Friday, March 30, 2018

Mailvox: today is not the 1930s

MP explains why Smoot-Hawley is deemed to have been so important in the 1930s, and why tariffs cannot be a similar concern today even if we accept Jude Wanniski's original case for its connection to the Great Depression:
I was reading some of your earlier threads and I noticed you had questions as to how the Smoot-Hawley Tariff came to be associated with causing the Great Depression.

The idea was first proposed by Jude Wanniski in his book “The Way the World Works.” Specifically, it is in Chapter 7, “The Stock Market and the Wedge.”

 I recently read the first 10 chapters of Jude’s book and I can say it is excellent overall and well worth reading, but the conclusions are vastly different from the normal interpretations of Smoot-Hawley. Basically, Jude was tracking the reportage of the Smoot-Hawley legislation as it was winding its way through Congress. Every time the legislation experienced a setback, the stock market would rally. Every time it experienced a success, the stock market would decline. When Hoover finally signed the Smoot-Hawley tariff into law, the market took a massive dive. Thus, you have the evidence of the Smoot-Hawley tariff causing the Great Depression.

This is good as far as it goes, but it begs the question as to why the market was so concerned about the tariff to begin with. Was the market really worried about reciprocal tariffs or a decline in economic activity? It turns out that the evidence in Jude’s chapter points to a different reason:

The stock market was tracking the tariff legislation because it was worried about a bond market dislocation. This is my analysis piecing together the evidence presented in chapter 7 of Jude’s book.

 Basically, before WWI, America was the world’s biggest debtor nation, importing capital from all over the world to build and invest in the United States. During and after WWI, America became the world’s biggest creditor. Out of the national income of $30 billion, Woodrow Wilson lent $11 billion to England and France to fight WWI. After the war, America lent an additional $14.7 billion for private and public investment, a lending boom that continued to grow throughout the roaring 20’s. This means that during probably the biggest boomtime in US history up to the period, where the economy grew to $100 billion before the crash, the United States was accumulating a massive bond portfolio where a sizeable percentage of assets were concentrated in foreign bonds.

 Because the US was on a gold standard where $20 bought an ounce of gold, the only way for foreign entities to pay for their dollar-denominated debts was to sell to the United States, exchange goods for cash, and then meet the terms of their bond agreements. To guarantee that they could sell goods, gain cash and pay debts, European firms were dumping product in the United States.

The dumping was at first concentrated in the agricultural sector and it was wreaking havoc on farmers. Because farmers accounted for 25% of the population, they managed to push the Fordney-McCumber Act of 1922, a tariff of not only 34.8%, but with a Tariff Commission whose duty was to equalize production costs as a condition for any tariff removal. Yet, throughout the 1920’s, not only did the dumping continue, it moved upmarket. Wisconsin Senators, by the late 1920’s, were complaining about Belgian cement undercutting Wisconsin cement companies.

Jude’s book provides great insight into what was going on in the 1920’s American economy. Warren Harding ran on a campaign of “returning to normalcy” by repealing the high income taxes of the war years. This caused the US economy to boom. By 1925, the top marginal tax rate was reduced to 25% and the US economy was roaring along.

Unfortunately, the malfeasance of the Wilson administration led the United States to lend enormous amounts of money to the rest of the world, a practice that continued among private sector banks throughout the 1920’s. JP Morgan would lend money to Belgian cement makers that would then export government-subsidized cement to the US, sell it, and then service the bonds, which reflected in higher stock prices for JP Morgan and Belgian cement companies, but would wreak havoc on local businesses that then lobbied for tariff protection.  This process was repeated across hundreds of different industries.

The stock market was not worried that the drop in international trade would tank the US economy. International trade was small as a percentage of the US economy, roughly 4% total. But, that 4% of international trade was servicing the accumulated lending that amounted to anywhere from 30-50% of the value of the entire US economy. The tariff meant that firms would not be able to service the money lent to them by Americans and, thus, lead to massive bond defaults.

What happens to the value of company stock if the company defaults on its bonds? The stock goes to zero.

That is what the market was paying attention to and why it was reacting the way it did to the Smoot-Hawley tariff.

We can see why today tariffs will not have the same effect that they did in 1929: the US is not the world’s biggest creditor. Our debtor status means that we are not vulnerable to a bond-market dislocation. Other nations are. We can safely go back to raising tariffs and building the United States.
Of course, this also explains why creditor nations such as Germany and South Korea are so inordinately terrified of what are, in reality, very small and modest tariffs. It's not just their massive export sectors that are potentially at risk, but the huge financial Ponzi schemes that have been constructed on top of them. The various camels we call economies are overloaded with debt and there are an awful lot of things that look like straws these days.

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Blogger David-2 March 30, 2018 5:14 AM  

This analysis is very good. I liked The Way The World Works when I initially read it years ago because I thought it's analysis seemed on point (and new). But this explanation of the observed facts (stock market behavior during Smoot-Hawley's progress in the Congress) is in fact a better explanation. Thank you MP.

Blogger Rocklea Marina March 30, 2018 5:40 AM  

Okay, now I'm confused. I get the post, but aren't all countries debtors these days? Then I went to Infogalactic.

And apparently, Germany's debt clock has started going backwards and will be zeroed in 800 years. The Reich wins again.

Anonymous Anonymous March 30, 2018 6:14 AM  

"And apparently, Germany's debt clock has started going backwards and will be zeroed in 800 years."

At the rate Germany is going, there will be no Germans left to continue the trend by the end of the century. I don't think the invaders will be able to continue the German economy at the present rate.

I wonder how a Muslim built Porsche will sell.

Blogger Amy March 30, 2018 6:22 AM  

An entire high school semester of American history, rendered with perfect clarity and brevity.

Thank you for this explanation and analysis. It makes a whole lot of early twentieth century events clearer. Studying economics is like watching paint dry, but these quick explanations are enlightening and easy to follow for the layperson.

One of the many reasons I love VP is the caliber of commentary and the depth and breadth of knowledge round these parts. It could comprise its own course of supplementary studies for kids in high school and beyond.

Blogger Rocklea Marina March 30, 2018 6:31 AM  

"I wonder how a Muslim built Porsche will sell."

Sales are predicted to be, well, explosive.

Blogger Rocklea Marina March 30, 2018 6:35 AM  

And the SUV line is going to excel in people moving....and scattering.

Anonymous Anonymous March 30, 2018 6:54 AM  

Amy wrote:An entire high school semester of American history, rendered with perfect clarity and brevity.

If high school history classes presented anything near accurate history; which they don't, of course. (Though I'll allow that there's some private school or two that does.)

But I know what you mean. And you're very right. Excellent nuggets of enlightenment we receive here.

Blogger Emmett Fitz-Hume March 30, 2018 7:12 AM  


I agree. I'm one of the mid-wits who come here to be enlightened. I used to think I was a little smarter than average but I realized a few years back that was only because the sample size was so small.

Vox and some of his smarter regulars are doing the lord's work. Heck, even the Gammas who show up regularly are excellent examples, albeit examples of what not to do or say.

The revelation of the Socio-sexual heirarchy alone and its predictive ability has been one of the greatest paradigm shifts I've ever heard, second only to discovering the word of the gospel and my baptism.

Blogger Amy March 30, 2018 7:12 AM  

@Duke, I’m still remediating shortfalls in my education and working on ensuring that my kids get real educations. Things like this are important for me to understand so I can lay better foundations for them. I keep a file of these articles, posts, and any relevant comments for future reference. I was a high school teacher once, and perhaps I might put a toe in those waters again, only more informed and more convicted in my stance. Antifragile and all that.

Blogger Looking Glass March 30, 2018 7:15 AM  

It's always the Debt. "What went wrong with the economy?" With the rare exception of a volcano wiping a city off the face of the earth, it's always the Debt.

The study of the Stock Market, in the days before it was all controlled by Algos, is interesting, as it points to the massive inflation caused by the Fed coming due in all of ~15 years after the founding. It would take over a decade to dig out of the result.

Interesting note about South Korea and the Debt issue, as the government was willing to bend really, really far when Trump came calling with Steel Tariffs.

Blogger Stilicho March 30, 2018 7:20 AM  

Gold was readily exchangeable for dollars to pay the bond interest, so Wanniski's theory won't work on that basis. Where it can work is if there were no other market for cement so the Belgians had to sell in the US. Again, unlikely in the extreme. However, were the big banks who held the Belgian bonds working behind the scenes to keep Belgian cement selling to make sure that they would be paid on the bonds (perhaps because the bonds would be defaulted otherwise), then the fear of bond market dislocation-and perhaps subsequent margin calls on the holding banks when their collateral went to zero- could explain the stock market movements. Sounds quite plausible in light of what we've learned about international financial corporations as well.

Regardless, the market crash was a symptom not a cause of the great depression. The unsustainable, fragile, interconnected debt was the cause. Wanniski's theory describes how one aspect unraveled.

Blogger Azure Amaranthine March 30, 2018 7:33 AM  

"It's always the Debt. "What went wrong with the economy?" With the rare exception of a volcano wiping a city off the face of the earth, it's always the Debt."

You know what else started in ancient Babylon?

The practice of banking.

Then it proceeded to create/incentivize and subsequently victimize/annihilate every single empire since.

Mystery, Babylon the Great, all its associated mysticisms, magics, and arts. The golden empire, those to whom which does debt somehow always means profit.

Blogger Stilicho March 30, 2018 7:34 AM  

i.e. The big banks were manipulating the situation to make Belgian cement more profitable when sold in US as a means of keeping the Belgians profitable enough to keep the bond payments coming and/or making Belgians more profitable to make the value of their bonds higher (thus protecting banks from margin calls).

Blogger Looking Glass March 30, 2018 7:51 AM  

@12 Azure Amaranthine

Much of Lending, not necessarily Banking, is built around the Creation of Money, but it's not actually created. It's a Debt on the Future. There's a Theological argument in there that Factional Banking is explicitly a sin.

Anonymous Anonymous March 30, 2018 7:54 AM  

tariffs cannot be a similar concern today

there are an awful lot of things that look like straws these days.

Would not the breaking of many camel backs be a concern for the US, and therefore the tariffs also a concern, given the resulting reduction in our debtor status? Don't we rely on that status a great deal today to control other countries?


Blogger Looking Glass March 30, 2018 7:58 AM  

@13 Stilicho

And they couldn't do it without the power of the Federal Reserve.

Blogger LZ March 30, 2018 8:04 AM  

And now you know why I'm bearish on the yuan. Anyone notice HK is slowly working it's way to a potential currency crisis? Literally any day if the USDHKD does drop.

Blogger LZ March 30, 2018 8:04 AM  


Blogger Bodo Staron March 30, 2018 8:20 AM  

German debt is at around 2 Billion Euros. But there is a much more worrying number, the TARGET2. It's at almost 900 billion Euros. Germany is lending the other Euro countries the money, so that they can buy goods from us. Of course, this debt will never be repaid, so once it all comes crashing down... I have no idea what will happen then.

Blogger dienw March 30, 2018 8:26 AM  

Excellent article. I was taught that the cause of the depression was U.S. businesses were over producing to such an extent that a large surplus of goods built up and no one was buying the products; therefore, the businesses all over the U.S. went broke; of course no one explained how it is that so many businesses could make the same marketing mistake all at the same time; but then, no one asked that question.

So, why was the banking/dept connection so thoroughly ignored after the fact. The banksters are smart enough to make money on both sides of the coin and they don't need shoeshine boys to tell them which way the wind is blowing.

Blogger James Dixon March 30, 2018 8:35 AM  

> I get the post, but aren't all countries debtors these days?

I don't know of any that aren't, but there may be a few. However, there is a big difference between internal debt (i.e., bonds you sell to your own citizens) and debt to foreign people and governments.

> One of the many reasons I love VP is the caliber of commentary and the depth and breadth of knowledge round these parts.

I've stated several times that the reason I'm a regular here is that I learn things. I try to repay the favor when I can.

> The various camels we call economies are overloaded with debt and there are an awful lot of things that look like straws these days.

Straws are blown by the wind and come to rest where they will. There's a storm coming. Expect a lot of breakage.

> Of course, this debt will never be repaid, so once it all comes crashing down... I have no idea what will happen then.

The debt will be repudiated. The currency will be devalued and exchanged for a new one. There will be much pain and misery. And then the cycle will start again. People don't learn from history.

Blogger James Dixon March 30, 2018 8:38 AM  

> ...was taught that the cause of the depression was U.S. businesses were over producing to such an extent that a large surplus of goods built up and no one was buying the products...

Because no one had the money to buy their products. Because there were no jobs and the banks where people kept their money were folding left and right. It's an interconnected system.

Blogger Nate March 30, 2018 9:01 AM  

This rings so true. it reminds me of US vs Miller. People hear a blurb... and that blurb becomes the whole story.

In this... they hear "Tariffs caused the Great Depression"... and that's all they got. Not the how or why... just... tariffs did the bad thing so tariffs are bad.

With Miller... the court actually ruled that the NFA only had authority to regulate non-military firearms. But they decided that a sawed off shotgun was not military firearm... so they let the conviction stand.

Since the conviction stood... everyone thought the NFA was unaffected by Miller.. when in fact the decision gutted the NFA completely.

But the blurb is all that ever matters. We would do well to learn these lessons and always focus on controlling the blurb.

Blogger TMLutas March 30, 2018 9:01 AM  

@14 Yes, there's a good case to be made that selling yourself into bondage does not stop being sinful because it's a future's contract. The other side of the argument is that people prefer money today over money tomorrow. If you deprive them of it today and give it back to them tomorrow, you have to make things right so that they balance.

Both arguments, to this day, continue at a low level inside the Catholic Church and no doubt other faiths, though I don't know their internals.

Blogger Johnny March 30, 2018 9:09 AM  

Things have been different since the 1930's because governments have been much more willing to intervene in ways intended to effect the level of economic activity. In the previous period the the level of economic activity (the business cycle) was very plainly a debt cycle. Increased borrowing caused an expanding economy until some sector became so deeply in debt that it was not stable. When debt went bad in that area the economy would slow, the slowing economy would expand the amount of bad debt, borrowers everywhere became more reluctant to borrow, the slowing economy would expand the amount of bad debt, and the outcome was a crash both in the bond markets and the economy generally.

The 1929 stock market crash was typical of that era. The thing is, there was a lot of stock held on margin, that mandated that stockholders leave the market quickly or lose everything, and that triggered a huge stock market crash, triggered by the usual, excessive borrowed money.

I haven't looked at data, but just going by what seems obvious, we seem to be in the biggest debt expansion of all time. And it is global, not national, in scope. If we get a blowup it is going to be a world beater.


What seems apparent to me is that our tariff policy is driven primarily by domestic political considerations. Foreign trade is best for the biggest companies because they have the easiest time exerting power in more than one country. Thus our current low tariff policy mainly helps those large institutions that are global.

Nothing changes. It used to be domestic, internal partisan interests that caused high tariffs. And that has always been helping one domestic interest at the expense of another.

A side consideration is that it used to be a lot tougher for governments to tax "internally." Thus they depended on tariffs more in the past and big government folk were also high tariff folk.

Blogger Rocklea Marina March 30, 2018 9:20 AM  

"It's a Debt on the Future"

It's also a really neat way of making babies. Unfortunately, minus tariffs and trade barriers, that's been offshored as well. The more efficient that manufacturing and the division of labor becomes, the more certain collapse. It would be better, to have to work for a year to afford to buy a flat screen TV, than a day. Debt, when it can't be paid, is also a way of conserving resources. It doesn't seem to serve that function anymore, more a Tontine now, I think.

Blogger pyrrhus March 30, 2018 9:24 AM  

@19 Yes, Germany is in the same position today as the US in 1929.
It has loaned huge amounts of money to other countries to support its largely export based economy. But it has strangled the customers' economies in the process.....the debt will not be paid.

Blogger SciVo March 30, 2018 9:32 AM  

Stilicho wrote:Gold was readily exchangeable for dollars to pay the bond interest, so Wanniski's theory won't work on that basis.

But if another country just paid in gold, wouldn't its own currency lose credibility without a large store of gold to back it? I don't think they were actually fungible in a practical way, not at the scale that we're discussing. They needed dollars.

Blogger Looking Glass March 30, 2018 9:34 AM  

@20 dienw

Maybe the most important insight we've learned from the Internet, with regards to History, is "write your own history books". A lot of groups from the beginning of the mass publishing era (so about ~1830) on figured out Propaganda works on History as well.

@27 pyrrhus

Germany has, straight up, made Greece a possession at this point.

Blogger rumpole5 March 30, 2018 9:38 AM  

I would like to see a discussion of the economic effect of domestic shale oil production in the US. The effect of all the money formerly spent on imported oil and now staying here has to be huge. If we could get off oil by increased use of hybrid cars and trucks, and electric vehicles powered by floride atomic power plants, then we could sell our oil abroad. I read that Russia is supporting our SJW anti nuclear power wackos, so they must understand what would happen if the USA were to go nuclear for our electric and transport.

Blogger Looking Glass March 30, 2018 10:00 AM  

@30 rumpole5

Much of the anti-nuclear movement can be traced back to the reality that it actually works, and iterative improvements would drastically limit the nuclear waste. The USA could never go "off" oil, a lot still goes into the manufacture of many things, but a large increase in nuclear power would be a good thing.

Main thing Shale Oil brings is a significant drop off in pressure to find Oil in other places, thus changing a lot of the calculations people are making at the strategic level. It also puts advanced R&D spending into the States itself, along with more infrastructure to support both R&D and distribution. Basically, roads, rails & pipes that lead to a lot of wealth going to the areas that the oil comes from, which is better to be from the States than some from horribly corrupt 3rd World location.

Blogger LZ March 30, 2018 10:25 AM  

China thinks Trump is worried about Made in China 2025, China's plan to become a major competitor in industries such as biotech, aircraft and advanced materials. Whether they are right about that or not, it reveals that they think Trump should be worried about it. What is Trump Afraid Of? China Answers: Made in China 2025

Blogger Looking Glass March 30, 2018 10:38 AM  

@32 罗臻

Considering it'd be done mostly by stealing American tech, we'd be "concerned". At some level, we aren't that concerned about Chinese Tech because China will never be able to churn out enough Engineers to make up for the significantly lower quality. Right along with the low quality standards in research & manufacturing. The issue is preventing China from stealing all of the R&D work done by others, since they'll never really be able to do it themselves at Western rates.

Main issue is that China bribed enough American officials to be allowed to pillage entire industries via state subsidization & massive price undercutting, but China is utterly dependent upon access to the US Market. This gives Trump all of the leverage to normalize the Trade issues. The ChiComs are left to decide how they want to play the situation, as Trump has all of the leverage, but he's not out to destroy them over it. If they play things straight, it'll be a slow process, but, if they don't, Trump will drop the hammer.

Blogger Azimus March 30, 2018 10:52 AM  

On the question of debt over-burdening the economy: how are the Greeks doing these days? Since the appointment of their President Goldman Sachs, I haven't heard much.

Blogger Looking Glass March 30, 2018 11:19 AM  

@34 Azimus

The beatings are continuing, but morale stubbornly refuses to improve.

Blogger LZ March 30, 2018 12:17 PM  

Considering it'd be done mostly by stealing American tech, we'd be "concerned".

I'm not sure how much stealing of technology is involved anymore. Not that it isn't occurring, but that they have enough to compete now. In some industries, China is innovating faster than the West. In mobile phones, they begin developing products before the next generation of chips are ready. They also don't have meetings to make decisions, they start developing immediately.

"I have heard from multiple people familiar with how Chinese companies operate that their prevailing business culture is one of utmost speed. Decisions that would take American and European companies weeks, if not months, turn into action and engineering prototypes within days in China. That's partially down to the shorter physical distance between the decision makers and the manufacturing facilities, but more than that, it's an expression of a particular Chinese version of the "move fast and break stuff" attitude endorsed in Silicon Valley.

That distance between manufacturers and research/decision makers is exactly what "free traders" don't understand. China gets in, and on top of having the proximity (manufacturing) advantage they also have a growing cultural advantage in business. China is not some weak competitor anymore. SJWs are as serious a threat to American competitiveness as idiotic free trade policies.

Blogger Audacity17 March 30, 2018 12:41 PM  

Fantastic analysis. I need to pull that book off my shelf and reread.

Blogger Dirk Manly March 30, 2018 12:42 PM  

"I wonder how a Muslim built Porsche will sell.

If you think that's bad, consider how a Muslim-DESIGNED Porsche will sell.

Engineer: Look at new design for a front-suspension which uses 70% less metal. Do you think it will perform better?

Engineer 2: Insh-allah!*

(*) Insh-Allah = "If Allah is willing" -- Muslim-speak for "I take absolutely NO responsibility for what will happen."

Never accept ANY product designed or built by a fatalist. They honestly believe that their own actions have no influence on the results of anything.

Blogger Looking Glass March 30, 2018 12:57 PM  

@36 罗臻

The current Chinese Mobile Development is, "Apple release, everyone copy!". This is why Apple does releases so close to their announcement. However, the important bits of a phone (SoC, Software) are some combination of American and Korean developed.

The one thing China has going for it is Foxconn, which is probably the best run Chinese company that has major Western presence. Though they also now charge at similar rates to what they would in the West, which is exactly why they're opening up a huge facility in Wisconsin.

The distance used to not be an issue, as America still manufacturers a massive amount, but the pillaging of industries by our Elites for their benefit (and shipping them to other countries) removed that in many industries. Though for electronics, you really mean Taiwan more than mainland China, but mainland China is already starting to show signs of no longer being a "low cost" manufacturer.

As for the theft of IP & R&D, that's what the Joint-Ventures are far. It's one thing to force them to setup shop in the country, as the USA did to Japan with cars, but China takes the approach of using the State Intelligence agencies to steal as much information as possible. The "thousand leaves on the wind" approach to Industrial Espionage has worked, but it's eventually going to get a backlash as certain areas become more expensive to research in.

Blogger DonReynolds March 30, 2018 2:21 PM  

In case no one else noticed it, there was a long commercial advertisement by Davos on YouTube late last night....the "World Economic Forum"...and the only speaker was Xi Jinping (General Secretary of the Chinese Communist Party, Chairman of the Central Military Commission, and President of the Peoples Republic of China), apparently in a life-time appointment. Speaking in English, he appealed to the people of the world to reject protectionism, which he described as shutting yourself in a dark room. (It may keep out the wind and rain, but it also keeps out the light and fresh air.) He invited everyone to join with China in opposing protectionism, saying that China has the courage to swim in the ocean rather than drown. It was very nicely done. I am sure all the Leftists cheered on their couch as the autocrat of China made a direct appeal to the US citizens to oppose their own president. Of course, any similar appeals by Trump would be considered an act of war in Red China.

What Mr. Janping did not mention was that Red China was ALREADY heavily protectionist (with tarrifs) and had profited heavily from the scheme for many decades. He did not mention that a Chevy Camero automobile costs three times as much in China as it costs in the USA....all because of import tariffs. Japan is a relative bargain, by comparison, where a Camero only costs twice as much because of import tarrifs. No doubt there is a black market (where possible) of Chinese buyers purchasing the US auto in Japan, in order to save money, in the same way that Americans used to buy European cars and ship them home.

The basic problem with trade squabbles between countries is.....there is no one interested in squabbling on behalf of the USA. OUR "OWN" multinational corporations are even more likely to outsource what remains of domestic production to cheap labor countries rather than permit foreign corporations to hire the same cheap foreign labor to make the same product instead.

I am not even for sure what multinational corporations would be considered "American" anymore. Back when I saw "Buy American" on so many pickup trucks, the ONLY pickup trucks made in the USA were Volkswagen and Nissan. The government of France bought the consumer electronics divisions of RCA and General Electric years ago. Fiat (Italy) owns Chrysler Corporation. Whirlpool appliances are made in Mexico. So I am not sure what is actually being saved besides American brand names, which are sold and licensed all over the world. Of course the biggest LIAR in the world (that still claims to "Buy American", and "always did") is Wal-Mart. They became the world's biggest retailer by selling cheap Asian goods for decades and no amount of banners and US flag signs are going to change that.

Blogger Azure Amaranthine March 30, 2018 3:56 PM  

"Much of Lending, not necessarily Banking, is built around the Creation of Money, but it's not actually created. It's a Debt on the Future. There's a Theological argument in there that Factional Banking is explicitly a sin."

You don't even have to go into theology, it meets the same criterion that I've been hypothesizing fits all sins.

Taking pleasure in the present at the price of the future.

To expound, everything that is good is (also) good because it leads to further good things. Things that do not lead to further good things after themselves, but rather to evil things, are themselves evil things.

Good things serve life, evil things serve death.

Blogger CM April 05, 2018 8:47 AM  

I really want to spread this theory everywhere, but am not an authority on it. Could the writer offer some references?

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