props are pulled away. The expiry of homebuyers' tax credit led to a 30pc fall in the number of buyers signing contracts in May. "It is cataclysmic," said David Bloom from HSBC.

Federal tax rises are automatically baked into the pie. The Congressional Budget Office said fiscal policy will swing from a net +2pc of GDP to -2pc by late 2011. The states and counties may have to cut as much as $180bn.

Investors are starting to chew over the awful possibility that America's recovery will stall just as Asia hits the buffers. China's manufacturing index has been falling since January, with a downward lurch in June to 50.4, just above the break-even line of 50. Momentum seems to be flagging everywhere, whether in Australian building permits, Turkish exports, or Japanese industrial output.

On Friday, Jacques Cailloux from RBS put out a "double-dip alert" for Europe. "The risk is rising fast. Absent an effect policy intervention to tackle the debt crisis on the periphery over coming months, the European economy will double dip in 2011," he said.

It is obvious what that policy should be for Europe, America, and Japan. If budgets are to shrink in an orderly fashion over several years – as they must, to avoid sovereign debt spirals – then central banks will have to cushion the blow keeping monetary policy ultra-loose for as long it takes.

The Fed is already eyeing the printing press again. "It's appropriate to think about what we would do under a deflationary scenario," said Dennis Lockhart for the Atlanta Fed. His colleague Kevin Warsh said the pros and cons of purchasing more bonds should be subject to "strict scrutiny", a comment I took as confirmation that the Fed Board is arguing internally about QE2.

Perhaps naively, I still think central banks have the tools to head off disaster. The question is whether they will do so fast enough, or even whether they wish to resist the chorus of 1930s liquidation taking charge of the debate. Last week the Bank for International Settlements called for combined fiscal and monetary tightening, lending its great authority to the forces of debt-deflation and mass unemployment. If even the BIS has lost the plot, God help us.

I personally think they're going ot let this go now. Another 30% off housing in this country and another 10-20 in the US we can "cope" with. It'll just be a deep, deep, recession - it's not a systemic collapse that could threaten the banking system anymore. Although having said that, Europe is a different matter. Wait for the banking stress tests out in a couple of weeks.

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Correct me if I'm wrong, but I am under the impression that said 'Bank Stress Tests' do not include exposure to 'sovs' on the basis they won't default.

Mainly to do with other exposures such as consumers, business and commercial property.

Happy to be corrected because I can only faintly recall having read that somewhere a while back.

:blink: Wow, is that true ?

Are the EZ politicos really THAT arrogant and misguided?

EDIT: just saw your edit. Based on that article, the banks stress test might as well be renamed H.U.B.R.I.S.

Edited by VoteWithYourFeet

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I personally think they're going ot let this go now. Another 30% off housing in this country and another 10-20 in the US we can "cope" with. It'll just be a deep, deep, recession - it's not a systemic collapse that could threaten the banking system anymore.

That is 100% wrong. Very rose tinted stuff.

Read keens latest paper here:

http://www.debtdeflation.com/blogs/2010/06/28/levy-paper/

The size of this one is many many times the mega-tonnage of GD1. Mainly because all the western sovs are near bankruptcy from 60 years of trying to paper over the robbery that has been enacted on the household sector during that period.

If they let it go, expect a major mushroom cloud.

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http://www.telegraph.co.uk/finance/comment/rogerbootle/7871485/We-must-not-be-seduced-by-apparent-attractiveness-of-a-strong-pound.html

With the US trapped in depression, this really is starting to feel like 1932

The US workforce shrank by 652,000 in June, one of the sharpest contractions ever. The rate of hourly earnings fell 0.1pc. Wages are flirting with deflation.

By Ambrose Evans-Pritchard

Published: 9:33PM BST 04 Jul 2010

I personally think they're going ot let this go now. Another 30% off housing in this country and another 10-20 in the US we can "cope" with. It'll just be a deep, deep, recession - it's not a systemic collapse that could threaten the banking system anymore. Although having said that, Europe is a different matter. Wait for the banking stress tests out in a couple of weeks.

I agree, and think Europe is the same. If I didn't I would be hoarding gold and beans and wearing the tin foil hat.

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They changed their mind about not including them about the end of June. But the assumptions are still pretty rubbish...looking at all exposure (without discriminating) and applying a flat 3% default rate. If so it could provide a big disappointment when people realise.

http://moneymorning.com/2010/06/29/bank-stress-tests-6/

+1

This sounds like the typical smoke-and-mirrors EU compromise solution, where everything is averaged out as if there were no country-specific issues.

Pathetic, really.

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AEP is one of the best forecasters yet worst policy adviser regarding this financial crisis. He is a QE fruit n nutcase. But he was one of very few mainstream journalists to spell out what the blowup of those bear stearns funds meant back in the halcyon days of late summer 2007

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Decent article by Hussman. He's not your typical tfher.

http://www.hussmanfunds.com/wmc/wmc100628.htm

yes not bad but like so many he seems to assume the possibility of an inflationary exit is always there. That we can default via inflation.

However we can't, for a number of reasons. Firstly, any inflation that takes hold during a global inflation led recovery will be cost push inflation as the stronger asian and south American nations increase their share of consumption at our expense. Cost push inflation does not make paying debt back easier. Secondly, generating inflation needs people - our people, not foreigners - to borrow more money yet our private sector is the most indebted it has ever been in all of history. Thirdly, even if it still had more capacity to take on debt, the demographic structure of the population, with the median age having passed 50, will resist very strongly any and all pressure to level up again.

This time it IS different. The current demographic configuration has never been witnessed in any of the recent or ancient sample data employed either by hussman or by rogoff et al in the 'this time it is different' paper.

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Guest Steve Cook

That is 100% wrong. Very rose tinted stuff.

Read keens latest paper here:

http://www.debtdefla.../28/levy-paper/

The size of this one is many many times the mega-tonnage of GD1. Mainly because all the western sovs are near bankruptcy from 60 years of trying to paper over the robbery that has been enacted on the household sector during that period.

If they let it go, expect a major mushroom cloud.

yep

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75pc of first loans in NAMA not being paid off

By John Mulligan

Monday July 05 2010

JUST one-quarter of the €15.3bn first tranche of loans transferred to NAMA are being repaid, despite the banks' assurances that 40pc were performing.

The revelation means that 75pc -- or €11.5bn worth -- of loans transferred to the toxic assets agency by financial institutions are no longer being actively repaid.

And it raises the prospect of taxpayers getting a smaller return on their massive investment after NAMA's expected 20-year lifespan expires.

The borrowers involved in the first tranche included big-name property developers and investors such as Liam Carroll, Sean Mulryan, Bernard McNamara, Gerry Gannon, Derek Quinlan and Treasury Holdings, which is owned by Johnny Ronan and Richard Barrett.

A second tranche of loans worth about €13bn is due to be transferred to NAMA within a couple of weeks.

NAMA has been forced to forensically examine each loan in that tranche in order to assess its viability.

It also emerged that the toxic debt agency will pursue tenants directly in developments such as shopping centres, in cases where the owner took out a loan to build the site, but has stopped repayments.

The first tranche of NAMA loans was transferred in May by financial institutions Anglo Irish Bank, Bank of Ireland, Allied Irish Banks (AIB), EBS and Irish Nationwide.

It is understood that the five institutions participating in the scheme had initially informed the government agency late last year that 40pc of loans it was to take over from them were 'performing', meaning that repayments were being actively made by the borrowers.

It has now emerged that some advice given by the banks in relation to the loans was inaccurate.

Only 25pc of the €15.3bn in loans is now being serviced.

That means that there is an extra €2.3bn of loans which is not now being financed by the original borrowers.

The dramatic variance between the figures provided by the financial institutions and the ultimate reality detected by NAMA has caused considerable surprise in the government agency. It has since examined each loan to determine its precise status.

In its original business plan, NAMA had informed the Department of Finance that it could be in a position to return a €4.8bn profit to the Exchequer after 20 years.

Revise

However, the number of loans not being serviced has forced it to revise that figure.

In a best-case scenario, it is now believed that a profit of about €2bn could be returned, and in a worst-case scenario NAMA could make a loss of around €200m.

It has also transpired that banks had been able to force tenants to pay rent directly to them in cases where the borrower who owned the property was not making repayments.

For example, if a developer built a shopping centre using a bank loan and stopped making repayments, the bank could go straight to the shop tenants themselves.

However, it is understood that none of the institutions exercised this power, but that NAMA will now begin to pursue the tactic where appropriate.

A total of €81bn worth of loans will have been siphoned to NAMA by February next year.

- John Mulligan

Irish Independent

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Double dip is 100% certain, guaranteed.

That we feel the same here is also 100% certain guaranteed.

This is the mighty one folks. Delayed a couple of years by delusional bailouts that have not begun to address 300 years of bloating. Our housing market is toast--there is no way it can withstand headwinds of this strength.

America has flu and we will have flu +.

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Double dip is 100% certain, guaranteed.

That we feel the same here is also 100% certain guaranteed.

This is the mighty one folks. Delayed a couple of years by delusional bailouts that have not begun to address 300 years of bloating. Our housing market is toast--there is no way it can withstand headwinds of this strength.

America has flu and we will have flu +.

Does USA bail out mortgagees + mortgagers like the UK does ? Does the USA provide very expensive housing in prime cities like the UK does ?

I'm not saying bad times aren't on their way, but as far as the HPC goes there are still too many props holding it up.

Edited by exiges

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QE 1 was a good opening shot and warm up to test the process. QE 2 needs to be much bigger and more sustained.

'IT IS THAT BAD'. Once you admit to yourself it is really that bad.. you realize nuclear level solutions are what is needed. 1.5 trillion dollar deficits just aren't near enough at this point.

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yes not bad but like so many he seems to assume the possibility of an inflationary exit is always there. That we can default via inflation.

However we can't, for a number of reasons. Firstly, any inflation that takes hold during a global inflation led recovery will be cost push inflation as the stronger asian and south American nations increase their share of consumption at our expense. Cost push inflation does not make paying debt back easier. Secondly, generating inflation needs people - our people, not foreigners - to borrow more money yet our private sector is the most indebted it has ever been in all of history. Thirdly, even if it still had more capacity to take on debt, the demographic structure of the population, with the median age having passed 50, will resist very strongly any and all pressure to level up again.

This time it IS different. The current demographic configuration has never been witnessed in any of the recent or ancient sample data employed either by hussman or by rogoff et al in the 'this time it is different' paper.

It depends on how they try to print. Now what if the BoE printed for general government expenditure while at the same time lowering taxes. Moreover if the BoE did it with no intention of it ever being paid back - i.e. it would be debt free money. If need be the BoE could sterilize some of it by increasing bank capital ratio's to prevent a crack-up boom.

They could inflate without increasing debt, and the money would go straight into workers hands, meaning banks couldn't sit on it and inflation would be extremely likely.

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It depends on how they try to print. Now what if the BoE printed for general government expenditure while at the same time lowering taxes. Moreover if the BoE did it with no intention of it ever being paid back - i.e. it would be debt free money. If need be the BoE could sterilize some of it by increasing bank capital ratio's to prevent a crack-up boom.

They could inflate without increasing debt, and the money would go straight into workers hands, meaning banks couldn't sit on it and inflation would be extremely likely.

if we pull that kind of crap we will get hyperinflation sooner or later. You simply can't credibly have the government just deciding one afternoon in parliament to start sending out monopoly money.

The way the debt economy works is that banks expand credit, and then seeing this, the central banks follows up by increasing bank reserves to facilitate clearing of the expanded broad money supply. This means that the size of the money supply is decided independently by the private sector.

money push inflation happens when more people go into debt. money push inflation is what you want to pay down debt via inflation., and is the way past recessions have been dealt with. It works while the economy is below peak spending.

Now, what you are suggesting is have the government decide the size of the money supply, and I don't think it will work - if much money is mailed to workers, then either there is a promise by the govt to withdraw it when inflation exceeds a given level (in which case rational actors will save, not spend the money). So this fails to stimulate. However if the government commits to not withdraw it, then huge inflationary expectations set in immediately, which will crash the currency, and simply destroy everything.

The problem is if you promise to sterilise injections of liquidity later, they don't have much effect today. A small injection of base money (say double the base money), would create inflation successfully prior to peak spending being reached, but not afterwards.

A better solution is to reduce liquidity preference by credit easing (money funded illiquid private sector asset purchases - not buying government bonds), or by a negative nominal interest rate.

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if we pull that kind of crap we will get hyperinflation sooner or later. You simply can't credibly have the government just deciding one afternoon in parliament to start sending out monopoly money.

The way the debt economy works is that banks expand credit, and then seeing this, the central banks follows up by increasing bank reserves to facilitate clearing of the expanded broad money supply. This means that the size of the money supply is decided independently by the private sector.

money push inflation happens when more people go into debt. money push inflation is what you want to pay down debt via inflation., and is the way past recessions have been dealt with. It works while the economy is below peak spending.

Now, what you are suggesting is have the government decide the size of the money supply, and I don't think it will work - if much money is mailed to workers, then either there is a promise by the govt to withdraw it when inflation exceeds a given level (in which case rational actors will save, not spend the money). So this fails to stimulate. However if the government commits to not withdraw it, then huge inflationary expectations set in immediately, which will crash the currency, and simply destroy everything.

The problem is if you promise to sterilise injections of liquidity later, they don't have much effect today. A small injection of base money (say double the base money), would create inflation successfully prior to peak spending being reached, but not afterwards.

A better solution is to reduce liquidity preference by credit easing (money funded illiquid private sector asset purchases - not buying government bonds), or by a negative nominal interest rate.

Forget it.

Go negative on interets rates and you also get hyperinflation as the pool of people who bother holding cash shrinks massively and they all pile into PM's.

The real world always gives you a positive return of some sort, so people will look just go old school.

The system is doomed. We are getting an actual free market. W can either go straight to one with minimal friction, or we can dick around for another year or two hyperinflating and causing all sorts of misery..and then have a free market anyway because it's inevitable.

All the bankers tricks are available online. The magic box has done for the information monopolists what the guttenberg bible did for religion - nuked the ******er utterly.

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Go negative on interets rates and you also get hyperinflation as the pool of people who bother holding cash shrinks massively and they all pile into PM's.

maybe but maybe not. You have to remember that any kind of negative rate policy could only happen when the economy (and yes it does exist) was exhibiting severe liquidity preference.

in any case, I would expect that this would only be done after the markets had generated negative yield to maturity on short term government debt all on their own, so in that sense it would merely accommodate a market outcome.

anyway, they'll try credit easing first.

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if we pull that kind of crap we will get hyperinflation sooner or later. You simply can't credibly have the government just deciding one afternoon in parliament to start sending out monopoly money.

The way the debt economy works is that banks expand credit, and then seeing this, the central banks follows up by increasing bank reserves to facilitate clearing of the expanded broad money supply. This means that the size of the money supply is decided independently by the private sector.

money push inflation happens when more people go into debt. money push inflation is what you want to pay down debt via inflation., and is the way past recessions have been dealt with. It works while the economy is below peak spending.

Now, what you are suggesting is have the government decide the size of the money supply, and I don't think it will work - if much money is mailed to workers, then either there is a promise by the govt to withdraw it when inflation exceeds a given level (in which case rational actors will save, not spend the money). So this fails to stimulate. However if the government commits to not withdraw it, then huge inflationary expectations set in immediately, which will crash the currency, and simply destroy everything.

The problem is if you promise to sterilise injections of liquidity later, they don't have much effect today. A small injection of base money (say double the base money), would create inflation successfully prior to peak spending being reached, but not afterwards.

A better solution is to reduce liquidity preference by credit easing (money funded illiquid private sector asset purchases - not buying government bonds), or by a negative nominal interest rate.

It would be the BoE that would do it not the government, the BoE currently does it anyway through setting interest rates. If they increase reserve requirements at the same time it wouldnt have an inflationary effect. It would basically increase the debt-free part of the money supply, while keeping the money supply constant, thus in real terms reducing the debt.

Your solution if i understand it correctly would (unfortunately) give the benefit of the money printed to the current bunch of financial tossers that got us into this mess. Moral hazard aside, its not these that are overloaded with debt, its the general citizenry that is.

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Forget it.

Go negative on interets rates and you also get hyperinflation as the pool of people who bother holding cash shrinks massively and they all pile into PM's.

The real world always gives you a positive return of some sort, so people will look just go old school.

The system is doomed. We are getting an actual free market. W can either go straight to one with minimal friction, or we can dick around for another year or two hyperinflating and causing all sorts of misery..and then have a free market anyway because it's inevitable.

All the bankers tricks are available online. The magic box has done for the information monopolists what the guttenberg bible did for religion - nuked the ******er utterly.

Injin, I'm inclined to agree on this one. The bankers fraud is now widely exposed, and so people are cynical in dealing with bankers.

My own personal view is to hold assets that have intrinsic value, be that a shares or Gold. Bonds are just paper as are cash deposits - as useful as roll of Andrex.

Edited by Mikhail Liebenstein

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maybe but maybe not. You have to remember that any kind of negative rate policy could only happen when the economy (and yes it does exist) was exhibiting severe liquidity preference.

in any case, I would expect that this would only be done after the markets had generated negative yield to maturity on short term government debt all on their own, so in that sense it would merely accommodate a market outcome.

anyway, they'll try credit easing first.

They will just print because otherwise they will die.

Simple as that.

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It would be the BoE that would do it not the government, the BoE currently does it anyway through setting interest rates.

the distinction between the BoE and the treasury is almost wholly specious.

If they increase reserve requirements at the same time it wouldnt have an inflationary effect. It would basically increase the debt-free part of the money supply, while keeping the money supply constant, thus in real terms reducing the debt.

no it wouldn't, because if you print 200 billion and then require the banks to keep 200 billion on deposit at the central bank at all times the extra money you printed has no effect. It can only create inflation if you credibly commit to not restrict its circulation.

now, we have already created in the UK roughly 200 billion extra reserves and there have been noises about withdrawing it when the recovery comes. But given the state of sentiment and balance sheets anyone getting this new money is leary of spending it because they think for example that the government will neutralise it in the future.

Your solution if i understand it correctly would (unfortunately) give the benefit of the money printed to the current bunch of financial tossers that got us into this mess. Moral hazard aside, its not these that are overloaded with debt, its the general citizenry that is.

my solution, and its not really my solution (I just happen to understand it better than most), is to finally ditch the fiction of the 0% bound on nominal rates. So cut the deficit to zero over time, then cut nominal rates to say -2%, re-issue the 200 billion QE as long term gilts (which would still attract positive yields). Now, presumably by this stage the economy is in the toiler and we have sever deflation and money supply shrinkage. So we can have a negative nominal rate and still a slightly positive real rate due to money shrinkage. The income the government earns from this (the charge 2% on all reserves held at the central bank) is not spent but shredded. This decreases base money in line with broad money shrinkage, but keeps output near long term norms.

The idea that sensible investors would ditch treasury bonds paying -2% nominal to invest in metals falling in price by say 10% is ill founded and is borne of cultural inflation illusion.

Credit easing is the other option and it is an option that can work if the GFC is essentiaslly a one off event due to balance sheet issues built up over the last 10 years. But it is not, the GFC is a permanent shift to western economic shrinkage due to 60 years of ponzi economics, demographics and rising demand in the east and south. So credit easing can't be the solution.

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Guest Steve Cook

I do take that point.

In that case the price of labour should rise to the point where even greater automation will take place.

Productivity of the labour force under this demographic shape should soar. That and/or increased global labour mobility as barriers to travel are reduced to keep labour costs down. Perhaps both.

The qualification to the above, hotairmail, is that the cost of automation and all of the attendant maintenance technologies are also set to soar. As will global transportation/travel costs. Though, how soon, how much and whether such cost rises will or will not outstrip the rising cost of labour, remains to be seen.

Edited by Steve Cook

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  • 152 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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