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This is the personal website of Mark Cliffe, Chief Economist of the ING Group.

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Forget the New Normal. A VoxEU column

Normality suggests that the crisis is behind us, that we again understand what’s happening, and that we can make predictions. It invites little sense of urgency to make radical policy adjustments. It tempts us into thinking policy ‘normalisation’ may be around the corner. But there are several reasons why the term ‘abnormal’ could more readily be applied. I revisit the “New Abnormal” in a VoxEU.org column entitled “The New Normal That Never Was”. You can read it in full here.

cliffefig2_0 revised

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Driverless Cars – The Route to Richer, Happier Lives

Header_ColumnMCliffe_ING-World-1Q2016_03

Driverless cars are already a reality. There’s still work to be done on the technology, and big challenges confront their widespread adoption. But there can be little doubt that they promise to be a transformative technology. Apart from boosting output and productivity, driverless cars are set to make transport cheaper, faster, safer, cleaner, healthier, more social, and more convenient. So cities won’t just be smarter, but happier places too.

Tech leaders such as Google and Tesla suggest this could happen in the coming decade, which may be overoptimistic. But once the transition begins, the clamour to make cities not just smarter, but happier, will become irresistible.

Sharing

Today, cars are used less than 5% of the time. Shared vehicles would vastly increase this: Google suggests to as much as 75% of the time. This means that less vehicles will be needed, with some experts estimating as much as a 90 percent reduction.

This would greatly reduce the cost of mobility, and eliminate much of the need for parking spaces, freeing up valuable space for other, more attractive uses. In the US, for example, it is reckoned that there are nearly four parking spaces per vehicle.

The savings would not end there. With human drivers being initially segregated on highways, and eventually banned from public roads, traffic management would become massively more efficient. Driverless cars would travel much closer together in ‘platoons’ in synchronised fashion, interacting seamlessly via vehicle-to-vehicle communications and road sensors.

The result is that road space would be used far more intensively and congestion reduced and potentially eliminated. One study suggested that road capacity would be at least doubled. Faster journeys would therefore free up huge amounts of time. Drivers in England spend an average of 4 ½ hours a week driving. Imagine if this were cut in half, for extra work, leisure or sleep. This would come on top of the time that former drivers would gain as passengers in transit, using their vehicles as a mobile lounge or office.

Transforming cities

Driverless cars will radically alter the geography of cities. With streets largely cleared of parked cars, journeys might be less confined to the traditional hub-and–spoke highway networks, allowing more flexible decisions on both home and work locations.

In principle, the reduced pain and cost of commuting is likely to prompt some people to commute longer distances. However, since this might threaten the economic benefits of driverless cars, some form of road charging may help to discourage this. This would be easy to implement, since shared vehicle journey charges would likely be at least partly distance-based. Taxing usage would also provide governments with an income stream to replace the revenues lost on parking fees and speeding fines.

Another convenience of driverless cars is that they may also offer passenger-less services such as deliveries. This could complement the drone delivery services already envisaged by Amazon. Just imagine if the driverless car that you ordered to take you to a party could pick up your shopping and gifts – or even your kids – on its way?

Sharing rather than owning vehicles will also allow users more choice. Commuting to work on your own (as most people do)? Then order a single person vehicle, a ‘personal pod’[1]. Taking the kids to the beach? Then order a large people carrier with cinema equipment to keep them entertained en route.

More sociable places

Driverless cars promise to make cities more sociable places. Reduced travel times would free up more time for leisure. Enhanced mobility for non-drivers such young, elderly or disabled people would boost their social lives. Freed from driving, vehicle occupants would be free to interact with each other and, via mobile technology, with their friends elsewhere.

Moreover, particularly since driverless cars are likely to be electric, or hydrogen, powered, they will offer enormous environmental benefits to cities. According to some estimates, autonomous vehicles could reduce air pollution by an average 90 percent. This in turn will add to the benefits to city dwellers’ health and longevity. Aside from reduced pollution, the sharp reduction in of the number of road accidents, over 90 percent of which are down to human error, will address one of the prime sources of injury and death. According to the World Health Organisation, 1.2 million people are killed on the roads every year.

The reduction in accidents would cut the need for heavy safety protection, adding further to the tendency for driverless cars to be smaller and lighter. Combined with the dramatic efficiency gains in usage, energy and resource utilisation would plunge, reinforcing the environmental benefits.

So the economic, environmental and social impact of driverless cars promises to be transformational. In economic terms, they represent a massive productivity boost. Output will benefit from quicker journeys and the increased scope for working while travelling. The reduced cost of travelling, insurance, repair and the freeing up road and parking space will increase the spending power of both consumers and businesses. And the magnitude of this could be huge. In the US, the direct costs of owning and running cars accounts for over 12% of the cost of living. ING’s initial estimate is that over two-thirds of this, 8%, could be eventually be eliminated by driverless cars.[2]

Impact of driverless cars on CPI

The reshaping of the urban infrastructure will also entail substantial new investment. The near-gridlocked cities in emerging economies such as India and China stand to make huge gains in both mobility and activity

Beyond the monetary

Yet the benefits of the driverless car revolution will go well beyond the monetary. Research shows that commuting is one of the biggest sources of stress. According to Professor Daniel Kahneman “commuting is the worst part of the day, and policies that can make commuting shorter and more convenient would be a straightforward way to reduce minor but widespread suffering”. Studies show that people with the longest commutes have the lowest satisfaction with life, particularly if they are driving. So by making journeys quicker and more enjoyable driverless cars will make cities more liveable.

Just hype?

But wait. Isn’t all this talk of driverless cars becoming the norm in a few years just tech hype? Driverless cars still have a lot to learn about life on city streets, populated by unpredictable humans who are not just driving, but walking and cycling. They still have to figure out to deal with bad weather and icy roads. And even if we assume that these technological challenges are met, there are other barriers before driverless cars take over from human-driven vehicles.

On the legal front, while accidents will become progressively rarer as pesky human drivers gradually depart from the roads, issues of liability and data privacy will need to be resolved. Socially, there will be challenges from the loss of jobs, starting with taxi and truck drivers. Then there is the question of the interaction with public transport and infrastructure. While driverless vehicles may supplant bus services, will they complement or replace train services?

Moreover, traditional auto manufacturers will struggle with this new disruptive technology. Some will find it hard to transition from merely making cars to becoming mobility and experience providers. They may try to cling on to the idea that people will still want to own their own cars, even if they are not driving them.

Indeed, the ingrained car-owning culture may take many years to fade. But the compelling logic of sharing will ultimately prevail. As the economic, social and environmental benefits of driverless cars come to be recognised, the speed with which they overtake human-driven vehicles is bound to accelerate.

 

 

Footnotes

[1] If this became popular, this would reduce congestion further. Another alternative would have a similar effect would be ride sharing, or pooling. The success of Uberpool, whereby people share rides, and also the costs, indicates the potential.

[2] This is even before factoring in potential savings in health care and real estate (parking) costs.

Posted in Autonomous Vehicles, Driverless Cars, Economic Growth, Inflation, Innovation, Macro, Productivity, Real Estate, Sharing Economy, Technology | Leave a comment

Looking for Trouble

How politics could fuel downside risks to global markets

It is easy to find downside risks to the outlook for the global economy and markets. Worse still, a recent ING report, entitled ‘Looking For Trouble’, highlights doubts about the ability of economic policy to revive economic growth were a recession to strike. In a follow-up narrated presentation, I focus on the role that politics might play. In particular, there is potential for a damaging feedback loop between negative economic and financial market shocks and the rise of populist politics.

Looking for trouble PP20160427 10.08 - chart 3

An important part of the feedback loop between politics and economics comes through shifts in economic policy. Populists are challenging some or all of the neo-liberal orthodoxies on fiscal restraint, monetary laxity and trade and market liberalisation.

Looking for trouble PP20160427 10.08 - chart 2

Yet even if the mainstream politicians hold off the populist insurgency, it is worrying that policy-makers have failed to identify, or are unwilling to use, the necessary policy tools to counter a recession were it to strike. On the monetary front, doubts are growing as to how much further they could push on quantitative easing or negative interest rates. For now, mainstream politicians resist calls for more support from fiscal policy. But setbacks in the financial markets, or in the voting booths, may change this.

A significant downturn, even if milder than the ‘Great Recession’ of 2008-09, could open the door to yet another reappraisal of macro-economic policy. Politicians could revisit debt-financed public investment programmes, taking advantage of low or negative interest rates. Even ‘helicopter money’, whereby the stimulus is funded by newly-created money, could turn from theory into reality. While this may seem a long shot for 2017, more such radical moves are likely when the next downturn inevitably arrives.

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Savers are Negative on Negative Rates

In recent weeks market turmoil has put negative interest rates firmly on to the centrals banks’ agenda. The Bank of Japan sprang a surprise by following the European Central Bank in moving into negative territory, and there is even talk that the US Federal Reserve might be forced to reverse course and follow suit.

Negative rates, negative reactions

Did you save less with lower interest rates?

This poses a challenge to banks over whether or not to pass on the cuts to retail customers. Late last year ING surveyed around 13,000 consumers in Europe, the US and Australia to ask how they might react if rates went negative. A remarkable 77% said that they would take money out of their savings accounts. While a few would spend more, this would be offset by almost as many saving more. Yet most said that they would either switch into riskier investments or hoard cash ‘in a safe place’. Better news, then, for safe makers than for banks and central banks.

Click here for the full report.

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Beyond Mobile Banking – A List of 6 Ways to the Future

ING World Q12016

Financial markets are in turmoil and many economists are miserable about growth prospects. But tell this to the fintech world. The outlook for mobile banking has never been brighter. Its adoption has been much faster than the internet banking that preceded it. It’s so irresistibly convenient. And there’s far more to come. Here’s six ways it could develop:

  1. Advice

Right now mobile banking is very transactional. Most mobile banking apps allow you to pay bills, make payments, transfer money, check your balances or find a branch or an ATM. Some offer fancier analysis of your finances or more product information, but it’s largely functional, generic and task orientated.

This is all set to change. Financial innovators are working on turning your mobile phones and tablets into virtual digital advisors. Mobile banking will move beyond the transactional, product-pushing approach to one that is radically customer-centric, pro-active and goal-oriented, aimed at helping users make smarter decisions.

ING’s International Surveys of consumers show that they have a strong appetite for this. In a survey last year, 85% of European consumers said that their money management had improved because of mobile banking.

Mobile Banking - a change in managing finances (2)

To build on this demand providers will need to develop a much deeper understanding of their users, beyond the merely financial. What are they trying to achieve in life? Their account balance and past transactions will only provide a few clues.

So providers will have to provide richer interactions with their clients to learn more about their motivations, and make intelligent inferences from the behaviour of people with similar profiles. They will also have to draw upon third-party data sources to build more complete pictures of individuals and their families, friends and social networks.

The beginnings of this trend can be seen in the market for investment products, with the launch of ‘robo-advice’ services. These offer portfolio-management tools, with automated advice based on data users provide, such as online risk-appetite evaluations. For example,  younger, risk-tolerant investors will typically be advised to put a bigger proportion of their portfolios into equities, for example.

For providers and users alike, the mutual cost savings on relatively large investment transactions make them an attractive place for robo-advice to start. But there is scope for the trend to extend into the full range of financial decisions, even to mundane daily shopping transactions. Ever more efficient systems are commoditising the payments business, so the search is on, by banks and fintechs alike, for added value services around the payments business.

Here the big prize for banks is to do more than merely executing the payment. What if they could use their knowledge and data to make help you make a better choice?

Big transactions, like buying homes or cars, are months, if not years, in the planning. Right now, banks are generally only involved at, or near, the moment of payment. But with their transactions data and expertise, banks could step in to help users search, building on the experiences of millions of other customers.

Even with smaller transactions banks could play a more active role in providing tips and tools to help, given their role at the heart of the payments system.  Indeed, they could embed themselves in the whole transaction journey of searching, buying and, in some cases, use (think of feedback and reviews on purchases). As a result, they would be involved not just in the ‘how’ to buy, but the ‘why’ (“do I need this?”), ‘what’ (“which product should I buy?”), ‘when’ (“should I wait?”) and ‘where’ (“who’s offering the best deal?”).  The obvious question is: would users want this? The short answer is yes, so long as they found it useful. That usefulness will be enhanced by the other emerging fintech trends.

  1. Access

The banks’ mobile apps typically focus only their payments and savings accounts. Most people have other financial products and have money, savings, loans or investments with other banks or providers. The result is that most bank apps only give a partial picture of individuals’ finances, which presents an obvious problem for their aspirations to deliver digital advice.

So the next big trend is ‘aggregation’, combining people’s financial data from multiple sources to build up and analyse a holistic picture of their finances.  You need to know your total income and spending, the value of your loans, savings, investments and assets before you can make reliable plans and budgets. Some providers have started tackling this challenge, which faces formidable legal and IT hurdles, but the enormous potential value to users suggests that it will ultimately be met.

In effect, banks will have to rethink their business models, moving beyond the aspiration of being the single multi-product provider to their customers to offering value-added platforms for customers to access and manage their finances, whatever the source.

But why stop at financial products? Having built a complete financial platform for their clients, banks could also provide access to the purchase of other products and services. Many banks are worried that the likes of Google and Amazon might move into financial services and “eat their lunch”. But by providing access to multiple online marketplaces, big banks, who after all have huge customer bases, could take the game to the tech giants.

  1. Affective

This brings us to a third direction for mobile banking development. While the adoption rate of mobile banking has been near-exponential, it’s not an activity that takes up more than a few minutes of the three-hours-plus a day that many mobile users are spending on their devices. It’s functional, even boring. But it doesn’t have to be.

Indeed, if banks aspire to become omni-present trusted advisors, they are going to have to build a much deeper emotional connection with their clients. Financial transactions may not be fun (although people do get a buzz from bagging a bargain), but the spending goals that lie behind them are often emotionally engaging. Think of the excitement around buying an exotic holiday or a present for a friend

Financial decisions are woven into people’s lives, so people’s feelings and emotions need to be taken into account. The new field of ‘affective computing’ is already making progress in developing sensors to do so.  Combined with the insights of behavioural economics, which has discovered a wide range of psychological biases that deflect us from the coldly rational calculations of traditional economic theory, this could lead to much smarter devices. By learning from your moods and  behaviour and that of those like you, they could help you make decisions that are not just more cost effective, but more satisfying; ones that not just avoid mistakes, but also lead to success.

  1. Associative

Talking of satisfaction, people derive happiness largely from interactions with others. We’re social animals.  Most household financial decisions are driven by the needs, interests and reactions of other members of the household or family. We care about the reactions of our friends, neighbours, colleagues and peers. Yet mobile banking apps are still locked in the private world of you and the bank. So there’s huge scope to make mobile banking more social.

This is not to say that people are keen to share their financial secrets with one another. They’re not. However, facilitating intra-family and intra-household goal setting, budgeting and transfers would be a good place to start. In the new world of virtual digital advice, people may be happy to share their wish lists, tips and tricks, reviews and experiences with others. After all, people trust their families and friends more than companies.

Preserving privacy and security will be a precondition here; this will also depend on users opting in only to the features that they want and personal data being protected or anonymised by aggregation.

Now you might be thinking,  aren’t existing social networks like Facebook better placed to do this? Perhaps. But the banks, for now, do have some advantages, . They have millions of customers, even if they have barely begun to connect them into on-line communities. They have financial data, on incomes as well as transactions, that the social networks and tech giants might die for. They also have the lead in expertise in cybersecurity, credit evaluation, and financial planning.

Think of the possibilities. On savings, for example, most people have particular goals in mind, such as buying a car. Within their client bases, banks have ready-made communities of potential car buyers, who could share thoughts about which cars to buy, where to buy them, how to maintain and insure them.

Or think of the trend towards crowdfunding. Banks could facilitate the development of platforms for all forms of peer-to-peer finance. Existing joint ventures with P2P platforms hint at a future of more collaborative finance.

  1. Agile

A fifth direction for mobile banking is to become  more forward-looking and dynamic. People appreciate the new 24/7 convenience of mobile banking, but it’s all a bit static and backward looking.

By harnessing ‘Big Data’ about users and applying the tools of predictive analytics, banks are already starting to provide more sophisticated alerts about their clients’ finances. Looking at their typical spending, for example, they can be warned that their account might be about to slip into overdraft.

Eventually, these personalised micro-economic forecasts might stretch into the longer term,  such as  indications of future utility bills or the ranges of potential savings returns. Indeed, such personalised forecasting is essential if mobile banking morphs into financial advice, because all borrowing, saving and investments require a view on the future.

The transformation towards holistic advice will also require even higher frequency contact with users. Although mobile banking has already multiplied the number of contact moments between clients and their banks this has much further to go. Rather than being event-driven, or merely reporting to or alerting users, finance will become more interactive, immersive and engaging.

In the background, the virtual adviser will have to remain ‘always on’, scanning for opportunities and threats to its users. In the process, users, like their devices, will learn as they go along about how to make smarter decisions .

  1. Ambient

The notion of an adviser ‘always on’ suggests that the ultimate direction of mobile banking will be to free itself from dependence on mobile devices such as the app-driven smartphones and tablets that we are familiar with today. The development of cloud-based computing, artificial intelligence and the ubiquitous sensors of “the internet of things” open up the prospect of ‘ambient computing’. In the coming decades, we might migrate to an electronic environment that recognises our presence, senses our situation, anticipates our needs and responds to our commands.  Let’s just hope that the ambient financial advisor figures out a way of handling financial market turmoil…

An edited version of this post appeared in ING World

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21 Lessons from the Greek Crisis

 

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The refinancing deal struck on 13th July between Greece and its Eurozone partners left everyone bruised and unhappy. While it staved off the immediate threat of yet greater chaos from Greece being forced to abandon the euro, doubts remain as to whether the deal will succeed. So what are the lessons to be learnt?

  1. The creditors remain in charge. The radical left-wing Syriza-led government in Greece gambled that its international creditors would be so worried about the potential damage from a “Grexit” from the Eurozone that they would grant it softer terms on another bailout. It was wrong. Despite securing a strong ‘no’ vote in a last minute referendum on a package requiring it to deliver on reforms and further austerity measures, Syriza ended up having to capitulate to an even tougher deal.
  2. Politics trump economics, at least in the short run. At times the numbers in the fiscal plans that the Greeks were proposing were very close to those suggested by its creditors, but the confrontational tone of the debate made it hard for politicians on either side to sell the deal to their voters.
  3. Trust matters. The negotiations became acrimonious, and violent swings in bargaining positions (particularly from the Greeks) got in the way of striking a deal. In the end, trust is essential in any financial transaction. Sadly, given the Greek Prime Minister Alexis Tsipras criticised the deal as ‘blackmail’, mutual mistrust will persist.
  4. Don’t rely on economic forecasters. Forecasts on the outlook for Greece, not least from its creditors, have repeatedly been woefully optimistic, drastically underestimating the damage to growth from budget cutbacks. Only a little over a year ago, the International Monetary Fund was forecasting that the Greek economy would grow by 4% in 2015, now it looks like shrinking by the same amount.
  5. Severe austerity has a political price. Syriza’s support sprang from the depression in the Greek economy, which sent unemployment soaring to over 25% of the work force. This has bred resistance to further fiscal restraint.
  6. The more essential reforms become, the harder they may be to implement. The wrangling over the last few months has inflicted more damage on an already weak Greek economy and fuelled a toxic political climate. Intrusive surveillance of reform implementation by foreign creditors may be required, but is likely to meet with hostility.
  7. Just because an economic strategy has failed, it doesn’t mean it won’t continue. The combination of severe fiscal austerity and lack of reform has seen Greek government debt rise rather than fall. More austerity, in the shape of spending cuts and tax rises, has already been agreed, but it is not clear how far the pace of reforms will pick up.
  8. Make sure that you have an explicit and credible ‘Plan B’. Former Finance Minister Yanis Varoufakis claims that Greece, if it failed to get external finance, had a secret ‘plan B’ to introduce a temporary currency linked to the euro. But with the banks closed and the economy struggling, the creditors believed that Greece had either to accept its terms or face an economic meltdown. Other populists elsewhere in the Eurozone will have to reflect on this before eyeing the Euro exit door.
  9. Game theory is tough to apply in practice. Varoufakis, an expert in game theory, lost out on this one. Not only is the Eurozone a multi-player game, with each player having distinct motivations, it is also a multi-period game, rather than a one-off game: you have to recognise that other players will remember how you behaved before, and act accordingly.
  10. There are deep-seated differences in thinking within the Eurozone not just on politics, but also economics. The debate over Greece laid bare old divisions. On one side there is a German-led hard core emphasising rules, discipline and austerity and on the other the softer camp led by France and Italy advocating solidarity and growth.
  11. Fiscal union is a distant prospect. There is little appetite to share economic burdens across the Eurozone. As a result, the original vision that European monetary union would be bolstered by a system of fiscal transfers from the richer to the poorer members looks further away than ever.
  12. The Eurozone will continue to have a deflationary bias in the event of future debt problems. Debtors will be expected to deliver on budget cuts, with no matching expectation that creditors will offset this with fiscal stimulus measures.
  13. Generous welfare systems will continue to be under threat. Drastic cuts to public spending in Greece, with pensions being a particular target, will send a message across Europe. The young will have less secure financial futures than their parents.
  14. The Euro is no longer irreversible. German Finance Minister Schäuble’s public advocacy of a temporary Eurozone ‘time out’ for Greece – for which there is no provision in its founding Treaty – has opened the door to future speculation that members could leave. This creates a precedent that may come back to haunt the Eurozone.
  15. Without growth, Greece will struggle to repay its debt. There are plans to help with EU-backed investment programmes, but these are relatively small and are unlikely to be delivered until Greece delivers on austerity and reform measures.
  16. “Kicking the can down the road” makes it bigger. Eurozone creditors remain reluctant to write-off Greek government debt, as advocated by the IMF. While politicians attribute this to Eurozone rules, it stems more from fears of a voter backlash if they acknowledge losses on loans to Greece. The strategy of lowering interest rates and lengthening the payback period on the debt – ‘extend and pretend’ or ‘reprofiling’ – is less embarrassing than partly writing off the debt, but is likely to prolong the agony.
  17. Interest rates will remain low. Monetary policy will continue to carrying the burden of supporting economic growth. The European Central Bank will have to persevere with its programme of bond purchases (‘quantitative easing’) to hold down long term interest rates.
  18. The euro will remain a weak currency. While the ECB is set to be locked in to keeping interest rates low, the US and the UK are set to raise them in the next few months, driving the euro lower still.
  19. The rest of the world will have to live with weak demand from the Eurozone. Although the recent hiatus in Greece may prove only a temporary blow to the recovery across Europe, economic growth is likely to remain lacklustre. Moreover, the weak euro will continue to make it hard for exporters to the Eurozone.
  20. Exports will continue to be the bright spot for Eurozone companies. Producers in the Eurozone have benefited from the falling euro, which is making prices more competitive on world markets. The relative buoyancy of the US and the UK is also helping.
  21. Don’t make important financial decisions at night. The sight of bleary-eyed politicians announcing a deal at 7am after sixteen hours of negotiations should serve as a warning…

This post also appears in the latest edition of ING World

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Globalization Disrupted : Will world trade continue to disappoint?

Since the onset of the financial crisis, world trade is no longer growing twice as fast as output. I examine the reasons behind this in this presentation, an updated version of one produced to support a panel debate at a trade finance conference in Chicago last month. Although many commentators expect the headwinds confronting trade to continue, there are important offsetting factors in the longer term. The key points are as follows:

  • Growth in the developed markets is slower, reflecting sluggish domestic demand…
  • …especially in big deficit nations, which are trying to emulate Germany’s export success…
  • …with varying degrees of success – US and Spain have done well
  • Offshoring and re-imports have waned
  • Disruptive technologies may also reduce trade in the long term
  • But there could be positives from…
  • 1. Further Trade liberalisation.
  • 2. Offshoring : the spreading of Western FDI away from China to other low cost countries
  • 3. Offshoring by Chinese companies that want to produce close to their Western customers
  • 4. New energy flows, especially from the US
  • 5. A policy shift to boost infrastructure
Posted in Economic Growth, Macro, Macroeconomics, Technology, Uncategorized | Tagged , , , , , , , , , , , , | 2 Comments