Libyan Rebels, Gulf Cooperation Council Seek No-Fly Zone; President Obama, NATO Discuss the Possibility; How Do You Make a No-Fly Zone?

In order for the United Nations to act on a no-fly zone, all 5 permanent members of the UN Security council would have to agree. Those members are China, France, the Russian Federation, the United Kingdom and the United States.

Both China and Russia are against military action. However, NATO is another matter, and in response to a request from the six states of the Gulf Cooperation Council, president Obama and NATO are discussing the possibility.

Gulf Cooperation Council Requests No-Fly Zone

Please consider Qaddafi Airstrikes Spur NATO Talks of a Libya No-Fly Zone

Libyan government warplanes repeatedly bombed rebel positions near the oil hub of Ras Lanuf, adding urgency to discussions among U.S. and allied governments about imposing a no-fly zone.

President Barack Obama said members of the North Atlantic Treaty Organization are consulting on a “wide range” of potential responses to the turmoil in Libya, including military options. Arab Gulf nations advocated a no-fly zone as oil rose to the highest level in 29 months in New York.

U.K Foreign Secretary William Hague told Parliament that discussions at the United Nations Security Council on a resolution authorizing a no-fly zone are focused on setting a “clear trigger” for UN action and the legal basis for military actions. NATO defense ministers plan to meet March 10 and 11 in Brussels to discuss potential military and humanitarian actions in response to the Libyan clashes.

“I can’t imagine the international community and the United Nations standing idly by if Qaddafi and his regime continue to attack their own people systematically,” NATO Secretary General Anders Fogh Rasmussen told reporters yesterday in Brussels. “NATO has no intention to intervene in Libya, but as a defense alliance and security organization, our job is to conduct prudent planning for any eventuality.”

Obama said yesterday he authorized $15 million for aid organizations in addition to the $2 million the U.S. has already provided to support emergency evacuations of foreign workers who fled to the borders of Egypt and Tunisia.

The six Persian Gulf states of the Gulf Cooperation Council called on the United Nations to impose a no-fly zone over Libya to protect civilians caught in the battles, the group’s Secretary-General, Abdul Rahman Al Attiyah, said in Abu Dhabi after a meeting yesterday.

NATO is already increasing its surveillance of Libyan airspace, said the U.S. ambassador to NATO, Ivo Daalder.

The U.S. alliance has been flying Airborne Warning and Control System radar planes for 10 hours a day over the Mediterranean Sea and will increase that to round-the-clock coverage, Daalder told reporters on a conference call yesterday. Information from that monitoring and from NATO planning will be assessed by defense ministers, he said.
Decision Time

“Towards the end of the week, we will be in a position to know what it would take to do a no-fly zone,” Daalder said. “We will have a pretty good idea what kinds of options are available.”

White House press secretary Jay Carney said yesterday that it is “premature” to discuss sending weapons and supplies to the rebels. While providing arms to the rebels ‘is one of the range of options that is being considered,’’ Carney said, “it would be premature to send a bunch of weapons to a post office box in eastern Libya. We need to not get ahead of ourselves in terms of the options we are pursuing.”

Rebels Requests No-Fly Zone

CBS News Reports Libya rebels beg for no-fly as bombings persist

CBS News was en route to the front line when a government warplane dropped two bombs on a road leading there. The shrapnel from those bombs was still warm when CBS News arrived at the blast site.

Near the craters was the wreckage of a pickup truck. A family with three children was in it when Qaddafi's air force struck. Two of the children died.

The survivors were slashed by shrapnel. The circling warplanes made for a very jumpy day on the front line

Britain, France Seek No-Fly Resolution

Yahoo! News reports Britain, France ready Libya no-fly zone resolution

A British-French resolution demanding a no-fly zone over Libya could go before the UN Security Council as early as this week, diplomats said Monday.

While Moamer Kadhafi's offensive against rebels is intensifying, any demand for military action would set off a new diplomatic battle at the Security Council.

Anticipating opposition, Britain's foreign minister has insisted that there must be "a clear legal basis" for the zone and set other conditions.

"You should expect something on Libya this week," one UN diplomat told AFP on condition of anonymity, confirming that France and Britain are drawing up a resolution. "There is a feeling of urgency now."

"There are elements of a text ready which can be distributed to the council. It could well be this week," said a British diplomat.

Britain and France have made the most aggressive calls among Western powers for a no-fly zone to hamper Kadhafi's offensive. The United States has said it is studying the possibility while warning of the major military operation it would entail.

The UN Security Council unanimously passed sanctions against the Kadhafi regime and ordered a crimes against humanity investigation on February 26. Any new move toward military action is likely to face tough resistance from China, Russia and other members of the 15 however.

Russia's Foreign Minister Sergei Lavrov last week called the no-fly zones "superfluous" and said international powers should concentrate on the existing sanctions.

"We do not consider foreign and especially military intervention a means to resolve the crisis in Libya," Russian news agencies quoted Lavrov as saying Monday. "The Libyans must resolve their problems themselves."

China's foreign ministry also indicated last week that it was cool to military action.

India, also a member of the Security Council, has opposed no-fly zones, though diplomats said it could be swayed if the Libya fighting worsens.

How Do You Make a No-Fly Zone?

Slate Magazine addresses the question: How Do You Make a No-Fly Zone?

American politicians are debating whether to establish a no-fly zone over Libya to prevent Muammar Qaddafi from bombing rebels. The Pentagon and White House advisors warn that such an operation would be complicated and tantamount to war, while several senators say it could be accomplished with relative ease.

How do you set up a no-fly zone?

Generally speaking, the first step in creating a no-fly zone is to blow up nearby anti-aircraft guns, missile batteries, radar installations, or anything else that might be used to shoot down a no-fly air patrol. Not every military commander takes that step: NATO planes didn't wipe out the air defenses in northern or southern Iraq, or the former Yugoslavia, prior to launching patrols. But Defense Secretary Gates has made it clear that he won't send combat planes into Libya without first laying the proper groundwork. If his plan were put into action, the United States would destroy Qaddafi's defenses, then send pairs of fighter jets, mostly F-15s and F-16s, to fly around the country in irregular patterns for six-hour shifts. If the pilots were threatened by ground-based fire, they would engage in evasive maneuvers—quick acceleration, climbing, diving, and sweeping—to thwart the gunners before noting their position and responding with missile strikes.

Some fighter pilots get pretty stoked about patrolling a no-fly zone, because it's one of the few missions that might actually lead to air-to-air combat. (The last American flying ace—that's a pilot who shoots down five or more enemy planes—earned his title during Vietnam.) But those looking for a dogfight in the no-fly zone have usually been disappointed. NATO pilots shot down just one Iraqi plane during the 1990s, and it had barely entered the zone when it was destroyed. After that incident, neither Saddam Hussein nor Slobodan Milosevic wanted to risk his expensive aircraft in a showdown with American pilots, so they kept their planes on the ground and hidden as best they could. Pilots report that no-fly zone patrols involve a few hours of boredom, and a few minutes of excitement evading any ground-based defenses that weren't destroyed ahead of time.

Count me in the group that thinks this would be a piece of cake. The Libyan air force would be no match for US fighter pilots.

The first few Libyan planes that attempted to fly would be immediately blasted from the sky and that would end the flight attempts right then and there.

Addendum:

Several people thought what I wrote above implies definitive support for a no-fly zone. It doesn't.

I can make a case either way. Here is the no-fly zone case.

1. We were invited to the party, not only by the rebels but by the Gulf Cooperation Council.
2. The mission is easy to define with easy goals.
   
3. The mission curtails little risk.
   
4. The mission has a low cost.
   
5. The US and Europe both have a strategic interest should Qaddafi suddenly decide to start blasting the refineries in a final act of desperation.

Some will find that list compelling, others not. In general terms, I think all 5 of those conditions are necessary before one can even think about a military option. Compare those points to Vietnam, Iraq, and Afghanistan and it is tough to explain how any of those wars met any of the above conditions (simplifying point 5 to the general case "strategic interest").

Nonetheless, I have a great deal of sympathy for the one-point position "this is not our battle".

Either way, I strongly oppose sending in US ground troops in any circumstances.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Hussman on QE and the "Iron Law of Equilibrium"; Will Stocks Be Firm Until QE II Ends?

Inquiring minds are reading John Hussman's latest post Quantitative Easing and the Iron Law of Equilibrium.

The Iron Law of Equilibrium: Every security that is issued must be held by someone until it is retired.

There are three corollaries to that Law: 1) No security can be under- or over-owned. Prices and expected returns adjust to ensure that the exact quantity outstanding is the exact quantity held. The investor's challenge is to ask whether those prices and expected returns are reasonable; 2) The outstanding stock of issued currency and money market securities always remains effectively “on the sidelines” and held by someone - until the time those securities cease to exist; 3) Money never goes “into” or comes “out of” a secondary market. It is always “home.”

If you think carefully about equilibrium, it helps to clear up all sorts of fallacies that people hold about the financial markets. For example, the currency and money market securities that are held by investors will - in aggregate - never "find a home" in any other form or any other market. If somebody takes their cash and tries to buy stock, they get the stock and the seller gets the cash. Nothing disappears, and nothing is created - only the owner changes. As I wrote years ago in the Freight Trains and Steep Curves piece that anticipated the recent financial strains, the mountain of money-market securities held by investors is not a reflection of "liquidity looking for a home," but is rather a measure of how dependent borrowers are on short-term sources of credit. Investors are holding a lot of money market securities because a lot of money market securities have been issued, and those securities will stick around until they are retired.

As I noted last week, an understanding of equilibrium is particularly important when it comes to the Federal Reserve's program of Quantitative Easing (QE), so some further discussion may be helpful.

Essentially, QE has added to what will soon be $2.4 trillion of non-interest bearing cash and bank reserves, which someone will have to hold. The first effect of QE is therefore to immediately drive the interest rate on near-substitutes of cash (such as 1-month and 3-month T-bills) to nearly zero. This happens because any significant positive interest rate would induce people to try to shift their holdings from non-interest bearing cash to T-bills, and they bid up T-bills to the point where they are indifferent between the two. In the end, all the T-bills that have been issued are held, and all the cash is held (if interest rates could not be pressed lower, the competition between interest-bearing stores of wealth and zero-interest cash would make cash a "hot potato," causing it to rapidly lose value relative to goods, services, and everything else, which is what we call inflation).

Technically, the Fed is buying Treasury securities and creating currency and bank reserves to pay for them. This would simply be an asset swap were it not for the fact that the U.S. is running a budget deficit of about 10% of GDP, so the Fed's purchases don't even absorb the amount of newly issued Treasury debt. The government budget constraint is simple: spending = taxes, plus the change in Treasury securities held by the public, plus the change in Treasury securities held by the Fed (base money creation). So the overall effect of QE is to reduce the amount of debt that the public would otherwise have to buy, and to instead create money and bank reserves to indirectly finance government spending.

The main effect of QE on the financial markets has little to do with stimulating spending, and everything to do with the fact that the currency and bank reserves bear zero interest, and yet have to be held by someone. In equilibrium, QE requires that the interest rates on near-cash securities must also be nearly zero.

Of course, a similar process happens for riskier and longer-term assets, but the resulting returns are less exact. For stocks, we've seen investors drive prices up to the point where probable 10-year returns are only about 3.2%. But of course, you can get a 3.2% 10-year return by having zero returns for 1-year, and returns averaging about 3.6% for the next 9 years. So depending on the overall profile of returns expected by investors, it's quite possible that near term stock returns have already been driven to zero on a risk and maturity-adjusted basis. The key point, in any event, is that the primary function of QE is to distort market equilibrium by raising the price and depressing the future prospective returns on nearly every asset class.

If you look at the commodity markets, the same factors are at play. Regardless of whether one expects modest or significant inflation, it's clear that the inflation expectations of the market are generally positive. So people expect that a year or two from now, goods and services will be more expensive. But if they are holding cash or money market securities, it is clear that interest earnings will not make up for those higher prices. So what do people predictably do? They hoard commodities now. When does it stop? At the point where commodities are priced high enough that they are expected to have the same negative return, relative to a broad basket of consumer goods, as cash is expected to have.

Keep in mind that commodities aren't really a good inflation hedge once inflation is well anticipated. Rather, commodities tend to "overshoot" in the early stages of inflation, and then typically lose ground relative to the broad CPI as inflation proceeds. For example, in 1975, the CRB shot to about 5 times the level of the CPI. By the early 1980's, the ratio had dropped to half that level, and continued to decline during the subsequent disinflation.

It is widely believed that the rise in commodity prices reflects the effects of China, India and other developing countries, but this long-term growth story certainly didn't prevent commodities from collapsing in 2008. It's a well-known result in resource economics that even when a resource is exhaustible and in significant demand, the price does not rise at a spectacular rate. Rather, except when there are new shocks that were previously unanticipated, the price of an exhaustible resource will tend to increase at roughly the rate of interest (Hotelling's rule).

Certainly, concerns in Libya and elsewhere are creating some additional short-term pressures, but it should be clear that the primary force behind the rise in commodity prices is that QE has suppressed real interest rates to negative levels. If anything, QE is one of the primary forces driving up food and energy prices globally, contributing to extreme difficulty among the impoverished of the world, and adding to social tensions and resulting violence.

With the notable exception of the spike in the CRB triggered by the OPEC oil embargo in 1973, which preceded the movement of real interest rates, a significant portion of commodity price fluctuations reflects pre-emptive hoarding and release of commodities as surrogates for future consumption of goods and services, in response to the difference between expected inflation and the interest rate available on money-market securities.

Sideline Cash Myth Revisited

Corollaries two and three above are simply another iteration of the sideline cash myth that Hussman and I have written about many times before.

The myth is "cash is waiting to come into the market driving up the price of stocks". The reality is that except for IPOs and debt offerings, for every buyer of a security there is a seller. Thus, no matter how many shares of stock anyone buys, the amount of sideline cash does not change.

However, the Fed did succeed in changing short-term sentiment towards equities and commodities alike, and that sentiment change has been to the upside.

Will Stocks Be Firm Until QE II Ends?

Based on continually bullish surveys, it appears that most market participants expect a positive market bias to commodities and equities until Quantitative Easing stops.

While that could be the case, it is not necessarily so.

Recall the stock market and commodities started rising on the Fed's QE announcement,months before the program actually started. Might not equities and commodities sell off months ahead of the end of QE II?

Of course everyone expects QE III and QE IV. However, those expectations may not translate into reality and it's also possible those expectations have already been priced in, if not more than priced in.

CRB Overshoot, Are We There Yet?

Hussman points out the tendency of the CRB to "overshot" to the point where commodities have have a large negative value in further hoarding. The same applies to equities. We may (or may not be) at such a point already.

Yet, Bernanke denies any responsibility for commodity price pressures while conveniently taking credit for the rise in the stock market. Such a position is clearly not defensible.

Stock Market Valuations

Hussman wrote "As of last week, the estimate from our standard methodology is that the S&P 500 is priced to achieve total returns over the coming decade averaging about 3.2% annually. That said, this long-term estimate does not reduce into a forecast for near-term returns, or even returns over the next year or two."

I think 3.2% is in the high side. For details, please see Negative Annualized Stock Market Returns for the Next 10 Years or Longer? It's Far More Likely Than You Think

Whatever the rates of return are, I side with Hussman in regards to skew. Returns are highly unlikely to be uniform.

Moreover, given the current structural headwinds and fiscal constraints, I believe there is a much greater than even chance the next five years will not be as good as the subsequent five years.

Finally, even if Hussman's model is correct, 3.2% annualized returns will cause massive additional stress on poorly-funded pension plans and their unsustainable assumptions of 7.5 to 8% annual returns.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Gallup Survey Shows Unemployment Rate at 10.3% and Rising, BLS Says 8.9% and Falling

A Gallup survey says the unemployment rate in the US is 10.3% and rising. Meanwhile, the BLS says it's 8.9%. The comparison is not precise because Gallup does not seasonally adjust but the BLS does.

However, on an equal comparison basis, Gallup has the unemployment rate where it was a year ago but the BLS shows a drop of .5%.

For BLS details please see BLS Jobs Report: Nonfarm Payroll +192,000, Unemployment Rate 8.9%; Reflections on the Jobs Report .

Now let's take a look at the most recent Gallup survey.

Gallup Finds U.S. Unemployment Hitting 10.3% in February

Inquiring minds note Gallup Finds U.S. Unemployment Hitting 10.3% in February

Unemployment, as measured by Gallup without seasonal adjustment, hit 10.3% in February -- up from 9.8% at the end of January. The U.S. unemployment rate is now essentially the same as the 10.4% at the end of February 2010.

Unemployment Rate Not Seasonally Adjusted



The percentage of part-time workers who want full-time work worsened considerably in February, increasing to 9.6% of the workforce from 9.1% at the end of January. A larger percentage of the U.S. workforce is working part time and wanting full-time work now than was the case a year ago (9.3%).

Part-Time Workers Wanting Full-Time Jobs



Underemployment Surges in February

Underemployment, a measure that combines part-time workers wanting full-time work with those who are unemployed, surged in February to 19.9%. This resulted from the combination of a sharp 0.5-point increase since the end of January in the percentage unemployed and a 0.5-point increase in the percentage working part time but wanting full-time work. Underemployment is now higher than it was at this point a year ago (19.7%).

Underemployment



This deterioration in the jobs situation combined with surging gas prices, budget battles at the federal and state level, and declines on Wall Street tend to explain the recent plunge Gallup recorded in consumer confidence. They also align with the continued "new normal" spending patterns of early 2011. Although Gallup's Job Creation Index has improved over the past year and showed modest improvement in February, the improvement has not been significant enough to positively affect underemployment and unemployment.

Warren Buffet said Wednesday on CNBC that the U.S. unemployment rate should be in the low 7% range by late 2012. If that is going to be the case, the job creation environment must change dramatically from what it is today.

Explaining the Differences

I was asked to shed some light on the differences between these surveys. Except to reiterate an opinion from last year I cannot.

Last year I stated that normal seasonal firing patterns may not play out. My rationale was a belief that we would not see the traditional release of employees in the post-Christmas slump because staffs were cut to the bone and there was a marginal pickup in consumer demand.

That presumption now appears to be the case. However, the question is not one of a few good months of non-firing but rather where to from here.

I still see no driver for job growth, and that is just what Gallup says. Moreover, I discussed this setup not as an afterthought, but in advance.

Adding to that discussion, just yesterday I noted Big-Box Retailers Reconsider Size; Saturation, Online Sales Affect Store Expansion Plans and Hiring Needs

...

Big-Box Decisions Affect Store Hiring Plans

I am wondering, do we really need "Walmart Express" at all? At best it is a sign of total saturation of big boxes and a turf battle for smaller cities and neighborhoods.

As such, think about store hiring plans now vs. store hiring plans in the midst of the big-box commercial real estate boom.

With the new "smaller is better" model, another commercial real estate boom remotely close to the build-out that occurred in 2005-2007 is not in the cards.

Moreover, residential housing is still dead.

Together, the picture just does not add up to the 200,000+ jobs a month many economists and market cheerleaders expect.

Risks Skewed to the Downside

The Gallup survey reflects what I suggested would happen. Improvements last month have given way to a relapse this month (it just has not shown up in the BLS reports).

Moreover, critical budget issues affect states, and Congress is poised to cut spending. Together with rising oil prices on a supply shock, possible European interest rate hikes, a cutoff in Quantitative Easing, forced cutbacks in China due to overheating, and a stock market that is priced well beyond perfection, the best one can say is that risks are hugely skewed to the downside, both for the stock market and the unemployment picture.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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In Praise of Extreme Public Union Lunacy in San Jose

Hardly a week goes by in which I do not see examples of extreme public union idiocy. Nonetheless, it is rare to see an entirely new concept prop up. Here's a new one.

Pete Constant, a San Jose Councilman wants to answer his own phone. However, union rules dictate that he have a $70,000 assistant he does not even want. What's even more ridiculous is the union has sent this matter to the courts to resolve.

Please consider Internal Affairs: The fight over Councilman Constant's missing secretary

At a time when San Jose faces more than a $100 million budget deficit and the prospect of hundreds of layoffs, San Jose City Councilman Pete Constant is battling with a City Hall employees' union over whether he should be forced to hire an administrative assistant.

Judge Kevin McKenney of Santa Clara County Superior Court recently ordered that the case be taken to a costly arbitration instead of the state's Public Employment Relations Board -- something both Constant and the city's attorneys had sought.

That decision pleased the city's 214-member Confidential Employees Organization, which contends the city was required to confer with the union before Constant decided to eliminate the position. The job -- which requires answering phones, scheduling appointments and making photocopies, among other duties -- pays about $70,000 a year.

"My concern quite frankly is not who decides the issues. It's getting a resolution on the core issue, which is: Who should determine how I staff my office?" said Constant, who was re-elected last year to a second term representing West San Jose.

The City Council's only Republican contends that residents of the district support his ability to make decisions for them. Besides, Constant said, he prefers to do all of the secretarial work himself, with help from four full-time council aides.

Councilman Constant contends that the $70,000 can be better spent on things such as resource fairs, helping neighborhood associations, an online database that updates Constant's office with constituent information and inquiries, and license fees for an iPhone app that allows residents to easily report problems.

But LaVerne Washington, president of the employees' association, said it is not Constant's prerogative to create his own "process and procedures," which she said conflict with labor agreements between the city and the union.

In Praise of Lunacy

I commend the sheer idiocy of LaVerne Washington, president of the employees' association, in pressing this case.

LaVerne Washington shows without a doubt why the only solution to this madness is the total repudiation and complete destruction of public unions.

I cheer Washington's idiocy because this is just the kind of thing that gets the public riled up against public unions. It will backfire.

Union Slave Rules

Union rules prohibit citizens from being volunteer fireman, from volunteering to help their schools, from seeking non-union employment, and from controlling their own lives.

Now we see union rules dictate a city councilman who does not want to hire an assistant to waste $70,000 hiring one.

People cannot yell "fire" in a movie theater, for good reason. For the same reason, union rights to "organize" must stop at the point when they tread on the rights of others to pursue employment, to do whatever they want with their own time, and to not waste money hiring employees they do not need.

No one who stands up for the taxpayer in public union contracts. Worse yet, many of those contracts intrude on private rights as noted above.

The proper solution is the complete elimination of public unions and all the slavery they stand for.

Please see Paul Krugman, Stephen Colbert, Bill Maher, others, Ignore Extortion, Bribery, Coercion, and Slavery; No One Should Own You! for further discussion of the slavery issue.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Libyan Rebels Capture Major Oil Hub; Government Forces Repel Rebel Attacks in Other Cities; How Long Can Qaddafi Hang On?

Yesterday, rebels captured Ras Lanuf, a town 400 miles east of Tripoli, home of a tanker terminal that exports about 200,000 barrels of oil a day as well as Libya’s biggest refinery.

However, both sides have claimed victories elsewhere, and accurate assessments of precisely what is happening are difficult.

Please consider Libya's Rebels Claim Another Oil Hub in Day of Clashes

Fighting between Libyan rebels and troops loyal to Muammar Qaddafi intensified as the opposition advanced west from the oil hub of Ras Lanuf toward the leader’s hometown of Sirte.

Rebel fighters battled Qaddafi’s troops today as they approached Sirte, 230 miles east of the capital, Tripoli, said Khaled el-Sayeh, a coordinator between the opposition’s military forces and its interim ruling council in Benghazi.

State television reports that Qaddafi’s troops had recaptured Ras Lanuf overnight were false and designed to “bring down the morale of the youths,” el-Sayeh said. The rebels today remained in control of the port, which regime forces shelled with rockets and artillery, the AP reported.

Rebels yesterday took control of Ras Lanuf, 400 miles east of Tripoli, where they shot down two helicopters and a fighter jet. The town has a tanker terminal that exports about 200,000 barrels of oil a day. It also contains Libya’s biggest refinery, with a capacity of 220,000 barrels a day, more than half the country’s total output, according to the International Energy Agency.

Rebel Advance in Libya Set Back by Heavy Assault

The New York Times reports Rebel Advance in Libya Set Back by Heavy Assault

The Libyan military drove rebel forces back along the main coastal road on Sunday, ambushing the advancing militias as they entered the town of Bin Jawwad and pushing them out with tank fire and airstrikes, according to witnesses near the town.

The number of the casualties in the battle was unclear, but it set back the rebels’ advance just a day after they celebrated a major victory in taking the vital oil port of Ras Lanuf. On Sunday, rebel leaders said they were regrouping outside that city and would begin pushing toward Bin Jawwad again.

Just outside the capital, a standoff continued in the rebel-held city of Zawiyah, a day after forces loyal to Col. Muammar el-Qaddafi waged a heavy assault toward the city center and then pulled back to close off all roads out.

Nineteen days after it began with spirited demonstrations in the eastern city of Benghazi, the Libyan uprising has veered sharply from the pattern of relatively quick and nonviolent upheavals that ousted the leaders of Tunisia and Egypt. Instead, the rebellion here has become mired in a drawn-out ground campaign between two relatively unprofessional and loosely organized forces — the Libyan Army and the rebels — that is exacting high civilian casualties and appears likely to drag on for some time.

That bloody standoff was evident on Saturday in Zawiyah, the northwestern city seized by rebels a week ago, where the government’s attacks raised puzzling questions about its strategy. For the second day in a row its forces punched into the city, then pulled back to maintain a siege from the perimeter. Hours later, they advanced and retreated again.

By the end of the day, both sides claimed control of the city.

In Benghazi, the rebels’ de facto capital, the rebels took further steps toward political organization. Their shadow government, the Libyan National Council, held its inaugural meeting Saturday and appointed a three-member crisis committee.

While the rebels may have a new defense minister in Benghazi, their fighters on the eastern front did not appear to be taking orders from anyone on Saturday as they pushed past Ras Lanuf, an oil refinery town that they retook from Colonel Qaddafi’s loyalists on Friday night.

Armed with rocket-propelled grenade launchers, the rebels advanced confidently by car and foot through the desert until a fighter jet was heard. Even a rumor of a jet engine in the distance would send the fighters in a mad dash through the dunes, searching for cover and firing in the air.

Slow, Uneven Progress

The battle for Libya is now 18 days and counting. The rebels continue to gain territory, then give some back only to take it again. Over time however, they appear to be advancing from multiple directions towards Tripoli.

Based on belief that Qaddafi's top military leaders would turn on him, I initially thought this would all be over in a few of weeks. So far that has not happened. Now with both sides disorganized and with rebels increasingly stretched thin as they capture more territory, how much longer this can go on remains to be seen.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Union Divide: Debate Over Public Unions Divides Families; Debate a Good Thing

The debate over public unions has become increasingly intense, to the point of splitting families, even in once-solid union country.

Please consider In union strongholds, residents wrestle with cuts

In Midwestern union strongholds, residents torn over proposals to curb union benefits, powers.

There once was a time when Harry and Nancy Harrington -- their teenage children in tow -- walked the picket line outside the nursing home where she was a medical aide, protesting the lack of a pension plan for the unionized work force.

But those days of family solidarity are gone.

Harry now blames years of union demands for an exodus of manufacturing jobs from this blue-collar city on the shore of Lake Michigan. He praises new Wisconsin Gov. Scott Walker for attempting to strip public employee unions of nearly all of their collective bargaining rights.

"I'm sorry, but the unions want to yell, they want to intimidate," says Harry Harrington, 69, as he sets a coffee cup down next to another newspaper headline about the union demonstrations.

"They want to be heard," retorts Nancy Harrington, 66, who fears a weakened union would jeopardize the teaching career of their now 38-year-old daughter.

The Harringtons typify the new national reality for labor unions. Support is no longer a sure thing from the middle class -- not even in a city long considered a union stronghold in a state that gave birth to the nation's largest public employee union. National polls show that the portion of the public that views unions favorably has dropped to near historic lows in recent years, dipping below 50 percent by some accounts.

In Racine, a nearly two-hour drive southeast of the epicenter of the union controversy in Madison, the question of the union's appropriate role has divided husband and wife, mother and child, co-workers and friends. It's the hot topic on editorial pages, at coffee shops, even at the craft club that meets in the community center at Roosevelt Park, where a dozen retired women recently were talking over the top of each other about union powers while knitting socks and hats.

Yet the teachers union is not the power it once was in the Racine area. Despite a well-funded media campaign, the union's candidate, Democratic state Sen. John Lehmen, of Racine -- a former high school teacher -- was ousted by Republican challenger Van Wanggaard in last fall's election. District voters also picked Walker over Democratic gubernatorial candidate Tom Barrett.

Debate a Good Thing

This debate is a good thing. Debate portends change. Until recently few cared how much public unions and their untenable benefits were raping taxpayers. Now many do, and it's a start.

Unions have struck back of course, primarily by the same fear-mongering, extortionist tactics they always have. However, battles like these are not won in a day. Progress continues in Ohio, Wisconsin, Tennessee, New Jersey, and even California.

That's a good start.

A few years ago the only people talking about these issues were Jack Dean at Pension Tsunami and I. Even now, most bloggers have ignored the issue. Unfortunately, some bloggers such as Yves Smith at Naked Capitalism and Leo Kolivakis at Pension Pulse are on the wrong side of it.

The facts are indisputable however.

• No one speaks for the taxpayer in so-called collective bargaining negotiations
• Public unions are in power via a constant barrage of extortion, coercion, bribery, and backroom dealing.
• Public unions have bankrupted countless cities and many states.
• Public unions and collective bargaining are tantamount to slavery

For a look at the slavery debate, please consider Paul Krugman, Stephen Colbert, Bill Maher, others, Ignore Extortion, Bribery, Coercion, and Slavery; No One Should Own You!

The more the issues are discussed, the better the chances of change to address the problems.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Echo Rolled Back

A few issues came up with Echo that will prevent deployment this weekend as planned. Will postpone for another weekend.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Goodbye JS-Kit, Hello Echo: New Comment System on This Blog

At long last I am upgrading the comment system on my blog. This change will take place shortly.

The JS-Kit release I have been on is a couple years old. Time and technology have moved on. My choices were as follows:

1. Write my own software
2. Wither and Die
3. Move to Disqus
4. Migrate to Echo

Number 1 is out. I do not have the time or interest in writing my own. I need a commercial product.

Wither and die hardly seems like a good option.

The choice came down to Disqus vs. Echo.

If you search the internet you can find whatever you want to hear, good or bad, with some users frustrated with one or both of the products.

However, Echo has a couple of significant advantages. First, Echo is a migration. JS-Kit developed Echo. Disqus, would be starting all over.

Second, Echo has attracted quite a following including Sports Illustrated, Newsweek, Slate, the Washington Post, Time, and numerous other big-name companies.

Here is a snapshot of some of the companies using Echo.




Moreover, Echo has an open architecture. Enhancements and solutions can be developed by end users. That may take a while but it is an enormous advantage.

Third, I tested and like the new interface. Echo supports sign-ins from the following.



You can also sign-in with your blogger ID (on page 2).

Those sign-ins will work regardless of what computer you are on. JS-Kit had issues moving from
computer to another.

What's New

Echo will not pop up in a new window as before. Instead, when clicking on "comments" the window will expand inline. This is typical of most other blogger commenting systems but is new to my blog. It takes no more time to do this than pop up a new window.

For new users, login or signup is the same. Just click on one of the options above to sign in.

As before, the first comment from everyone requires moderation. In this case, everyone.

I need some leeway in the time it takes to approve new users. However, I have better tools under Echo to see what comments await moderation. Hopefully the initial response will be faster than before.

The difference is we are starting with a blank slate. Everyone will have to be approved.

Here is the login window everyone will see.



Once you are logged in, simply type your comments in the above box.

Threaded vs. Unthreaded

The debate still rages. Some people like threaded mode. Others don't. Threaded mode works beautifully when there are under 50 comments. When comments get beyond a few pages, it can become unwieldy.

However, some people always like it. Others want to view comments sequentially by time stamp. It makes it easier to see what is new. Some like new comments displayed first other pure sequential.

There is no right or wrong actually. There are only preferences. Unfortunately, and as is with most other commenting systems, those preferences are not usable selectable.

For now, I have to make a selection. One of the moderators on my board has a strong preference for threaded mode.

Threaded mode it is. Let's try that for a while and see how it works out. In the meantime, I ask Echo for a user selectable set of controls so everyone can display comments as they see fit.

Migration of Comments

The last couple weeks of comments will be available shortly. A conversion process is already underway for the rest of them. Perhaps I only go back a year or so. Beyond that, I don't see that much use.

Those details will be up to the Echo team.

Issues

I am quite sure issues will arise just as they do with any new system. However, Echo is a big step in the right direction from JS-Kit.

It has numerous capabilities I did not turn on initially including incorporating comments from Facebook, Twitter, and other social network sites.

Thanks to Those Who Helped

With that I want to thank Khris Loux, Andrew Kushnir, Chris Saad, and the rest of the Echo staff for their assistance in this conversion.

Finally, one of the difficulties in this process is that nothing is easy in blogger templates. Here's to "MDH" who helped me in this effort. This migration would not have been possible without "MDH".

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Obama's Definition of Halfway: 18%; What Would a Government Shutdown Mean?

President Obama claims he is meeting Republicans "half-way" on Republican plans to reduce the deficit by $61 billion. "Half-way" is $11 billion ($10.5 billion to be more precise).

My math strongly suggests the president needs math lessons.

Please consider Obama offers deeper cuts, appeals for budget deal

President Barack Obama says he's willing to make deeper spending cuts if Congress can compromise on a budget deal that would end the threat of a government shutdown.

Obama's appeal for common ground came Saturday in his weekly radio and Internet address, but lacked specifics on how to bridge the $50 billion gulf that divides the White House and Democratic budget proposal from the deeper reductions offered by Republicans.

The government is running on a temporary spending bill that expires March 18, so the parties have until then to come up with a plan to pay for the remainder of the budget year through September.

"We need to come together, Democrats and Republicans, around a long-term budget that sacrifices wasteful spending without sacrificing the job-creating investments in our future," Obama said.

"My administration has already put forward specific cuts that meet congressional Republicans halfway. And I'm prepared to do more," said Obama.

But the claim that Democrats are meeting Republicans halfway only stands up under the Democratic explanation of the intricate numbers game being played on Capitol Hill.

Obama has threatened to veto that plan, and a Democratic offer of $6.5 billion in cuts -- on top of $4 billion already signed into law -- restores money the House GOP cuts from education, health and other programs.

"You may have heard President Obama say that we need to make sure 'we're living within our means,'" said freshman Rep. Diane Black, R-Tenn. "He's right about that. Unfortunately, his budget doesn't match his words.

Tortured Math

The way that article is worded, I am not even positive the Democrats have offered up even as as the $11 billion I gave them credit for.

I am struggling with the fact that the Democratic proposal "restores money the House GOP cuts from education, health and other programs."

What kind of tortured logic allows you to claim credit for cuts if you restore money elsewhere?

Let's dive deeper into one of Obama's statements: "We need to come together, Democrats and Republicans, around a long-term budget that sacrifices wasteful spending without sacrificing the job-creating investments in our future"

Since when is getting rid of wasteful spending "a sacrifice"?

What Would a Government Shutdown Do?

For all this concern about having a budget in place by March 18 (revised later from March 5 by some sort of emergency funding provision), does it really matter?

CNN Money discusses the setup in Shutdown: What you need to know

Which services would stop?

During the last major shutdown, the government closed 368 National Park Service sites, along with national museums and monuments.

In addition, 200,000 passport applications went unprocessed, and toxic waste cleanup work at 609 sites stopped. The National Institutes of Health stopped accepting new clinical research patients, and services for veterans, including health care, were curtailed.

Work on bankruptcy cases could slow. In the last shutdown, more than 3,500 cases were delayed.

Which services would the government keep running?

Agencies are allowed to perform any operations necessary for the safety of human life and protection of property.

The government would keep essential services -- like air traffic control and the national security apparatus -- in full operating mode.

Federal workers who provide medical care on the job would be kept on, as well as employees who handle hazardous waste, inspect food, patrol the borders, protect federal property, guard inmates or work in power distribution.

Workers who protect essential elements of the money and banking system would also report to work.

The Postal Service, which is self-funded, will continue to operate.

Preposterous Hype

For all the hype over a shutdown, I fail to see how it would matter much. Republicans should stick to their guns. I assure you the world will not end.

The world did not end in the Clinton administration during five days in November 1995 and another 21 days that ended January 1996.

Indeed the best thing might be for everyone to see how little a "shutdown" would matter.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Big-Box Retailers Reconsider Size; Saturation, Online Sales Affect Store Expansion Plans and Hiring Needs

Online shopping not only has state departments of revenue pulling their hair out over lost sales tax revenue, it also has retailers like Best Buy, Sears, KMart, and Home Depot questioning, the merits of the big-box mentality itself.

The Wall Street Journal reports As Big Boxes Shrink, They Also Rethink

Major big-box retailers have been shifting to smaller stores—and scratching around for more profitable ways to fill under-used spaces as they go about reinventing themselves.

Sears Holdings Corp. is letting prospective tenants browse an online list of Kmart and Sears stores with space to rent.

Sears reached a deal to lease 34,000 square feet of store space in Greensboro, N.C., to Whole Foods Market Inc. for a grocery store set to open in 2012.

Home Depot Inc. is selling off portions of its parking lots to fast-food chains and auto repair shops. Gap Inc. is reverting to a Russian nesting-doll strategy: after years of expanding by adding standalone stores such as GapKids and Gap Body, it is shrinking them and stacking them back inside its namesake Gap stores.

Best Buy Co. last week became the latest retail chain to go smaller, announcing last week that it was slowing growth of new big-box stores this year in favor of adding 150 Best Buy Mobile locations, focused on smartphones.

Wal-Mart Stores Inc. also said last week that it was accelerating the rollout of smaller locations—40,000 square feet or less—after it reported a seventh straight quarterly decline in sales at U.S. stores open at least a year. The retail giant, which rose to dominance with 185,000-foot Supercenters, plans to open its first Walmart Express store in the second quarter of this year, though it won't say where.

The miniature Staples carries just 1,200 of the retailer's most high-volume sales items, compared to 8,000 items in traditional stores.

Office Depot Inc., meanwhile, quietly began opening new shops the size of convenience stores in December. The new 5,000-square-foot Office Depot stores are barely a fifth the size of the company's traditional locations, yet still manage to contain the office supplies and copy and mail services that account for 93% of the bigger stores' sales, said Kevin Peters, Office Depot's North American retail president.

"Our box was just too big and didn't work for our customers," Mr. Peters said Wednesday. "We are reinventing Office Depot as a convenience retailer. Think CVS and Walgreens."

Key Word is Saturation

The "bigger is better model" that collapsed with residential real estate, has expanded to its big brother, commercial real estate.

The problem is not the size of the stores, but the sheer number of them. Areas that got by with a single Home Depot, now have 2 Home Depots, a Lowes, and a Menards.

If they all shrink, does it do any of them any good?

Store Advantages

• Those who need something and want it now
• Those who want to make comparisons and see a product in person

Online Shopping Advantages

• It's invariably cheaper online
• There is frequently no sales tax
• You do not have to waste time and money traveling
  

Online Sales Have States Furious Over Lost Sales Taxes

Cash strapped states are furious with Amazon.Com over sales tax collections. Several states passed laws or have sent Amazon bills. Amazon's response in every case so far is to leave the state.

For details, please see Amazon May Cut Ties to California Over Tax Issues; Texas Distribution Site Closed Over Similar Issues Last Month; Litigation Issues Move to Forefront

Last week I went to Best Buy to buy a particular cable I needed. They did not have it. I ended up ordering it from Amazon. If stores shrink, and they do not have what customers want, customers will just buy more stuff online.

Big-Box Decisions Affect Store Hiring Plans

I am wondering, do we really need "Walmart Express" at all? At best it is a sign of total saturation of big boxes and a turf battle for smaller cities and neighborhoods.

As such, think about store hiring plans now vs. store hiring plans in the midst of the big-box commercial real estate boom.

With the new "smaller is better" model, another commercial real estate boom remotely close to the build-out that occurred in 2005-2007 is not in the cards.

Moreover, residential housing is still dead.

Together, the picture just does not add up to the 200,000+ jobs a month many economists and market cheerleaders expect.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Ben Bernanke is a Fiscal Moron

Fed chairman Ben Bernanke likes to bitch about Congressional interference in Fed monetary policy yet Bernanke repeatedly tells Congress what to do regarding fiscal policy.

I think neither should tell the other what to do because the Fed should not exist at all.

With that remark out of the way, please consider Republicans, Fed Clash on Job Impact of Spending Cuts

“We need to address the deficit; that’s very important,” Bernanke told the House Financial Services Committee in a March 2 hearing. “But I think it would be most effective if we did that over a timeframe of 5 or 10 years and not try to do everything immediately.”

The Fed chief said the House Republican plan to slash $61 billion from 2011 government spending could also subtract “a couple of tenths” of a percentage point from U.S. economic growth over several years.

An independent analysis released by Goldman Sachs last month found that the Republican proposal would reduce economic growth by 1.5 to 2 percentage points during the second and third quarters of this year.

Bernanke attributed the lower Federal Reserve estimates to some “differences in assumptions.”

“We’ve tried to do a realistic analysis of what those cuts would do over a couple of years,” he said.

Boehner called Zandi the “pet economist” of House Democratic Leader Nancy Pelosi of California, citing his support for an economic-stimulus bill that the White House once estimated would keep unemployment below 8 percent. Boehner cited a statement signed by 150 economists sent to President Barack Obama calling for spending cuts.

Stanford University economist John Taylor, a Treasury undersecretary under former President George W. Bush, says both Zandi and Goldman Sachs relied on a flawed methodology. He wrote that he found “no convincing evidence” that the budget-cutting bill would reduce employment or economic growth.

We have a freaking $1.4 trillion deficit and Bernanke is bitching about a Congress addressing mere $61 billion of it. Bernanke warns against attempts "to do everything immediately” hoping to spread that $61 billion out over a decade.

Bear in mind that $61 billion is a mere 4.36% of what needs to happen. Is Ben Bernanke a fiscal moron or what?

As an added bonus for those who may have missed it, please consider Hello Ben Bernanke, Meet "Stephanie"

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Record Gasoline Prices in Europe, Over $8 in UK, Italy, Germany; California Faces $4; Reflections on "Inflation"

Bloomberg reports Record Gasoline Grips Europe, California Faces $4 a Gallon.

Gasoline prices are setting records across Europe and exceeding $4 a gallon in California as the rise in crude oil caused by the conflict in Libya punishes companies and consumers.

Households are cutting back on travel, cinema visits and groceries in the U.K., where prices jumped to 130.68 pence a liter ($8.06 a gallon) yesterday, according to research from the Automobile Association, Britain’s largest motoring organization. Prices set records in the Netherlands and Italy today. The current average U.S. gasoline price is near a two-year high at $3.81 a gallon, according to the AAA website.

The impact on consumer prices may push European Central Bank President Jean-Claude Trichet to raise interest rates as soon as next month to discourage higher wages and head off the threat of an inflationary spiral.

“Rising fuel costs are negative because they push inflation up and slow the economy down,” said Philip Shaw, chief economist at Investec Securities in London. “It is essentially energy costs that have resulted in ECB putting its finger on the interest rate trigger.”

In Italy, gasoline prices reached 1.544 euros a liter and diesel climbed to 1.438 euros a liter ($8.17 a gallon), according to a chart published by web energy daily Quotidiano Energia. Gasoline prices in the Netherlands reached a record 1.697 euro a liter from 1.692 euro in June 2008, according to Paul van Selms, head of UnitedConsumers, a lobby group for consumers in the Netherlands.

The average price for super-grade gasoline in Germany, Europe’s largest economy, was 1.55 euros per liter today, close to the 1.58 euro record from 2008.

Reflections on Inflation

I do not know if Trichet hikes short-term interest rates soon or not. It is conceivable it is the correct move.

However, the idea that something needs to be done in the face of a supply shock on top of overheating in China and peak oil constraints is ridiculous. Supply shocks are anything BUT inflationary.

If Europe or the US was on a rampage with credit expanding wildly it would be a different matter. However, credit expansion is not happening in the US or Europe.

Dumb things happen (in both directions) when central-planning jackasses view inflation in terms of prices rather than money supply and credit, then take (or fail to take) action because of prices.

For example, Greenspan ignited an enormous housing bubble by failure to consider reckless credit expansion. Instead, Greenspan foolishly focused on the CPI which suggested low inflation.

Such policies have central bankers forever-chasing their tails.

Where Should Rates Be?

Nothing above implies agreement with central bank rates set near zero.

The free market, not a bunch of bureaucrats, should set interest rates. None of the central bankers saw this crisis coming, so how the hell do they think they know what interest rates should be?

I don't know where they should be and they sure don't know either. At least one of us is smart enough to admit it.

For more on this line of thinking, please see Goldman's Blood-Sucking Leeches Model, Money Multipliers, Macroeconomic Dark Ages, the Taylor Rule, and Nonsense from Trichet.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

BLS Jobs Report: Nonfarm Payroll +192,000, Unemployment Rate 8.9%; Reflections on the Jobs Report

A Few Words Regarding the Jobs Report

This was a solid jobs report, not as measured by the typical recovery, but one of the better reports we have seen for years. Moreover, 30,000 government jobs bit the dust. The higher that number, the better off we will all be. +212,000 private jobs is a good number. However, I suspect this may be as good as it gets for a while.

At the current pace, the unemployment number would ordinarily drop, but not fast. However, many of those millions who dropped out of the workforce could start looking if they think jobs may be out there. Should that happen, the unemployment rate could rise, even if the economy adds jobs at this pace. It is very questionable if this pace of jobs keeps up. I rather doubt it in fact.

Bear in mind that the unemployment rate varies in accordance with the "household survey" not the reported headline jobs number.

In the last year, the civilian population rose by 1,853,000. Yet the labor force dropped by 312,000. Those not in the labor force rose by 2,165,000.

In January alone, a whopping 319,000 people dropped out of the workforce. In February (this months' report) another 87,000 people dropped out of the labor force.

Were it not for people dropping out of the labor force, the unemployment rate would be over 11%.

February 2011 Jobs Report

Please consider the Bureau of Labor Statistics (BLS) February 2011 Employment Report.

Nonfarm payroll employment increased by 192,000 in February, and the unemployment rate was little changed at 8.9 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in manufacturing, construction, professional and business services, health care, and transportation and
warehousing.

Unemployment Rate - Seasonally Adjusted

Bear in mind, were it not for millions of people allegedly dropping out of the labor force over the last year, the unemployment rate would be over 11% right now.

Nonfarm Payroll Employment - Seasonally Adjusted Changes

Nonfarm Payroll Employment - Seasonally Adjusted Total

Establishment Data



Employment in the private sector rose by 222,000 in February. In the past 12 months, the private sector has added 1.5 million jobs – an average of 127,000 per month.

Statistically, 127,000 jobs a month is enough to keep the unemployment rate flat.

Index of Aggregate Weekly Hours



During February, the average workweek for all employees on private nonfarm payrolls was unchanged at 34.2 hours. The average workweek for production and nonsupervisory employees on private nonfarm payrolls increased by 0.1 hour to 33.5 hours. The index of aggregate weekly hours for all employees rose by 0.2 percent over the month. Since reaching a low point in October 2009, the index has increased by 2.4 percent.

Average Hourly Earnings vs. CPI

Average hourly earnings of all employees in the private sector were changed little in February, following a 9-cent gain in January. Hourly earnings are up 1.7 percent over the year. Between January 2010 and January 2011, the consumer price index for all urban consumers (CPI-U) increased by 1.7 percent.

The big question here is how those wages are being distributed. I think we know the answer to that.

BLS Birth-Death Model Black Box

The big news in the BLS Birth/Death Model is the BLS has moved to quarterly rather than annual adjustments.

Effective with the release of January 2011 data on February 4, 2011, the establishment survey will begin estimating net business birth/death adjustment factors on a quarterly basis, replacing the current practice of estimating the factors annually. This will allow the establishment survey to incorporate information from the Quarterly Census of Employment and Wages into the birth/death adjustment factors as soon as it becomes available and thereby improve the factors.

For more details please see Introduction of Quarterly Birth/Death Model Updates in the Establishment Survey

In recent years Birth/Death methodology has been so screwed up and there have been so many revisions that it has been painful to watch.

It is possible that the BLS model is now back in sync with the real world. Moreover, quarterly rather than annual adjustments can only help the process.

The Birth-Death numbers are not seasonally adjusted while the reported headline number is. In the black box the BLS combines the two coming out with a total.

The Birth Death number influences the overall totals, but the math is not as simple as it appears. Moreover, the effect is nowhere near as big as it might logically appear at first glance.

Do not add or subtract the Birth-Death numbers from the reported headline totals. It does not work that way.

Birth/Death assumptions are supposedly made according to estimates of where the BLS thinks we are in the economic cycle. Theory is one thing. Practice is clearly another as noted by numerous recent revisions.

Birth-Death Number Revisions

Inquiring minds note enormous backward revisions in Birth-Death reporting.

Birth Death Model (as reported in January)



Birth Death Model Revisions 2010 (as reported February)



Is this new model going to reflect reality going forward?

That's hard to say, but things were so screwed up before that it is unlikely to be any worse. One encouraging sign is several negative numbers in the recent chart. January would have been negative too, had they shown it. Historically there were only 2 negative number every year, January and July. That anomaly broke November of 2010.

Birth Death Model Revisions 2011 (March)

Do NOT subtract that 112,000 from the headline number. That is statistically invalid.

Household Data

In the last year, the civilian population rose by 1,853,000. Yet the labor force dropped by 312,000. Those not in the labor force rose by 2,165,000.

In January alone, a whopping 319,000 people dropped out of the workforce. In February (this months' report) another 87,000 people dropped out of the labor force.

Were it not for people dropping out of the labor force, the unemployment rate would be over 11%.

Households Stats

• The number of unemployed persons (13.7 million) and the unemployment rate (8.9 percent) changed little in February. The labor force was about unchanged over the month. The jobless rate was down by 0.9 percentage point since November 2010.
• The number of long-term unemployed (those jobless for 27 weeks or more) was 6.0 million and accounted for 43.9 percent of the unemployed.
• Both the civilian labor force participation rate, at 64.2 percent, and the employment-population ratio, at 58.4 percent, were unchanged in February.
• The number of persons employed part time for economic reasons was essentially unchanged at 8.3 million in February. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job.
• In February, 2.7 million persons were marginally attached to the labor force, up from 2.5 million a year earlier. These individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the
  survey.

Table A-8 Part Time Status



click on chart for sharper image

There are now 8,340,000 workers whose hours may rise before those companies start hiring more workers.

Table A-15

Table A-15 is where one can find a better approximation of what the unemployment rate really is.



click on chart for sharper image

Grim Statistics

Given the total distortions of reality with respect to not counting people who allegedly dropped out of the work force, it is hard to discuss the numbers.

The official unemployment rate is 8.9%. However, if you start counting all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is in the last row labeled U-6.

While the "official" unemployment rate is an unacceptable 8.9%, U-6 is much higher at 15.9%. Moreover, both the official rate and U-6 would be much higher were it not for huge numbers of people dropping out of the workforce.

Things are much worse than the reported numbers would have you believe.

That said, this was a solid jobs report, not as measured by the typical recovery, but one of the better reports we have seen for years. +212,000 private jobs is a good number.

At the current pace, the unemployment number would ordinarily drop, but not fast. However, many of those millions who dropped out of the workforce could start looking if they think jobs may be out there. Should that happen, the unemployment rate could rise, even if the economy adds jobs at this pace. It is very questionable if this pace of jobs keeps up. I rather doubt it in fact.

Looking ahead I strongly doubt the reports will be this good over the course of a year.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Costa Mesa to Lay Off 43% of City Workforce, Outsource Services; Nearly Half-Way There; The Ideal Number of Public Employees is Zero

The City of Costa Mesa, with a population over 100,000, is about to become 43% closer to the idealized goal of no city workers.

In a massive step in the right direction, Costa Mesa to lay off nearly half of city workforce, outsource services.

The city of Costa Mesa plans to lay off more than 200 employees and outsource 18 city services by the fall.

The layoffs would cut the city's municipal workforce by 43%. The City Council approved the layoffs in a 4-1 vote late Tuesday night, despite nearly unanimous opposition from the audience.

City officials said pink slips will go out in the next six months. The mayor blamed years of missteps by city staff and rising pension costs.

Almost half of city work force gets pink slips

The Daily Pilot has more details in Almost half of city work force gets pink slips

About 203 city employees will be receiving the six-month notice in the City Council effort to correct the budget.

City officials have crunched the numbers and determined that more than 200 Costa Mesa employees — or 43% of Costa Mesa's municipal workforce — could be laid off through outsourcing.

Of the 472 full-time positions, 203 city employees, give or take one or two, will get pink slips notifying them that they could be laid off in six months, said Administrative Services Director Steve Mandoki.

Tuesday's move is part of a dramatic restructuring of a city that faces potentially skyrocketing pension costs in the coming years.

Costa Mesa's own projections show that in the next few years, it will be expected to pay more into the state's public pension fund, CalPERS. It's a situation being replayed up and down the state: When the CalPERS pension fund was flush in the early 2000s, Costa Mesa did not have to pay much to the state to cover its employees' retirement costs. Now that CalPERS investments are hurting, cities have to cover the difference.

That pattern looks to continue for at least the next five years, city officials project.

Laying off hundreds of employees and their accumulating pensions by the fall would help to balance the city's budget in years to come, council members reason.

"We're going to run out of money sometime this year if nothing changes," said Councilman Eric Bever.

Costa Mesa Half-Way There

The best way to deal with public employees and their overly generous pension contracts is to not have public employees at all.

I commend Costa Mesa for a huge but incomplete step in the right direction.

Other than a small number of elected officials and a few administrative assistants, the correct number of public employees is zero.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Goldman's Blood-Sucking Leeches Model, Money Multipliers, Macroeconomic Dark Ages, the Taylor Rule, and Nonsense from Trichet

Caroline Baum has an excellent column on Bloomberg today regarding money multipliers and a Goldman Sachs projection of what Republican budget cuts may do to the economy.

There were so many things in her post I wanted to reference that I asked Caroline if I could use her entire post. She graciously replied "Let 'er rip".

Goldman's Model Evokes Blood-Sucking Leeches: Caroline Baum

Macroeconomics really is stuck in the Dark Ages.

Take “fiscal stimulus,” for example, the idea that the government can step in to fill the void when the private sector isn’t spending and boost economic growth in the process.

Economists have been debating the pros and cons of fiscal stimulus since the 1930s, when John Maynard Keynes diagnosed the problem as one of inadequate private investment and prescribed public spending, financed by borrowing, as the cure.

The discussion hasn’t advanced very much in eight decades. Sure, economists have devised elegant mathematical models that purport to show that $1 of government purchases translates into -- take your pick -- no increase in gross domestic product (the multiplier is zero, according to Harvard’s Robert Barro) or $1.50 of GDP (a multiplier of 1.5, according to Berkeley’s Christina Romer, who was chairman of President Obama’s Council of Economic Advisers when the $814 billion stimulus was crafted in 2009). They haven’t really proven anything.

Keynesian economics went into hibernation in the latter part of the 20th century following an array of stimulus failures on the part of both Democratic and Republican administrations in the 1970s. The only thing the spending stimulated was stagflation.

In the 1980s, inflation came down, the Berlin Wall came down, economists thought the volatility of the business cycle had come down, and the notion of government as the solution went out of vogue.
Keynesians All

All it took was a good financial crisis for the Keynesians to come out of the woodwork.

The debate over fiscal stimulus went viral last week (at least in the geek world) with an economic forecast from Goldman Sachs Group Inc. (GS), a counter from Stanford University economist John Taylor (he of the Taylor rule), and an addenda from Goldman yesterday.

The Goldman gang projected an economic drag (that would be the opposite of stimulus) on GDP growth of 1.5 to 2 percentage points in the second and third quarters if House-passed budget cuts of $61 billion for the remainder of fiscal 2011 become the law of the land.

Asked about the Goldman forecast Tuesday following testimony to the Senate Banking Committee, Federal Reserve Chairman Ben Bernanke demurred.

“Our analysis doesn’t get a number quite like that,” he said. “Two percent is an enormous effect.”

He could have added: “especially when the rest of government is growing.”
Wrong on Everything

“Total government spending is up 6.7 percent in 2011 from 2010,” Taylor told me in a telephone interview.

Defense spending is rising, as are non-discretionary outlays for programs such as Medicare and Social Security that are on automatic pilot.

The proposed cuts would reduce non-defense non-security discretionary spending, a teensy share of the federal budget, back to 2008 levels.

In a Feb. 28 blog post, Taylor said Goldman’s analysis was “wrong.” He criticized it for failing to consider the beneficial effects that expectations of lower future deficits and smaller tax increases would have on the economy. He criticized the methodology for relying on the same “large multiplier theory” used to justify the 2009 stimulus. And he criticized the assumption that proposed spending equates with actual spending, which trickles out over time.

Aside from that, Mrs. Lincoln, the Goldman analysis was spot on.

‘Alchemists and Quacks’

This fundamental disagreement among professional economists about whether government spending helps or hurts represents the state of the art, or science, today. In what other science do practitioners design a treatment plan based on inconclusive proof that the medicine does any good?

There are no control studies in economics, no way to hold everything else constant to determine the impact of one variable, no way to falsify conclusions that models spit out. Financial Times columnist John Kay, writing yesterday about risk modelers, referred to them as “alchemists and quacks.”

A bit harsh, perhaps, but he’d probably hold macroeconomic models in the same high regard.

Whenever oil prices spike, modelers instantly project how much the increase will subtract from GDP growth. No mention of why prices are rising. Is it the result of a supply shock, which results in higher prices and reduced quantity demanded, or an outward shift in the demand curve, which equates with higher price and quantity demanded? There is a difference.

Known Knowns

In microeconomics, which is the study of how individuals and firms interact in specific markets, certain truths are self-evident. Which doesn’t mean economic planners can see them. Governments across Asia right now are using subsidies and price controls to ease the pain of higher oil and food prices even though their actions will exacerbate the crisis.

Goldman countered Taylor’s critique with a clarification. The projected 1.5 to 2 percentage point hit to GDP was to the quarterly annualized growth rate, not to the level. Thanks for that.

As I said before, we entered the 21st century with macroeconomics still looking for an Age of Enlightenment.

Five thousand years ago in ancient Egypt, medics used leeches to suck the blood of ill patients, believing the practice could cure everything from fevers to food poisoning.

Today’s physicians have largely forsaken bloodsuckers for modern medicine. It’s about time macroeconomics emerged from the Dark Ages as well.

Caroline Baum, author of “Just What I Said,” is a Bloomberg News columnist. The opinions expressed are her own.)

Dark Ages Indeed

I am wondering "How many times does an economic model have to be discredited before it is discarded?"

This idea that government spending can stimulate the economy is total nonsense. If it worked, we would see something more than 2.8% economic growth for a deficit of $1.4 trillion dollars.

The Fed purchasing Trillions of Fannie Mae and Freddie Mac bonds did nothing for housing, nor did several rounds of housing tax credits.

Government spending accounts for an ever-increasing share of GDP. Moreover, the only reason GDP is up at all is that by definition, government spending adds to GDP. The multiplier is actually negative. It takes an increasing amount of "stimulus" spending just to say in the same spot.

Taylor Model Nonsense

Taylor criticizes the Goldman multiplier model and rightfully so.

However, his own economic model is fatally flawed. He believes all the Fed needs to do is go on autopilot, hiking or lowering interest rates in accordance with the Taylor Rule.

In economics, a Taylor rule is a monetary-policy rule that stipulates how much the central bank would or should change the nominal interest rate in response to divergences of actual inflation rates from target inflation rates and of actual Gross Domestic Product (GDP) from potential GDP. It was first proposed by the U.S. economist John B. Taylor in 1993. The rule can be written as follows:

In this equation, is the target short-term nominal interest rate (e.g. the federal funds rate in the US), is the rate of inflation as measured by the GDP deflator, is the desired rate of inflation, is the assumed equilibrium real interest rate, is the logarithm of real GDP, and is the logarithm of potential output, as determined by a linear trend.

Unmeasurable Economic Gibberish

The idea that interest rates can be set by mathematical modeling when the variables themselves are subject to debate as to how to measure them is preposterous.

Take the CPI for example. I believe home prices should be in the CPI. They used to be.

Somewhere along the line some theorist decided "owners' equivalent rent" (OER) was a more valid concept. What is OER? It is the amount one would pay himself if renting a house from himself. It is the single largest component of the CPI. The measure of inflation from 2002 to now would be wildly different if one used actual home prices instead of OER.

Which model is more accurate? Look at the Fed's chasing-its-tail actions hiking in baby steps on the way up, then lowering interest rates to zero when the economy collapsed.

ECB President Jean-Claude Trichet, a Keynesian Clown Too

Just today, Jean-Claude Trichet is talking about hiking rates in Europe.

His concern is pass-through inflation as noted in the Bloomberg article Trichet Says ECB May Raise Rates, Show `Strong Vigilance'

“There is a strong need to avoid second-round effects,” Trichet said, calling for moderation from wage and price setters. The ECB is “prepared to act in a firm and timely manner.”

This whole idea of pass-through inflation and second-round effects is yet more Keynesian claptrap. If someone pays more for gasoline, they have less to spend on clothes. It is as simple as that, but not to those purposely hiding behind economic models and their multiplier effects.

Alchemists and Quacks Galore

Making decisions on flawed models is bad enough in closed economic society.

Errors in every model are exacerbated by the fact we have a global economy subject to economic pressures of all kinds from countless places.

Financial Times columnist John Kay, writing yesterday about risk modelers, referred to them as “alchemists and quacks.” There are no control studies in economics, no way to hold everything else constant to determine the impact of one variable, no way to falsify conclusions that models spit out.

On that basis, the analyst from Goldman Sachs, Taylor, Bernanke, Krugman, Greenspan (and countless others) are all quacks.

Why Model at All?

There are no control studies because it is impossible to do them.

The real world is constantly changing, while mathematical models, Goldman's and Taylor's alike sit there as unmeasurable economic gibberish, when every component is subject to measurement errors and debate about what needs to be measured in the first place.

End the Fed

The free market could not possibly have done a worse job in setting interest rates than the perpetual chasing-their-own-tail central bank tactics that continually create boom-bust bubbles of ever-increasing amplitude in both directions.

If central bankers knew where interest rates should be we would not be in this mess, or at least the mess would be smaller. For further discussion about what the Fed does and does not know, I strongly encourage you to read the Fed Uncertainty Principle.

Ironically, the one thing the Fed never mentions and the ECB seldom mentions is money supply.

Here's the deal: Inflation is a direct result of the cheapening of money. Strike that, inflation IS the cheapening of money and central bank policy in conjunction with fractional reserve lending is the cause.

Central bankers do not talk about such things because they are at the root of the problem.

The solution of course is to not only get rid of the Taylor rule, but to get rid of the Fed, the ECB, and central bankers around the globe.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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