1. A full FICA suspension:

The suspension of FICA paid by employees restores spending which supports output and employment.
The suspension of FICA paid by business helps keep costs down which in a competitive environment lowers prices for consumers.

2. $150 billion one time distribution by the federal govt to the states on a per capita basis to get them over the hump.

3. An $8/hr federally funded transition job for anyone willing and able to work to assist in the transition from unemployment to private sector employment.

Call me an inflation hawk if you want. But when the fiscal drag is removed with the FICA suspension and funds for the states I see risk of what will be seen as ‘unwelcome inflation’ causing Congress to put on the brakes long before unemployment gets below 5% without the $8/hr transition job in place, even with the help of the FICA suspension in lowering costs for business.

It’s my take that in an expansion the ‘employed labor buffer stock’ created by the $8/hr job offer will prove a superior price anchor to the current practice of using the current unemployment based buffer stock as our price anchor.

The federal government caused this mess for allowing changing credit conditions to cause its resulting over taxation to unemploy a lot more people than the government wanted to employ. So now the corrective policy is to suspend the FICA taxes, give the states the one time assistance they need to get over the hump the federal government policy created, and provide the transition job to help get those people that federal policy is causing to be unemployed back into private sector employment in a more orderly, more ‘non inflationary’ manner.

I’ve noticed the criticism the $8/hr proposal- aka the ‘Job Guarantee’- has been getting in the blogosphere, and it continues to be the case that none of it seems logically consistent to me, as seen from an MMT perspective. It seems the critics haven’t fully grasped the ramifications of the recognition of the currency as a (simple) public monopoly as outlined in Full Employment AND Price Stability and the other mandatory readings.

So yes, we can simply restore aggregate demand with the FICA suspension and funds for the states, but if I were running things I’d include the $8 transition job to improve the odds of both higher levels of real output and lower ‘inflation pressures’.

Also, this is not to say that I don’t support the funding of public infrastructure (broadly defined) for public purpose. In fact, I see that as THE reason for government in the first place, and it should be determined and fully funded as needed. I call that the ‘right size’ government, and, in general, it’s not the place for cyclical adjustments.

4. An energy policy to help keep energy consumption down as we expand GDP, particularly with regard to crude oil products.

Here my presumption is there’s more to life than burning our way to prosperity, with ‘whoever burns the most fuel wins.’

Perhaps more important than what happens if these proposals are followed is what happens if they are not, which is more likely going to be the case.

First, given current credit conditions, world demand, and the 0 rate policy and QE, it looks to me like the current federal deficit isn’t going to be large enough to allow anything better than muddling through we’ve seen over the last few years.

Second, potential volatility is as high as it’s ever been. Europe could muddle through with the ECB doing what it takes at the last minute to prevent a collapse, or doing what it takes proactively, or it could miss a beat and let it all unravel. Oil prices could double near term if Iran cuts production faster than the Saudis can replace it, or prices could collapse in time as production comes online from Iraq, the US, and other places forcing the Saudis to cut to levels where they can’t cut any more, and lose control of prices on the downside.

In other words, the risk of disruption and the range of outcomes remains elevated.

Though it does make Australia one of the world’s largest contributors to the increasingly unpopular emissions issues.

Australia Has Record Trade Surplus on China Coal, Iron Demand

Australia Has Record Trade Surplus on China Coal, Iron Demand

By Jacob Greber

Aug. 4 (Bloomberg) — Australia’s trade surplus unexpectedly
reached a record in June as Chinese demand spurred exports of
coal and iron ore, while imports stagnated amid a slowdown in
domestic spending.

The excess of exports over imports reached A$3.54 billion
($3.2 billion), almost double the median forecast in a Bloomberg
News survey, a Bureau of Statistics report showed in Sydney
today. A separate report showed house-price gains decelerated in
the second quarter, underscoring the impact of the central
bank’s six interest-rate increases since early October.

Good for stocks, not so good for most of the people still struggling to survive, as the Obama administration continues to preside over what might be the largest transfer of wealth from bottom to top in the history of the world.

And no credible energy policy. We are completely at the mercy of the Saudis who can unilaterally hike prices any time they feel like it.

Karim writes:

• “Business in July was strong, the best month since October 2008.” (Fabricated Metal Products)
• “Slow economy has killed sales for new equipment orders.” (Machinery)
• “Quoting activity and sales are slow, and backlog is dropping.” (Computer & Electronic Products)
• “Business continues to be sluggish and has fallen slightly as the economic ills continue.” (Nonmetallic Mineral Products)
• “Retailers are still unwilling to gamble on inventory.” (Printing & Related Support Activities)

Bernanke

While the support to economic activity from stimulative fiscal policies and firms’ restocking of their inventories will diminish over time, rising demand from households and businesses should help sustain growth. In particular, in the household sector, growth in real consumer spending seems likely to pick up in coming quarters from its recent modest pace, supported by gains in income and improving credit conditions. In the business sector, investment in equipment and software has been increasing rapidly, in part as a result of the deferral of capital outlays during the downturn and the need of many businesses to replace aging equipment. At the same time, rising U.S. exports, reflecting the expansion of the global economy and the recovery of world trade, have helped foster growth in the U.S. manufacturing sector.

To be sure, notable restraints on the recovery persist. The housing market has remained weak, with the overhang of vacant or foreclosed houses weighing on home prices and new construction. Similarly, poor economic fundamentals and tight credit are holding back investment in nonresidential structures, such as office buildings, hotels, and shopping malls.

This chart shows demand for gasoline is still down year over year, even with substantially lower prices.

It is also another indication of the ‘soft spot’ in demand that may have hit a couple of months ago.

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Looks like it, unless there is another side of this story we don’t know about, but seems highly doubtful

The only legal place you can store mercury is in your mouth, by the way.

Mercury Found in Every Fish Tested, Scientists Say

By Cornelia Dean

August 19 (NYT) — When government scientists went looking for mercury contamination in fish in 291 streams around the nation, they found it in every fish they tested, the Interior Department said, even in isolated rural waterways. In a statement, the department said that some of the streams tested were affected by mining operations, which can be a source of mercury pollution, so the findings, by scientists at the United States Geological Survey, do not necessarily reflect contamination levels nationwide. But Interior Secretary Ken Salazar said the findings underlined the need to act against mercury pollution. Emissions from coal-fired power plants are the largest source of mercury contamination in the United States. A quarter of the fish studied had mercury levels above safety levels set by the Environmental Protection Agency for people who eat the fish regularly, the Interior Department said.

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(email exchange)

This will drive up prices of food and energy longer term.

Still no plan to quickly bring down crude demand to offset declines in supply side incentives.

>   
>   Obama doesn’t buy the idea that US tax credits encourage oil and
>   gas production. His FY-2010 budget would delete eight such tax
>   breaks – start importing Brazilian ethanol.
>   

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It’s too early to say for sure the Mike Master’s sell off has run its course.

I looked at the announced OPEC supply cut as evidence they think it has.

Net supply issues remain and at least so far demand destruction has only meant a slowing growth of consumption.

Crude Oil Rises on Surge in Global Equities, Possible Fed Cut

By Alexander Kwiatkowski

Supply Declines

Global crude-oil output is falling faster than expected, leaving producers struggling to meet demand without extra investment, the Financial Times said, citing a draft of an International Energy Agency report.

Annual production is set to drop by 9.1 percent in the absence of additional investment, according to the draft of the agency’s World Energy Outlook obtained by the newspaper, the FT reported. Even with investment, output will slide by 6.4 percent a year, it said.

The shortfall will become more acute as prices fall and investment decisions are delayed, the newspaper said. The IEA forecasts that the rising consumption of China, India and other developing nations requires investments of $360 billion a year until 2030, it said.

OPEC Considers Meeting

The Organization of Petroleum Exporting Countries’ decision last week to trim production for the first time in almost two years failed to stop prices falling yesterday.

“If circumstances dictate we have another meeting, of course we will meet,” OPEC Secretary-General Abdalla el-Badri said at the Oil & Money conference in London. He said he expects a market response to last week’s output cut after about a week.

Shokri Ghanem, chairman of Libya’s National Oil Corp., echoed el-Badri’s comments, saying he’s watching the market to see whether it’s deteriorating or stabilizing.

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Bank of England holds interest rate at 5%

by Gary Duncan, Grainne Gilmore

The Bank of England rebuffed mounting concerns over the rapidly weakening economy today and held interest rates at 5 per cent as it pursued its drive to quell soaring inflation.

The tough verdict from the Bank’s rate-setting Monetary Policy Committee (MPC) brushed aside pleas from business leaders and trade unions for a cut in base rates to shore up Britain’s growth, amid growing fears that the country is on the brink of recession.

The Bank’s decision came after headline consumer price inflation leapt to a 10-year high of 3.8 per cent in June, well above the Bank’s 2 per cent target, and amid expectations that it could hit 5 per cent over the summer, following swingeing increases in household gas and electricity bills imposed by utility companies.

The MPC had been widely expected to spurn pressure for a rate cut today in a bid to make clear its determination to bring inflation back to the target set by the Chancellor. The committee will almost certainly have discussed raising rates this morning, as it did last month, when Professor Tim Besley, voted for an immediate increase. He is expected to have done so again today, and may have been joined by other hawkish MPC members.

The Bank will set out its thinking more clearly next week when it publishes its latest forecasts for the economy in its quarterly Inflation Report. That is expected to emphasise the dilemma that the MPC confronts, with inflation set to soar far above target in the next few months, even as the economy slides towards a severe downturn.

The quandary facing the Bank was underlined yesterday as the International Monetary Fund sharply cut its forecasts for Britain’s growth this year and next, while issuing a warning that it saw “little scope” for interest rates to fall, although it also saw no need for an immediate rate rise.

Today’s no-change verdict by the MPC came despite bleak economic news in recent days, which have produced danger signs of recession.

Concern that Britain’s growth had ground to a virtual halt last month, and could even be in the grip of recession, were inflamed this week after bleak figures revealed growing frailty in the most critical parts of the economy.

These included shrinking activity in the services sector, the economy’s engine room that account for three quarters of the UK’s output, as well as in manufacturing.

The services sector, spanning businesses from cafes and leisure centres to accountancy and law firms, shrank for a third month in succession last month, according to the latest purchasing managers’ survey, regarded by the Bank as a key gauge of economic conditions.

Although services activity edged up from a seven-year low that was plumbed in June, the survey pointed to an even sharper slowdown ahead, with levels of outstanding business for the sector’s companies falling for a tenth month in a row, and inflows of new business dropping to a record low.

At the same time, it emerged that manufacturing is suffering its first sustained run of decline since 2001, after its output fell in June for a fourth month in a row, dropping by 0.5 per cent.

The figures were among the latest data confirming the dire plight of the economy, and came after official confirmation that the pace of Britain’s overall growth slowed to just 0.2 per cent in the second quarter, its weakest rate of expansion for three years.

The falling housing market remains a key source of economic anxiety, with the Nationwide Building Society reporting that house prices tumbled by a further 1.7 per cent last month, leaving them down 8.1 per cent on last year – their sharpest annual pace of decline since 1991.

The high street is also being badly hit by the downturn, with official figures showing that retail sales plunged by 3.9 per cent in June – their biggest monthly drop for 22 years.

Yesterday, the International Monetary Fund added to the mood of pessimism as it cut its forecast for Britain’s growth this year and next to only 1.4 per cent, and 1.1 per cent, respectively. The prediction of the UK’s worst performance since the end of the last recession raised the spectre of two years of economic misery.

In May, Mervyn King, Governor of the Bank, was forced to write an explanatory letter to the Chancellor, required by law, explaining why inflation had risen more than 1 point above its 2 per cent target, after it climbed to its then-high of 3.3 per cent. Mr King has admitted that he expects to write more such letters this year.

The Bank’s inflation headache has been further aggravated by signs of further severe price pressures in the pipeline to the consumer, Manufacturers’ costs rose at a record 30 per cent annual rate in June, and prices for goods leaving factories rose by a record 10 per cent. Inflation is being stoked by a sharp slide in the pound, by about 12 per cent over the past year, which lifts Britain’s bills for imported products.

However, there has been some let up in international food and energy costs, with oil prices tumbling by 13 per cent in a month, and prices for food products are also on the slide.

>   
>   On 8/3/08, Craig wrote:
>   
>   Ok. And the irony is as prices fall, demand increases again.
>   Until consuming governments get their head around that fact
>   and put some kind of floor under crude prices to incent
>   substitution (which may be beyond their thinking and/or impossible
>   politically), it seems like crude prices are gonna play rope-a-dope
>   with consumers.
>   
>   
>   Craig
>   
>   

Crude will be rationed as is everything else (scarcity, etc.).

The question is how. Ration by price or by other things?

Rationing by price is the most pervasive and means the wealthy (by definition) outbid the less wealthy for the available supply.

Make you wonder why the Democrats support higher prices, as that means they support their supporters going without while the wealthy drive any size SUV they want. Much like wondering why Obama supports Bernanke after Bernanke explained to Congress how he’s keeping inflation down by keeping a lid on inflation expectations after explaining the main component of inflation expectations is workers demanding higher wages, meaning Obama, Kennedy, and the rest of the left is praising Bernanke for doing a good job of suppressing wages.

Non-price rationing is less common but not unfamiliar, such as mandating cars get an average of 27 mpg, minimum efficiency standards for refrigerators, windows, etc. This takes an element of rationing by price away and results in the wealthy consuming less and leaving some for the less wealthy to consume a bit.

So seems to me the logical path for the Democrats would be something like my 30 mph speed limit for private transportation, which is ‘progressive’ and also drives the move towards public transportation with non price incentives as previously outlined. But there hasn’t even been any discussion of a progressive policy response. All seem highly regressive to me.

So I expect the world’s new and growing class of wealthy will continue to outbid our least wealthy for fuel and other resources.

Also, there may be limits to how high we want world consumption/burning of fuels for all the various ‘green’ reasons.

That would mean drilling and other production increases are out, as would be increased use of coal via the electric grid for electric cars.

And, again, it would be the world’s wealthy outbidding the less wealthy for consumption of the allowable annual fuel burn, as somehow allocation by price continues to rule.

Most paths keep coming down to the continuing combination of weakness and higher prices.

Warren

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(comments from my brother, Seth, who was cc’d)

>   
>   I think democrats have lots of business and profits waiting
>   in govt subsidies for wind and solar. If oil prices fall that goes
>   away for now and they can’t produce on the subsidies for
>   them-cynical view but probably true
>   
>   There are also a lot of wealthy democrats and they want their
>   votes. Poor people all vote for democrats anyway-even with
>   declining lifestyles they are not going to McCain. So I think
>   Obama is pandering to the wealthy-it might be who he is-no
>   one really knows.
>   
>   With all of their green talk I have not seen any of them reduce
>   air travel, suv caravans or turn off the a/c in the capital. Just a
>   way to get votes and sound concerned. I saw a tv program
>   about how the chinese olympic swimming building is a green
>   sustainable building. It is 7 acres, pools, 25,000 people.
>   they finally said it uses about 25% less energy than a comparable
>   building would have. That is not green or sustainable, especially
>   since the building was not needed in the first place. I think “green”
>   is about making money, not the environment.
>   
>   
>   Seth
>   

I just can’t allow myself to be that cynical like you new yorkers!

:)

Warren

>   
>   
>   I think I am cynical usually, but this green thing drives me nuts
>   it started 30 years ago but is now all about money
>   when I see some lights turned off in Times Square (even in the
>   daytime) or the 5 huge spot lights on the CBS building lighting up
>   Katie Couric’s 50′ x 30′ poster which are on 24 hours a day turned
>   off, then I will believe it is about resources and not money.
>   there is a long way to go.
>   they advertise expensive green buildings here-I am not kidding-the
>   big thing is thermostats with timers on them and bamboo floors-didn’t
>   we have those 30 years ago??
>   
>   they talked about the oscar ceremony being green this year-the
>   celebrities were all giddy about it-what they did was use red
>   carpet made of recycled fibers????? what is that?
>   absolutely nothing-
>   anyway, time to calm down. too much excitement here
>   seth -
>   
>   

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