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Debt, Deficits and the Cost of Free Lunches


It seems that every generation or two, fundamental economic ideas are questioned and challenged. The reasonable and important idea that governments should balance their budgets on an annual basis was challenged in the 1930s by the rise of Keynesian Economics and the counter-argument that deficit spending was desirable, if it was used to maintain full employment. Now it seems that any defense or desire for fiscal restraint and less government spending and borrowing are entirely out the window. Fiscal folly is the watchword of the day.

It is not surprising that politicians care little about annual budget deficits and growing debt, since spending money is their way of buying votes from interest groups wanting to eat at the government trough. In America today, it is all a political game by which Democrats and Republicans pander to their respective voting blocs, especially in an upcoming presidential and congressional election year like 2020.

On the one hand, the danger of a looming political crisis is warned about in the media when they point to the coming budgetary circus that will most likely start playing out toward the end of the summer of 2019, when Congress comes back into full session and the new federal budget year that begins on October 1, 2019, will have to be handled in some way.

Budgetary Brinkmanship and Political Plunder

Will the country be facing another federal government shutdown threat like the one in late 2018 and early 2019? Will the national debt limit be raised to permit the spending of the huge sums of money needed to fulfill all the demands for other people’s money above actual taxes collected through the syphoning off of private sector resources by continued government borrowing in the financial markets?

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Weekly Commentary: Dudley on Debt and MMT

Weekly Commentary: Dudley on Debt and MMT

December’s market instability and resulting Fed capitulation to the marketplace continue to reverberate. At this point, markets basically assume the Fed is well into the process of terminating policy normalization. Only a couple of months since completing its almost $3.0 TN stimulus program, markets now expect the ECB to move forward with some type of additional stimulus measures (likely akin to its long-term refinancing operations/LTRO). There’s even talk that the Bank of Japan could, once again, ramp up its interminable “money printing” operations (BOJ balance sheet $5.0 TN… and counting). Manic global markets have briskly moved way beyond a simple Fed “pause.”

There was the Thursday Reuters article (Howard Schneider and Jonathan Spicer): “A Fed Pivot, Born of Volatility, Missteps, and New Economic Reality: The Federal Reserve’s promise in January to be ‘patient’ about further interest rate hikes, putting a three-year-old process of policy tightening on hold, calmed markets after weeks of turmoil that wiped out trillions of dollars of household wealth. But interviews with more than half a dozen policymakers and others close to the process suggest it also marked a more fundamental shift that could define Chairman Jerome Powell’s tenure as the point where the Fed first fully embraced a world of stubbornly weak inflation, perennially slower growth and permanently lower interest rates.”

And then Friday from the Financial Times (Sam Fleming): “Slow-inflation Conundrum Prompts Rethink at the Federal Reserve: Ten years into the recovery and with unemployment near half-century lows, the Federal Reserve’s traditional models suggest inflation should be surging. Instead, officials are grappling with unexpectedly tepid price growth, prompting some to rethink their strategy for steering the US economy. John Williams, the New York Fed president, said on Friday that persistently soft inflation readings over recent years could damage the Fed’s ability to convince the general public it will hit its 2% goal.

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Mike Maloney: “One Hell Of A Crisis”

Mike Maloney: “One Hell Of A Crisis”

Crashing stocks, bonds, real estate & currency all at once?

Mike Maloney, monetary historian and founder of GoldSilver.com, has just released two new chapters of his excellent Hidden Secrets Of Money video series.

In producing the series, Maloney has reviewed several thousand years of monetary history and has observed that government intervention and mismanagement — such as is now rampant across the world — has alwaysresulted in the diminishment and eventual failure of currency systems.

As for the world’s current fiat currency regimes, Mike sees a reckoning approaching. One that will be preceded by massive losses rippling across nearly all asset classes, destroying the phantom wealth created during the latest central bank-induced Everything Bubble, and grinding the global economy to a halt:

Gold and silver are tremendously undervalued right now, and I dare you to try to find another asset that is tremendously undervalued. There just is not. By all measures, everything is just in these hyper-bubbles. OK, real estate is not quite a hyper-bubble; it’s not quite as big as 2005 and 2006, but by all measures, it’s back into a bubble. But now, we’ve got the bond bubble, the biggest debt bubble in the world. These are all going to pop.

We had a stock market crash in the year 2000, and then in 2008, we had a crash in stocks and real estate. The next crash is going to be in stocks, real estate and bonds — including a lot of sovereign debt, corporate bonds and a whole lot of other bonds that will be crashing at the same time. So, it will be all of the standard financial asset classes, including the traditional ‘safe haven’ of bonds that are going to be crashing at the same time that the world monetary system is falling apart.

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Massive Deficit Spending Greenlights Waste, Fraud, Profiteering and Dysfunction

Massive Deficit Spending Greenlights Waste, Fraud, Profiteering and Dysfunction

America’s problem isn’t a lack of deficit spending/consumption. America’s problems are profoundly structural.

The nice thing about free to me money from any source is the recipients don’t have to change anything. Free money is the ultimate free-pass from consequence and adaptation: instead of having to make difficult trade-offs or suffer the consequences of profligacy, the recipients of free money are saved: they can continue on their merry way, ignoring the monumental dysfunction of their lifestyle.

This explains the appeal of Modern Monetary Theory (MMT), which holds that deficit spending is the “solution” to all our problems because governments can’t go broke–they can always emit whatever currency they need via printing or borrowing.

The problem with government deficit spending is it’s free money to the recipients: there are no feedback mechanisms to enforce any consequences for spending that’s wasteful, fraudulent or inefficient/ineffective.

Deficit spending simply enables the wasteful, corrupt, rewarding-insiders profiteering state-cartel kleptocracy to continue gorging on public spending.So what desperately needed efficiencies and improvements are imposed on the higher education cartel by handing the cartel another trillion dollars of public spending? None.

What desperately needed efficiencies and improvements are imposed on the healthcare cartel by handing the cartel trillions of dollars in publicly funded “Medicare for all”? None.

What desperately needed efficiencies and improvements are imposed on the national defense cartel by handing the cartel additional trillions of public spending? None.

What kind of sense does it make to encourage wasteful consumption on a finite planet with limited resources? The entire rationale of Modern Monetary Theory (MMT) is that the productive capacity of the economy isn’t being maxed out because we’re not consuming enough.

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America’s Greatest Crisis Upon Us…Debt to GDP Makes It Clear

America’s Greatest Crisis Upon Us…Debt to GDP Makes It Clear

America in the midst of its greatest crisis in its 242 years of existence.  I say this based upon the US federal debt to GDP (gross domestic product) ratio.  In the history of the US, at the onset of every war or crisis, a period of federal deficit spending ensued (red bars in graph below) to overcome the challenge but at the “challenges” end, a period of federal austerity ensued.  Until now.  No doubt the current financial crisis ended by 2013 (based on employment, asset values, etc.) but federal spending continues to significantly outpace tax revenues…resulting in a continually rising debt to GDP ratio.  We are well past the point where we have typically began repairing the nation’s balance sheet and maintaining the credibility of the currency.  However, all indications from the CBO and current administration make it clear that debt to GDP will continue to rise.  If the American economy were as strong as claimed, this is the time that federal deficit spending would cease alongside the Fed’s interest rate hikes.  Instead, surging deficit spending is taking place alongside interest rate hikes, another first for America.
The chart below takes America from 1790 to present.  From 1776 to 2001, every period of deficit spending was followed by a period of “austerity” where-upon federal spending was constrained and economic activity flourished, repairing the damage done to the debt to GDP ratio and the credibility of the US currency.  But since 2001, according to debt to GDP, the US has been in the longest ongoing crisis in the nations history.

But what is this crisis?  The chart points out the debt to GDP surges in order to resolve the Revolutionary war, the Civil War, WWI, and WWII. But the debt to GDP surges since 1980 seem less clear cut.  But simply put, America (and the world) grew up and matured, but the central banks and federal government could not accept this change.

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Canada’s Debt Spiral

Canada’s Debt Spiral


Living beyond our means requires us to borrow money to cover the difference between our income and our spending. Many Canadians now understand the financial consequences of this practice and regret the choices they’ve made. Unfortunately, Prime Minister Trudeau is not one of them, as evidenced by his government’s budget deficits which are further eroding the financial wellbeing of Canadians. He has broken a campaign promise, ignored basic economic principles, and seems hell-bent on setting an ignominious record.  According to the Fraser Institute: “Justin Trudeau is the only prime minister in the last 120 years who has increased the federal per-person debt burden without a world war or recession to justify it.”

The Broken Promise

The Liberals had won the 2015 federal election with a pledge to run annual shortfalls of no more than $10 billion over the first three years of their mandate, and to eliminate the deficit by 2019-20.

The deficit for 2016-17, Trudeau’s first full fiscal year, was $17.8 Billion. The forecast for 2017-18 is $19.9 Billion, and for 2018-19, the forecast is $18.1 Billion.

And now, from the government’s 2018 budget, we read this:

While austerity can come from fiscal necessity, it should not turn into a rigid ideology about deficits that sees any investment as bad spending.

The government says deficits are economically beneficial, and compares deficits to loans taken out by entrepreneurs and business owners. But here’s the rub: in order to spend, the government must first raise money by taxing or borrowing (deficits). This deprives the private sector of money which would otherwise be available for businesses to borrow and invest in new production, thereby creating jobs and raising our standard of living.

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Generation Screwed to Morneau: stop shoveling government debts on Canada’s kids 

Generation Screwed to Morneau: stop shoveling government debts on Canada’s kids 


Bill Morneau, Canada’s Minister of Finance, told a touching story recently about being alone while his daughters were away at university.

A poster about women’s rights that he saw in one of the girls’ rooms as he toured the empty house provided inspiration for a slew of new spending programs in his 2018-2019 budget, Morneau said.

The speech drew considerable admiration from the bureaucrats, lobbyists and lawyers gathered at the Conseil des Relations Internationales de Montreal’s event, many of whom profited directly from the extra spending.

This seasoned audience of Ottawa swamp creatures recognized the Finance Minister’s personal story as political staging.

They all knew that Morneau was leaving out the fact that his daughters’ generation will have to pay back most, if not all, of the $18.1 billion that their parents are borrowing to finance the government’s “Equality and Growth” deficit.

Politicians running up government debts in order to pay themselves raises (and shovel cash to their pals) is an old story. The good news, as we first reported two years ago , is that some millennials are fighting back.

A youth movement that preaches fiscal responsibility

“I’m not okay with Bill Morneau borrowing additional money to channel to special interest groups,” said Paige Hunter, McGill Coordinator at Generation Screwed , a youth movement that preaches fiscal responsibility. “Going further into debt isn’t in anyone’s interest.”

Renaud Brossard, Generation Screwed’s executive director, agreed. “We jokingly call this an ‘everything is fine’ budget,” said Brossard. “There is no plan to address the country’s long-term debt, and there is no recognition that there may be another recession around the corner.”

Generation Screwed has grown considerably since Brossard first joined four years ago, while still a student. The organization, which is sponsored by the Canadian Taxpayers Federation , now has 17,000 Twitter and Facebook followers.

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Reckless Deficit Spending by Congress Set to Wreck the Dollar

Reckless Deficit Spending by Congress Set to Wreck the Dollar

U.S. equities got a free ride on the Trump train after his election, even as Federal Reserve officials hiked interest rates. That ride may have ended last week.

Hiked Rates

If commentators are correct and the blame for recent selling in the stock market falls on the burgeoning fear of rising interest rates, it looks like Fed tightening is finally having the effect many predicted when the cycle began.

Most currently expect the FOMC to continue with hikes at about the same pace set in 2017. They have gotten away with several hikes, but attempting several more will be harder for them.

The question is whether the Fed’s tolerance for pain is any higher under new chairman Jerome Powell. We’d wager that it won’t take much in the way of flagging stock prices and slowing growth to have them reversing course and punching the stimulus button.

No one should bet that last week’s rally in the dollar means the bottom is in. The next few years look downright terrifying for the greenback. Here are some factors to consider:

  • Congressional Republicans embarrassed themselves last week by proving the lip service they pay toward fiscal conservatism is nothing but lies. The Republican leadership shepherded through $300 billion in additional spending. Furthermore, they once again completely suspended the limit on borrowing;
  • The Treasury will be issuing staggering amounts of new debt to fund the Congressional spending spree. Last fall’s tax cut may be good news for taxpayers, but it will also magnify federal deficits. Net new debt in 2018 is expected to be $1.3 trillion – the highest since 2010!
  • President Trump will soon begin the push for a trillion-dollar infrastructure program. That will almost certainly be paid for with additional borrowing.
  • The creditworthiness of the U.S. is once again back in the news. Rating agency Moody’s raised the idea of a downgrade for U.S. debt last week.


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More Frogs Boiling—–Why Trillion Dollar Deficits Are Coming Back Soon

More Frogs Boiling—–Why Trillion Dollar Deficits Are Coming Back Soon

The latter delusion brings to mind what might be called the “CBO hockey stick”, which is a fiscal fantasy so unhinged from reality as to make the Wall Street stock analysts look like models of sobriety by comparison. To wit, CBO’s latest 10-year budget projection assumes that the US economy will hit full employment next year, and remain there with nary a bump or recession in sight through September 2026, at least.

Well, now. Don’t bother to say Rosy Scenario move over because the arithmetic of CBO’s fantasy speaks for itself. That is, it is advising Washington to relax——we are heading for 207 straight months without a recession. And not in the next world, but this.

Average Length of Recoveries

Since that’s roughly double the longest expansion on record its worthwhile to recall what’s changed since that one-of-a-kind expansion started in March 1991. For starters, the China export tsunami had not even commenced. Nor had the US economy been hollowed out by the massive off-shoring of breadwinner jobs that has resulted from the Fed’s bubble finance policies of the last two decades.

Thus, what had been nearly 25 million goods-producing jobs at the start of the 119 month-long 1990s expansion has been reduced to only 19.5 million today.

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Deficit Spending is Not the Answer

The Growing Chorus for Fiscal Stimulus

Central bankers and monetary adherents the world over are united in the common grouse that fiscal policy is lacking.  Grander programs of direct stimulation are needed, they grumble.  Monetary policy alone won’t cut the mustard, they gripe.

1-global debtGlobal debt-to-GDP ratios (excl. financial debt). Obviously, it is not enough. More debt is needed, so we may “stimulate” ourselves back to prosperity.

Hardly a week goes by where the monetary side of the house isn’t heaving grievances at the fiscal side of the house.  The government spenders aren’t doing their part to boost the GDP, proclaim the money printers.  Greater outlays and ‘structural reforms’ are needed to spur aggregate demand, they moan.

For example, last month, just prior to the G20 gala, the Organization for Economic Cooperation and Development (OECD) asserted that “Getting back to healthy and inclusive growth calls for urgent policy response, drawing on monetary, fiscal, and structural policies working together.”

The OECD report also stated that “The case for structural reforms, combined with supporting demand policies, remains strong to sustainably lift productivity and the job creation.”

4295203312_1ec36291bc_bThe Chateau de la Muette in Paris – this magnificent building that once housed members of France’s nobility nowadays ironically serves as the headquarters of the socialistic central planning bureaucracy known as the OECD. This parasitic carbuncle is high up on the list of globalist institutions that must be considered an extreme threat to economic freedom and progress.     Photo via oecd.org

Several weeks later, on March 10, European Central Bank President Mario Draghi offered a similar refrain.  At the ECB press conference Draghi remarked that “all [Eurozone] countries should strive for a more growth-friendly composition of fiscal policies.

Then, wouldn’t you know it, former Fed Chairman Ben Bernanke also added his alto vocals to the chorus.  Last week, in his Brookings Institution blog, he wrote:

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Norway’s Interest Rate Conundrum

Norway’s Interest Rate Conundrum

Current Situation 

The ECB recently stimulated more than expected, cutting rates by five basis points and expanding  quantitative easing. It is already expected that Norges Bank (The Norwegian Central Bank) will cut rates next week, seeing accelerating inflation as temporary. They have a 2.5% inflation target mandate “over time,” giving them lee-way. They see demand falling off while the local economy, driven by exports, recovering. Therefore, they feel that they can cut rates. My previous articles challenged the assumptions that the oil sector will recover, showing that new technology reduces long term prices below offshore break-even points, and exports can make up the difference, illustrating that key sectors, like fishing, can be replicated in Canada, Maine, Russia and Japan.

We are experiencing 1970’s style stagflation, coming from the supply side, not demand. Prices are going up because Norges Bank continues to destroy the Norwegian Krone, turning it into the Nordic Peso. This is where they are “hiding” the damage to save rest of the economy. For example, housing prices will rise in NOK but fall in USD or gold (universal commodity) terms. It’s a shell game, leading to long term decline or even worse, an unexpected period of elevated inflation, requiring a rapid rise in interest rates.  Housing remains at risk in this situation (Norway does not have 30 year fixed loans, most people float monthly).

I am in no position to stop them from making trips to Thailand, fruit from Spain and iPhones from California more expensive, but at least I can share my knowledge with others.

The dashboard, above, lines up key figures, showing how low rates drive inflation, gradually eroding public wealth. It is important to notice that inflation is much higher than interest paid at the bank, punishing responsible behavior. A person’s savings diminishes over time in terms of purchasing power.

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Canada’s new deficit plan is trouble

Canada’s new deficit plan is trouble

Justin_Trudeau_supporting_Gerard_Kennedy_1,_rotatedYesterday Federal Finance Minister Bill Morneau announced the projected deficit for 2016-17 is now $18.4 billion. This amount does not include $10.5 billion in new spending promised by the Liberals during the election campaign.   When the budget is delivered in one month’s time it is foreseeable the total deficit could be in excess of $30 billion. During question period Prime Minister Trudeau defended the proposed financial course of action as something the Canadians want and voted for, while the Leader of the Opposition, Rona Ambrose, alleged that increased federal spending will amount to waste. (Ms. Ambrose is likely well aware of the wastefulness of government programs after having served for three years as Minister of Public Works and Government Services. In that role and other portfolios she has held she is not innocent herself of producing and perpetuating waste.)

In their book Free to Choose, Milton and Rose Friedman exposed, among other things, the fallacy of the welfare state and the disappointing nature of all government programs. This is an unavoidable consequence of the spender spending someone else’s money on yet someone else. It is like paying for someone else’s lunch out of an expense account. The spender has little incentive either to economize or to try to get his guest the lunch that he will value most highly. Moreover, as Hayek (1945) explained in the “Use of Knowledge in Society”, spenders do not have and cannot obtain the information necessary to spend money on other peoples’ money on yet other people as effectively as when you spend your own money on yourself. This is the crux of why government spending is so wasteful. Legislators vote to spend someone else’s money. Bureaucrats who administer the spending programs do the spending someone else’s money on yet someone else.

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The Follies and Fallacies of Keynesian Economics

Eighty years go, on February 4, 1936, one of the most influential books of the last one hundred years was published, British economist, John Maynard Keynes’s The General Theory of Employment, Interest and Money. With it was born what has become known as Keynesian Economics.

Within less than a decade after its appearance, the ideas in The General Theory had practically conquered the economics profession and become a guidebook for government economic policy. Few books, in so short a time, have gained such wide influence and generated so destructive an impact on public policy. What Keynes succeeded in doing was to provide a rationale for what governments always like to do: spend other people’s money and pander to special interests.

In the process Keynes helped undermine what had been three of the essential institutional ingredients of a free-market economy: the gold standard, balanced government budgets, and open competitive markets. In their place Keynes’s legacy has given us paper-money inflation, government deficit spending, and more political intervention throughout the market.

It would, of course, be an exaggeration to claim that without Keynes and the Keynesian Revolution inflation, deficit spending, and interventionism would not have occurred. For decades before the appearance of Keynes’s book, the political and ideological climate had been shifting toward ever-greater government involvement in social and economic affairs, due to the growing influence of collectivist ideas among intellectuals and policy-makers in Europe and America.

Keynes on Time Magazine Cover

Before Keynes: Wise Free Market Policies

But before the appearance of The General Theory, many of the advocates of such collectivist policies had to get around the main body of economic thinking which still argued that, in general, the best course was for government to keep its hands off the market, maintain a stable currency backed by gold, and restrain its own taxing and spending policies.

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A New Era For Canadian Oil And Gas, For Better Or Worse

A New Era For Canadian Oil And Gas, For Better Or Worse

Canadian voters kicked out the conservative government in the October 19 election, a party that had been in power for a decade. Polls had predicted a slight lead for the Liberal Party, but in a surprise result, the Liberals actually won a majority of seats in parliament and will form a majority government. Most analysts had expected the Liberal Party would have had to form a coalition government, but many voters appeared to strategically vote for the frontrunner in order to ensure a loss for the conservatives. The new government of Prime Minister-designate Justin Trudeau will almost certainly be much less friendly to the oil and gas industry in Canada, though to what extent remains uncertain. Trudeau opposes Enbridge’s (NYSE: ENB) Northern Gateway Pipeline, but also backs TransCanada’s (NYSE: TRP) Keystone XL Pipeline – the latter of which could be blocked by the U.S. government. More will be known in the coming weeks. However, one clear promise from Trudeau was his plan to engage in deficit spending to goose the economy through higher investments in infrastructure.

The U.S. Department of Interior cancelled two lease sales for the Arctic, effectively ruling out new drilling for several years. The agency said that there was almost no interest from potential buyers for acreage in the Chukchi and Beaufort Seas, so it decided to scrap the lease sales. The move follows the decision from Royal Dutch Shell (NYSE: RDS.A) to abandon Arctic drilling, and without any other companies positioned to move forward, offshore drilling in the U.S. Arctic may not happen for years. In addition to cancelling the lease sales, the Obama administration also denied a request from Statoil (NYSE: STO) and Shell to allow an extension of their leases. They are set to expire in 2017 (Beaufort Sea) and 2020 (Chukchi Sea).


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Global Economy Nearing a “Structural Recession”

Global Economy Nearing a “Structural Recession”

And monetary policies will be “ineffective”

To the never-ending astonishment of our economists, global growth has been much weaker since the Financial Crisis than before it, despite enormous global stimulus from years of extreme central-bank monetary policies and record amounts of government deficit spending.

This should not have happened, according to our economists. Fiscal stimulus and expansionary monetary policies beget economic growth, which beget even more economic growth. That’s the theory. And that’s precisely what hasn’t happened. All it did was inflate asset prices. But the global economy has been a dud.

“If we calculated global growth with China’s true growth rate and not the official rate, global growth in the second quarter of 2015 would be only 2%,” figured Natixis, the investment bank of France’s second largest megabank, Groupe BPCE.

This “sluggish growth, close to a recession, is due to persistent, structural causes; we therefore use the term ‘structural recession’ to show that it does not have a cyclical origin,” the report explained. It’s not caused by normal cyclical fluctuations, but by “persistent structural problems that are specific to each region.”

China loses its cost-competitiveness

The problem dogging China is the soaring cost of labor, in an economy that is still too centered on low-end products and exposed to “a very high level of the price elasticity of exports.” Thus, if Bangladesh or Vietnam can produce it a little more cheaply, China loses those exports.

Labor costs have soared in the double digits year after year. Even per-unit labor cost, which compensates for productivity gains, has jumped year over year: in 2015, by 4.5%, which is at the low end; and by over 10% at the high end in 2000-2001 and 2007-2008.

Hence a decline in exports of those products, a weakening of investments, and a sharp weakening of what Natixis calls China’s “true growth.”



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Olduvai IV: Courage
In progress...

Olduvai II: Exodus
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