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The Irish Times editorial considers the UK fiscal stimulus package, or at least half of it. November 26, 2008

Posted by WorldbyStorm in Irish Politics.
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Can I dovetail this with Michael Taft’s thoughts which you’ll find above… it’s odd reading the Irish Times editorial yesterday. It’s not so much what is said as what is not said. Consider that, under the heading ‘Borrow and spend’ the IT argues that…

BRITAIN’S CHANCELLOR of the exchequer Alistair Darling hopes the country can spend its way out of recession. In his pre-budget report yesterday, he announced a temporary indirect tax cut by lowering the standard VAT rate to 15 per cent from 17.5 per cent from next month.

Ahah. That must be the spend bit… sort of. It continues:

His aim in this mini-budget is to stimulate demand by encouraging consumers to shop and thereby reverse the economy’s slide into a deepening recession. This fiscal stimulus – via lower taxes – represents a calculated gamble. Given the weak state of the British economy, however, the risk is worth taking.

Yeah, except of course if we read the Guardian we see that

The chancellor unveiled a clampdown on public spending growth, increases in the top rate of income tax to 45p for those earning more than £150,000, and a 0.5% rise in national insurance contributions costing everybody earning more than £20,000 a year around £3 a week from April 2011 onwards.

Okay, so not quite ‘via lower taxes’… And lest one get overly enthusiastic consider harpymarx’s words on same. But back in the Irish Times what of the borrow bit?

The tax cuts to boost consumption will be financed by increased public borrowing. Mr Darling expects that when economic growth resumes in a couple of years, large budget deficits will be quickly reduced and budget balance restored. In an economy that is undergoing something of a deflationary spiral, with prices falling, consumers have changed their spending habits. Shoppers are slower to spend today as they anticipate lower prices tomorrow. But a 2.5 percentage point reduction in the VAT rate may not change their psychology. So far the pre-Christmas sales on Britain’s high streets, with price discounts of 20 to 25 per cent on offer, have failed to persuade shoppers to open wallets.

How much public borrowing though?

Alistair Darling yesterday gambled the government’s political future on a “spend now, pay later” £21bn package of tax cuts and spending increases designed to lift the economy out of recession by next summer.

Insisting that he was not prepared to ignore the suffering of families in “exceptional circumstances”, the chancellor said in his pre-budget report that he would borrow £78bn this year and £118bn next to fund a 13-month VAT holiday, cuts in income tax, more generous payments to pensioners and parents, and a £3bn boost to infrastructure.

Now a rough reckoning makes £118bn to be over 7.6% of GDP. Risky stuff, no doubt, but a risk that Darling considers well worth taking. Not least because as Will Hutton noted yesterday ,on hearing the news “…the FTSE jumped nearly 10%. Incredible times”.

So, as the Tories noted yesterday, the ‘borrowing’ element is pretty significant and considerably more so than the Times dry ‘increased public borrowing’. This is a level of borrowing unheard of under New Labour. And is entirely anathema to the Conservatives.

But what of our state? The IT notes that this isn’t unqualified good news for the RoI.

…In Border areas the continued weakness of sterling has made British goods much more competitive. To visitors from the Republic, a 15 per cent VAT rate makes cross border shopping increasingly attractive with the prices of some goods (groceries, alcohol and clothes) up to 30 per cent cheaper. A much lower UK VAT rate opens a huge indirect tax differential between Britain and Ireland. It has happened just as the Government is raising VAT by half a percentage point (to 21.5 per cent). And with sterling likely to weaken further as a result of yesterday’s fiscal package, that disadvantage seems set to increase.

And also that…

The mini-budget response by the British government, as indeed by many other governments, highlights the very different policy response adopted by the Irish government in tackling the challenge of economic recession.

Such as?

Where other countries have favoured tax cuts as a means of stimulating demand, the Government has raised taxes in a bid to control a soaring budget deficit – but without much obvious sign of success.

I really don’t want to be unkind, but I don’t read that at all in the data available from Darling’s pre-budget report. The emphasis is balanced between tax and borrow, not shifted over to tax alone. Moreover it completely ignores the increases in tax in the UK, not least those in national insurance.

It’s weird, all the time it as if the editorial writer, in tandem with their political and economic commentariat, are unable to visually process the word ‘borrow’, or see the word ‘tax’ without it having ‘cut’ appended to it.

But the IT becomes more egregiously odd as it continues…

No economy has experienced such a rapid reversal of fortune as the Irish economy over the last year as the property bubble burst and property related tax revenue collapsed dramatically. That has left the Government struggling to contain a sharp deterioration in the public finances. Next year, a planned general government deficit of 6.5 per cent of GDP, which is twice the borrowing limit set for euro zone economies, seems likely to be exceeded. Ireland finds itself paying more to international lenders to finance a soaring budget deficit and this risk premium partly reflects the rapid deterioration in the public finances. The Government has left itself with less scope to provide a fiscal stimulus of the kind provided by its British counterpart.

But this analysis, that we have ‘less scope’ only holds true if we believe that ‘tax cuts’ are the only way forward, that 6.5 per cent of GDP as a deficit is somehow anomalous in the current economic circumstances – at least in European and global terms. And it simply isn’t. Furthermore, while it is true that the borrowing limit for euro zone economies has been breached this isn’t unique to this state, nor – once more looking at our partners in Europe – is this per se a bad thing. Incidentally the ominous warnings about the EU on this issue can be contextualised by the following:

The Maastricht Treaty has set out the reference value for government deficit at 3 per cent of gross domestic product (GDP). Taking into account the Commission’s opinion the Council decides, by a qualified majority, whether an excessive deficit exists establishing a deadline for effective action to be taken. If no effective action is taken, the Council may give notice to the Member State in question to take measures to reduce the deficit. Then, if no effective action has been taken in compliance with a notice, the Council may decide to impose sanctions which take the form of a non-interest-bearing deposit with the Community.

Nor will we be alone…CNN reports the EU Commission

…say[ing] France and Ireland will break EU budget rules in 2009 by running a yearly government deficit of more than 3 percent of GDP. The ceiling is intended to keep their shared currency stable. Britain, Latvia, Lithuania, Romania and Hungary will also likely exceed the limit.

And what of the past?

In 2005, the governments with the highest public deficit figures were those of Hungary (6.1% of GDP – 5.4% in 2004), Portugal (6.0% – 3.2% in 2004), Greece (4.5% – 6.9% in 2004), Italy (4.1% – 3.4% in 2004), Britain (3.6% – 3.3% in 2004), Germany (3.3% – 3.7% in 2004) and Malta (3.3% – 5.1% in 2004). Meanwhile, Belgium, Denmark, Estonia, Finland, Ireland, Latvia, Spain and Sweden registered a government surplus in 2005.

And two years ago in 2006… ‘Currently 12 EU states face disciplinary action for breaching this limit.’

Now there’s a fair bit of chat about how Lisbon has changed the EU perception of Ireland, but that – I think – works both ways. When the IT, and other commentators within it and elsewhere are having cold shivers over our breaching the limits perhaps it’s time (and I say this as one broadly pro-EU and a pro-Lisbon voter) the EU sat back and afforded us the same courtesy, not to say facilities, as was extended to that list of reprobates above. And that our economic bien-pensants who cheerleaded our economy to just this pass started to reexamine their own thoughts on these matters.

It’s not that 6.5 isn’t high, but that it isn’t entirely disastrous. That in a global financial crisis this is sustainable, and may require something a little bit more determined than the same old song about ‘tax cuts’…

But then the Irish Times view of the world, as expressed day in day out is one where tax cuts are the only way to economic purity and borrowing and deficits are inconceivable. In a world which has begun to set its face to that sort of certainty there is something archaic about the view. Unfortunately, though, we must continue to live within a political establishment utterly unable to see beyond that philosophical and political limitation.

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Comments»

1. Harpymarx - November 26, 2008

Many thanks for the link WbS.

I just think this pre-budget report from Darling just throws meagre crumbs at the working class. It isn’t left-wing. And various child poverty and pensioners organisations are angry as hell as it does virtually nothing to alleviate poverty.

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2. Eagle - November 26, 2008

I think the VAT cut in the UK is not really intended to get people shopping, but is a desperate gamble to try and keep retailers solvent and/or allow them to maintain staffing levels. I expect there’ll be no price cuts – maybe on some staples, such as laundry detergent, etc. – but that 2% might be the difference in allowing some retailers to stay afloat. Otherwise, it makes no sense as the Guardian points out that discounts of 25% are just about standard now.

It’s not that 6.5 isn’t high, but that it isn’t entirely disastrous. That in a global financial crisis this is sustainable, and may require something a little bit more determined than the same old song about ‘tax cuts’…

What if it was closer to 8% as Goodbody’s forecasts? What if this is the first of three consecutive deficits that will double the 3% limit? The government has been living in DisneyWorld it’s been so optimistic on what it expects to get in for 2008 & 2009 (& 2007). I’d love to know how many refunds are being processed for 2007 right now.

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3. Eagle - November 26, 2008

Jim Power says that the 2009 deficit could be 10%. That strikes me as closer to the truth than the government’s forecast.

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4. CL - November 26, 2008

Its not the breaching of the (arbitrary) Maastricht limits as such which causes the difficulty.
I
“Michael Klawitter, a strategist at Dresdner Kleinwort, said the cost of insuring Irish sovereign debt through credit default swaps (CDS) has surged to 133 basis points. “The markets have begun to see a risk to the solvency of the Irish government. They are questioning whether it has the financial muscle to back up the guarantees,” he said.”

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/3486249/Markets-wary-of-Irish-debt-as-fresh-rescue-looms.html

Lenihan has little scope to engage in Keynesianism.
The EU especially Germany has been very slow to respond to the crisis. There is some talk of an EU-wide fiscal stimulus, but after the anti-Lisbon vote an infusion of funds from the Commission to Ireland is unlikely.
There is nothing particularly ‘left-wing’ about a fiscal stimulus: the massive Obama effort is being organized by Larry Summers, late of the World Bank and one of the Clinton era’s de-regulators.

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5. Eagle - November 26, 2008

And, CL, there’s very little liquidity in Irish debt. So, even though Italy has a much higher debt as a percent of GDP, there’s a lot more activity in Italian bonds than Irish bonds. So we pay more because of both an increasing risk perception (correct, to my mind) and a lower liquidity than exists for other countries’ debt.

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6. CL - November 26, 2008

True, and Ireland without a Central Bank, cannot create money, unlike the U.K. and the U.S.
WASHINGTON — The Federal Reserve and the Treasury announced $800 billion in new lending programs on Tuesday, sending a message that they would print as much money as needed to revive the nation’s crippled banking system.-NYT 26/11/08

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7. Eagle - November 26, 2008

Exactly. We’re not in control of our currency. The same options being used by the British are not available to us.

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8. WorldbyStorm - November 26, 2008

CL, (and Eagle) you’re right that fiscal stimulus isn’t per se a left wing policy. But in tactical terms, and strategic, anything that boosts public expenditure and supports the public sector constitutes an opportunity for the left.

As regards control over finances. Well, true again. But we need only look at Iceland to see how illusions about national sovereignty in the economic sphere ran into the brick wall of a global fiscal crisis. And while granted the EU sets the terms it’s worth noting that they’re more flexible than the IT pretends and they give a certain degree of support to progressive measures (which this government appears dead set in not taking).

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9. CL - November 26, 2008

Certainly capitalism’s most serious crisis since the Great Depression presents an opportunity for the left. To avail of this opportunity the economic ideology that undergirds capitalism must be debunked. No small task since it is such orthodox economics that is mainly on offer in all economics departments throughout the world. Empirical reality has dealt it a serious blow. But the origin, nature and political implications of orthodox economic ideology is little understood. So the left must move forward to Polanyi, Marx, Veblen, and, yes. to Keynes as well.

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10. Eagle - November 26, 2008

WBS

I’m not totally sold on the “There but for the grace of God” use of Iceland I’ve heard here. The Taoiseach used it – particularly ungraciously – in September. My problem is that Iceland played a very dangerous game with its currency and that is a big part of their current troubles. There are other non-Euro countries that have not suffered as much (see Denmark or Sweden or even the E. European countries, I think).

Having said that, this current crisis has also shown that it’s entirely possible that we could be Iceland now if we’d stayed out of the Euro.

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11. Eagle - November 26, 2008

By the way, by “here” I mean in Ireland, not the CLR.

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12. WorldbyStorm - November 26, 2008

CL entirely agree with you.

Eagle, I think you’re absolutely right about the lunatic policies (and hubris) of Iceland. And it isn’t just the euro, but I do think our problems would be greater if we’d been out of the euro. Which I guess is what you say as well.

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13. CL - November 27, 2008

The Dept. of Finance has said that the Irish state “no room for manoeuvre in terms of a further fiscal stimulus”, and so will not participate in the EU fiscal stimulus plan announced by the Commission.

http://www.irishtimes.com/newspaper/breaking/2008/1126/breaking46.html?via=mr.

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14. Eagle - November 27, 2008

WBS

Not sure that our problems would be greater if we’d stayed out of the Euro. On the one hand, there are obvious benefits to being in a large currency. A big currency is more stable. On the other, it’s hard to be part of a currency when (a) we’re such a small economy and (b) our economic cycle is not really in synch with the large economies that determine the strength or weakness of the currency.

If we had stayed out we would have had the higher interest rates than we had for so long after we signed up (and for a good while before) for the Euro. If the interest rates had been higher it would have lessened the boom and given all that extra money splashing around somewhere else to invest. Unfortunately all the money went looking for investment and it mostly found its way into property.

It’s a tough question, one that I’ve thought some about. Yet I don’t think I’ve really thought deeply enough to say anything definitive on whether the Euro was a positive or negative influence on the Irish economy.

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15. Eagle - November 27, 2008

And, of course, the fact that we can’t match the UK in devaluing our currency is a big problem for our exporters, who still depend on the UK to a great extent. I think that’s particularly true of those exporters that are of Irish origin (that is, not American multinationals).

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16. ejh - November 27, 2008

Certainly capitalism’s most serious crisis since the Great Depression

Really? It might turn out that way, but it isn’t yet.

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17. CL - November 27, 2008

ejh-Informed opinion disagrees. One example:

“We are facing one of the great crises in the history of capitalism; nothing this bad has been seen in advanced capitalist world in eighty years, since the Great Depression itself.” John Bellamy Foster.

http://mrzine.monthlyreview.org/foster101008.html

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18. CL - November 27, 2008

Or perhaps ejh you have information on the costs of some previous crisis. The cost of the current is in the trillions.
“The unprecedented pledge of funds includes $3.18 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s”

http://bloomberg.com/apps/news?pid=20601109&sid=arEE1iClqDrk&refer=home

This Bloomberg figure is probably on the low side.

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19. WorldbyStorm - November 27, 2008

CL, re your earlier quote from the Dept. of Finance on the other, I’ve noted in my second last post how self-serving that is and how wide of the mark the analysis by them is.

As regards this being the greatest crisis since… in some ways yes and in others no. A lot depends on how system wide it is, something we can’t tell just yet. Is the credit crisis and the attendant issues in the US and in the banking sector a sectoral problem that came to light due to the recession and an issue that the actions of governments can rectify or is it that it is a symptom of a broader malaise within capitalism as currently structured. I don’t know, who does? But I do agree that the responses of governments have been unprecedented.

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20. WorldbyStorm - November 27, 2008

Eagle, I guess the basic crux of the matter is that we’re too small a state to be able to exercise full sovereignty in such matters, although who can these days, and therefore the eurozone has given a degree of shelter which if it were absent we would find the current problems much worse again. But I take your point, it could be that the cost/benefit is rather marginal in either direction – although surely it makes more sense to row in with the big battalions on this one?

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21. CL - November 28, 2008

WBS, I really don’t see where the Irish govt. has room for further fiscal stimulus. With a deficit at 6% of GDP and rising and with its guarantee of all bank liabilities, and these banks in serious trouble, any further international borrowing risks the solvency of the state.
Exhortations from the Commission are unlikely to lead to an Eu-wide response. Merkel is worried about inflation, not the developing ‘stag-deflation’.
As for the crisis being sectoral. Hardly. Its system-wide and world-wide.

“The only precursor for the current financial crisis is the Great Depression, but even that isn’t a very good comparison. In the nineteen-thirties, the financial system was much less sophisticated and interconnected.” John Cassidy

http://www.newyorker.com/reporting/2008/12/01/081201fa_fact_cassidy?currentPage=all

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22. ejh - November 28, 2008

Or perhaps ejh you have information on the costs of some previous crisis

No, I have some memory of living through the economic crises of the Seventies and recall some of the unemployment figures.

People can say that it’s going to be the worst crisis since the Thirties, and it may turn out like that: but as yet it isn’t so.

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23. WorldbyStorm - November 28, 2008

CL, the state could continue to borrow, indeed as Michael Taft has noted such borrowing can be and should be taken, and while the deficit is now over 6% this is neither as extraordinary as it might seem in other better times, nor is the international banking system, now underwritten by US and other national states, in quite as bad a shape as you propose. You’re right about there not being an EU wide response, in part due to our own quixotic approach to our local concerns.

CL, I’m curious, what precisely are your thoughts on these matters. You seem to take as read the analysis that has been made by the IT etc….

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24. skidmarx - November 28, 2008

“The cost of the current is in the trillions”

Of course, unless the figures are adjusted for inflation, recent crises are always likely to appear more serious in financial terms.

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25. Bartholomew - November 28, 2008

“Certainly capitalism’s most serious crisis since the Great Depression”

It’s true that people can get apocalyptic at times like these. I remember an Economist editorial in about 1975 saying that if the FT index fell below 200 that the western economic system would collapse. As far as I remember, it reached 145 but not everything fell apart.

What strikes me as different about the current crisis (and speaking as a relative economic illiterate) is the level of sheer uncertainty about quite fundamental things. In particular, in September and October, nobody seemed to know what anything was worth. Banks and funds had enormous amounts of complicated bonds which might be worth trillions or might be worthless. They had also made huge loans against property but nobody knew how much the property was worth. They didn’t know how much other banks were worth so they stopped dealing with them. People didn’t know how much their houses were worth, so they stopped spending. The prices of basic food commodities had doubled, there were food riots in Indonesia, and nobody knew why – biofuels, speculators, demand in China? One day oil is 90 a barrel, a few weeks later it’s 140, another few weeks and it’s 80. It feels as if price mechanisms have completely failed, that markets can’t do the one basic thing they’re supposed to do well, and on which all the other wonderful things they’re supposed to do, like efficient resource allocation, depend.

Mind you, it would be nice if we went from knowing the price of everything and the value of nothing, to not knowing the price of anything but understanding the value of things.

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26. CL - November 29, 2008

Wbs, no i don’t believe that the state can continue to borrow without adverse repercussions. The Irish Govt. has guaranteed all liabilities of Irish banks: the banks are in serious trouble, being seriously under-capitalised and heavily exposed to the still declining property market in Ireland and in the U.K. So the blanket govt. guarantee affects Ireland’s international credit rating.
“Michael Klawitter, a strategist at Dresdner Kleinwort, said the cost of insuring Irish sovereign debt through credit default swaps (CDS) has surged to 133 basis points. “The markets have begun to see a risk to the solvency of the Irish government. They are questioning whether it has the financial muscle to back up the guarantees,” he said.” Evans-Pritchard column, Telegraph. 19 Nov.
I have not the slightest doubt that F.F. would use whatever fiscal stimulus would get them out of the current hole if they could. To suggest that they haven’t taken this route because of ideological opposition is not a tenable position.
Fianna Fail, as the political wing of the propertied/speculator/construction industry can be largely blamed for the current difficulties. The Irish problems are of course aggravated by the international economics crisis which economics Nobel Laureate, Paul Krugman today in the NYT called ‘the worst since the 1930s’.
The EU Commission has called on the member states to engage in fiscally stimulating their economies and to borrow money, above the Maastricht limits, if necessary. Ireland because of the banking problem created by F.F. and the propertied interests it represents, cannot participate in the proposed Eu stimulus. Just because the I.T. sees that Lenihan has little room for maneuver is not a reason to deny empirical economic reality.
Ireland in the Eurozone is akin to an individual state in the U.S. Neither one can run up a fiscal deficit and monetize it because they lack the power to create money .Neither do they have power to set interest rates or the exchange rate. This is the reality of Ireland’s situation. The big difference is that in the U.S. the central, federal govt. will bail out the states and municipalities as soon as Obama takes power. There is no such central power in Europe. Europe’s strongest economy, Germany, has agreed to a paltry ‘stimulus’ of about half of !% of its GDP. Chancellor Merkel is worried about inflation.
My argument is not against the Eu nor against the Eurozone. The Euro has proved its value in the current crisis. But the crisis has also revealed the weaknesses of the European project: inability to act in concert to attack the problems head on, and serious differences among the most important members about what should be done.
To point out that ‘sovereignty’ is not all that its cracked up to be is legitimate in an argument. But to then proceed and propose policies for Ireland as if Ireland’s financial sovereignty had not been subsumed in the Eurozone is not.
To know what freedom to act is available, necessity has to be recognized.
I don’t pretend to know how to get out of the current difficulties. But bank nationalization and a land tax would be steps in the right direction.
My views continue to evolve I hope, and are not i pray dogmatic.I appreciate very much the discussion on this site: such dialectical endeavour is surely an important path towards knowledge of political economic reality.

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27. CL - November 29, 2008

..and finally…
To say that the capitalist system is facing its greatest crisis since the 1930s does not mean that one is predicting its collapse. Certainly Paul Krugman is not.
The response of the capitalist powers to the crisis has been unprecedented and massive, drawing on knowledge of the Great Depression.
Will the trillions expended save the system? Nobody knows. But it will be different. And now i’m thoroughly sick-for a while,- of the dismal pseudo-science called economics.

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28. WorldbyStorm - November 29, 2008

I’d pretty much agree with all you say as it happens as regards possible ways forward, just wasn’t sure where you were coming from CL. I think we will see that nationalisation you talk about… it may not be called it though…

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29. WorldbyStorm - November 29, 2008

Although we might still have a disagreement as to the viability of further borrowing… ;)

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