Saturday, October 24, 2015

Ask Not What Your Country Can Spend For You

Ask what you can spend for your country.  At least, some folks might like it if you did.  The Federal Reserve is in trouble.  The economy is meandering.  Unemployment levels have reached full employment, but labor force participation levels are low.  The Fed accentuates the negative and projects gloom about employment.  Wages stagnate, and, net of inflation, are lower than a generation ago.  The dollar is strong, which encourages imports while discouraging inflation. The Consumer Price Index is dropping, leading some to conclude that we have deflation.  This conclusion is a classic example of how statistics mislead.  Prices are higher if you take out energy costs.  If the price of everything except energy is going up, and energy is dropping a lot, do we really have deflation?  Or a misleading statistic?

But we digress. The Fed has greatly reduced its quantitative easing measures, since they didn't seem to be doing much good any more.  It's holding short term interest rates lower than a snake's belly.  But it can't do more.  The Fed is now low on ammo and can't expend what it has left; it has to hold something in reserve in case the economy belly flops.

There's no possibility of fiscal stimulus.  The federal government tied its budget into knots with the sequestration law, which requires automatic spending cuts each year through 2021.  Congress and the White House can get around the cuts by passing specific legislation providing for something other than sequestration.  But, given how the daily love fest between Congress and the White House consists of brickbats, but not bouquets, the chance for fiscal stimulus is lower than short term interest rates.

That leaves you, dear consumer.  The U.S. economy is about 70% consumption, and if consumers don't consume, the economy reaches for one of those little airline bags.  So spend, spend, spend.

Right?  Come on, right?

Or maybe not.  Consumers learned the hard way after the 2008 financial crisis that lavish spending and debt accumulation are shortcuts to financial ruin, and that saving improves the quality of your sleep.  Just because the Fed made it cheap to borrow doesn't mean borrowing is a good idea--soda is inexpensive but drinking a lot of it is a very bad idea.  If the Fed can't move short term interest rates above a complete goose egg, you have to suspect that maybe the Fed knows that the economy is a complete goose egg.  In which case, the last thing you want to do is spend freely.

We live with a contradiction:  our individual financial health requires acting in a way that is unhelpful to near term economic growth.  But those who are prudent can get through hard economic times, and it makes sense to put self and family first.  This leaves policy makers with controversial choices--negative interest rates, easing immigration restrictions to bring in educated, ambitious foreigners, and even more hotly debated measures (can you say Ex-Im Bank?).  How likely are these?

The truth is government policy is largely played out.  The economy will have to rise or fall based mostly on its own.  The next surge of growth, whenever that is, will probably come in a rush of technological innovation that may be hard to foresee.  Until then, the economy will likely meander.  If you're building up your savings and preparing for a tough slog, you'll probably be okay.  Ask not what you can spend for your country.  Ask what you can save for yourself and your family.

Monday, October 5, 2015

Everyone's a Loser in Syria

With Russia's entry into the bag of dog doo that is Syria, the chattering classes are all astir over who's up, who's down, who's winning and who's losing.  Russia is the usual nominee for winner.  But what exactly has Russia won?  It can't win the war.  Between ISIS, the Kurds and various other rebel groups, most of Syria is no longer in the hands of the Assad regime.  Russia can't afford to commit the tens of thousands of ground troops, equipment and air power that would be needed to retake and hold all this ground, and the Assad regime's army appears too depleted to mount the major offensives that would be needed.  All Russia can do is prop up an Assad rump regime in western Syria that would be under constant attack.  That would mean an indefinite commitment to a war with no end in sight and no possibility of a Russian victory.  

Russia's puppet in Syria, Bashar al-Assad, isn't a winner; he has only avoided becoming a big loser.  His diminished army can't reconquer what he's lost in Syria.  Russian air strikes will allow him to bolster his lines and tighten up his defenses.  But a few dozen Russian air craft don't begin to provide enough air power to support an offensive that could retake all of Syria.  At the same time, Assad's authority is diminished.  Now, he will have to do whatever Putin tells him to do, and like it, as well.

The Iranians, who apparently negotiated an alliance of sorts with Russia, have had their weakness revealed.  For all their bluster and unacknowledged efforts to build nuclear weapons, they don't have the strength to prop up a two-bit dictator in a small nation.  They had to call in first, their Hezbollah allies, and then Russia.  Maybe the Iranians are claiming a propaganda victory.  But they just ceded power to Vlad the Invader, and it's generally a bad idea to give power to an aggressive despot.  Has the Islamic Iranian government forgotten that one reason Shah Mohammed Reza Pahlavi allied himself so closely with the United States was because the Russians wanted to take over Iran after World War II?

The Shiite dominated government of Iraq has cozied up to Russia and allowed Russian military planes to fly over Iraqi air space in order to reach Syria. Maybe it had no choice; its Iranian handlers could have told it to cuddle up to Putin.  But, reality is you can't be an ally of America and an ally of Russia.  If the Iraqis snuggle up to Putin too much, America may not provide as much military equipment or intelligence to Iraq as it once did.  It may see less value in supporting a Shiite government in Baghdad and perhaps more value in supporting the Kurds.

The Sunni rebel groups--ranging from ISIS to the various metastasizes of al Qaeda to the tiny and shrinking handful of moderate rebels supported by the United States--are ships out of luck.  They can't win, not with Russian military assets located in and protecting western Syria.  They will be battered by Russian air power, and will have to hunker down.

Saudi Arabia and its Sunni allies have quietly been supporting various of Assad's opponents, hoping to unseat him and install a Sunni-friendly government.  That ain't happening now, not with Russian soldiers in Latakia.

The Kurds have enjoyed notable success in Syria, carving out safe havens for themselves and others who aren't Sunni or Shiite crazies.  But Russian air power will likely preclude further Kurdish gains.  The Kurds will have to concentrate on holding what they have.

Turkey has been fighting Russia for centuries.  Now, with Russian military aircraft in Syria, the Russians just flanked Turkey and can hit it from two sides.  Not that Putin has expressed any unfriendly intentions toward Turkey, but given the centuries of war between these two nations, nothing needs to be said.

Israel has been fighting various Russian allies almost since its inception.  Never, however, have Russian military assets been so closely positioned to Israel.  Had Iran been so brazen as to station military aircraft in Latakia, Israel's more advanced air force would have swarmed in the next morning before dawn and walloped the warm living yogurt out of the Iranians.  But Israel cannot attack Russian forces.  It can only watch, and hope that Syria proves to be a hopeless morass for Russia.

And last, but not least, the United States has seen its modest influence in Syria diminish even more.  By propping up Assad, Putin precludes any possibility of an American victory.  Not that it matters since, at this point, America isn't even really engaged in Syria.  The Obama administration issues a steady stream of press releases about Syria, but it's doing little more than talking. Since it's not engaged in Syria, it doesn't have the leverage to get the Russians out.  Hopes that Russia will join hands with the U.S. in attacking ISIS are delusional.  ISIS has weakened America's position in the Middle East.  Why would Putin want to weaken ISIS, which is doing the dirty work for him?  All he needs to do is prop up Assad, his puppet in Syria, while ISIS and America batter away at each other, neither able to conclusively defeat the other.

In the end, the absence of anyone strong enough to impose peace and order in Syria means that the country will be de facto partitioned.  That's what happened to Yugoslavia.  It's what's happening now in Iraq.  The flood of refugees into Europe will continue.  The truth is everyone is a loser in Syria.