Thursday, June 26, 2014

Partition Iraq

Joe Biden, while a Senator, got it right.  Iraq should be partitioned.  Not that prescriptive advice like this really matters any more because the partitioning has already happened and there really isn't any way to undo it.

ISIS, the Sunni extremists, already control northwestern Iraq, along with a good chunk of northeastern Syria.  No one will be able to dislodge them.  The Iraqi government's army is too busy surrendering territory and weapons to retake lost ground.  The Assad regime in Syria no longer has the ability to defeat a force as powerful as ISIS.  And the U.S. isn't sending in ground troops, without which you can't take or hold territory.

The Kurds have carved out a homeland for themselves, anchored by the city of Kirkuk, and they won't give it up, not after centuries of subjugation.  Certainly, the Iraqi army can't retake the Kurdish territory, and the Kurdish paramilitary Pesh Merga appears more formidable than ISIS. 

The Shiites in Iraq hold the southern and southeastern portions of the country, which contains most of Iraq's oil wealth.  Why fight for the less valuable land farther north when they already hold the jackpot?

Trying to keep Iraq together is guaranteed to produce unmanageable friction and endless warfare.  The Iranians now have their claws into the Baghdad government, and won't give that up.  America's Sunni allies on the Arabian Peninsula--Saudi Arabia, Kuwait, Qatar, etc.--have many secret supporters of ISIS, who will be royally p.o.'d if the Shiite government in Baghdad is able, with American assistance, to repress Sunni tribes in Iraq.  The Kurds have quietly allied themselves with Israel and sometimes with America, and pissing them off could weaken America's influence in the region.

America's power in the region might increase if Iraq were partitioned.  Even though once betrayed by the CIA, the Kurds would still ally themselves with the U.S., and offer American personnel a centrally located place from which to operate.  The Shiite Baghdad government might want to maintain friendly ties with America in order to counterbalance the Iranians.  Yes, the Baghdad government has cozied up to Iran.  But the Iranians are Persian, and the people in Baghdad are Arabs.  Iraq and Iran fought a bitter war with over a million dead in the 1980s, and the Baghdad government won't want its territory to become a province of a new Persian empire.

As for the Sunni area now controlled by ISIS, the U.S. could do what it did during the 2007 surge:  buy off the indigenous Iraqi Sunni tribes.  That's how the U.S. defeated al-Qaeda once before, and it's a way to undermine ISIS now.  The whack jobs that control ISIS impose an extremely harsh form of Islam--even al-Qaeda gave ISIS the boot because it thought ISIS unduly brutal (imagine that!).  The indigenous Sunni tribes in Iraq tend toward moderation, and won't be happy with the beheadings, stonings, non-medical amputations, and other barbarism that ISIS will inflict.  It's a safe assumption that U.S. Special Forces personnel and CIA agents have already started slipping into ISIS controlled areas.  Money talks, and thoughtfully large sums of money placed in the hands of the right Sunni chieftains might well lead to an ousting of ISIS.  The Sunnis might well want to carve out their own independent state, and the U.S. shouldn't get in the way.  A stable, moderate Sunni state in northern Iraq is far less likely than an ISIS caliphate to serve as an incubator of Islamic extremists who would target the U.S.  Especially if American aid flows generously to such a nation.  And America's allies in the Arabian peninsula might look favorably upon such a sanctuary for their religious brethren.

Partitioning has flaws, but not as many as the alternatives.  Yugoslavia no longer exists, but its constituent parts have learned with assistance from NATO how to refrain from ethnic cleansing.  The borders of the Near East (Israel, Jordan, the Palestinian Authority, Syria and Egypt) are the result of partitioning.  Yes, there's a lot of tension and some low level warfare in the Near East.  But the utter chaos of today's Iraq isn't present.  And South Asia is functional, if not entirely peaceful.

Re-uniting Iraq will involve combat and civilian deaths, probably a lot of them.  All of America's elites, war hawks, chicken hawks, experts, pundits, and bombasts don't have an effective way to put Iraq back together again, not unless hundreds of thousands of American troops are reintroduced to re-fight the ground war.  And that ain't happening.  It's better to leverage the new status quo, which we can't change anyway, to our advantage. 

Thursday, June 12, 2014

How To Reduce Volatility in Your Retirement Income

The S&P 500 has dropped three days in a row, and after all the market calm of recent months, many investors must be thinking that the apocalypse looms.  There are understandable explanations for the recent downdrafts.  Islamic radicals of the Sunni variety have rapidly seized several towns and cities in Iraq, along with American weapons and vehicles provided to the Iraqi government (and the administration worries about giving small arms to moderate Syrian rebels?).  Iranian paramilitary troops, who are Shiites, supposedly are fighting alongside Iraqi government troops to retake territory seized by the Sunni radicals. Is Iran now a more important ally of the Iraqi government than the U.S.?

Russian tanks have reportedly rolled into Ukraine, where the fighting is escalating.  Bashir Assad is winning in Syria, and the moderate rebels that the U.S. supports seem to be almost inconsequential.  Most of East Asia is squabbling over this island or that, with contending nations issuing many a proclamation declaiming a neighbor as a ratfink, a double ratfink or even a triple ratfink. 

Domestic politics also create uncertainty for the markets.  Eric Cantor, House Majority Leader, was just defenestrated in a primary election by a guy from far right field whose name, even if we mentioned it now, you probably wouldn't recognize.  (But we're going to, because it's Dave Brat, a marvelously fitting name for a guy who ousted the Majority Leader.)  Cantor, who outspent his opponent's six-figure campaign by $5 million, convincingly proved that money isn't everything.  Not even in politics.  The Koch brothers must be scratching their heads about what checks to write next.

The markets will always be plagued by volatility.  And it tends to pop up when you least expect it.  That might be inherent in the definition of volatility, but you know what we mean.  Yogurt happens, but you don't want your retirement finances smeared with yogurt.  While there are no complete protections against the ups and downs of life, here are a few ideas for calming the financial waves.

Build Up Social Security Benefits.  Disregard the hyperbole.  Social Security will be there when you retire.  Maybe not exactly as it is now, but nevertheless in a meaningful form.  Any politician who votes to eliminate or sharply reduce Social Security retirement benefits will end up doing an Eric Cantor faster than Eric Cantor as voters reject the idea that they should have to eat dog food in their old age.  Work as long as you can to build up your benefits.

Get a Pension.  If you're lucky enough to get a pension, stick out it long enough in that job to qualify.  Although classic defined benefits pensions are usually found these days only alongside the remains of diplodocus, lasso one if you can.  Other pension arrangements, like cash balance plans, are a lot better than no pension. 

Save More.  Saving more is a salve for portfolio instability and financial insecurity.  Those that have the saving jones won't have to get loans.

Use Retirement Accounts.  Retirement accounts like 401(k)s, IRAs and so on offer tax advantages that let you leverage your retirement savings, while limiting your ability to prematurely spend your savings.  A particular advantage to a 401(k) account comes if your employer provides a matching contribution, which is the freest money most people can get.  Use these accounts as much as you can.

Diversity Your Investments.  The values of all assets wax and wane.  But they usually don't wax and wane in unison.  More commonly, some assets get yeasty while others do the fallen souffle thing.  And vice versa.  So a diversified portfolio is usually kind to your antacid budget.  There are moments, like the 2008-09 financial crisis, when it seems like almost all assets belly flop.  But these cognitively dissonant interludes are the exception and not the rule. 

Consider an Annuity.  A fixed annuity (one that pays a specified dollar amount per month) or a fixed annuity adjusted for inflation can be a reasonable way to provide a steady income.  Annuities aren't cheap, and you should buy only from an insurance company with a strong credit rating. Don't put more than about one-third to one-half of your portfolio into an annuity because cash needs in old age can be unpredictable and it helps to have a nice pool of cash or cash equivalents.  Be very cautious about variable annuities--they often have high expenses, and the point here is to reduce volatility, not subject yourself to it in another form. 

Health Insurance and Long Term Care Insurance.  Financial volatility can sometimes come from sudden increases in expenses, and not just decreases in portfolio values.  Health care and long term care needs are the biggest landmines in the journey through retirement.  Most retirees are covered by Medicare, but if you're not, then buy something else.  The Affordable Care Act, despite all the teeth-gnashing on the right, is likely to be a good option if you don't have anything else.  If you have a significant net worth, consider buying long term care insurance, especially if you have a spouse who may depend on that net worth after you've gone to the great Dance Party in the sky.  It's expensive, but so is long term care.  If you want more than the quality of care given to Medicaid patients, long term care insurance may be a good choice.

Part-time Work.  Okay, you want to hear about retirement, not employment.  But part-time employment reduces the extent you need to draw down your savings, so you can keep more powder dry for later.  It also lessens your risk of dying from the boredom of day time TV.  It may boost your Social Security benefits (depending on your work history).  And the dignity of work is better than the indignity of looking for sales on dog food.

Saturday, June 7, 2014

Going Negative in Europe

"Going negative" is a political term of art, usually meaning that one candidate campaigns primarily by throwing mud at the other candidate(s).  In our jaded times, going negative has come to predominate.  Trash talking, if nothing else, captures attention.

These days, Europe is going negative for political reasons, although not in the usual sense.  The European Central Bank announced recently that it was cutting the interest rate it pays on deposits from banks to -0.1%.  In other words, banks that deposit funds with the ECB will pay a 0.1% fee for the privilege of having the ECB hold their money.  The ECB claims to be concerned with a low nominal interest rate of 0.5%, and supposedly cut rates below zero to spur bank lending.  Whether more lending will be done is unclear, as banks in the EU have been awfully finicky about extending credit in recent years (except to sovereign nations that sometimes aren't creditworthy).  Banks could cover the costs of the ECB's negative move by lowering interest rates paid on deposits (i.e., on longer term deposits that still have a positive rate) and increasing lending rates for existing borrowers. There's no necessary reason for them to make new loans.

The 0.5% inflation rate that supposedly led the ECB to go negative isn't strikingly different from the low inflation that already prevailed in Europe. One can't help wondering how much the EU was motivated by politics, as opposed to monetary policy.  The EU's badly conceived structure--a monetary union without true fiscal controls--encouraged overly enthusiastic borrowing by sovereign members, particularly those that were economically weaker.  The resulting debt crisis was met with the EU's BYOB (bring your own bailout) policy that meant austerity for those least able to cope, and economic recession (or, in some EU member nations, depression).  It's hardly surprising that political extremism flourished.
Nationalistic parties in Europe have recently made striking gains in EU parliamentary elections (yes, in the election of delegates to the EU Parliament, a quarter of whom now would favor the dissolution of the EU).  It must scare the mudcakes out of the ECB's bureaucrats that a quarter of the EU's governing body would be pleased to defenestrate the ECB.

Moreover, nationalistic impulses in Russia led to its seizure of Crimea from Ukraine.  Even though Russia formally transferred Crimea in political marriage to Ukraine in the 1950s, Vladimir Putin (Vlad the Invader, one might call him) seems to believe that Russia nevertheless holds a droit du seigneur to take Crimea for itself. In addition, Russian nationalism (plus surreptitious Russian military intervention) has fueled unrest in eastern Ukraine, leading to civil warfare.  It now looks like Ukraine may go the way of Syria.  Neither side is strong enough to win, and both sides are supported by outside interests that cannot afford to lose.  Russia can protect its interests by keeping the insurgency going at a low boil, just enough that Ukraine is afraid to cozy up too closely to NATO.  America has to do something to help Ukraine, but can't offer enough military assistance to decisively defeat the insurgents.  (Given the pathetic performance of the Ukrainian military, the only way the insurgents can be defeated is if we send in the Marines, and that ain't happening).  So, the nastiness of irregular warfare and flight of civilians from war zones, so familiar to observers of the Syrian civil war, is now being replayed in Ukraine.

Policy makers at the ECB undoubtedly noticed the rising manifestations of nationalism around them, and surely understand that the fiscal austerity imposed by the doyennes of the EU isn't doing a bang up job of fostering economic growth.  That leaves the central bank as the only actor in this drama who can administer the antidote to extremism:  the promotion of economic prosperity.  So, the ECB surely is going negative for political reasons.  And that's a problem.  Central banks were created to foster financial stability, not political stability.  But, with political processes in Europe (as well as in America) moribund on their best days, the ECB is trying to bail out a life raft with a tea cup.  And it's not hard to figure out its chances of success.