Felix Salmon

Paywall math, Guardian edition

Felix Salmon
Jan 25, 2010 22:11 UTC

There’s been a lot of speculation on this blog about the economics of the NYT paywall. So let’s stop speculating and look at what Alan Rusbridger, the editor of the Guardian, has to say on the subject. After all, the Guardian, and its website, are in a very similar situation to that of the NYT: a newspaper which has a huge online audience, but which is still losing a lot of money. What’s more, there’s a good chance that a NYT paywall, if it’s set high enough, will catapult the Guardian into position as the most widely-read newspaper in the English-speaking world.

My commercial colleagues at the Guardian – the ones who do think about business models – want to grow a large audience for our content and for advertisers, and can’t presently see the benefits of choking off growth in return for the relatively modest sums we think we would get from universal charging for digital content. Last year we earned £25m from digital advertising – not enough to sustain the legacy print business, but not trivial. My commercial colleagues believe we would earn a fraction of that from any known pay wall model.

They’ve done lots of modelling around at least six different pay wall proposals and they are currently unpersuaded. They’re looked at the argument that free digital content cannibalises print – and they look at the ABC charts showing that our market share of paid-for print sales is growing, not shrinking, despite pushing aggressively ahead on digital. They don’t rule anything out. But they don’t think it’s right for us now.

The New York Times, like the Guardian, is currently seeing little if any erosion of its print circulation from the fact that it’s available for free online. That might be counterintuitive, but it does seem to be true, at least for the time being. So if I’m right that the main purpose of the NYT paywall is to shore up the newpaper’s print circulation, this would seem to be a weird time to implement it.

In fact, the reverse is true: with Rupert Murdoch seemingly hell-bent on putting paywalls around all of his newspaper properties (although not, as Rusbridger notes, around SkyNews.com), a lot of Murdoch’s readers are going to look elsewhere for news. And many of them will find their way to the Guardian and the NYT. I’m told that the current plans for the paywall around the Times and the Sunday Times are for what John Gapper calls a “Berliner”: no meter, no free content, just a wall which you have to pay to get past. I’m sure that Rusbridger is licking his lips in anticipation.


There’s not much point in putting a paywall up for Sky News. The TV station is free to air, so it’s not like they’re cannibalising subscription revenue, even in theory.

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Abnormal Returns gets even better

Felix Salmon
Jan 25, 2010 19:38 UTC

Abnormal Returns has gone real-time! The indispensible link-fest will still arrive daily, but now that Tadas Viskantas has sold his site to StockTwits, a second column has appeared on the site, with “links in real time”, mainly from Twitter.

This is great news for the econoblogosphere, on many levels. It helps to ratify the importance of Twitter for driving the conversation; it helps to make AR even more important than it has been until now; and it also demonstrates a new way of monetizing small, one-man blogs: exit via acquisition. Tadas gets a check from StockTwits now, and a regular paycheck from them going forwards: this means, I hope, that we can look forward to him sticking around for a while.

As for me, I’m going to be a bit quiet for the next 24 hours or so, as I wend my way to the top of a Swiss alp for a certain alpine gabfest. Tadas should be able to take care of your econoblogospheric needs until then.

The corporate conscience

Felix Salmon
Jan 25, 2010 17:43 UTC

Justin Fox kicks off his new HBR blog with a cracking post on the jurisprudence of treating corporations as persons. If John Roberts really believes that shareholders control corporations, he says, that’s all the more reason not to allow corporations the rights of individuals — and he uses Milton Friedman, of all people, to make his case:

The “one and only social responsibility of business,” economist Milton Friedman wrote back in 1970 in a New York Times Magazine essay that launched a thousand arguments, is “to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game …” Friedman contrasted this with the multiple responsibilities that an individual — such as a corporate executive — might have “to his family, his conscience, his feelings of charity, his church, his clubs, his city, his country.” …

The individuals who make up the electorate in the United States are, as Friedman described, beings of many facets — their actions and their views shaped by pecuniary self interest but also by values, beliefs, and loyalties that might conflict with that self interest. The ideal for-profit corporation, on the other hand, is out to do nothing but make as much money as it can “within the rules of the game.” It is supposed to behave in a fashion that for an individual would probably be described as psychopathic. And if corporations are allowed to play a decisive role in shaping the “rules of the game,” we have effectively put the inmates in control of the asylum…

If corporations are persons, they are — if they behave as Milton Friedman wanted them to — persons with mental and emotional impairments so severe that any decent judge would feel entirely justified in declaring them incompetent.

There’s a connection, here, to the increasingly conventional-wisdom argument that walking away from a mortgage is perfectly fine since the banks who lent the money in the first place wouldn’t hesitate to behave in exactly the same way. But if Justin is right, we’d have to be psychopaths to treat corporations as our role models in such matters.

Justin’s timing on this is impeccable, as the world’s plutocrats start firing up their private jets to fly in to Davos and pat each other on the back for their efforts to “improve the state of the world” with their “double bottom-line” or even “triple bottom-line” endeavors. It’ll be interesting to see what Davos Man thinks about the ruling in Citizens United vs FEC: the general default position at the alpine gabfest is that successful corporations, acting in their own self-interest, are perfectly positioned to make the world a better place. Maybe giving them enormous influence in US elections will simply help in terms of steering the country towards more enlightened policies!


murphzero, here’s my two suggestions for containing corporate spending on elections.

1) Don’t make it a tax-deductible business expense. After all, if I as a real person choose to buy an ad denouncing a candidate, I don’t get to deduct it from my taxes.

2) Require the business to include all such spending in its annual reports to shareholders, and its plans for such spending in its public prospectus. If businesses get free speech because they are controlled by shareholders, the shareholders have to be able to know how that right is being used on their behalf.

Hmm, as I consider those, they actually come at the problem from two different directions. Option 1 is for people who think that businesses shouldn’t be able to spend money on elections as part of their business; option 2 is for those who think that it is legitimately part of the business.

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The legislative headaches of the Volcker Rule

Felix Salmon
Jan 25, 2010 15:54 UTC

Tracy Alloway has the transcript of the White House background briefing on the new, Volcker-inspired, banking regulations. And yes, they do require extra legislation:

We want to take legislative steps. We will ask Chairman Dodd and Chairman Frank to supplement what is already in their bills with legislative steps that don’t just authorize but actually require regulators to prohibit one form of that risky activity, and that’s proprietary trading by firms that own banks. So it is a legislative step.

While there is an element of better-late-than-never here, there’s no doubt that this legislation really should have been included in the original House bill. Going back and asking Barney Frank to include a whole new set of rules and regulations after already having battled hard to get the present version through seems highly inefficient, at the very least.

And here’s the bit that Simon Johnson was so upset about:

The liability cap will be structured in such a way that it constrains future growth that leads to excessive concentration in our financial system. It’s not designed to reduce the share of any existing firm.

It’s designed to make sure that we don’t end up with a system that some other countries have in the world, in which there’s enormous concentration in their financial sector. So it’s designed to constrain future growth. It’s not about reducing liabilities within — the share within the existing structure…

The focus really is on making sure that in the future that firms don’t grow so concentrated that they would exceed this kind of cap overall on sources of funding. It’s designed to constrain future growth so that we don’t have the extent of concentration you see in many other major advanced countries in the world that were — resulted in way more devastating damage to those countries during the financial crisis even than occurred here in the United States.

In other words, the biggest US banks aren’t too big right now, we just want to make sure that they don’t get a lot bigger.

The problem is that the biggest US banks are too big. And being too big is not a relative thing, it’s an absolute thing. Yes, RBS was bigger, in relation to UK GDP, than any bank in the US — just as UBS was enormous relative to Swiss GDP. But JP Morgan Chase is bigger than either of them. And in a globally interconnected world of multinational financial institutions, it’s silly to give the biggest US institutions a pass just because they’re based in a large country. Essentially, the government seems to be saying “we’ve got lots of taxpayers, so we can afford to bail these institutions out if necessary”. But of course they can’t. And as a result, the liability cap should be set to prevent Goldman Sachs or anybody else from having a bloated trillion-dollar balance sheet. Such things aren’t necessary, and the systemic risk they pose is potentially devastating.

Since the Volcker Rule hasn’t even begun to be codified in the form of actual legislation yet, no one has much of a clue how much the ban on prop trading and internal hedge funds might reduce big banks’ balance sheets. But if you read the transcript, the Senior Administration Officials make no attempt to spin the ban as a way to shrink banks. Instead, they simply say that it’s not fair for banks to use their government backstop to get cheap funding for proprietary bets.

My feeling, then, is that the effect of this legislation on bank size will be marginal even if it passes — and that there’s a very good chance it won’t even get that far. I fear that in an attempt to gain the rhetorical high ground, the administration has only succeeded in giving itself yet another intractable legislative headache.



Sure, I was using IFRS vs. US GAAP, which I shouldn’t have, but the point still stands. The main difference between IFRS and US GAAP is in derivatives (i.e., mater netting agreements). But even when you take that into account, RBS is still bigger than JPM, as they have north of $150bn in derivatives not under ISDA masters, and the general rule when netting down derivatives under ISDA masters is to use 1/10th of gross. Barclays is still bigger too.

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Capital wins over labor at Goldman

Felix Salmon
Jan 25, 2010 14:53 UTC

2009 was the year when stocks and unemployment both rose substantially: the ultra-loose monetary policies being followed by central banks around the world seemed to help capital more than they did labor. That’s good for banks in general, and for Goldman Sachs in particular, which makes its money from markets rather than from lending.

But Goldman’s executives seem to have realized the implication here: that the banks own employees would be foolish to leave right now, even if they’re paid much less than they might have had reason to expect. Last week we learned that their compensation would be just 36% of total revenues; today, we’re told that partners (but not necessarily top traders) in London are having their bonuses capped at £1 million.

I’m sure they’re unhappy about this: after all, Deutsche Bank made an early decision that any pain from the UK bonus tax would be shared across the organization, rather than being concentrated on senior executives in London. It was probably reasonable to assume that the one-for-all-and-all-for-one culture of Goldman Sachs would take the same path, but no: you can be sure that partners everywhere else in the world are going to make significantly more than their London counterparts.

There might be an element of nod-and-a-wink here, with the top brass at Goldman telling the London partners privately that they can expect an outsize bonus for 2010, once the tax is out of the way. But what’s obvious is that Goldman doesn’t particularly feel that it’s competing for talent with other banks this year — at least not at the partner level. If you’ve got a good career at Goldman Sachs, you’re better of eating one year’s reduced bonus than you are jumping shop to somewhere with a much less certain future.

Indisciplined Democrats vs regulatory reform

Felix Salmon
Jan 25, 2010 06:06 UTC

Barack Obama ran what was arguably the most disciplined and on-message presidential campaign in history. But all that the Republicans need to do right now to ensure that financial regulatory reform never happens is sit back and watch the Democrats fight each other to a bloody stalemate. It’s inconceivable that the GOP would ever allow itself to get into a mess like this.

I don’t think anybody anticipated this turn of events back in June, when we saw the first relatively detailed Treasury proposal on the subject. Sure, there were a lot of problems with it, but it was necessary, the Democrats had control of both houses of Congress, and at least it was something. What’s more, insofar as there were weaknesses in the proposal, they were generally a direct consequence of the fact that Treasury had been careful to put together a proposal which could pass political muster.

Except, Treasury’s finely-honed political calculations turned out to be somewhat awry: it wasn’t long before Barney Frank was tearing into one of the key legs of the proposal, removing both community banks and the vanilla option from the Consumer Financial Protection Agency.

And then Chris Dodd came along, with his own set of entirely idiosyncratic ideas: where Treasury put the Fed at the center of the regulatory nexus, for instance, Dodd wanted to remove it from that role entirely. And where Treasury soft-pedaled on regulatory consolidation, for fear of angering powerful constituencies, Dodd went much further, combining not only the Office of the Comptroller of the Currency with the Office of Thrift Savings, but throwing in the Federal Deposit Insurance Corporation for good measure.

At this point, all semblance of party discipline had clearly broken down. Did the Republican leadership in the Senate ever put forward versions of White House proposals which were fundamentally at odds with what George W Bush’s White House wanted? There’s a time and a place for negotiating these things, but Dodd seemed to have slept through that entire time period, releasing his list of bright ideas a good five months after the release of the Treasury plan should have put an end to the discussions.

And then, of course, Scott Brown won in Massachusetts, and the White House, in something of a panicked move, decided to marginalize its key economic advisors — Tim Geithner and Larry Summers — in favor of the more radical, if much less thought-through, ideas of Paul Volcker. Again, there’s a lot to like in those ideas. But we’re now up to four competing conceptions of financial regulatory reform: Treasury’s, Frank’s, Dodd’s, and Volcker’s. And that’s just within the Democratic party; the Republicans, of course, rejuvenated by the result in Massachusetts, have their own ideas. And if you thought Big Finance was powerful before the Supreme Court decision in Citizens United vs FEC, you can imagine how wary many Democrats are now of risking the ire of the lobby with the deepest pockets of all — and how keen they are to have its support.

The upshot of the whole sorry story is that the Democrats seem to be very good at doing the divide-and-conquer work of the banking lobby all on their own; the lobbyists’ main job is to stand back, keep quiet, and watch the process get mired down in endless second-guessing and debate. After all, the one thing that everybody in government can agree on right now is that they want to crack down on bankers in some way or other. The problem is that with no end in sight to the fight between all the competing ideas currently doing battle in Washington, there’s a very good chance that none of them will win, and that we’ll end up with the worst of all possible worlds: a continuation of the status quo.

Update: Tim Fernholz responds.


At this late stage of decay, the only thing that can save the Democratic agenda would be for the president to declare that he will resign his office if he cannot bring universal health care reform to the American people. It is time for this president to place the welfare of the American people above any question of personal political ambition. “If I fail to bring universal health care reform to the American people, I will resign my office—get out of the way for someone more fitting for the job.” President Obama. He would instantly recover his credibility and we will rise in his support.

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Revisiting the uncollectable artwork

Felix Salmon
Jan 24, 2010 16:30 UTC

I think, but I’m not sure, that I’m a key vector through which A Tool to Deceive and Slaughter started going viral: my blog entry on the artwork got picked up by Tyler Cowen (and others) before the artist, Caleb Larsen, was interviewed by Wired.co.uk in a story which was then Slashdotted. The work, which was originally priced at $2,500, had a couple of days to go when I blogged it, but didn’t end up selling in that auction.

When the piece automatically relisted itself, however, the bids started rolling in, and the latest bid is $4,250 with over 4 days to go. Since no one bought the work in the previous auction, all of that money is going to go to Larsen (and possibly his gallery).

So here’s one question: say that you put in a bid after seeing my blog entry, and won the piece for $2,500. Would you be sitting on an immediate profit of $1,750 right now, less $262 for Larsen, who gets 15% of any appreciation in value? Or is the fact that Larsen is still the seller one of the reasons for the work’s current price?

It would seem to be reasonably obvious that the higher in value this auction goes, the greater the probability that it will mark the highest point in the piece’s long-term price trajectory, which could weirdly undercut the whole point of the piece. Let’s say that it sells for $10,000, and that the buyer then immediately lists it on eBay for its new market value of $10,000. If it doesn’t sell at that level for a few weeks or months, there’s a good chance that it will never again reach that level.

So what happens when the winning bidder has owned the piece for a while? Here’s what the contract says:

Upon purchasing the Artwork, Collector may establish a new value for the Artwork. The new value may not exceed current market expectations for the Artwork based on the current value of work by the Artist. This value may be reassessed quarterly. This value will be set as the minimum bid of the auction.

This language, it seems to me, allows the winning bidder to keep the minimum $10,000 price tag on the artwork more or less in perpetuity. It’s justifiable the first time around, and then going forwards the winner has only a right, and no obligation, to reduce that price tag if the market value falls. (The value may be reassessed quarterly, but it doesn’t have to be.)

If the buyer wants to sell the work, then, perhaps because eBay starts charging her an insertion fee every week, she can bring down the price to something more likely to clear. But if she likes it and wants to keep this seemingly uncollectable artwork for herself, she probably can — at least until someone is willing to pay more than she did for it.

The upshot is that there’s a decent chance of a rather ironic outcome to this auction: that the piece which constantly sells itself on eBay only ever gets sold once, by the artist to a collector. Just like a normal work of art which never tries to sell itself at all.


How Justin Fox almost saved American democracy

Felix Salmon
Jan 24, 2010 08:21 UTC

It’s auf Wiedersehen but not goodbye to Justin Fox, as he leaves his perch at Time to blog anew at HBR come Monday. His value to the blogosphere was clear from his very first post, a thousand-word disquisition on how boards of directors are a bit like an tonsils: “a largely useless, if mostly harmless, institution”. It included this passage:

As recently as the early 1900s, the board had a pretty clear function. It was the perch from which big shareholders and creditors watched carefully over the men they had hired to manage their companies (as is true today at companies controlled by private equity firms). But the very success of some of these pioneers of industrial capitalism led to the undoing of this model. Corporations outlived their founding shareholders, outgrew the need to borrow money, and, as the stock market captured the public imagination in the 1920s, found their shares in the hands of thousands of small investors in no position to watch carefully over anything. Managers naturally took charge, and boards became appendages entirely beholden to them.

If only the Chief Justice of the United States spent more time reading blogs! James Fallows finds this passage from oral arguments in the case in which John Roberts helped overturn over a century of jurisprudence to allow corporations to spend unlimited amounts of money in political campaigns:

” ‘When corporations use other people’s money to electioneer,’ as Kagan explained, ‘that is a harm not just to the shareholders themselves but a sort of a broader harm to the public,’ because it distorts the political process to inject large sums of individuals’ money in support of candidates whom they may well oppose.

“Roberts sharply challenged this line of argument. ‘Isn’t it extraordinarily paternalistic,’ he asked, ‘for the government to take the position that shareholders are too stupid to keep track of what their corporations are doing and can’t sell their shares or object in the corporate context if they don’t like it? … ‘ “We the government have to protect you naive shareholders.” ‘

Of course, as both Fox and Fallows could have explained to Roberts, that isn’t how it works at all. Here’s Fallows, making mincemeat of Roberts’s argument:

Virtually all such “wealth” as my wife and I hold, apart from our house, is in low-cost indexed mutual retirement funds. I literally have no idea which specific companies I might have bigger or smaller positions in. By the prevailing wisdom of the day, I’m behaving rationally for a non-expert prudent investor. By Roberts’ standard, I am “too stupid to keep track” of what every one of these companies is doing and shifting my positions day by day in response. Or maybe just too lazy.

As long ago as 2003, Roberts owned no fewer than 46 different common stocks, on top of 31 different mutual funds, one ETF, and a REIT. I very much doubt that he was keeping track of what all of the corporations he owned were doing, and selling his shares or objecting in the corporate context if he didn’t like it. And I don’t think that he believed that his mutual-fund managers were doing that either. Maybe he assumed that the magical qualities of the efficient market hypothesis meant that he didn’t need to do that, and that some other group of shareholders would do it for him. Although it’s hard to understand why someone who believed so strongly in the EMH would own 46 individual common stocks.

In any case, a perusal of Justin’s book would surely have disabused Roberts of his faith in the EMH. But clearly, Roberts has read Fox in neither blog nor book form, and as a result we are now left with a devastating piece of jurisprudence which threatens to fundamentally alter US democracy for decades to come. Of course, it’s not Justin’s fault that Roberts didn’t read him. But it does go to show just how powerful a single blog entry can, theoretically, be.


threatens to fundamentally alter US democracy for decades to come
Actually, many states already had no restrictions on funding of state-level campaigns. Australia has hardly any either. But doubtlessly you never actually examined the effects of such different policy regimes before opining on what the effects of the recent decision will be.

In any case, a perusal of Justin’s book would surely have disabused Roberts of his faith in the EMH
Expositors of the EMH have read Fox’ book and not changed their minds. Perhaps you exaggerate how influential it is or how openminded most people are.

There is nothing at all incoherent in Roberts declining to engage in shareholder activism and objecting to the government doing so on his behalf. See Demsetz and the “Nirvana fallacy”.

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Should Krugman replace Bernanke?

Felix Salmon
Jan 24, 2010 02:12 UTC

What would happen if Ben Bernanke withdrew his name from consideration as Fed chairman tomorrow, and Barack Obama picked up the phone and asked Paul Krugman to step into the breach? Bruce Bartlett reckons that “Paul has enough sense not to accept the position even if it is offered–just as Milton Friedman rejected Reagan’s offer for him to replace Volcker in 1982″ — but I’m not so sure. After Simon Johnson proposed the idea this morning Krugman said that it was “crazy” — but he did so without saying that he would refuse the job if offered. I think he’s sensible to leave the door ajar: it’s really hard to say no to a president who asks you to serve your country by taking what Matt Yglesias calls “the single most important domestic policy job in the country”.

Take another look at that Krugman blog entry: most of it is taken up with reasons not to confirm Bernanke. The only reason to confirm Bernanke, in Krugman’s book, is that he’s “a great economist” who acted forcefully at the height of the crisis. But we’re not at the height of the crisis any more, and Bernanke isn’t about to leave the FOMC any time soon — in fact, he’d probably stay on as chairman* more or less indefinitely, as Krugman or any other potential successor wended their way through a long and inevitably partisan nomination process. Would he lose power and influence as a lame duck? Not if the new nominee was public in supporting his policies, as Krugman probably would be.

Krugman asks the key question:

Does it make sense to deny Bernanke reappointment simply in order to appoint someone who would follow the same policies?

The answer, I’m beginning to think, might actually be yes. Right now, the FOMC isn’t really doing very much: it’s keeping rates at zero, and trying to wind down some of the extraordinary measures which it implemented during the crisis. But there’s a very good chance that the biggest job of the next Fed chairman is not going to be monetary policy: instead, it’s going to be bank regulation, once some kind of financial-reform bill has been passed in to law. And on the regulatory front, Bernanke — who opposes the creation of a Consumer Finance Protection Agency, and who sat meekly by as the Fed allowed all manner of mortgage abuses during the subprime boom — looks very much like the conservative Republican that Yglesias says he is.

In an ideal world, then, it might well make sense to have Bernanke stay on the FOMC — as he will, his term as governor doesn’t expire until 2016, and he could easily be re-nominated as a governor at that point — while Krugman, as chairman, steered the Fed as a whole towards an approach to bank regulation which is much closer to the Obama/Volcker/Warren view of the world than to the Bernanke/Summers/Geithner view of the world.

The problem, of course, is that it’s incredibly hard to get there from here, and given the obstacles to getting anything done now that the Republicans in the Senate can block anything they want, it doesn’t make a lot of sense to put a huge amount of political capital into trying to get a partisan like Krugman through the confirmation process.

The base-case scenario is still that Bernanke gets confirmed as Fed chairman, and that when some version of financial regulatory reform finally gets signed into law, the Fed’s powers of regulatory oversight will be boosted substantially. At that point, the nation will need the Fed to be a strong regulator which takes its new responsibilities seriously and is proactive about restraining Wall Street’s natural tendencies towards societally-dangerous behavior.

I’m not convinced that Bernanke is the best person to run such an organization — after helping to engineer, during the crisis, a series of mergers which only exacerbated the problems of too-big-to-fail banks, he has done nothing to counteract the effects of his actions, nor has he indicated that he would like to do so in future. As Krugman says, he seems to have “been assimilated by the banking Borg”. The Fed is the organization best placed to be a tough and effective regulator — but it can only fulfill that role if it has the willingness as well as the ability to reign in America’s biggest banks.

On the other hand, there are now four conceptions of financial regulatory reform floating around Washington — Treasury’s, Frank’s, Dodd’s, and Volcker’s. It’s a mug’s game to presume to predict how they’ll all coalesce into a final law, which means that it’s a bit silly to start nominating a Fed chairman in the expectation that the job will, in future, include a lot more regulatory oversight than it does at present. And on the monetary-policy front, Bernanke is as good a choice as anybody could hope for.

*Update: Either that, or Donald Cohn, his vice-chair, would take over as chairman.


Thanks for the laugh. Bernanke and his cadre of inflation targeters may not be very healthy for the world economy, but Krugman? Printing money faster and subsuming more of the private economy into the government are now ancient economic ideas with little evidence to credit their continued existence. One hopes that the U.S. either stays with the devil it knows and forgoes academics with brilliant minds that appear bitterly frozen in 1938; or hires someone who reads books other than those of Keynes.

Lazy Jack

http://www.thanksforthelaughs.wordpress. com

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