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December 08, 2010 – Comments (34)

I prefer to two-player interaction.  Going solo reminds me of something else.  Meanwhile, as we wait for a Modern Monetary Theory proponent to accept my challenge, let's have a friendly chat.

Metal Manipulation Mania

There have been some interesting blogs about JP Morgan and silver manipulation lately. To paraphrase: there is no evidence that silver is being manipulated, but it might be.  I agree. There is no evidence. And it might be true. =D 

But there's a couple things that I would like to add.  First, I don't care either way. I've never needed a silver "price manipulation theory" (or a gold one) to understand the fundamental reasons for owning gold or silver. I have never joined the manipulation crowd and I probably never will.  Ted Butler, one of the most prominent silver manipulation theorists, has been doing this since the early 1980's.  He has never produced a shred of evidence.  Silver goes up in price because dollars increase faster than silver, ceteris paribus. Silver goes down in price when investors overestimate the extent to which this will happen. It's really that simple.  It has notihing to do with Metal Manipulation Mania. If people think the banks are pushing the price down, so be it.  It's really not importannt.  Many people are at a loss to explain rising commodity prices in general, and rising metal prices specifically.  Unfortunately, we can't even adequately settle upon the meaning of words used to describe rising prices.  This makes critical thinking on the subject of price rises rather difficult.

Make Them Define the Terms

If you get confused by the Inflation/Deflation debates, here is sound advice: make the debators define the terms before you consider their argument.  Let me give you an example. Recently a little known blogger posted a link to a few items that had fallen in price recently.  He then summed it up with the statement: "evidence of deflation."  I'm not going to link to the blog in question, since it's not worth it, but it represents a common mistake.

Deflation is a persistent drop in the general price level.  Now, we can assume that economists argue all the time over the exact meaning of the bolded words in the previous statement.  Let's just step away from that debate for a moment. We can clearly see what does not qualify as deflation.  The massive decline in housing prices, for example, is not deflation since it only applies to one sector of the economy.  Likewise, we can say this about any popped bubble.  A more sophisticated approach might point out that housing price declines may cause a general and persistent decline in prices, i.e. deflation. Perhaps. Though this has never happened since the world has gone completely paper.

Inflation can be defined in probably a half dozen ways depending upon which economist you ask.  For four thousand years, before there was a professional class of economists, there was a widely accepted definition: inflation was the act of debasing currency.  In other words, inflation was an action by humans to deliberately manipulate the currency to the manipulator's benefit. Pointing out the inflation was an action and not an event or situation is very important. It assigns blame. Of course, we don't define it that way today.  I strongly suspect that this is due to the rise of a professional class of economists who owe their livelihoods to the money manipulators.

The generally accepted present day definition is a persistent rise in the general price level.  Again, modern day economists spend a great deal of "productive" time arguing about the definition of those two words.  Don't let it bother you.  Just ask the blogger/writer/debator to define them his or herself. 

Here's where I stand:

1. Deflation defined as a persistent drop in the general price level, ceteris paribus, is a good thing.
2. Bubbles popping are bad. However, bubbles being formed are the real problem. 
3. Inflation is the act of currency debasement. Monopoly money production by the Federal Reserve is always inflation, but this conclusion requires further explanation.

Money, Money Substitutes, and !Money

There is money and then there is money substitutes. And then there is !Money. (The exclamation is a negation symbol in logical notation. It reads as "Not Money.")

Money comes about naturally. Its value is determined by the subjective evaluations of market participants. These subjective evaluations are arrived at voluntarily. Nobody put a gun to their head and told them to use this commodity as a money or that one. At least, until governments got involved, in particular when government demanded that taxes be paid using a certain money.

At the point that someone puts a gun to your head and says "use this as money," your evaluation of its value is no longer arrived at voluntarily.  Likewise, if you wake up tomorrow and everyone is using chocolate doughnuts as money (that would mean you are in Heaven, of course), your decision to use chocolate doughnuts is not arrived at voluntarily either.  There is no market for money, and therefore, there is no money.  There is !Money.  In other words, it's something else. It's fiat doughnuts, you could say. The point is that any economic theory that treats !Money as if it were real money is going to have some problems.

Market actors can use money substitutes, and they often choose to do so, voluntarily.  The professional economist class would like you to believe that the money substitutes themselves have a value that can be separated completely from the underlying money.  This is clearly nonsense. I'm not going to spend any time on that.  Some of them like to say that the money substitute itself is money.  Also, nonsense. 

Others will tell you that money is simply a medium of exchange and that it has no value intrinsically.  If we are talking about Fed notes, that is true.  Fed notes are !Money.  If we are talking about real money, however, it is not.  Again, the point is that we don't use real money, so any economic theory that pretends we do is going to have problems. An economic theory that recognizes our !Money as !Money will do a better job of explaining how the !Money works.  That economic theory is Modern Monetary Theory. Hopefully, one of their proponents will join me in the debate offered at the link at the top of the page.

Along the way in our glorious Republic (I can't even type that without laughing), our money substitutes becames substitutes for other money substitutes, rather than for money itself.  This, obviously, is a nonsenical arrangement.  Some call this an "operation reality."  Maybe so, but it's worth pointing out that it makes price imputation quite difficult.

Perhaps you don't know what that means - price imputation. Well, we can talk about that concept if you'd like, but I'm ready to bring this blog to a close.

Qatar Wins the World Cup

And I don't care. =D If I'm still here in 2022, I've got other problems.

David in Qatar

34 Comments – Post Your Own

#1) On December 08, 2010 at 4:45 AM, Starfirenv (< 20) wrote:

David, Market Actors for sure. I'm long "physical fitness" before all the manipulation hubub. Any thoughts on the coming Re Val of the Iraqi Dinar?
+1 regards.

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#2) On December 08, 2010 at 6:27 AM, whereaminow (< 20) wrote:

Starfirenv,

There have been rumors of a currency reval for the Dinar ever since GWB declared 'Mission Accomplished.'  It appears to be a scam.

This is how it usually works. Black market traders in Iraq - being infinitely smarter in business than US military and contractors - convince the Americans that there is about to be a currency reval.  The GI's, stupidly, trade US$ for Iraqi Dinar, expecting them to jump in value when the new peg is announced. 

Of course, this is very stupid.  Yet this scam has been going on since 2003.  I don't know how many times I've heard from one of my buddies in the combat zones that so-and-so just told them about a great investment idea - Iraqi Dinars! 

Any new Iraqi currency will be quickly devalued, no matter how the peg is set.  America is installation a "progressive" government in Iraq.  So you can expect that printing money to paper over economic reality to be a top tool in their economic kit.  Whenever it is that they actually put together a stable government.

David in Qatar

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#3) On December 08, 2010 at 6:42 AM, whereaminow (< 20) wrote:

Qatar World Cup

Ok, here are some real thoughts on Qatar winning the 2022 World Cup.  As far as who won, I don't care, and not just because I don't care much about the World Cup.  I feel the same way about the Olympics.  It's a pointless exercise in State Worship.

But, what does winning the World Cup mean for Qatar?  I think it's going to be a nightmare for the local non-Qatari.  The Qataris are thrilled. They just crawled out from the rocks about 15 years ago.  Literally, there was nothing in Qatar and no reason for a Qatari to be proud of his homeland as recently as the early 1990s.  Now it is one of the wealthiest places on Earth, per capita.

So for the Qatari, this is great. He is guaranteed to make a massive amount of money from this. And he'll have box seats.

Already the country is about 80-90% non-Qatari. With the construction for the World Cup over the next 12 years, that is going to grow.  Your knee jerk reaction is probably to think only of imported unskilled labor, but there will also be a massive demand for skilled labor as well.  Just as the massive increase in construction projects over the last decade has produced the same diversity.

So the population is going to continue to increase the demand for local companies like QTEL. I think the DSM (Qatar Stock Exchange) will see major gains (both real and inflationary). 

Qatar's market grew faster than its government, but there is still alot of crony capitalism.  So I would recommend investing in companies that have a relationship with the Al Thani family.  They should get many favorable contracts over the next decade.

David in Qatar

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#4) On December 08, 2010 at 7:36 AM, dbjella (< 20) wrote:

I am pretty sure we will never have a free market for money unless we get to some kind of Mad Max situation, but if we were to back money with gold or some commodity(ies) how does the "economist" know what the right level of money is for an economy?  

For instance, if we were backed by gold and all of a sudden someone finds a huge strike of gold, then wouldn't the price of money go down? 

I struggle with arguments for going back to gold and I certainly struggle with the current fiat situation.  My CAP score must be an indication that I understand the stock market :) I am getting more and more nervous every time I see ole Ben on TV talking like he knows what he is talking about.

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#5) On December 08, 2010 at 8:05 AM, whereaminow (< 20) wrote:

dbjella,

but if we were to back money with gold or some commodity(ies) how does the "economist" know what the right level of money is for an economy?  

No economist can ever know the right level of money for an economy. No person could ever know that. Money, under the gold standard, comes to the market as a response to the demand for goods and services.  This fact of money's existence is in direct opposition to mainstream theories that promote money creation in order to increase demand.  It works the other way around, which is why their theories never work. :)

For instance, if we were backed by gold and all of a sudden someone finds a huge strike of gold, then wouldn't the price of money go down? 

Certainly this could cause inflation, but if you are thinking of some motherlode type discovery, the market would just reject gold and select another money, as it always has.  The likelihoood of this kind of event is pretty darn low though, and the likelihood that such a discovery would come to the market with no warning is about zero.

I struggle with arguments for going back to gold and I certainly struggle with the current fiat situation.

That's a good thing. I did as well, for a long time, until I finally fully grasped the theory in Mises' and Rothbard's works.

David in Qatar

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#6) On December 08, 2010 at 8:34 AM, whereaminow (< 20) wrote:

Some More Random Thoughts Which Aren't Blog Worthy

I really really want to yell "I Told You So!"  Last year, I brought to the attention of CAPS the massive scandal that is Anthropogenic Global Warming Theory.  Since I was the first CAPS member to spend serious blog time discussing and debating global warming issues (not the first to bring it up, but the first to hold his ground and present the complete case against AGW), I received a ton of backlash.

Many accused me of being a conspiracy theorist. After all, where was the evidence that big government and big business were behind the push for AGW "solving" initiatives?

Wikileaks has answered their questions. Among the diplomatic cables released is a treasure collection of US diplomatic pressure to bribe, threaten, and cajole other countries into going along with US pro-AGW policies regardless of any science, either pro or con.  It was, and always will be, all about the money.

Another interesting scientific note is NASA's latest hilarious scandal.  It appears their scientists found a whole new life form, except that the science is so poorly done it has the rest of the scientific community either laughing at them or excoriating them.

Government science is just like everything else with the government.

Government initiatives always seem great at first. They always seem necessary, benign, even progressive, at first.  But that's because, as Henry Hazlitt would say, you are only seeing the bridge being built. ("Yay, we went to the moon!") You don't see the transfer of money. The projects that are not completed or will never be taken up in the private sector because of the transfer of resources to the government. Eventually, all governments became wasteful, all government projects lose money, and all government organizations become arrogant and lethargic.

NASA has become a disgrace, as any libertarian could have predicted. (Not to mention the lives they've lost, due to bureaucratic incompetence as was discovered in later investigations.)

Ok, that's enough for this rant.

David in Qatar

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#7) On December 08, 2010 at 8:46 AM, whereaminow (< 20) wrote:

Oops, I forgot to inlcude the link about NASA's new "life form."

David in Qatar

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#8) On December 08, 2010 at 9:46 AM, lemoneater (81.74) wrote:

One of the things I have learned from MF is that I don't really know what money is. I used to think it was something concrete like coins and bills in my piggybank or the jewelry on my finger, but now I'm not so sure.

 

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#9) On December 08, 2010 at 9:49 AM, lemoneater (81.74) wrote:

The most fun money I have is in my brokerage. It changes the amount whether I trade or not. It is much more abstract than coins that jingle or paper that rustles although I'm assured that I could change it into tangible form.

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#10) On December 08, 2010 at 9:56 AM, lemoneater (81.74) wrote:

I'm going to be happy as long as my husband can exchange colored paper for our mortgage and electronic numbers for utilities.

 

 

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#11) On December 08, 2010 at 10:01 AM, lemoneater (81.74) wrote:

We can't forget the magical reusable plastic card. One of the most bizarre forms of money ever. We use the tamer bank card for groceries, but the wild and potentially dangerous credit card helps with bigger items. (Feed the tiger every month--pay it off so it doesn't get ravenous and bite off the arm of your income.) 

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#12) On December 08, 2010 at 10:12 AM, whereaminow (< 20) wrote:

One of the things I have learned from MF is that I don't really know what money is.

Alan Greenspan once made that exact statement: "we don't know what money is."  The difference of course was that he was in charge of the "money."

LOL

David in Qatar 

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#13) On December 08, 2010 at 10:13 AM, lemoneater (81.74) wrote:

Of course, I have taken shrimp before as payment, it is a delicious, but perishable currency. I will sometimes work for food. Depending on who prepares it.

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#14) On December 08, 2010 at 10:15 AM, lemoneater (81.74) wrote:

@ #12 I don't know whether it is comforting to know that Greenspan doesn't know what money is either. :)

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#15) On December 08, 2010 at 10:19 AM, lemoneater (81.74) wrote:

Perhaps Cato is right that soup will be a viable currency. I won't accept any MSG in my soup! That eliminates a lot of brand and flavors as a workable exchange for me.

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#16) On December 08, 2010 at 10:21 AM, lemoneater (81.74) wrote:

Have a great day, David. You certainly bring up interesting topics for discussion.

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#17) On December 08, 2010 at 10:22 AM, brickcityman (< 20) wrote:

I'll make you an offer...  If you get tired of waiting I'll debate you... 

 

But be warned it will likely be a Stephen Colbert-ish attempt at arguing with you while giving you ammunition and exposing my ignorance.

 

...  Probably not what you were looking for, but hopefully entertaining none-the-less

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#18) On December 08, 2010 at 10:24 AM, lemoneater (81.74) wrote:

Apologies on all my sentence fragments. I don't always think in complete sentences. Somehow James Joyce can get away with stream of consciousness, but mine just is bad grammar!

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#19) On December 08, 2010 at 10:35 AM, whereaminow (< 20) wrote:

lemoneater,

It's cool, man. This was a stream of consciousness blog on my side too. Just messing around with some thoughts.

I'm glad you enjoyed it, and that you took the time to think about some of the ideas.

brickcityman,

LOL, that would be a good time. Maybe, we'll do it that way. Let's give them a couple more days.

David in Qatar 

  

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#20) On December 08, 2010 at 10:39 AM, brickcityman (< 20) wrote:

I say, unless someone is paying you to write the rules of grammar are more guidelines than "rules". 

 

And if you can conince someone to pay you to write without observing the rules of grammar then chances are you are being paid handsomely.

 

...Of course my high-school english teacher never saw eye to eye with me on this...   (But then again he wasn't being paid all that much.)

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#21) On December 08, 2010 at 11:39 AM, mtf00l (44.77) wrote:

Dude!  Write a book!

if !money == money and !money != money then !!money == true

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#22) On December 08, 2010 at 12:17 PM, silverminer (30.99) wrote:

David, you and I agree on many topics, but clearly the metals manipulation issue is not one of them. :) I agree that manipulation must not form the core of any investment thesis, but that doesn't mean it's not crucial for metals investors to understand the dynamics at play within the markets they're invested in.

It was revealed this week that JPMorgan has amassed more than 50% of the LME's physical copper stockpile. That's a perfect example, since knowledge of that fact is indispensible for anyone with exposure to copper. 

IMO, It doesn't have to be the source of one's bullishness to remain a crucial matter.

You continually surprise me. :) Back before you became bullish on gold and silver, that surprised me as well, since everything else about your financial paradigm appeared consistent with the thesis behind higher metal prices. In retrospect, I'm sure you'll agree. And now this ... you are such a free market proponent that I would have expected you to indeed care whether the metals markets are heavily manipulated by banks or not. Rigged markets are an enemy of freedom, and I know how you feel about freedom. :)

Whatever you decide, you're still a rockin' Fool! Fool on!

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#23) On December 08, 2010 at 12:18 PM, lemoneater (81.74) wrote:

Somehow grammar never got to the intuitive stage for me although I live, eat, and breathe literature. 

 

 

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#24) On December 08, 2010 at 12:46 PM, whereaminow (< 20) wrote:

silverminer,

LOL, well I knew you'd be stopping by at some point :)

Let's just say it's not a fight that I want to get involved in. Yes, there is witness testimony (not infallible, but good to have) and there is some expert opinion that thinks it is likely, and there is of course the general shady nature of the banking cartel and the futures market.

But do I really want to spend any of my time arguing about metal manipulation? No. It's not my cup of tea.

So I'm not going to tell you that I think you're wrong. And I'm not going to tell those who are skeptical of these claims that they're wrong.

But, as you agree, there are many sound, fundamental, and logically irrevocable reasons for holding gold and silver. So I have no reason to wade in the other waters.

Thanks a ton for your compliments, btw. I feel the same about you (and I think more so!)

David in Qatar 

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#25) On December 08, 2010 at 6:50 PM, rfaramir (29.26) wrote:

whereaminow: "No economist can ever know the right level of money for an economy"

Um, no. Mises demonstrated (first to prove? or what that a predecessor like Menger or Baum-Bawerk?) that *any* amount of money is the right amount for an economy.

Since a proper money is pretty nearly infinitely divisible, as the amount of wealth increases and the stock of money stays constant, smaller and smaller quantities of money will be used per unit of wealth in each exchange. This is price deflation. In the rare case of wealth destruction, e.g., war or natural disaster, prices will rise and it will require more units of money per transaction of the same amount of wealth. This is price inflation.

The quantity of money in an economy is only *ideally* constant, of course. Gold and silver mines exist, but the free market easily deals with them. At least they take effort (work, energy, capital, labor) to turn earth into money. The rate can be estimated and taken into account in the prices offered for other goods. The rate of new discoveries can be estimated, too, for longer term pricing, and surprise discoveries don't throw the markets for much of a loop, either.

The only problem, is when someone can increase the 'money' supply with little or no effort. (Of course, strictly speaking, we're now talking about money substitutes or even !money, but if it is declared "legal tender" by a powerful entity, we treat it mostly as money, so loosely speaking it is money.) Without a predictable quantity it has no predictable value, which makes it much less useful as money.

 

Other than that, you're spot on. I especially like your attitude toward the silver and gold market manipulation. Unless one has more data or feels the need to correct someone's gross logical fallacy, there is no need to add words to the discussion.

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#26) On December 08, 2010 at 8:26 PM, Valyooo (99.35) wrote:

Deflation would be a good thing...if we weren't in a fractional reserve banking system

Now when people pay down debt, the money supply shrinks, making it really hard for people to repay debt, causing default, causing depressions

I mostly agree with you though

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#27) On December 08, 2010 at 9:12 PM, ChrisGraley (29.65) wrote:

But be warned it will likely be a Stephen Colbert-ish attempt at arguing with you while giving you ammunition and exposing my ignorance.

That's the funniest thing that I've heard in a while!

 

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#28) On December 08, 2010 at 11:33 PM, whereaminow (< 20) wrote:

rfaramir,

You are right, of course, in Mises' determination of the proper amount of money.  My comment was poorly worded but what I was referring to was the claim by the professional economist class that they can determine the exact amount of money needed given a set of statistical inputs.  Many of my readers are not familiar with the "fatal conceit" (to borrow from Hayek) of mainstream economists.

Your knowledge of free market principles always impresses (perhaps even intimidates!) me, so I hope you will be regular commentor on my blogs for a long time to come.

Thanks!

David in Qatar

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#29) On December 09, 2010 at 8:42 AM, Starfirenv (< 20) wrote:

David- re #1,#2. Thank you. Sorry for the late response. I had just had a 16 hr travel day and by the time momma was done with me I slept for a day.

As for the Dinars, have you seen the new paper with a hologram of a horse where Saddam used to be. They say 'Central Bank of Iraq' and have the metalic thread. Are these GIs buying the new stuff or old stuff or do you think it matters. Is the new stuff even in circ yet?

Yes. It will be our "favorite" general but I wonder if we will ever leave.

Thanks again.

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#30) On December 09, 2010 at 7:03 PM, rfaramir (29.26) wrote:

whereaminow "Your knowledge of free market principles always impresses (perhaps even intimidates!) me"

Wow, such praise! I blush now.

 

"I hope you will be regular commentor on my blogs for a long time to come."

Absolutely! You are an energetic, vocal advocate of liberty and personal responsibility, so anything I can do to bolster your arguments, lift your spirits, or occasionally correct a little something, I'm glad to.

And this is a reminder to myself to be extra careful in the correcting. Corrections are easy to give out (Neo-Sisyphus: "someone's wrong on the internet, I've got to set them straight!"), but not only should one be gentle, one should make sure of a correct reading first. You were making fun of economists who thought they could fix the economy with the 'right amount' of money, while I read it as you thinking it was possible. I'm just glad my "Um, no" lead-in wasn't too offensively blunt.

I'm actually still new-ish to Austrian Economics myself. I got pointed at mises.org a few years ago, started reading their daily emails, and in a couple months could pass their test of Are You An Austrian at the 97.5% level. Then I let it go for a while (bad move). As the bust hit, I got back into it and saw that I could have followed advice to get out at the top: they saw it coming and saw the top (closely enough). Since then, I try to listen to Austrian podcasts in the car (commuting) almost every day. So, I'm rather immersed in it, but not a master of it. It is hard to wrap your mind around liberty and its implications. I'm learning new ones all the time. But it's worth it, and easy, after a while, as it all makes sense and fits together. Just not the way 'they' tell you it does (for most values of 'they').

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#31) On December 10, 2010 at 9:13 PM, whereaminow (< 20) wrote:

@ Starfirenv and rfaramir,

Thanks for the follow up comments.  I'm working on my MMT post and hopefully we'll see you guys there!

David in Qatar

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#32) On December 10, 2010 at 9:30 PM, Starfirenv (< 20) wrote:

Not sure where "there" is but if you link here..... Regards.

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#33) On December 10, 2010 at 9:31 PM, Starfirenv (< 20) wrote:

Not sure where "there" is but if you link here..... Regards.

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#34) On December 11, 2010 at 2:45 AM, whereaminow (< 20) wrote:

Starfirenv,

Not done yet :)
I'll probably look to post it on Wednesday morning. (That's a self-declared deadline so don't hold me to that.)

David in Qatar

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