WatchPoliticians, economists, private citizens, public and private unions all want to have highly paid jobs. Not many such jobs exist. Why not these folks focus on cutting down the cost of living? For instance, food is damn cheap in the states. In countries like India, those in Africa, majority of their earnings go to the food. In the states, majority of it goes to paying rent (mortgage), health insurance, etc.
Manufacturing jobs are not coming back: even Foxconn in China is replacing humans with robots. JC Penney is replacing cashiers with self-check out counters. Big expense items for any company is labor and their health insurance. Companies, in order to beat the competition, find creative ways to cut down these expenses.
Why don't academics, thinktanks, politicians, economists, focus on CUTTING down the cost of living? Why waste time on generating highly paid jobs, only to have these wages taken away by rentiers?
What do you say?
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bgamall4 says
bgamall4, we have swallowed many misconceptions sold by both Austrians (like mish) and mainstream economists about what money is, how it is created, how it flows, etc.
Banks can lend without any reserves (here, you need to study horizontal and vertical transactions). Banks are not lending not because of two reasons.
1. They are not finding creditworthy folks and firms. For instance, Google, Apple, etc, don't need any frigging money from banks to lend. And banks don't wanna take risk by lending out to Raindoctor, Inc, which wanna sell weight loss drugs in Oakland and East Palo Alto. If you read the evolution of Private Equity and/or LBO, it is a child of junkbonds (remember our Mitt Romney raised money through Junk bonds with help from Mike Milken). Junk bonds came into the picture because banks don't wanna lend to risky firms; however, healthy firms don't need banks since they can raise money in the market or since they can use their earnings to grow (in fact, 40 percent of firms expansion is funded by earning--thats the recent statistics). Venture Capital is for new firms; private equity for junk companies and for raiders.
2. They don't wanna take risk. They can risk by lending $5M to my company and ideas. They can even charge me 10 percent. But the problem is the chance of making profit is very slim: in fact, they will end up writing off the loan they give me. So, in this scenario, their capitals get depleted.
When banks lends you $100K, two things happen: (a) they add $100K to their assets; (b) they add $100K to their liabilities. +100K-100K = 0. They don't need any reserves. In fact, I heard, Canadian banks dont have any reserve requirements. Banks need to keep some capital for asset losses (like when they write off loans: here they use dirty tricks).
Read these:
http://bilbo.economicoutlook.net/blog/?p=332
http://bilbo.economicoutlook.net/blog/?p=352
http://bilbo.economicoutlook.net/blog/?p=381
http://bilbo.economicoutlook.net/blog/?p=20536
The other myth sold is: govt needs to sell bonds to finance its deficits. It is empirically false. I was fooled by mainstream economists (both left and right) and by Austrians like mish shedlock.
Read those four posts and this one as well
http://www.nakedcapitalism.com/2012/04/scott-fullwiler-krugmans-flashing-neon-sign.html
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raindoctor says
I am not an Austrian but I thought Mish agreed with what you say. I don't know if he is a true libertarian. Please advise.
Also, we see in Europe that countries must have banks buying bonds of the countries whose interest rates are exploding.
But regardless, do you agree that speculation is being enhanced by excess reserves, or where is the money coming from to do so?
BTW, I agree that inflation is not a result of this massive excess reserve growth.
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bgamall4 says
Yeah, he is a true libertarian. He thinks that deficits are funded by borrowing. That's not how it really works. Treasury sales of bonds or open market operations--etc are meant to target interest rates (short term, ones). Fed can't control the aggregate demand, nor can it increase the lending. Treasury can spend without issuing long term t-bonds: in fact, one way to euthanize rentier class is to stop selling long-term t-notes and retire existing long-term t-notes. For more on this, you can read Bill Mitchell's works and blogs--I have just started unlearning the crap sold by mish about deficits.
European crisis has to do with Euro. If PIIGS countries, and France had their own currency like UK, they wound't be this situation. PIIGS are not sovereigns, anymore; banksters are bankrupting these countries. If they had sovereign currency, they woudn't be in this situaiton. Randall Wray's MMT primer has some posts that address this issue.
Money is IOU, it is not a commodity. Banks create both money and assets: the moment they financialize something, they do two things: (a) an asset; (b) a liability. That's why they create IOU's. Bank A IOU's is accepted by Bank B. Bank B's IOU is converted to Soverign's IOU through federal reserve. Read the MMT primer's debt pyramind of IOUs to get proper understanding.
Banks don't need reserves (for instance, Canadian banks dont have that reserve constainrs or they have 0 reserves). Whenever Treasury spends money, Banks' reserves are increased. Whenever people pay taxes, reserves are decreased.
Speculation has nothing to do with reserve requirements. It is because they are not able to generate profits in traditional banking. Google, Apples of this world dont need money from banks. So, Banks can do two things: (a) they can give loans to private individuals (like housing crisis); (b) they can gamble in stock markets, etc.
Regarding (a) When they lend money to risky ventures like housing, they gotta maintain capital reserves. Here, they use off balance sheet vehicles, securitization, and accounting practices like not marking to market.
Regarding (b), they can create new financial instuments (like futures, cds, swaps, etc). When they create these instruments, they are doing two things: (a) an asset (these instruments); (b) liability. Assets = liabilities. And maintain capital ration based on those assets. Here, they play the tricks to show that they have capital reserves.
BTW, I spent last 3 days to read Randall Wray's MMT primer. Many of my confusions, my questions, are solved by their theory.
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Raindoctor, can't say I disagree with anything you say except that Mish would agree that reserves don't fund loans, but that loans are originated from scratch. Isn't that what you are saying?
It would be better if banks used the excess capital to fund real projects, or maybe have the government do it. Otherwise we have 147 dollar oil.
I enjoyed your post above.
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bgamall4 says
With every loan, you are also creating an asset. So, they zero out.
You don't need banks to bail out the main street. If congress has balls, they can do it differently: budget $4 T for infrastructure projects. Here, treasury can act on it without selling any frigging t-notes for $4T. Treasury adds $4T to contractors/individuals accounts, the way social security checks are given. When you get a check from treasury for $2K, here how it works.
1. You get a check from treasury for $2K
2. You deposit $2K in your bank of america checking account
3. BofA adds $2K in your account; adds $2k on their liabilities side
4. BofA settles this treasury check with Federal reserve (here, fed adds $2k to BofA reserves at Fed reserve level)
No bonds required for uncle sam to give you $2k. Extend the same logic to $4T. Banks can add $4T to individual accounts; Treasury (by using Federal reserve) adds $4T to these private banks reserves.
Study "Employer of Last resort" or 'Job Guaratee" program, a policy recommendation by Modern Monteary theorists.
http://neweconomicperspectives.org/2012/03/mmp-blog-42-introduction-the-the-job-guarantee-or-employer-of-last-resort.html
Libertarians, Conservatives say that deficits cause inflation and that deficits needs be borrowed. That is not truth at all. And the leftist economists like Krugman don't know shit about how banking system and federal reserve operate. Nor do these mainstream leftist economists, who advise Democrats wanna learn the truth. It is a giant scam, the more I think about. They are spreading the same scam in China, India, Africa, elsewhere: financialize every aspect of life and then screw the population
So, stop blaming banks. We all know about republicans, who are honest about what they wanna do. Look at democrats, who are not honest about what they wanna do: these assoles don't know how money is created and functions. Those who know how it works (like lobbysists for banks and the existing wealthy) subvert the way MMT sketched ELS/JG by using fallcious arguments. They do that because they wanna keep the existing wealth.
Read Bill Mitchell's "Full Employment Abandoned: Shifting Sands and Policy Failures"
http://www.amazon.com/Full-Employment-Abandoned-Shifting-Failures/dp/1858985072/ref=la_B001JP83Q8_1_1?ie=UTF8&qid=1345183795&sr=1-1
Blame leftist economists, who are ignorant about treasury, federal reserve operations and the banking system
Blame democrats. Don't blame banks, since things can be done without banks' help.
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raindoctor says
Dems did not have the 60 votes in the senate to pass infrastructure bills. Republicans blocked the programs. Also Obama's stimulus in the beginning was small because they lacked the 60 votes.
But you are right about Krugman. In 2003 he called for a housing bubble. He wants inflation. He wants wages up but they will chase commodities up which is a losing proposition. I wrote a couple of articles on BI about 1. how they want to securitize the rents after the 1 percent gobbles up the houses and 2. Ryan wants a housing bubble in his massive budget cut where medicare will get vouchers and the savings will be passed on to the wealthy so hedge funds can buy up all the houses.
Ryan wants a housing bubble and Mitt wants a bigger one than his dad blew. His dad was stopped by a sovereign USA, but now the banks are sovereign. It is the NWO.
I wrote previously that the housing bubble was a scam from the start, at Basel 2 when they purposely adopted phony risk management in order to sell CDO's with low interest. That allowed the easy money to flow and that pushed up the prices of houses until the hot money left.
Liar loans were being done in the seat of all financial evil, the UK Square Mile, and they were called self certified loans. Then, they were imported to the US circa 2003 when the government pulled out of origination and the bogus AAA bonds fueled the real housing bubble, mid 2003 to 2007.
Ever thought about sharing your stuff on Business Insider or Seeking Alpha?
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What happens when techne replaces labor to the extent that it's no longer possible to employ most or all of the adults except for the 10% who own the production, or service the production directly?
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thunderlips11 says
Then you see a lot of guys on the side of busy streets with a cardboard sign in their hands begging.
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marcus says
As for LA or NYC,,,it has become ingrained into their thinking on RE and wealth. As shiller pointed out, the upper end who paid cash also went ape-shit on over paying for RE expecting higher returns. Mortgages were not the issues, its all about prices.
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bgamall4 says
Its pretty well know Mitt wants the RE market without government interference to find its own correction/bottom. He has said it many times over.
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thomaswong.1986 says
Yes, but that alone would not do it. The 1 percent are using hedge funds to buy up a lot of the real estate. the banks love it as they have less loss on their real estate and loan portfolios.
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thomaswong.1986 says
He doesn't want government interference, but he wants 1 percent interference. He wants the 1 percent to buy more and gird up the bottom of the market by class warfare from the top. He doesn't want the average American to own a house unless he does so with a toxic easy money loan.
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thunderlips11 says
The whole game of efficiency is misguided. Companies reduce the output, even if they are efficient to meet the demand, so that they can make money.
The problem is not so much about robots replacing humans. If robots replace humans in every work, isn't it good? After all, we can use the time to do whatever we want? Yes, it is good: but the problem is we have toll booths (rentiers) that collect toll from everything related to survival: food, shelter, health, etc. Here, a tax policy can be used to euthanize rentiers. The other problem is: even the robbed wanna be a robber! That's the irony. Today, we all complain about rentiers because we are not rentiers: we all believe that we can become rentiers one day, thats why we defend the logic of rentiers. For instance, Fannie Mae, Freddie Mac, Mortgage interest rate reduction, Prop 13 in California, FHA, etc--all these programs/entities increase the cost of living, yet every one wants to keep them!
Read this:
http://neweconomicperspectives.org/2012/06/mmp-blog-51-the-efficiency-fairy-and-inflation-goblins.html
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This is great reading, thanks Raindoctor.
bgamall4 says
Exactly, unless we replace the way society functions.
While I enjoyed RD's link, I have this question
Can't "Efficency", instead of resulting in layoffs, instead translate into shorter hours at the same pay?
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thunderlips11 says
It aint gonna happen, unless 70 percent of humans understand how modern fiat money system works. A sovereign nation with a sovereign currency (not like those EU members without their own currency) does not fund their spendings by issuing bonds--that has been the reality and the truth. But there are vested interests and the intellectual dishonesty from the intellectuals like Krugman--the latter will subvert everything.
Sensible way of dealing issues.
1. Campaign finance reform
2. Part time politicians (no fulltimers)
3. Stop selling long term treasury notes (why pay interest to the elite when you don't need any long term bonds to fund the sovereign deficits/spending. Short term bond sales are required to target the interest rates)
4. Tax rentiers (non-productive class): real estate/land; non-wages.
50% of US GDP is wages. In mexico, it is 25 percent!! If things go the way they are going now, wages to total GDP ratio will reach that of the third world.
The problem is not with the money, nor with the treasury, nor with the federal reserve. It is those folks, we all wanna become one day: who does not wanna become a billionaire and keep those billions for 20 generations? After all, we entertain those fantasies!
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I like your thinking. Let me add:
5. 90% inheritance tax
6. Ban Trusts that pay to any individual person more than the Median Wage / year.
7. Tax religious institutions on revenue not spent on charity.
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raindoctor says
Then why are the bonds issued? If America issued currency without the creation of bonds we would pay less interest don't you think? When the treasury sells bonds money is deposited with the treasury. But then we have to pay interest. If we just issued the money without bonds there would be no interest. Lincoln did that with the Greenbacks if I understand it correctly.
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raindoctor says
Like the banksters wouldn't control those guys? They would no less than the ones in power now. We have had full time politicians for a long time, and they did their jobs, until now.
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bgamall4 says
Short term treasury notes are needed to drain reserves from the banking system. The question is: why and when to drain reserves? To target the interest rate. When there is a lack of reservers, Federal reserve open market operations buy the bonds from the banks, to keep the flow going.
Interest rate = cost of money (IOUs).
Long term treasury notes are not needed. It is a free lunch for the wealthy. If long term t notes were to be abandoned, the wealthy would have find a different way to make money, instead of collecting rent on their money (interest).
Long term t-notes sale creates an illusion that deficits are funded by borrowings. Follow the Modern Monetary theory. It gives you a clear picture of everything.
There are two kinds of bond sales: when there are exessive reserves, open market operations drain these reserves. The other one is the illusory one: when treasury wanted to sell bonds for the deficit spending, they use primary dealers to sell them. Later, federal reserves buy the same bonds that primary dealers bought (a simple way of putting). In the same operation, pension funds, ordinary folks like us buy notes from treasury. If you understand how everything works (thats what MMT does), you can cut off this illusory nonsense. Just sell short term notes to target the interest rate; and let the gubmint spend. People think that if you let the gubmint spend, it can create hyperinflation. Nah, it hasn't happened in Japan. Two constraints for gubmint spending: inflation and unemployment.
Inflation occurs for two reasons: when there is a full employment, if the demand is more than the supply--we never had such a situation; private portfolio allocations and rentiers--the purpose of this discussion.
There is a myth, we have all swallowed: deficits are funded by borrowings. A sovereign nation with a sovereign currency doesn't need any borrowing, as long as such a sovereign nation is self-sufficient (as in creating aggregrate demand).
Many countries in Africa don't have a decent aggregate demand. They sell raw materials to other countries and buy clothes, foods, medicine from the latter countries. Even though these african nations are sovereigns with their own soverign currencies, they have to depend on the foreign exchange, since they don't have a circuit of internal production and consumption. The states does not have that problem.
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bgamall4 says
Even if dems had 60 votes, they could not have done it. You got folks like Baucus, a pimp from Montana, and other folks. I prefer wolves (repubs) to wolves in sheep clothes (dems). At least the real wolves help bring a change quicker than wolves in sheep clothes. A quicker change--positive or negative--is what we need, so that people can act.
bgamall4 says
Read this post, which deals with basel I, II, III, and capital vs reserve requirements.
http://bilbo.economicoutlook.net/blog/?p=9075
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raindoctor says
I agree, banks in the bubble were supposed to increase capital against assets but did not do so. That was done on purpose by the regulators, who allowed the liar loans and wanted the bogus CDO's and bogus Swaps based on those CDO's to flourish.
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raindoctor says
I think the banks use the money on the spread they get for selling the treasuries to the Fed to gamble in futures markets. They all do it so it isn't much of a gamble, more, a relentless push upward in oil prices.
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My daily expenses are minimal compared to my income. My co-workers kid me about this and my very conservative lifestyle. They of course are driving expensive cars and have large credit card balances.
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bgamall4 says
They don't need to worry about spread there. Imagine that these banks create a new instrument called 'Carson pass derivatives', CPD for short. That derivate worth is $1M. They sell that to another entity (hedgefund/fellow bank/calpers/norwegian retiree fund, etc). Here, they collect $1M from these entities and the latter get a piece of paper. Here, our issuer bank has taken risk because of this CPD contract. The regulatory framework demands that our issuer bank has to maintain certain capital for the risks they take. Here, they use some kind of weighted average: 0 for treasury notes, the riskier the asset, the weight goes up. This is where our rating agencies come in. They rate this CPD as AAA+; the bank benefits from this rating, as it reduces the capital requirement.
There is another way to reduce capital requirement. Create an off balance sheet vehicle (just like reinsurers in insurance industry). Lets call this fictitious company Ebetts Pass, Inc. Now Ebetts Pass, Inc, buys that CPD risk from our issuer. How does it buy it? By issuing another IOU, whose risk is better than CPD. This trick further reduces the capital requirement.
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jvolstad says
Well, you are bringing down the aggregate demand for the entire economy! They call it a paradox of thrift!!
Anyway, there is a way to protect the aggregate demand. How? of course, by providing safety nets. If there are no safety nets, people stop consuming; if consumption goes down, the production goes down as well. If the production goes down, the wages go down; if the wages down, the consumption goes down! Here, you can provide HELOCs, so that consumption doesn't go down.
Bismarck, an anti-socialist, fought socialists. He is considered to be the father of modern safety nets like social insurance. How come an anti-socialist introduced safety nets? Why anti-socialists of today (say, repubs) wanna gut safety nets like social security? Without safety nets, consumption goes down! That's what happening in China, which produces $8T a year and consumes $1T a year.
Safety nets are necessary for capitalism to thrive!
Those who are trying to gut safety nets are killing their golden goose!
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raindoctor says
no, you need not reduce production due to lower domestic demand for goods and services you create. you expand beyond your borders and encourage exports.
.. have a Coke and a McDonalds Cheeseburger in China. Its American meat and wheat anyway.
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raindoctor says
Social Security started out in the 30s, but there have been many changes since.
Do you think a early 20th century "safety net" still applies in the 21st century.. almost 100 years later ?
Time to rethink and modernize.... example.. wouldnt a personal retirement account in the tax holders control and name with option of buying US govt savings bonds be a plausible alternative ?
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thomaswong.1986 says
No. See Chile.
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I, for one, think that maybe its time to increase the cost of living. Whoever thought that you should get to live free of charge? Best you always remember, that you owe someone else for the right to live, and it doesn't come cheap!
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raindoctor says
Don't worry. The Fed will justly punish jvolstad with inflation and ZIRP.
How dare he try to protect his capital from theft by Crony Capitalists! The nerve!
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I would, but my neighbors, the Joneses, just got a new car and deck built! So naturally, I need these things too.
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raindoctor says
But the Market(tm) is always right. We should stand aside from this force of nature and not intervene in the slightest, no matter what happens. How dare humans attempt to regulate or mitigate the forces of nature?! Bow down before Mammon, do as He says, most Holy Market!
I'm glad we don't have this attitude towards Drainage Ditches, Earthquake-zone building codes and Hurricane preparedness.
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raindoctor says
I wrote about that off balance sheet accounting. That allowed toxic loans to be hidden off the books of the banks awaiting securitization.
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thomaswong.1986 says
The banksters are drooling over those private accounts and all the fees they would generate. Greedy bastards.
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thunderlips11 says
We would if Ron Paul was in charge. He would say we are not going to help those people so they should move out of those dangerous places. Pretty soon we will all be living in some hell hole in Texas away from the hurricanes. No where else is safe!
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thomaswong.1986 says
If you think out how modern fiat monetary regime works, this is what you see sectorally:
gubmint deficits = private-sector savings.
You can also look cumulatively. Cumulative private-sector savings = cumulative gubmit deficits!
Of course, you may get confused by the existence of nominal assets. All assets are financialized; so, you need to start think in terms of financials.
We should look beyond what mainstream (including Austrians, neo-classicals and neo-liberals) is saying about montetary system.
So, the question is not so much about the risky nature of financial instruments (t notes, derivates, cd-s, money market funds, etc). Social security/medicare is not solvent if you beyond the false assumption that deficits and/or govt expenses are financed by taxes and/or t-notes sales.
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bgamall4 says
We should stop worrying about banks. Even if there were healthy banks, they do not increase the aggregate demand, which drives the production, which further drives jobs.
So, what we need is: a tax policy that favors local production; a fiscal policy that creates job in infrastructure and other things. Both libertarianism (Austrians) and mainstream economics (neo-classical and/or neo-liberal) espoused by both leftist and right economists prevent the latter fiscal policy for different reasons.
1. Austrians and mainstream economics operate with a false assumption that govt deficits are funded by borrowings.
2. What distinguishes mainstream left economists from the right? NAIRU, etc
http://bilbo.economicoutlook.net/blog/?p=20679
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errc says
I am all for it!! However, I hate the way things go: they are too slow for me. Accelerating the changes help bring in changes: otherwise, it is like kicking the can down the road!
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Read this latest article:
Skilled work, without the worker!!
http://www.nytimes.com/2012/08/19/business/new-wave-of-adept-robots-is-changing-global-industry.html?_r=1
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raindoctor says
Well, easy money loans do increase demand, but at a price. If you have enough easy money loans and the house becomes an appreciating piggybank, you do increase demand. But then it all crashes.