What is the FIRE Movement? Could it be Hurting Our Economy?

The Fire movement is a growing trend amongst young workers, which is growing in popularity, thanks to its very enticing goal, which is spelled out in the name. FIRE is an acronym of Financial Independence and Retiring Early.

. The idea is that, by following a very aggressive saving and investing strategy, people can get to a point where they are effectively retired at a very young age, sometimes younger than 30.. In a world where we are being told that pensions are running dry and the average person may have to work in some capacity for their entire life, this sounds like a bit of a lofty dream.

Sure there are trust, fund, babies and young tech millionaires who may Earn millions within their first few years in the real world, but surely kicking back on beach and never thinking about work again, is not attainable to a regular wage slave right.

Well, if some figure, heads and internet forums are to be believed, then well yeah. Actually, it is for pretty much anybody. Now in the interest of full disclosure. I am a passionate advocate for the financial independence movement.

, But that does not mean that I don’t see issues with it.. Now many of those issues are glossed over in the sheer simplicity of it, which is also part of the reason it is so powerful. So long as someone can get to a point where their investments are making as much as their living expenses long term.

They have achieved financial independence.. Getting to that point is harder for some than others, but advocates of the movement argue that this difficulty has more to do with personal lifestyles rather than personal incomes.

. So what are the mechanics of the FIRE movement? How could someone use it to stop working forever? Is this actually attainable for anybody like they say? And finally, What would this movement do to the wider economy If everybody strives towards a goal where they quit working at age? Thirty shurely! This would bring our world to a grinding halt right.

Well, if we can properly explore and answer these questions, we will be able to reveal if this whole thing is grounded in reality or, if it’s, just a fanciful pipe dream for people who really hate their boss.

INTRO. Add Now, if you are thinking to yourself that this idea of retiring at age, thirty sound pretty compelling, the first thing you need to do is really understand how this system works. So outside of broad statements like saving and investing.

What are the NUTS & amp BOLTS OF FIRE? There are historical figures for a range of very important factors in the economy which help us in a sense, make projections into the future.. The assumptions that are relevant to the idea of FIRE are that a well diversified investment portfolio should return around 8 % per year and that inflation is around 2-3 % per year.

. Some of these figures can change, but with this we get the foundation of being able to live forever off your portfolio.. For example, if you had a million dollars invested into a broad market index fund, you would normally expect that over time, the returns from this portfolio to be around that 8 % and for the past 100 years or so that has been correct on average.

. This return would be split up between dividends and capital, appreciation in otherword the rise in the price of the stocks within the index.. What this means is that effectively, you would be able to draw $ 80,000 from this portfolio every year and it would maintain it’s value.

. Now $ 80,000 is a pretty comfortable lifestyle for most people in most cities around the world and while saving a million dollars is obviously hugely difficult, it’s not impossible for people in good professional careers, especially if we are looking at a dual income household.

. But there are two factors that make this a little bit more difficult than it would initially seem.. The first is inflation. The Federal Reserve Bank of the United states targets a 2 % inflation rate.

In 1960. The equivalent of an 80,000 salary today was around $ 5,600 per year., Since the FIRE movement is all about retiring at a young age and enjoying a long life. Without the need to work. You should realistically be planning for at east the next 50 years.

At a 2 % rate of inflation in 50 years time that $ 80,000 a year that you are pulling from your investment portfolio would only be the equivalent of a $ 32,000 salary. Today. I mean you could still scrape by in a low cost area of the united states, but it’s far from comfortable, and it might put you in a position where you need to go back to work at the age of 70.

After 40 years out of the workforce…. Good luck, ..., What that means is for this million dollar portfolio to maintain its real value. You would need to put back in $ 20,000 per year to fend off that 2 % inflation rate.

Not a huge deal, but that means now you are only left with $ 60,000 per year to live on. Beyond that. Some people want a bit of a buffer. In their investment growth, so it is normally suggested to reinvest at least 3 % back into your portfolio year on year.

, Alright. So now, all of a sudden, we are living on $ 50,000 per year for the rest of our lives, and this is before we get to problem 2.. There is a strategy in investing called dollar cost averaging, and it is a really powerful thing to understand.

. The idea is that the market is erratic and mostly unpredictable, but over time it trends upward.. So if you consistently invest at a set time interval like lets, say once per month, you are going to get the most out of the market for 3.

Reasons. Reason 1 is that it takes the emotion out of investing. If you automatically set money aside and don’t think about it, you aren’t going to be tempted to buy into the next hot stock or pull your money out at the bottom of the market.

Reason. 2. Is that it gets your money to work right away if you hold off on investing for a year or until you have done research on a particular stock or whatever you will be missing time in the market to generate returns.

, Since, on average, the market returns 8 % per year, if you hold off investing $ 10,000, you would already be $ 800 behind someone dollar cost averaging. Time in the market beats timing the market as it were.

Now. The third reason is the most powerful and also the hardest to understand.. The key to investing is buying low and selling hight right Well. By investing at set intervals, you are kind of doing this by default.

. If, for example, you invest $ 1,000 a month into walmart stock, it would depend on the price of the shares as to how much stock you buy., For example, if it is trading at $ 100 per share, you would be able to buy 10 shares simple enough.

, But lets say the price doubles to $ 200 per share. Well, at that price, your $ 1,000 monthly investment is only going to buy 5 shares, and the same is true: if the price drops to $ 50 per share, where suddenly, you are going to buy 20 shares per month.

By maintaining a consistent investment pattern, this hypothetical Investor has bought more shares when they are cheaper and less shares when they are more expensive, giving them a win in atleast one side of the buy low sell, high debate.

. The problem with all of these benefits of dollar cost averaging on the buy side is that they are drawbacks on the sell side.. If someone is drawing $ 5,000 per month from their portfolio to maintain their living expenses, then they are naturally going to sell of more of their shares when they are cheaper, then when they are more expensive.

. For all of these reasons, most people in the fire community work around the 3 % rule.. This rule is created by starting with an 8 % expected return and then deducting 2 % for inflation, 1 % for market volatility, 1 % for the impacts of negative dollar cost averaging and 1 % as a comfortable margin of safety.

. In plain english, what this means is that if you can live off 3 % of your investable net worth every year before considering taxes, congratulations, you are financially independent and you will continue to be into eternity all other things being equal.

, But 3 % is not huge. If you wanted to live off $ 100,000 per year, you would need $ 3.3 million dollars invested.. There are some people that will push this 3 % rule to a 4 % rule to be a little riskier, but retire a little sooner.

But the fact of the matter it, you still need to be pretty damn rich. The idea that anyone can do. This is simply not true, but it might still be less daunting than these numbers would suggest and infact.

There are even Tiers of the fire movement to account for this. So how could an average person Stop Working Forever, While making enough money to live forever? On $ 100,000 a year might sound almost impossible.

Many pundents of the movement argue that this is far from necessary. And that infact FIRE is more so about really assessing what you value, rather than earning lots of money.. If you value material things and want to be able to go on multiple holidays per year to exotic destinations, thats fine, but you are going to have to give up a little bit more of your time and spend slightly longer in a career building up an investment Portfolio.

Other people might be perfectly content to live in low cost of living areas and pursue low cost hobbies, which means they will need far less money to be financially independent.. What this means is that how quickly you can retire is determined by your savings rate rather than your gross savings.

. A nurse earning 60,000 per year after taxes and living on $ 30,000 per year should be able to retire within 16 years at a 3 % safe withdrawal. Rate., A neurosurgeon, on the other hand, might be earning $ 500,000 per year after taxes, but after an expensive mortgage, private, school, fee’s, exotic holidays and student loans, they might end up spending $ 400,000 per year.

. What this means is that it would take this doctor, 28 years to get to a point where they could maintain their lifestyle indefinitely off their investments.. Now, both of these instances are the result of personal choice.

If the neurosurgeon loves his job and loves his nice things, then all power to them, but if they dislike their job, the fire movement advocates for properly assessing. If you like, that, new porsche as much as dislike 6 months at work.

, Now, of course, for some people. This maths simply doesnt work. You can only lower your living expenses so far before you push yourself into poverty and unfortunately the reality is today that alot of people out there can’t afford even a basic lifestyle while still having money left over to save.

. But for those who can its extremely important to think about major financial decisions in terms of opportunity costs with the missed opportunity being years that you could spend sleeping in working on hobbies or traveling rather than sitting in an office.

Now, this is all well and good. On a macro economic level, if this was to really take off, surely it is not sustainable.? How would a world without workers Work? We have explored the labor market twice in the last 2 months, and both times we have found that human labor is very important to maintaining a functioning economy, not to mention a functioning society.

. This shouldn’t be a huge surprise to anybody, least of all people who sit down to watch video’s on economics.. But what might surprise you is that there might be an alternative. Consider this thought.

Experiment. Someone is working and saving half of their income. With that money they buy a farm. They then pay to have a workshop put on that farm, and then they pay to have machines, automate the planting and harvesting of crops.

. They also pay to have a mine with access to basic materials set up and robots to harvest and refine those metals aswell.. Finally, their workshop is kitted out in all of the latest technology to allow them to produce anything their little heart desires from scratch.

. Well, in this example, this person would be completely financially independent, (, assuming they don’t have to pay land taxes ). Now this hypothetical is sure to make alot of ranchers and off the grid.

Folks very excited, but its not too different from what FIRE practitioners are doing.. All of the things our hypothetical worker bought were either land or capital goods, as in machinery or technology that makes making stuff possible.

. Now, in this very direct example, this individual was investing in things that would be used to produce goods and services for themselves., But more realistically, a real person would use their money to invest in things that would be used to produce goods and services for everybody.

. They would then charge everybody the rights to use their productive capacity in the form of profit which would be paid out to them as dividends and would in the real world likely have a company acting to facilitate this.

. In a sense, Financial Independance is like crowdsourced independence. Using financial instruments to make the process of living off machinery and land more efficient., So would a mass uptake in FIRE practitioners ruin the economy? Well short term? Yes, the drop in consumer spending and rush to financial markets would cause alot of volatility, but long term.

It is theoretically possible.. We explored this idea of an automated future where capital goods completely replaced labor in the factors of production in our video on Automation.. I don’t want to repeat too much of that hear, but a big takeaway was that this capital intensive future could be a utopia or a complete disaster, depending on how this inevitable transition was handled.

. Final Thoughts, The financial independence retire early movement is certainly not something that is going to be the right fit for everybody.. For many, the cuts to their lifestyle are just not worth the extra few years out of their careers.

. There is also, of course, the psychological aspect of not having anything to work. Towards. Go play a sandbox game with unlimited money hacks to get an idea of how quickly it can actually get pretty boring without some kind of a challenge.

. There are theories and suggestions that go a long way to remedying some of these more psychological issues. But again that is not our area of expertise here at Economics Explained.. Instead, from a pragmatic economist point of view, the FIRE movement’s biggest takeaway might be the lesson it gives us in the trade off of time for stuff.

. If you start thinking about purchases in the form of how many hours you need to work to buy something, you might be less tempted to splurge. 70 hours of team meetings for that new iphone 30 hours working through excel macros to pay for that new outfit.

10. Lame excuses as tyo why you were late to buy dinner at a fancy restaurant. For some people, it’s worth it, but for many people it isn’t. For the people that don’t think it’s worth it. Sometimes the daunting prospect of actually starting to invest is the only thing holding them back.

. Fortunately, this first step can be made a lot easier. With acorns.. The fire movement is a trend amongst young workers, which is growing in popularity thanks to its very enticing goal, which is spelled out right there in the name.

Fire is an acronym for financial independence and retiring early. The idea is that, by following a very aggressive saving and investing strategy, people can get to a point where they're retired at a very young age, sometimes younger than 30.

. In a world where we are being told that pensions are running dry and the average person may have to work in some capacity for their entire life, this sounds like a bit of a lofty dream. Sure there are trust fund babies and young tech bros, who may earn millions within their first few years in the real world, but surely kicking back on a beach and never thinking about work again is not attainable for a regular wage slave right.

Well, if some figureheads and internet forums are to be believed well yeah, actually it is pretty much attainable for anybody now in the interest of full disclosure. I am a passionate advocate for the financial independence movement, but that does not mean that i don't, see issues with it now.

Many of those issues are glossed over in the sheer simplicity of it, which is also part of the reason why it is so powerful. So long as someone can get to a point where their investments are making as much as their living expenses long term.

They have achieved financial independence, simple as that. Getting to that point is harder for some than for others, but advocates of the movement argue that this difficulty has more to do with personal lifestyles rather than personal incomes.

So what are the mechanics of the fire movement? How could someone use it to stop working forever? Is this actually attainable for anybody like they say? And finally, what would this movement do to the wider economy if everyone strives towards a goal where they quit working at the age of 30? Surely this would bring our world to a grinding halt right? Well, if we can properly explore and answer these questions, we will be able to reveal if this whole thing is grounded in reality or if it's, just a fanciful pipe dream from people who really hate their boss.

This episode of economics explained was made possible by our mates at acorns the app that simplifies all your financial needs, checking, saving investing retirement and much more all in one stay tuned until the end to learn more or sign up now at acorns.

com, ee and acorns will Deposit five dollars into your portfolio to help you get started with investing the link is on the screen now and in the video description below now. If you are thinking to yourself that the idea of retiring at the age of 30 sounds pretty compelling.

The first thing you need to do is really understand how this system works so outside of broad statements like saving and investing what are the nuts and bolts of fire. There are historical figures for a range of very important factors in the economy, which helps us in a sense make projections into the future.

The assumptions that are relevant to the idea of fire are that a well-diversified investment portfolio should return around eight percent per year and then inflation is around two to three percent per year.

Some of these figures can change, but with this we get the foundation of being able to live forever off your investment portfolio. For example, if you had a million dollars invested into a broad market index fund, you would normally expect that over time the returns from this portfolio would average out to about eight percent per year and for the last 100 years, or so that has been correct.

On average, this return would be split up between dividends and capital appreciation, in other words, the rise in price of stocks within the index. What this means is that effectively, you would be able to draw 80 000 from this portfolio every year and it would still be worth a million dollars now.

80 000 is a pretty comfortable lifestyle for most people in most cities around the world and while saving a million dollars is obviously hugely difficult. It's, not impossible for people with good professional careers, especially if we are looking at dual income households, but there are two factors that make this a little bit more difficult than it would initially seem.

The first is that inflation rate, the federal reserve bank of the united states targets a 2 inflation rate in 1960. The equivalent of an 80 000 salary today was around 5 600 per year, since the fire movement is all about retiring at a very young age and enjoying a long life.

Without the need to work, you should realistically be planning for at least the next 50 years. At a 2 rate of inflation in 50 years time that 80 000 a year, salary that you are pulling from your investment portfolio would only be the equivalent of a 32 000 salary.

Today i mean you could still scrape by in a low cost of living area. In the united states, but it would be far from comfortable and it might put you in a position where you need to go back to work at the age of 70 after 40 years out of the workforce.

Good luck! What that means is that, for this million dollar portfolio, to maintain its real value, you would need to put back in at 20 000 per year to fend off that 2 inflation rate not a huge deal, but what that means is that now you are only left With 60 000 a year to live on beyond that, some people want a bit of a buffer in their investment growth, so it & # 39.

S normally suggested to reinvest at least three percent back into your portfolio year on year. Alright, so now, all of a sudden, we are living on fifty thousand dollars per year for the rest of our lives, and this is before we get to problem two.

There is a strategy in investing called dollar cost averaging, and it is a really powerful thing to understand. The idea is that the market is erratic and mostly unpredictable, but over time it trends upwards.

So if you consistently invest at a set time interval like let's, say once per month, you are going to get the most out of the market for three reasons. Reason one is that it takes the emotion out of investing.

If you automatically set money aside and don't think about it, you aren't going to be tempted to buy into the next hot stock or pull your money out at the bottom of the market. Reason 2 is that it gets your money to work right away if you hold off from investing for a year until you have done some research on a particular stock or whatever you will be missing time in the market to generate returns, since, on average, the market Returns eight percent per year, if you hold off investing ten thousand dollars, you would already be eight hundred dollars behind someone who is just dollar cost averaging time in the market beats timing, the market as it were now.

The third reason is the most powerful and also the hardest to understand the key to investing is buying low and selling high right well. By investing at set intervals, you're kind of doing this by default, which sounds weird, but let me explain if, for example, you invest 1 000 a month into walmart stock, it would depend on the price of the shares as to how much stock You actually buy, for example, if it is trading at 100 per share, you would be able to buy 10 shares simple enough, but now let's say the price doubles to 200 per share.

Well at that price, your one thousand dollar a month. Investment is only going to buy five shares and the same is true: if the price drops to fifty dollars per share, where suddenly, you're, going to be able to buy 20 shares per month by maintaining a consistent investment pattern, this hypothetical investor has Bought more shares when they are cheaper and less shares when they are more expensive, giving them a win in at least one side of this buy low and sell high debate.

The problem with all of these benefits of dollar cost averaging on the buy side is that they are the same as the drawbacks. On the sell side, if someone is drawing five thousand dollars per month from their portfolio to maintain their living expenses, then they are naturally going to sell more of their shares when they are cheaper than when they are more expensive.

For all of these reasons, most people in the fire community work around the three per cent rule. This rule is created by starting with an eight percent expected return and then deducting two percent for inflation.

One percent for market volatility, one percent for the impacts of negative dollar cost averaging and one percent as a comfortable margin of safety. In plain english, what this means is that if you can live off three percent of your investable net worth every year before considering taxes, congratulations, you are financially independent and you will continue to be into eternity all other things been equal, but three percent is not huge.

If you wanted to live off one hundred thousand dollars per year, you would need three point: three million dollars invested. There are some people that will push this three percent rule to a four percent rule to be a little riskier, but retire a little sooner.

But the fact of the matter is to pull something like this off. You still need to be pretty damn rich. The idea that anyone can do this is simply not true, but it might still be less daunting than these numbers would suggest and in fact there are even tiers of the fire movement to account for this.

So how could an average person stop working forever, while making enough money to live forever? On 100 000 a year might sound almost impossible. Many pundits of the movement argue that this is far from necessary and in fact, fire is more about assessing what you value, rather than earning lots of money.

If you value material things and want to be able to go on multiple holidays per year to exotic destinations, that's, fine, but you are going to have to give up a little bit more of your time and spend slightly longer in a career Building up an investment portfolio, if you ever want to retire, other people might be perfectly content to live in a low cost of living area and pursue low cost hobbies, which means that they will need far less money to be financially independent.

What this effectively means is that how quickly you can retire is determined by your savings rate rather than your gross savings. A nurse earning sixty thousand dollars per year after taxes and living on thirty thousand dollars per year should be able to retire within 16 years.

At a 3 safe withdrawal rate, a neurosurgeon, on the other hand, might be earning 500 000 per year after taxes, but after an expensive mortgage, private school fees, exotic holidays and student loans, they might end up spending 400 000 per year on their living expenses.

What this means is that it would take that doctor 28 years to get to a point where they could maintain their lifestyle indefinitely off their investments. Now both of these instances are the result of personal choice.

If the neurosurgeon loves his job and loves his nice, things, then well all power to them, but if they don't like their job, the fire movement advocates for properly assessing. If you like that new porsche as much as you dislike six months at work, now, of course, for some people, this mass simply doesn't work, you can only lower your living expenses so far before you push yourself into poverty and unfortunately the reality Is today that a lot of people out there can't afford even a basic lifestyle while still having money left over to save, but for those who can it's extremely important to think about major financial decisions in terms of opportunity? Costs with the missed opportunity been years that you could have spent sleeping in working on hobbies or traveling rather than sitting in an office now.

This is all well and good individually, but on a macro economic level, if this idea was to really take off, surely it's, not sustainable? How would a world without workers work? We have explored the labor market twice in the last two months, and both times we have found that human labor is very important to maintaining a functioning economy, not to mention a functioning society.

This shouldn't, be a huge surprise to anybody, least of all all the people who sit down to watch videos on economics. But what might surprise you is that there could be an alternative, consider this thought experiment.

Someone is working and saving half of their income with all that saved money, they buy a farm and then they pay to have a workshop put on that farm, and then they pay to have machines, automate the planting and harvesting of crops.

They also pay to have a mine with access to basic materials, set up and robots to harvest and refine those metals as well. Finally, their workshop is kitted out in all of the latest technology to allow them to produce anything their little heart desires from scratch.

Well, in this example, this person would be completely financially independent, assuming they don't have to pay land taxes. Now this hypothetical is sure to make a lot of ranchers and off-the-grid folks very excited, but it's, not too different from what fire practitioners are doing.

All of the things our hypothetical worker bought were either land or capital goods, as in machinery or technology that makes making stuff possible. Now, in this very direct example, this individual was investing in things that could be used to produce goods and services for themselves, but more realistically, a real person would use their money to invest into things that would be used to produce goods and services for everybody.

They would then charge everyone the rights to use their productive capacity in the form of profit, which they would then pay out to themselves as dividends and in the real world likely have a company acting to facilitate this.

In a sense, financial independence is like crowd-sourced off-the-grid independence, using financial instruments to make the process of living off machinery and land more efficient. So would a mass uptake and fire practitioners ruin the economy? Well, short-term? Yes, the drop in consumer spending and rush to financial markets would cause a lot of volatility, but long term.

It is theoretically possible. We have explored this idea before on the channel in an automated future, where capital goods completely replace labor and the factors of production in our video on autonomy.

I don't want to repeat too much of that here, but a takeaway was that this capital intensive future could be a utopia or it could be a complete disaster depending on how this inevitable transition was handled.

The financial independence retire early movement is certainly not something that is going to be the right fit for everybody. For most people, the cuts to their lifestyle are just not worth the extra few years out of their careers.

There is also, of course, the psychological aspect of not having anything to work towards go play. A sandbox game with unlimited money, hacks turned on and you get the idea of how quickly can get pretty boring without some kind of challenge.

There are theories and suggestions that go a long way to remedying some of these more psychological issues. But again, this is not our area of expertise. Here at economics explained instead from a pragmatic economist point of view, the fire movement's biggest takeaway might be the lesson it gives us in the trade-off of time for stuff.

If we start thinking about purchases in the form of how many hours you need to work to buy something, you might be less tempted to splurge 70 hours of team meetings for that new iphone 30 hours working through excel macros to pay for that new outfit.

10. Lame excuses to your boss as to why you were late in order to buy that fancy dinner well for some people, it's worth it, but for many people it isn't now for the people that don't Think it's worth it.

Sometimes the daunting prospect of actually starting to invest is the only thing holding them back. Fortunately, this step can be made a lot easier with acorns acorns. Is your all-in-one financial services app? That makes investing as easy as spending every time you use your debit or credit card.

You can set up acorns to automatically round up your purchase to the nearest whole dollar and then auto, invest the difference for you right into your diversified portfolio and the best part. Is you don't have to be an economist like myself to get started that's, because acorns does the investing work for you.

Each portfolio has been constructed with ets, managed by arguably the smartest money managers in the world, vanguard and blackrock, not to mention help from nobel prize-winning economist, dr harry markowitz.

Even better. The acorns platform provides pre-built portfolios, which you can adjust based on your risk. Tolerance, for example, if you're young and have many years before you reach retirement, you can select acorns's, aggressive portfolio which consists entirely of equities or if you're a bit older and looking to de-risk your holdings, You can select acorns's, conservative portfolio, which is entirely comprised of short-term government bonds.

Whatever your financial goals are acorns can help you get there and that's. Why we, here at economics, explained as well as seven million other users trust acorns to manage our investments and savings? We'd, be remiss if we didn't mention the power of compound interest or the eighth wonder of the world.

As einstein once said, consider this the average acorns user invests more than 30 a month using roundups or about 360 per year. Now let's, assume that you're 25 years old at the time of watching this video and you're finally ready to commit to becoming a long-term investor by setting aside just 30 a month from your roundups into Your diversified acorns portfolio, which, for this hypothetical example, grows at seven percent a year.

You'd, have a whopping, 79, 406. and 91 cents by the time you reach retirement at age 65.. That's extremely impressive for spare change that you probably won't even realize is missing here's, something else even more mind-blowing.

You can accelerate the wonders of compound interest by using a tool like acorns's. Automatic recurring contributions feature by investing just an extra ten dollars a day into this hypothetical portfolio.

You'd, have a whopping, eight hundred and seventy three thousand four hundred 476 dollars and two cents by the time you retire at age 65.. If you're thinking now. Well, that's. All great mr economics explained, but i'm, not 25, and i don't have 40 years to invest.

Let this video now remind you of that ancient chinese proverb the best time to plan a tree was 20 years ago. The second best time is now guys. Never forget. Every oak tree begins as a humble acorn, and you can start planning your financial oak tree today with acorns sign up now at acorns.

com ee and they'll deposit five dollars into your portfolio to help you get started with investing that'S acorns.com ee. The link is on the screen now and in the video description below, thanks for watching guys, bye,


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