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I've just finished wading through the nearly 600 pages of Thomas Picketty's "Capital In The 21st Century". It's easy to see why it's been such a bomb shell, it brings together in one volume all the key information regarding inequality and the fall (and current rise) of a rentier class.

In summary Picketty paints a picture of the 18th and 19th century world where unless you inherited or married into wealth it was extremely unlikely that you'd ever acquire any meaningful wealth and it would be almost unknown for you to pass on anything substantial to your children. He then goes on to show how the period 1914-1945 radically changed that previous world, and left a legacy of punitive taxation that kept the rentier class in check until the 1980's. For example the top rate of inheritance tax in Britain was below 10% in 1900, but funding two world wars quickly drove that up to 50% in 1930, 65% in 1940, 80% in 1950, and inheritance tax peaked at 85% in 1970 before falling back to 40% today.

Picketty makes the point that even though income inequality has grown over the past 30 years, wealth or capital inequality is much greater still. After all, the lowest half of the population still earns a sizeable percentage of all the nation's income, but the lowest half of the population owns almost no wealth, in virtually all countries and at all times the bottom 50% of the population owns 5% or less of the nation's assets or capital wealth. Half the population of Britain today will work their entire lives but leave virtually nothing to their children.

Picketty's central economic argument is that as those world wars recede into history, and as the competition of globalisation keeps tax rates relatively low, we're seeing a return to the world of the 18th and 19th centuries, where wealth tends to be gathered and owned by a relatively small group. He also argues convincingly that we're likely to see total underlying economic growth fall during the 21st century to an annual level of 1-1.5%, but that the return on capital will be 3-4%, a process that further drives the concentration of wealth.

I've been thinking about the implications of Picketty's projections for the UK housing market, and the conclusions aren't good. Basically we have to ask ourselves what will be the size of the inherited wealth stream that will progressively flow into the UK economy, and what effect will that have on property prices?

Picketty provides some solid data to help with the first part of that question. His most detailed analysis is in France, but similar numbers hold true for Western Europe (although he does point out that the UK has a slightly greater tendency to pass on wealth as gifts before death rather than bequests after death). In the 19th century inheritances accounted for 20-24% of annual national income. By 1950 this had crashed to 4%. But it's now back up to 14`% and forecast to continue growing, so that by 2040 it will have regained the 20% level last seen in the 19th century.

In the UK inheritance tax is zero below £325,000, and is 40% above that amount. What that means is that the average house in Britain can be passed on, complete with all the capital gains it represents, tax free. The Conservative party (and I believe UKIP agrees) want to see the inheritance tax threshold raised to £1m. In the world of the post war baby boomers inherited wealth was only a small factor, they basically could save up a deposit and buy a property and they were competing on a level playing field against their own peers. When I was buying my first property in the early 1980's there was no one taking the process to sealed bids because they'd just come into an inherited windfall. But today nearly one pound in every seven is inherited rather than earned, and that will grow over the coming years to one pound in every five.

I'm sure some inheritances are squandered, or the recipient is a cat's charity as the deceased has no living relatives. But a very large percentage of those inheritances will surely flow straight into the UK property market. Especially as Picketty pointed out the tendency in the UK to pass on wealth via gifts rather than wait until bequests after death. It all suggests a more sinister interpretation of the Bank Of Mum And Dad, a future where if you're lucky enough to have the right parents you can expect a substantial helping hand into a property of your own. But if you're not that fortunate then you either have to rent for your entire life or accept a sharply lower standard of living as you're saddled with repaying a crushing mortgage debt.

Not good.

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But today nearly one pound in every seven is inherited rather than earned, and that will grow over the coming years to one pound in every five.

Ouch.

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The last time wealth was this concentrated was in about 1929/30 and the great narrowing started in the early 1930s. I don't see how this fits with the "it was the wars wot equalised it" thesis seeing as we weren't at war at the time.

the-top-01-holds-a-near-record-22-of-the

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Very interesting. Haven't read the book yet but as an academic he's clearly able to say things no politician would dare. It's also worth pointing out that reinvested returns are central to the longevity of any ponzi scheme. Inherited property wealth broadly serves that purpose in a property ponzi - capital is retained within the scheme not reinvested elsewhere.

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The last time wealth was this concentrated was in about 1929/30 and the great narrowing started in the early 1930s. I don't see how this fits with the "it was the wars wot equalised it" thesis seeing as we weren't at war at the time.

the-top-01-holds-a-near-record-22-of-the

Umm its fairly obvious that it does.

The first big drop is at the first world war. It then rises until the great depression hits and wipes some of it out. Then the second world war hits and wipes even more of it out. Then the high post war tax rates keep the wealth share low until the laste 1970's. At that point we have the ronald reagan miracle of lower taxes for the rich, and it starts to rise. Add in globalization and further tax cuts for the wealthy and we get to today.

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Very interesting. Haven't read the book yet but as an academic he's clearly able to say things no politician would dare. It's also worth pointing out that reinvested returns are central to the longevity of any ponzi scheme. Inherited property wealth broadly serves that purpose in a property ponzi - capital is retained within the scheme not reinvested elsewhere.

The beauty of it is that it's all backed up with hard data. So much of it in fact that the central thesis of his work is pretty much undisputable. It's left the neo-con's and red in tooth and claw free-marketeers grasping for rebutaals that they are clearly failing to find. So they have mostly end up just saying "It's rubbish, don't believe it, we don't have the data to prove it wrong but it's wrong anyway". They are badly loosing the argument.

The book isn't so mainstream here in the UK but it's gone bigtime in the U.S. The problem for the uk neo-con elite is that where the U.S. goes the UK follows, so if it has an impact on the US then it will through them impact us.

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I've just finished wading through the nearly 600 pages of Thomas Picketty's "Capital In The 21st Century". It's easy to see why it's been such a bomb shell, it brings together in one volume all the key information regarding inequality and the fall (and current rise) of a rentier class.

In summary Picketty paints a picture of the 18th and 19th century world where unless you inherited or married into wealth it was extremely unlikely that you'd ever acquire any meaningful wealth and it would be almost unknown for you to pass on anything substantial to your children. He then goes on to show how the period 1914-1945 radically changed that previous world, and left a legacy of punitive taxation that kept the rentier class in check until the 1980's. For example the top rate of inheritance tax in Britain was below 10% in 1900, but funding two world wars quickly drove that up to 50% in 1930, 65% in 1940, 80% in 1950, and inheritance tax peaked at 85% in 1970 before falling back to 40% today.

Picketty makes the point that even though income inequality has grown over the past 30 years, wealth or capital inequality is much greater still. After all, the lowest half of the population still earns a sizeable percentage of all the nation's income, but the lowest half of the population owns almost no wealth, in virtually all countries and at all times the bottom 50% of the population owns 5% or less of the nation's assets or capital wealth. Half the population of Britain today will work their entire lives but leave virtually nothing to their children.

Picketty's central economic argument is that as those world wars recede into history, and as the competition of globalisation keeps tax rates relatively low, we're seeing a return to the world of the 18th and 19th centuries, where wealth tends to be gathered and owned by a relatively small group. He also argues convincingly that we're likely to see total underlying economic growth fall during the 21st century to an annual level of 1-1.5%, but that the return on capital will be 3-4%, a process that further drives the concentration of wealth.

I've been thinking about the implications of Picketty's projections for the UK housing market, and the conclusions aren't good. Basically we have to ask ourselves what will be the size of the inherited wealth stream that will progressively flow into the UK economy, and what effect will that have on property prices?

Picketty provides some solid data to help with the first part of that question. His most detailed analysis is in France, but similar numbers hold true for Western Europe (although he does point out that the UK has a slightly greater tendency to pass on wealth as gifts before death rather than bequests after death). In the 19th century inheritances accounted for 20-24% of annual national income. By 1950 this had crashed to 4%. But it's now back up to 14`% and forecast to continue growing, so that by 2040 it will have regained the 20% level last seen in the 19th century.

In the UK inheritance tax is zero below £325,000, and is 40% above that amount. What that means is that the average house in Britain can be passed on, complete with all the capital gains it represents, tax free. The Conservative party (and I believe UKIP agrees) want to see the inheritance tax threshold raised to £1m. In the world of the post war baby boomers inherited wealth was only a small factor, they basically could save up a deposit and buy a property and they were competing on a level playing field against their own peers. When I was buying my first property in the early 1980's there was no one taking the process to sealed bids because they'd just come into an inherited windfall. But today nearly one pound in every seven is inherited rather than earned, and that will grow over the coming years to one pound in every five.

I'm sure some inheritances are squandered, or the recipient is a cat's charity as the deceased has no living relatives. But a very large percentage of those inheritances will surely flow straight into the UK property market. Especially as Picketty pointed out the tendency in the UK to pass on wealth via gifts rather than wait until bequests after death. It all suggests a more sinister interpretation of the Bank Of Mum And Dad, a future where if you're lucky enough to have the right parents you can expect a substantial helping hand into a property of your own. But if you're not that fortunate then you either have to rent for your entire life or accept a sharply lower standard of living as you're saddled with repaying a crushing mortgage debt.

Not good.

I think you are missing one key point in that it becomes increasingly concentrated. Thus this next generation it will be lucky boomer children. But the generation after it will be a few lucky boomer decendants with more held in property empires (it has to really if piketty's theroem is correct and I can't see how it's not). Eventually it will be everyone renting from hereditary owners of property as in the past - unless the masses stop it.

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The beauty of it is that it's all backed up with hard data. So much of it in fact that the central thesis of his work is pretty much undisputable. It's left the neo-con's and red in tooth and claw free-marketeers grasping for rebutaals that they are clearly failing to find. So they have mostly end up just saying "It's rubbish, don't believe it, we don't have the data to prove it wrong but it's wrong anyway". They are badly loosing the argument.

The book isn't so mainstream here in the UK but it's gone bigtime in the U.S. The problem for the uk neo-con elite is that where the U.S. goes the UK follows, so if it has an impact on the US then it will through them impact us.

Yes. The neo-liberals really don't have much of an answer to an argument that is so well researched. I have been actively seeking out rebutles to Picketty, to get a handle on the established political elite's most credible intelligent response.

As far as I can see, the best they can come up with is what they call "rational optimism". It is basically the Blairite rising tide lifts all boats argument, stating that in 1970 the average earning-person didn't have an iPhone or Ryanair so therefore we're all better off and should stop moaning.

Now apart from the obvious flaw that the average-earning person in 1970 could afford to house their family on one salary, had job security and could probably save for retirement, the "rational optimism" argument sidesteps the basic conservative-liberal idea that hard work should pay, risk should be justly rewarded and self-reliance should be encouraged.

The book fundamentally debunks the myths of neo-libralism. It's going to be interesting to see how an ideology reacts to its truths being dismantled.

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Yes. The neo-liberals really don't have much of an answer to an argument that is so well researched. I have been actively seeking out rebutles to Picketty, to get a handle on the established political elite's most credible intelligent response.

As far as I can see, the best they can come up with is what they call "rational optimism". It is basically the Blairite rising tide lifts all boats argument, stating that in 1970 the average earning-person didn't have an iPhone or Ryanair so therefore we're all better off and should stop moaning.

Now apart from the obvious flaw that the average-earning person in 1970 could afford to house their family on one salary, had job security and could probably save for retirement, the "rational optimism" argument sidesteps the basic conservative-liberal idea that hard work should pay, risk should be justly rewarded and self-reliance should be encouraged.

The book fundamentally debunks the myths of neo-libralism. It's going to be interesting to see how an ideology reacts to its truths being dismantled.

Was interested to see on Twitter that Blairs lick-spittle suck up John Rento(o)ul is dissing Picketty.

This from a so called lefty.

I don't think they can even be bothered to mask it any more.

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Yes. The neo-liberals really don't have much of an answer to an argument that is so well researched. I have been actively seeking out rebutles to Picketty, to get a handle on the established political elite's most credible intelligent response.

As far as I can see, the best they can come up with is what they call "rational optimism". It is basically the Blairite rising tide lifts all boats argument, stating that in 1970 the average earning-person didn't have an iPhone or Ryanair so therefore we're all better off and should stop moaning.

Now apart from the obvious flaw that the average-earning person in 1970 could afford to house their family on one salary, had job security and could probably save for retirement, the "rational optimism" argument sidesteps the basic conservative-liberal idea that hard work should pay, risk should be justly rewarded and self-reliance should be encouraged.

The book fundamentally debunks the myths of neo-libralism. It's going to be interesting to see how an ideology reacts to its truths being dismantled.

Ha, exactly.

Back in the 80s I can remember thinking, after listening to some Thatcher speeches,"she didnt invent the VHS machine".

She's using that as a mark of a higher standard of living. She had ****** all to do with it.

Seems my ******** detector was nicely polished at 18.

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Yes. The neo-liberals really don't have much of an answer to an argument that is so well researched. I have been actively seeking out rebutles to Picketty, to get a handle on the established political elite's most credible intelligent response.

As far as I can see, the best they can come up with is what they call "rational optimism". It is basically the Blairite rising tide lifts all boats argument, stating that in 1970 the average earning-person didn't have an iPhone or Ryanair so therefore we're all better off and should stop moaning.

Now apart from the obvious flaw that the average-earning person in 1970 could afford to house their family on one salary, had job security and could probably save for retirement, the "rational optimism" argument sidesteps the basic conservative-liberal idea that hard work should pay, risk should be justly rewarded and self-reliance should be encouraged.

The book fundamentally debunks the myths of neo-libralism. It's going to be interesting to see how an ideology reacts to its truths being dismantled.

They'll just ignore and it will be forgotten, one book isn't cause the collapse of the current system is it...

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In summary Picketty paints a picture of the 18th and 19th century world where unless you inherited or married into wealth it was extremely unlikely that you'd ever acquire any meaningful wealth and it would be almost unknown for you to pass on anything substantial to your children. He then goes on to show how the period 1914-1945 radically changed that previous world, and left a legacy of punitive taxation that kept the rentier class in check until the 1980's. For example the top rate of inheritance tax in Britain was below 10% in 1900, but funding two world wars quickly drove that up to 50% in 1930, 65% in 1940, 80% in 1950, and inheritance tax peaked at 85% in 1970 before falling back to 40% today.

Picketty makes the point that even though income inequality has grown over the past 30 years, wealth or capital inequality is much greater still. After all, the lowest half of the population still earns a sizeable percentage of all the nation's income, but the lowest half of the population owns almost no wealth, in virtually all countries and at all times the bottom 50% of the population owns 5% or less of the nation's assets or capital wealth. Half the population of Britain today will work their entire lives but leave virtually nothing to their children.

Think I must have read a summary of that book recently. Told of a young lawyer, with no opportunity to improve his situation, without marrying into it.

Quite sad, and unfair. Yes, found it, the review for French economist Thomas Piketty’s new book Capital in the Twenty-First Century: http://qz.com/193098/everything-wrong-with-capitalism-as-explained-by-balzac-house-and-the-aristocats/

Leave virtually nothing to their children? Maybe that's true for younger workers coming through who don't inherit themselves, but not for many of HPI parents now.

Some pro property high-value to older owners sources are saying how great things are, for there will always be a cascade of housing wealth to the children of family's who currently own the over-valued house prices, and don't care it's unfair... that rich HPI parent can also cover school fees... and there's always HTB schemes for those without 'illusion-maintained' wealthy parents.

They've saved the system, and it's younger non owners to pay for it all. And older people who stayed out of the bubble madness, only to see it inflated more. Won't you think of the victims? This is what you get for offering excuses.

It is all too simple to think that central banks have magic powers. They don't. They can create liquidity by creating debt. But this is not the same thing as creating capital.
Any time a central bank monetises an asset by buying it, in essence, with printing-press money, it also creates a liability. Only the market can create capital by valuing assets above liabilities. Turning on the printing presses at a higher speed destroys more wealth than it creates.

Sunday 9 March 2014

...On house prices, he points out that the young will inherit and while this will be distributed unevenly, it represents a cascade of wealth that passes on the gains of the old.

University fees? Well, they will hit poorer households, albeit not the young as a group because more affluent parents will use their wealth to subsidise the costs.

According to the ILC-UK's research, the average household wealth of the over 50s is £541,000, including private and personal pensions, property, financial assets, valuables and deposit savings.

http://www.theguardian.com/uk-news/2014/mar/09/baby-boomers-survey-affluence-inequality

Edited by Venger

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They'll just ignore and it will be forgotten, one book isn't cause the collapse of the current system is it...

He doesn't seem to offer any solutions to the situation anyway, going from the review I read.

But the US did have slavery far longer than its European counterparts; at the turn of the 19th century, enslaved humans in the US were thought to be worth one and a half years of national income. The American original sin was also a manifestation of inequality, and Piketty notes, with a nod to Quentin Tarantino’s slavery revenge epic Django Unchained, that the arbitrary treatment of slaves led to wide variations in prices. ......Piketty’s cultural references tend to illustrate things that have already happened: societies harshly stratified by wealth, with little mobility. There’s not much literature to depict his solution: Increased taxation of wealth across the globe, to protect democracy from rentiers.

We're in a world of over-capacity and surplus now, and a hell of a lot of debt, and contracting demand (excluding luxury market for the ever fewer with all the gains/money). Housing absorbing too much of the economy and incomes into fewer hands. Even mortgage lenders squeezed on staying profitable lending little (although at high sums) at low rates. And falling demand from borrowers there too.

Where will the banks make their money in this land of wealthy hogging asset value gains? My view is they will want an asset price crash, on complacent VIs, to volume lend at lower prices. That is the stage we've reached, end of the long-wave. It's a jump on ahead from changes such as genius Steinmetz' (1865 – 1923) work for GE, brining more overcapacity/surplus helping to phase out certain inequalities, except now with so much debt in the system, and extreme house prices.

The crash is going to catch out those who think they're invincible and things will continue to favour those owning hyperinflated property.

"Mr. Steinmetz," he explained, "yesterday my boss called me in and announced he had a terrific front-page story for me to send out. The story was that we've just sold a sixty-thousand-kilowatt turbine generator to Commonwealth Edison in Chicago. Well, golly, this may sound like big news to us, but not to the public. The story will get maybe a paragraph on the financial pages, that's all."

"Hmmmm," said Steinmetz. "The problem is to get the story on page one and thereby save your job. Right?"

"Yes, sir," Wagoner said bleakly. "But there's nothing dramatic about a generator."

"Nothing dramatic? Well, let's see." Steinmetz picked up a pencil and began to figure rapidly on a fresh sheet of paper, talking to himself as he did so. He murmured, "A sixty-thousand-kilowatt turbine generator produces the energy of eighty thousand horsepower. Each horsepower is equal to the muscle work of twenty-two and a half men; therefore, eighty thousand horsepower equals one million eight hundred thousand men. However, men cannot work twenty-four hours a day, while our generator does. Therefore, we multiply the generator manpower by three eight-hour shifts and we find it produces as much energy as five million, four hundred thousand men.

Now then, the slave population in 1860 was four million seven hundred thousand. Ha!"

He threw down his pencil and turned to the disconsolate young man. "I suggest you send out a story that says we are building a single machine that, through the miracle of electricity, will each day do more work than the combined slave population of the nation at the time of the Civil War."

In these dramatic terms, the giant turbine generator did make the front pages of all the newspapers in the nation and Wagoner kept his job and later went on to build for General Electric a news bureau that brilliantly pioneered industrial reporting.

http://www.electric-history.com/~zero/352-Steinmetz.htm

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Picketty makes the point that even though income inequality has grown over the past 30 years, wealth or capital inequality is much greater still. After all, the lowest half of the population still earns a sizeable percentage of all the nation's income, but the lowest half of the population owns almost no wealth, in virtually all countries and at all times the bottom 50% of the population owns 5% or less of the nation's assets or capital wealth. Half the population of Britain today will work their entire lives but leave virtually nothing to their children.

Partly true, but with one glaring flaw. The bottom 50% have much greater assets than described, by virtue of their entitlements.

To take just one such, the Basic State Pension is worth something like quarter of a million squids per person.

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They'll just ignore and it will be forgotten, one book isn't cause the collapse of the current system is it...

Silver Surfer beat me to it, but history disagrees with you. See above.

It is difficult to continue to justify your actions once your truths have been proved false.

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He doesn't seem to offer any solutions to the situation anyway, going from the review I read.

There are plenty of 'solutions' through, aren't there?

He proposes wealth taxes, but how about a libertarian revolution where we stop all benefits and subsidies, let the entire banking system collapse, and the value of assets with it?

The point is, it is up to politicians to offer up solutions, and the existing neoliberal solutions just got harder to justify.

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The last time wealth was this concentrated was in about 1929/30 and the great narrowing started in the early 1930s. I don't see how this fits with the "it was the wars wot equalised it" thesis seeing as we weren't at war at the time.

the-top-01-holds-a-near-record-22-of-the

Say thank you to Messrs Glass and Steagall

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Say thank you to Messrs Glass and Steagall

Good call. Unwinds shortly after the financial deregulation of the Reagan era.

A moment of caution needed though as Paul Krugman agrees:

The immediate effect of Garn-St. Germain, as I said, was to turn the thrifts from a problem into a catastrophe. The S.& L. crisis has been written out of the Reagan hagiography, but the fact is that deregulation in effect gave the industry — whose deposits were federally insured — a license to gamble with taxpayers’ money, at best, or simply to loot it, at worst. By the time the government closed the books on the affair, taxpayers had lost $130 billion, back when that was a lot of money.

But there was also a longer-term effect. Reagan-era legislative changes essentially ended New Deal restrictions on mortgage lending — restrictions that, in particular, limited the ability of families to buy homes without putting a significant amount of money down.
These restrictions were put in place in the 1930s by political leaders who had just experienced a terrible financial crisis, and were trying to prevent another. But by 1980 the memory of the Depression had faded. Government, declared Reagan, is the problem, not the solution; the magic of the marketplace must be set free. And so the precautionary rules were scrapped.

Source: Reagan Did It, NYT Op-Ed 31 May 2009

Always thought that KB was a closet lefty, (joking!).

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Partly true, but with one glaring flaw. The bottom 50% have much greater assets than described, by virtue of their entitlements.

To take just one such, the Basic State Pension is worth something like quarter of a million squids per person.

Clever, i'll have to think about that. One thought though, entitlements, no matter how generous, aren't bequeath-able.

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They'll just ignore and it will be forgotten, one book isn't cause the collapse of the current system is it...

The problem is that this along with everything else is resulting in a gradual change in peoples belief systems. They are more and more questioning the idea that capitalism (as currently practiced) benefits them. Just look at some of the comments pages on the telegraph, or for example this article on conservativehome.

http://www.conservativehome.com/thecolumnists/2014/05/garvan-walshe-pikettys-challenge-is-real-heres-how-to-outflank-him.html

Now 6 years ago there is no way such an article or anything remotely like it would have been posted there, and it would have been flamed to hell and back by readers. The neo-liberals are gradually loosing the war for hearts and minds. It's a slow process but it is occurring. That's why attacks on him or on others who publically share such thoughts are so aggressive and war-like. You show some mercy when you are winning, when you are losing and you know it, then it's no-holds barred.

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