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ECONOMICS AND ESOTERICA FOR A NEW PARADIGM

Archive for August 2010

Uncle Scam

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from Casey’s Daily Despatch
Posted originally Aug 25, 2010

As the fiat money monsters are brought to bay, the price of gold can really only go higher. Overly confident? I don’t think so.

THAT’S BECAUSE WHEN PEOPLE LOSE FAITH IN A CURRENCY, AS THEY WILL BEFORE THIS CRISIS is over, they unfailingly rush to exchange the unbacked paper money for something more tangible. While pretty much anything with an intrinsic value will do – real estate, antique cars, old masters – for all the reasons that Aristotle enunciated, gold is viewed in a class of its own, and so has an unblemished history as a universally accepted store of value. And, thanks to its portability, divisibility, durability, and consistency, it has also always been looked upon as a convenient form of money.

The most pressing macro-observation I’d like to make – an observation that’s critical for investors to understand (though most don’t or won’t) – is that the tectonic monetary shift now underway is truly global in nature. And it’s not going to be over until a new and markedly different monetary regime has been implemented.

It’s like this: Throughout history governments have experimented with fiat money. They have done so because the benefits to the government and the insiders that invariably latch on to power are just so damn attractive. The Romans did it by debasing their coinage, but the modern version goes one better by completely disconnecting a currency from any value whatsoever, and then wantonly printing as politically motivated needs or wants arise.

The latest fiat system kicked off in earnest in 1944 when Uncle Scam, in Bretton Woods, NH, got the leaders of the world’s war-weary countries to agree to accept the U.S. dollar as their reserve currency. In return, the U.S. agreed that the currency notes it would subsequently issue would be convertible into a corresponding amount of gold. Then Tricky Nixon came along in 1971 and canceled the right of the bearer to swap the notes for gold. Overnight, the link between the currency and anything tangible was lost.

That, of course, opened the door to all subsequent politicians to engage in the whole print, print, print thing. The keystone asset of the former system – gold – soon became a distant memory for the new crop of central bankers and, remarkably, to the bearers of the notes.

For any number of reasons, most of which related to the illusion of increasing prosperity, people simply stopped paying attention to what Uncle Scam was up to. Of course, that illusion was largely based on the increase in nominal wealth: if one year you’re worth $100,000 and three years later you are worth $150,000, the tendency is to feel richer even if your actual purchasing power has gone up by far less or even has declined due to a debasement of the currency.

Today’s dollar is worth just 18 cents in 1971 terms. But all scams must, in time, come to an end. And that’s what’s going on now. It ends here. Before this is over, the current iteration of the U.S. dollar – the vaporous construct with no actual value – will lose its value as money.

Which brings me to an important nuance in this discussion. Most failed fiat money experiments involve a single currency. The most convenient recent example is provided by Mugabe’s Zimbabwe. Rather than actually supporting the creation of marketable goods and services in what he sees as his private fiefdom, he took the low road of energetically abusing his fiat currency to the vanishing point.

In a situation such as that, the local citizenry suffers – as well as anyone foolish enough to be holding bonds denominated in the debased currency. But that’s about it. In the current scenario, the keystone of the entire global monetary system is the U.S. dollar. Which means that the primary reserve holdings of virtually all the world’s significant central banks are at risk of going up in smoke.

And it’s even worse that, because the dollar is also the number one trade currency – which means corporations around the world are sitting on huge holdings or are dependent on commercial contracts denominated in dollars. And even that’s not the end of it. Because Uncle Scam has long served as a role model to other world leaders, those leaders have enthusiastically followed suit and universally launched fiat monetary systems of their own. It’s bad enough that the world’s reserve currency is a fiction – but the situation becomes really dire when you accept as fact that all the world’s currencies are a fiction.

Man, we’re in a lot of trouble.

There will be NO double dip…

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by Egon von Greyerz
Matterhorn Asset Management
Posted originally at August 16th, 2010

NO, THERE WILL BE NO DOUBLE DIP. IT WILL BE A LOT WORSE. THE WORLD WILL SOON GO INTO AN ACCELERATED and precipitous decline which will make the 2007 to early 2009 downturn seem like a walk in the park. The world financial system has temporarily been on life support by trillions of printed dollars that governments call money. But the effect of this massive money printing is ephemeral since it is not possible to save a world economy built on worthless paper by creating more of the same. Nevertheless, governments will continue to print since this is the only remedy they know. Therefore, we are soon likely to enter a phase of money printing of a magnitude that the world has never experienced.  But this will not save the Western World which is likely to go in to a decline lasting at least 20 years but most probably a lot longer.

The End of an Era
The hyperinflationary depression that many western countries, including the US and the UK, will experience is likely to mark the end of an era that has lasted over 200 years since the industrial revolution.  A major part of the growth in the last 100 years and especially in the last 40 years has been built on an unsustainable build-up of debt levels. These debt levels will continue to swell for another few years until the coming hyperinflation in the West leads to a destruction of real asset values and a debt implosion.

In the last 100 years the Western world has experienced a historically unprecedented growth in production, in inventions and technical developments leading to a major increase in the standard of living. During the same period government debt, as well as private debt have grown exponentially leading to a major increase in inflation compared to previous centuries.

Until the early 1970s the growth in credit to GDP had been going up gradually since the creation of the Fed in 1913. But from 1971 when Nixon abolished gold backing of the dollar, virtually all of the growth in the Western world has come from the massive increase in credit rather than from real growth of the economy. The US consumer price index was stable for 200 years until the early 1900s. From 1971 to 2010 CPI went up by almost 500%. The reason for this is uncontrolled credit creation and money printing. Total US debt went from $9 trillion in 1971 to $59 trillion today and this excludes unfunded liabilities of anywhere from $70 to $110 trillion. US nominal GDP went from $1.1 trillion to $14.5 trillion between 1971 and 2010.  So it has taken an increase in borrowings of $50 trillion to produce an increase in annual GDP of $13 trillion over a 40 year period. Without this massive increase in debt, the US would probably have had negative growth for most of the last 39 years.

Total US debt to GDP is now 380% and is likely to escalate substantially.

The coming hyperinflationary depression and the credit and asset implosion that is likely to follow will most probably lead to the end of a 200 year era of growth for the Western world. If only the excesses from the 1970s were corrected we might have a circa 20 year decline. But more likely we will correct the era all the way back from the industrial revolution in the 18th century and this could take 100 years or more.

So after the tumultuous and very painful times that we are likely to experience in the next few years, the West will have a sustained period of decline. All the excesses in the economy and in society must be unwound. These abnormal and unreal excesses are not just corporate executives, bankers, hedge fund managers or sportsmen earning $10s to $100s of millions but also a total collapse of ethical and moral values as well as a breakdown of the family as the kernel of society.

Most people believe and hope that this major trend change could not happen today with all the measures that governments have at their disposal. But very few people comprehend that it is precisely the government interference, controls and regulations as well as money printing that have created the problems in the first place. Power corrupts, and the more pressure a government is under the more they intervene. Because they believe that their interference in the economy will save the country – read Obama, or the world – read Gordon Brown. Little do they understand that each interference, each regulation or each dollar or pound or Euro printed will exacerbate the problems of the economy manifold.

Governments now have two options; continue to spend and print money like the US or introduce austerity programmes like Europe. Whichever way they chose will not matter since they have reached the point of no return. The economy of the West cannot be saved by any means. But governments both in the US and in Europe will still apply the only method they know which is to print money.

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The death of cash? All over the world governments are banning large cash transactions

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from The Economic Collapse

http://theeconomiccollapseblog.com/archives/the-death-of-cash-all-over-the-world-governments-are-banning-large-cash-transactions

ARE WE WITNESSING THE SLOW BUT SURE DEATH OF CASH IN THIS GENERATION?  Is a truly cashless society on the horizon? Legislation currently pending in the Mexican legislature would ban a vast array of large cash transactions, but the truth is that Mexico is far from alone in trying to restrict cash. All over the world, governments are either placing stringent reporting requirements on large cash transactions or they are banning them altogether. We are being told that such measures are needed to battle illegal drug traffic, to catch tax evaders and to fight the war on terror. But are we rapidly getting to the point where we will have no financial privacy left whatsoever? Should we just accept that we have entered a time when the government will watch, track and trace all financial transactions? Is it inevitable that at some point in the near future ALL transactions will go through the banking system in one form or another (check, credit card, debit card, etc.)?

The truth is that we now live at a time when people who use large amounts of cash are looked upon with suspicion. In fact, authorities in many countries are taught that anyone involved in a large expenditure of cash is trying to hide something and is probably a criminal. And yes, a lot of criminals do use cash, but millions upon millions of normal, law-abiding citizens simply prefer to use cash as well. Should we take the freedom to use cash away from the rest of us just because a small minority abuses it?

Unfortunately, the freedom to use cash is being slowly stripped away from us in an increasingly large number of countries. In fact, as countries like Mexico “tighten the noose” around big-ticket cash purchases, our freedom to use cash is going to erode rather rapidly. The following is a summary of some of the very tight restrictions being placed on large cash transactions around the globe right now….

Mexico
In Mexico, a bill before the legislature would completely ban the purchase of real estate in cash. In addition, the new law would ban anyone from spending more than MXN 100,000 (about $7,700) in cash on vehicles, boats, airplanes and luxury goods. $7,700 is not a very high limit, and this legislation has some real teeth to it.  Anyone violating this law would face up to 15 years in prison.

Greece
In Europe, some of the “austerity packages” being introduced in various European nations include very severe restrictions on the use of cash. In Greece, all cash transactions above 1,500 euros are being banned starting next year.  The following is a comment by Greek Finance Minister George Papaconstantinou at a press conference discussing the new austerity measures as reported by Reuters….

“From 1. Jan. 2011, every transaction above 1,500 euros between natural persons and businesses, or between businesses, will not be considered legal if it is done in cash. Transactions will have to be done through debit or credit cards”

Italy
Even Italy has gotten into the act.  As part of Italy’s new “austerity measures”, all cash transactions over 5,000 euros will be banned.  It is said this is being done to crack down on tax evasion, but even if this is being done to take down the mafia this is still quite severe.

The United States
The U.S. government has not banned any large cash transactions, and hopefully it will not do so any time soon, but it sure has burdened large cash transactions with some heavy-duty reporting requirements. For example, your bank is required to file a currency transaction report with the government for every deposit, withdrawal or exchange over $10,000 in cash. Not only that, but if a bank “knows, suspects, or has reason to suspect” that a transaction involving at least $5,000 is “suspicious”, then another report must be filled out.   This second type of report is known as a suspicious activity report, and it is also filed with the government.

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The equity bulls were salivating…

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by Dan Norcini
Excerpt from “Hourly Action In Gold From Trader Dan”
Posted on Jim Sinclair’s jsmineset.com
Posted originally August 27, 2010

THE EQUITY BULLS WERE SALIVATING OVER THE PROSPECT OF WATCHING ANOTHER EPISODE of “let’s take the shorts out and slaughter them all” as the world eagerly awaited the giving of the law from Mt. Jackson Hole. With claps of thunder in the background and with flashes of lightning interrupting his keen observations upon the state of the US economy, (some swear that they saw the angelic host), the prophet of Monetary religion sounded forth his prognostications and then looked upon his handiwork. He then saw that his work was good and sat down and rested on the seventh day.

Yessiree folks – Chairman Ben uttered his incantations making all well with the turbulent world and bringing light and order to darkness and chaos. I do not know about you, but I feel so much better today after Ben told us all that he is going to make sure that the recovery is safeguarded from harm. When you combine that with news that instead of the economy slowing from a growth rate of 2.4% down to 1.3% as expected, it only slowed down to a 1.6% growth rate, well, it just doesn’t get any better does it?

I mean, the first thing I immediately thought of is, “Why don’t I rush out and buy lots of copper because things are really getting better in a hurry?”. Already forgotten are the abysmal housing stats of less than a week and the further rise in foreclosures and delinguencies, not to mention the clogged condition of the bankruptcy courts. Chairman Ben has whisked all of that out of the minds of investors with one mere pronouncement.

The fact that it has taken gazillions of conjured-into-existence-out-of-no-where dollars (some call that stimulus) to produce this pitiful growth rate number for the quarter, seems to have escaped the attention of the equity perma bulls who have yet to come to grips with the consequences of all of this. My own view is that it should be a relatively easy matter to get that growth rate up to double the figure given us. All we would need to do to get to 3.2% growth rate is to print twice the number of Dollars and double the rate of government indebtedness. That should be good for another 100 point rally in the Dow. If anyone knows the number that comes after quadrillion, please send that on to Ben and company. They are going to more than likely be needing it.

Seriously, it is hard to hide my contempt of this disgusting scene. This band of fools somehow believes that prosperity can be created by printing money without any consequences whatsoever. The US is sinking under a mountain of indebtedness and the Fed chairman tells us that it stands ready to engage in even more QE should the need arise. Flash to Ben – the need shall arise. China is already balking at buying US debt meaning you are going to have to buy it all yourself Ben.

What we are witnessing is the death throes of a debt-based monetary system of which those presiding over it apparently have come to believe their own delusions. The US public is learning what our grandfathers learned as a result of the Great Depression – Debt is something to be avoided – not heaped up and accumulated. That the borrower becomes the lender’s slave and that living beyond ones own means is inherently foolish and dangerous. That saddling one’s children and grandchildren with a debt burden that they did not create is immoral and wicked. Yet, all of this is lost upon the monetary lords who have their noses so close to the ground sniffing out the scent that they cannot see the path ahead leads off the edge of an abyss from which there is no escape. Or perhaps they do see and are attempting to secure their own parachutes before leading the rest of the masses over the edge.

I repeat – if lasting prosperity could be created by printing money and giving it away, previous generations that were wiser and more frugal than ours would long ago have stumbled upon this axiom.

That brings us to the war on gold. I am still amazed that after all these years and notwithstanding all the evidence to the contrary, there are still those obtuse enough to insist that there are no official sector attempts to manage or stem the rise in the price of gold. Gold is the only currency that these debasement thieves cannot pollute by conjuring more of it into existence. It rises when distrust of paper currencies is high and confidence in the ability of those who supposedly manage monetary affairs wanes. Thus it is and always will be in direct competition with unbacked fiat currencies.

Our money masters hate the yellow metal because its rise mocks their absurd assertions and debunks their claims of being able to “manage the economy”. It strikes, dagger-like, at the very hubris of these elitists who think that they are wiser than the collective judgment of the entire market, they alone possessing such keen insight into the nature of these matters that we should entrust our financial health to their hands. Imagine the conceit of a few men who think that by pulling on this lever or pushing on this button, that they can assure continuous prosperity and lasting wealth for all. Every generation considers itself wiser than the previous one which is why history does indeed repeat itself. Arrogant men never learn for they lack the one thing essential to make one truly wise – the ability to admit that we do not know all things nor that we mere mortals can always fix what ails us.

Hyperinflation, Part II: What It Will Look Like

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by Gonzalo Lira
Posted originally August 26, 2010

I usually don’t do follow-up pieces to any of my posts. But my recent longish piece, describing how hyperinflation might happen in the United States, clearly struck a nerve. It was a long, boring, snowy piece of macro-economic policy speculation, discussing Treasury yields, Federal Reserve Board monetary reaction, and the difference between inflation and hyperinflation—but considering the traffic it generated, I might as well been discussing relative breast size in the porn industry. With pictures.

To go back to Part 1 of this posting, see https://quantumpranx.wordpress.com/2010/08/24/how-hyperinflation-will-happen/#more-3283

ESSENTIALLY, I ARGUED THAT TREASURY BONDS ARE THE NEW AND IMPROVED TOXIC ASSETS. I argued that, if there was a run on Treasuries, the Federal Reserve—in its anti-deflationary zeal, and its efforts to prop up bond market prices—would over-react, and set off a run on commodities. This, I argued, would trigger hyperinflation. The disproportionate attention my post garnered is indicative of people’s current fears. As I’ve said before, people aren’t blind or stupid, even if they often act that way. People are worried—they’re worried about the current state of affairs: Massive quantitative easing, toxic assets replaced by the full faith and credit of the U.S. government in the shape of Treasuries, fiscal debt which cannot possibly be repaid, a second leg down in the Global Depression that seems endless and only getting worse—people are scared.

Many readers gave me quite a bit of useful feedback, critiques, suggestions and comments on the piece—clearly, what I was discussing touched on a deeply felt concern. However, there were two issues that many readers had a hard time wrapping their minds around, with regards to a hyperinflationary event: The first was, Where does all the money come from, for hyperinflation to happen? The question wasn’t put as baldly as that—it was wrapped up in sophisticated discussions about M1, M2 and M3 money supply, as well as clever talk about the velocity of money—the acceleration of money—the anti-lock brakes on money. There were even equations thrown around, for good measure.

But stripped of all the high-falutin’ language, the question was, “Where’s all the dough gonna come from?” After all, as we know from our history books, hyperinflation involves people hoisting bundles and bundles of high-denomination bills which aren’t worth a damn, and tossing them into the chimney—’cause the bundles of cash are cheaper than firewood. If the dollar were to crash, where would all these bundles of $100 bills come from?
 
The second question was, Why will commodities rise, while equities, real estate and other assets fall? In other words, if there is an old fashioned run on a currency—in this case, the dollar, the world’s reserve currency—why would people get out of the dollar into commodities only, rather than into equities and real estate and other assets?

In this post, I’m going to address both of these issues.
Apart from what happened with the Weimar Republic in the 1920’s, advanced Western economies have no experience with hyperinflation. (I actually think that the high inflation that struck the dollar in the 1970’s, and which was successfully choked off by Paul Volcker, was in fact an incipient bout of commodity-driven hyperinflation—but that’s for some other time.) Though there were plenty of hyperinflationary events in the XIX century and before, after the Weimar experience, the advanced economies learned their lesson—and learned it so well, in fact, that it’s been forgotten.

However, my personal history gives me a slight edge in this discussion: During the period 1970–’73, Chile experienced hyperinflation, brought about by the failed and corrupt policies of Salvador Allende and his Popular Unity Government. Though I was too young to experience it first hand, my family and some of my older friends have vivid memories of the Allende period—vivid memories that are actually closer to nightmares. The causes of Chile’s hyperinflation forty years ago were vastly different from what I believe will cause American hyperinflation now. But a slight detour through this history is useful to our current predicament.

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Bove: Financial Reform will leave 10 million people without bank services

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by Dan Weil
Originally posted 15 July 2010

TOP BANKING ANALYST DICK BOVE WARNS THAT THE financial reform bill, which is poised to become law, will cost at least ten million Americans their banking services.
That is because the financial penalties the bill imposes on banks will be passed along to their customers as fees. And that means many people won’t be able to afford to use a bank, he told CNBC.

Congress late Thursday sent legislation to President Barack Obama that imposes sweeping new regulations on Wall Street and creates new protections for millions of consumers. The Senate’s 60-39 vote came nearly two years after a financial crisis knocked the economy to its knees.

At a whopping 2,300 pages, the legislation is designed to rein in big banks and protect consumers in hopes of averting a repeat of the 2008 financial crisis. Its ultimate impact, however, will depend on the government regulators assigned to implement it, the Associated Press reported.

The bill places limits on leverage, proprietary trading and investments in private equity and hedge funds for the banks. It also creates a consumer protection agency to oversee areas such a mortgage lending and student loans.
All of this will cost banks money, Bove points out. And they will respond by passing on fees to their customers, he warns.

But many of the customers won’t be able to afford these fees, and that’s why at least ten million will no longer have access to a bank, the Rochdale Securities analyst said.
But not everyone has a dire view of the financial reform bill.
Former Treasury Secretary Henry Paulson sees plenty to like in it and wishes it was in place when the financial crisis began during his tenure in 2007-08.

The bill’s most important provision may be the one setting up a systemic risk council, he told The New York Times. The council would enable government officials to share information and close troubled institutions when the system is at risk.
If that rule had been in place when he was in office, “some things would hopefully have been identified earlier,” Paulson said.

© Moneynews

Written by aurick

27/08/2010 at 11:00 pm

“Democrats have launched America on the most reckless policy experiment in its history”

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by Kevin Hassett
Originally posted August 04, 2010

From Bloomberg: One of the more illuminating remarks during the health-care debate in Congress came when House Speaker Nancy Pelosi told an audience that Democrats would “pass the bill so you can find out what’s in it, away from the fog of controversy.”

THAT REMARK CAPTURED THE TRUTH THAT, WHILE MANY AMERICANS have a vague sense that something bad is happening to their health care, few, if any, understand exactly what the law does. To fill this vacuum, Representative Kevin Brady of Texas, the top House Republican on the Joint Economic Committee, asked his staff to prepare a study of the law, including a flow chart that illustrates how the major provisions will work.

The result, made public July 28, provides citizens with a preview of the impact the health-care overhaul will have on their lives. It’s a terrifying road map that shows Democrats have launched America on the most reckless policy experiment in its history, the economic equivalent of the Bay of Pigs invasion.

Before discussing what the law means for you, we have to look at what it does to government. That’s where the chart comes in handy. It includes the new fees, bureaucracies and programs and connects them into an organizational chart that accounts for the existing structure. It’s so carefully documented that a line connecting two structures cites the legislative language that created the link.

Ornate System
This clearly is a candidate for the most disorganized organizational chart ever. It shows that the health system is complex, yes, but also ornate. The new law creates 68 grant programs, 47 bureaucratic entities, 29 demonstration or pilot programs, six regulatory systems, six compliance standards, and two entitlements.

Getting that massive enterprise up and running will be next to impossible. So Democrats streamlined the process by granting Health and Human Services Secretary Kathleen Sebelius the authority to make judgments that can’t be challenged either administratively or through the courts. This monarchical protection from challenges is extended as well to the development of new patient-care models under Obama’s controversial recess appointment, Donald Berwick, whom Republicans are calling the rationer-in-chief. Berwick will run the Centers for Medicare and Medicaid Services, where he can experiment with ways to use administrative fiat to move our system toward the socialized medicine of Europe, which he has, at times, embraced.

Closer to Home
A sprawling, complex bureaucracy has been set up that will have almost absolute power to dictate terms for participating in the health-care system. That’s what the law does to government. What it does to you is worse.

Based on the administration’s own numbers, as many as 117 million people might have to change their health plans by 2013 as their employer-provided coverage loses its grandfathered status and becomes subject to the new Obamacare mandates.

Those mandates also might make your health care more expensive. The Congressional Budget Office predicts that premiums for a small number of families who buy their insurance privately will rise by as much as $2,100. The central Obamacare mechanism for increasing insurance coverage is an expansion of the Medicaid program. Of the 30 million new people covered, 16 million will be enrolled in Medicaid. And you could end up in the program whether you want it or not. The bill states that people who apply for coverage through the new exchanges or who apply for premium-subsidy credits will automatically be enrolled in Medicaid if they qualify.

Hurting the Elderly
To pay for this expansion, the bill takes $529 billion from Medicare, with roughly 39 percent of the cut coming from the Medicare Advantage program. This represents a large transfer of resources, sacrificing the care of the elderly in order to increase the Medicaid rolls.

For all this supposed reform, you, the American taxpayer, can expect a bill to the tune of $569 billion.

Front and center among the new taxes is the 40 percent excise tax on those lucky people with so-called Cadillac health plans. The higher insurance costs that are driven by the government mandates will push many more ordinary plans into Cadillac territory. If the idea of taxing people with coverage deemed too good doesn’t bother you, maybe the new 3.8 percent tax on investment income will. That will apply even to a small number of home sales, those that generate $250,000 in profit for an individual or $500,000 for a married couple.

In vivid color and detail, Congressman Brady’s chart captures the huge expansion of government coming under Obamacare. Harder to show on paper is the pain it will cause.

Kevin Hassett, director of economic-policy studies at the American Enterprise Institute, is a Bloomberg News columnist. He was an adviser to Republican Senator John McCain in the 2008 presidential election. The opinions expressed are his own.

Written by aurick

27/08/2010 at 10:29 pm