Thursday, October 23, 2014

The ISIS surprise and its meaning


ISIS' rapid advance through Syria and Iraq and its indifferent brutality have been frightening. Starting as an Iraqi terrorist group with links to Al Qaeda, it has grown amidst the chaos of the Syrian uprising by capturing weapons and Humvees, robbing banks, and taking over oil fields. Obama’s opponents see its progress as one sign that his policy for containing threats to the United States and its interests is failing. Obama himself has projected a degree of uncertainty when he said that, “The intelligence agencies had underestimated the peril posed by the Islamic State," and that the U.S., “Did not yet have a strategy” to confront ISIS. 

[Added text in response to readers' good questions: The purpose of this post is to explore the nature of this uncertainty as Obama experienced it. I am not actually examining the real politics of ISIS and its impact on international affairs. I am speculating about how Obama might have seen this real politics. I am arguing that Obama has been hobbled by a stance of ambivalence toward the U.S engagement with the Middle East. He believes, I speculate, that the Iraq invasion and its aftermath represented a kind of defeat for the US, but that the stakes for the US in the Middle East do not allow for disengagement. I suggest that this ambivalence underlies why he might have been surprised by ISIS,  and why he was defensive in responding to the claims that he was surprised.This process is one example of the impact of ambivalence on executive action]

One question journalists and others have sensibly asked is why was the president and his administration surprised, and why doesn’t Obama have a strategy? After all, as one broadcast journalist reports, in describing ISIS’ origins and expansion, “That process actually began as early as mid-to-late 2009. It was at that point that the Islamic State was in some ways forced to devolve into a typical terrorist organization. At that point it relocated much of its central leadership to Mosul (Iraq), which was a relative safe zone, and it was at that point that it essentially began its period of recovery.” 

It seems unlikely that with this extended history, the ISIS insurgency was a complete surprise. Indeed, when Obama faulted the intelligence agencies for failing to grasp the threat it represented, several intelligence heads replied in public that in fact they had warned the Obama administration. Indeed, one intelligence official testified to Congress this past February saying, “ISIS will probably attempt to take territory in Iraq and Syria in 2014, as demonstrated recently in Ramadi and Fallujah.” Similarly, CIA director John Brennan, “Defended his agency’s performance on intelligence in Iraq, saying that the CIA had been watching for ‘many months’ how ISIS was 'growing in capability in Fallujah areas and how they were expanding their reach.'”

Nonetheless, the director of the National Security Agency (NSA), Admral Michael Rogers, acknowledged that the intelligence community had underestimated the Islamic State’s transformation, “From an insurgency to an organization that was now also focused on holding ground territory. ‘It’s an area we talked about,’ he said, ‘but in hindsight, I wish we had been a little — I’ll only speak for me and for NSA — I wish we’d been a little stronger about.’” In other words, everyone was watching ISIS, but intelligence analysts, at least at the NSA, failed to anticipate the change in its intentions, from being an insurgency wreaking havoc with suicide bombers, to becoming a group that wanted to hold territory. This failure, if Rogers’ statement is accurate, evokes two classical challenges to intelligence. First, it is very hard to gauge an enemy’s intentions, particularly if you do not have spies on the ground.  Second, an untested assumption-- ISIS is an insurgency rather than an army occupying territory -- shapes what information you pay attention to and what you ignore. It can become your blind spot.

Indeed, the Obama administration misread the Iraqi army’s capability as well. Commenting on ISIS, a panel of intelligence agency officials, including the CIA’s Brennan, concluded that, “One of the biggest blind spots was the lack of good insight not only into the Islamic State, but into the readiness and state of the Iraqi security forces that the United States had been training and equipping for years.” Brennan went on to note that, “One of the most difficult things is trying to determine the will to fight. It speaks almost to intent.” In other words, good intelligence helps you assess an enemy’s or ally’s state of mind, and not just its position or material resources. As the ancient Chinese military strategist Sun Tzu argued, one does not defeat the enemy per se, but the enemy’s strategy, which is an outcome of his intentions and his self-assessed capabilities. But this is as much a matter of psychology as it is of data gathering. 

This failure highlights yet another source of intelligence failure, and that is the failure to deconstruct the assumptions behind’s one’s own strategy. It appears that for some time the Obama administration, viewing ISIS as an insurgency, worried most about its threat in the West—terrorists killing individuals- rather than to the West—hostile armies taking territory. Hundreds of young men with European passports were going to Syria and joining up with ISIS. Would some return to their countries of origin, determined to wreak havoc in Europe the U.S. and other western countries, by bombing facilities and killing individuals? Examining the Syrian insurgency one reporter noted, that administration officials were asking,  Is this a local fight? Are they going there to really just battle the Syrian forces and topple [Syrian President Bashar] Assad? Or is there even a small percentage of these folks who are going to return home and turn their sights on western victims and their fellow citizens?” As Obama noted, “In terms of immediate threats to the United States, IISL (ISIS), those folks could kill Americans.” Indeed, on September 18, “Counter-terrorism raids in Sydney, Australia were sparked by security intelligence that ISIS was planning a violent random attack as a demonstration of its reach.” In this sense, it was necessary to focus on threats to citizens in the West but it was not sufficient. ISIS is operating on two fronts, fighting as an army and acting as terrorists, with success on one front triggering success on the other.

One question is whether or not these intelligence failures; the failure to gauge an enemy’s intention, an ally’s capabilities and to test one’s own assumptions, were in some sense motivated. By “motivated,” I mean that there are emotional and thus un-verbalized reasons for neglecting intelligence that is available. Motivated failures can lead to what Zvi Lanir calls, “fundamental surprises.” For example, the Israelis’ were surprised by the success of Egyptian and Syrian attacks in the first days of the Yom Kippur war (1973), not for want of intelligence,-- the prime minister’s cabinet debated a preemptive air strike six hours before the war began-- but because their victory in the earlier "six-day war" (1967) created a self concept of themselves as a regional power that could enforce the status quo. Moreover, military doctrine presumed that the Arabs would attack only to destroy Israel, a near impossibility, rather to gain tactical advantage, as Egypt eventually did, despite its defeat militarily. As Lanir goes on to note, “In this context, information about the enemy, accurate as it was, had very little relevance in creating a more complex understanding of the national “self,” nor did it support an understanding of the “other” in relation to them.”
The question is what concepts of the national “self” and of the “other” have underlined Obama’s response to the ISIS threat. One hypothesis is that Obama represents the idea of the United States as a militarily defeated nation. In light of the enormous expense of the Iraq invasion and its chaotic aftermath, the death of hundreds of thousands of Iraqis, and the failure to secure a legitimate government in Baghdad, this self-concept of the U.S. as a defeated nation may in fact appear reasonable. But with this self-concept there is a temptation to see the enemy, the “other” in Lanir’s terms, as a group of outlaws or brigands who can be contained or eliminated through police actions rather than military activity. This may be one reason why Obama came to rely on the use of drones to kill individual terrorists as the best exemplar of U.S. power. 

This self-concept may also be why Obama had hoped early in his administration, to pivot his attention from the Middle East to Asia. The presenting issue Obama faces in Asia is how to coopt China as a partner while acknowledging its increasing standing and global reach. While he can project power in Asia by “increasing U.S. naval and air force assets in the Pacific,” he will exercise power if he can create economic arrangements that tie China, its Asian neighbors and the U.S. together. The challenge is using economic diplomacy not military forces.

But John Kerry, the current Secretary of State, described one additional rationale for the pivot to Asia. “Obama wanted to signal that the Bush-era obsessions with the Middle East, democratization, and terrorism were over.” The term, “obsessions” suggests, if Kerry is an accurate reporter, that Obama believed that the focus on the middle-east had been inappropriate and misdirected, that Bush had inappropriately personalized the issue. But in light of our hypothesis it also suggests that the Pivot to Asia was a psychological defense against confronting the intractability, messiness and failures associated with the middle-east. This may be one reason why Obama and the intelligence agencies misread the Iraqi army’s capabilities. If the Iraqi army was competent, the U.S. troop withdrawal would not jeopardize the region’s stability, and Obama could undertake the pivot without risking the reputation and standing of the U.S. 
 
My reader might still object that the idea of the U.S. as a defeated nation is after all realistic. But I want to suggest that Obama has internalized this idea psychologically under feelings of duress, rather than as the foundation for a strategy. He is resisting the idea just as he is has embraced it.  This point of view can account for three examples of Obama’s defensiveness in articulating his thinking about ISIS,

First, as we have seen, he initially blamed the intelligence agencies rather than himself for failing to anticipate ISIS’ rise. Second, when a New Yorker reporter interviewed Obama, he characterized ISIS and other terrorist groups as “junior varsity”* basketball players when compared to “pros” such as Al Qaeda. The reporter described Obama’s remark as “uncharacteristically flip.” A person’s flip response, particularly when it is uncharacteristic, signals their defensiveness, their unwillingness to consider a difficult and psychologically threatening question seriously. Third and finally, this may also be why he willingly conceded, that despite ISIS’ long-term buildup, he had no strategy for confronting it. This self-defeating comment is sensible only if his failure to secure a strategy meant that the obstacles ISIS presented were almost too great to be overcome. If so he should not be held accountable for lacking one. These defensive comments suggests that he lacks conviction in his own decisions. If my argument is reasonable, he lacks conviction because he believes but cannot yet suppose that the United States is a defeated power. This situation creates emotional duress and impairs judgment.

This duress may have deeper roots. Obama faces the dilemma of choosing between two different frames of reference for countering the threats in the Middle East. On the one side he can look at the region as the setting for the struggle against fundamentalism, or on the other, as the struggle for democracy. Despite our wishes, the two struggles are decidedly not equivalent and their difference has bedeviled Obama since the beginning. For example, Egypt as an autocracy is a good defense against fundamentalism, but a poor example of a democracy. Hamas was elected democratically, but maintains a fundamentalist cast. Iraq is a limited democracy burdened by fundamentalist currents. Bashar al Assad, the president of Syria represented secular Arabism but dictatorial tendencies. Indeed, as late as 2011, Hillary Clinton, then secretary of state said that, "The elements that led to intervention in Libya -- international condemnation, an Arab League call for action, a United Nations Security Council resolution -- are “not going to happen” with Syria in part because members of the U.S. Congress from both parties say they believe Assad is 'a reformer.'"

There is of course a strand of American idealism in the field of international relations that considers the choice between combating fundamentalism and supporting democracy to be a false one.  This was the basis for Bush’s confidence in invading Iraq in the first place. He would advance democracy in Iraq and in the process defeat fundamentalism in the region. He would export “democracy” much as the Soviet Union once exported revolution. This idealism allowed him to be decisive even if ultimately mistaken. This was also Christopher Stevens’ worldview, the American ambassador to Libya, who was killed in the attack on the American consulate in Benghazi. Shortly before leaving for Libya he shot a video for the Libyan people, describing his pride in pluralism and democracy and his belief that Libya, like the United States could achieve these ideals, and if necessary, through conflict. Of course, the collapse of Libya as a nation state and its devolution into an arena for tribal warfare is yet another witness against the case for this idealism.

It is reported that during the Cuban missile crisis, Richard Neustadt, the famous Harvard political scientist wanted to warn John F. Kennedy against precipitous action. The then Secretary of State, Dean Acheson, is purported to have said, “I know your advice, Professor. You think the president needs to be warned. But you’re wrong. The president needs to be given confidence.” Idealism to be sure is one source of confidence, but realism can be another. Acting realistically often means considering two choices that rub up against each other and choosing one as the focal point and the other as the backdrop. It is a matter of setting priorities. One takes action in relationship to the focal choice, for example fighting fundamentalism, while creating contingency plans and enacting defensive tactics, should the background choice, for example, supporting democracy, prove more decisive in the longer run.
When a leader fails to make such a choice, their actions take on the quality of ambivalence and detachment. Indeed, it is the ambivalence that stimulates the detachment as a psychological defense. The detachment reduces the felt burden of failing to choose.  It is now a common trope that Obama projects a kind of detachment as a leader. In a recent interview, Leon Panetta the former CIA director under Obama and author of a new book, Worthy Fights, said of Obama, "Too often in my view the President relies on the logic of the law professor rather than the passion of a leader." The reference to the professor evokes the idea of the “armchair” theorist who thinks coherently but can’t translate thoughts into actions.
I think that Obama’s professorial stance has much strength. As Philip Tetlock shows in his masterful study, Expert political judgment: How good is it, how can we know, detached observes who take an ironical stance toward the world are often better prognosticators. They are not impassioned by a worldview that oversimplifies their conception of a complex political situation. This may very well have been Bush’s fatal flaw. Moreover, the detached observer can avoid impulsiveness, a tempting stance when reality seems too complicated to decode. But at the same time this detachment in the hands of an executive who must take actions, can stimulate withdrawal, defensiveness, and ultimately mistakes. I want to suggest that Obama is caught in a situation of ambivalence, accepting but resisting the idea of the U.S. as a defeated nation, while stuck in the choice between promoting democracy or defeating fundamentalism


*For my colleagues outside of the U.S. the “junior varsity” is a group of inexperienced basketball players, often on a high school team, who take a back seat to the varsity players when the team plays opponents from other schools.

Monday, August 18, 2014

The Psychodynamics of the Stock Market




We think of stock market as an indicator of economic activity. But it is also an indicator of the emotions associating with investing, and more broadly with our shared images of the future. If the market signals our collective “greed and fear, these feelings only highlight that our experience of an unknowable future leaves us vulnerable to primitive emotions. This was the basis after all for Allan Greenspan’s, the chair of  the Federal Reserve Bank, famous speech in which he worried that the stock market, responding to the dotcom boom of the 1990s, was expressing “irrational exuberance.”

If we take this point of view, one presenting question is what emotional meanings can we glean from the stock market today? What might it tell us more broadly about the emotional current that underlies our hopes and fears about the future, not just of the market or the economy, but also of society more broadly?

There is little doubt that the market has been going up since the great recession. But what has been most worrisome is that the volume of shares traded has actually been falling. As the following graphs shows, trading volume has risen along with prices in the past, but since the Great Recession it has been declining, and markedly so since 2011.

 




Writing as early as  2012 The New York Times reported that, “Trading in the United States stock market has not only failed to recover since the 2008 financial crisis, it has continued to fall. In April, the average daily trades in American stocks on all exchanges stood at nearly half of its peak in 2008; 6.5 billion compared with 12.1 billion, according to Credit Suisse Trading Strategy. The decline stands in marked contrast to past economic recoveries, when Americans regained their taste for stock trading within two years of economic shocks in 1987 and 2001. This time around, the stock market has many more players, including high-speed trading firms, which have recently come to account for over half of all stock market activity. But even they, like all other major groups, have recently been doing less overall trading. ‘When you keep in mind recent history, this is kind of uncharted territory,' said Justin Schack, an analyst at Rosenblatt Securities.”

Ben Hunt, a colleague and a brilliant analyst of the stock market, writes that, "Since the outbreak of the Great Recession, with a few exceptional months marked by panic selling, trading activity in US equity markets has done nothing but go down. And when you take into account the growth of algorithmic trading and other machine to machine activity which now accounts for as much as 70% of daily trading volume, the decline in actual human beings buying or selling stock in order to acquire a fractional ownership share in an actual real-world company is much more dramatic. (http://www.salientpartners.com/epsilontheory/) Hunt calls this the “hollow market,” bringing to mind T.S. Elliot’s great poem which ends with the famous phrase,

“This is the way the world ends,
This is the way the world ends,
This is the way the world ends”,
Not with a bang but a whimper.

In other words, he is suggesting that the market appears increasingly lifeless- the world is ending- yet it does so quietly. Prices are still high but interest and passion are absent.. I want to propose that we can characterize this financial lifelessness in four ways; "the search for safety," "feelings of dependency," "the decline of difference," and the "inward turn." Let us look at each one in turn. As I hope to show, these emotional descriptors correspond to measurable developments on the stock market. In this sense the market provides nuanced measures of of our collective emotional state.

Safety: Strikingly, traders have organized their buying and selling to feel increasingly safe rather than at risk. The Chicago Board Options Exchange markets an index called the ‘VIX’ that traders can buy and sell. The index is based on a weighted average of options contracts*(see footnote), that in turn is based on 500 stocks that trade on the  New York Stock exchange  and the NASDAQ. When the index is high, traders expect more volatility in the market. When it is low they expect less. It is therefore often called the “fear index,” since it measures the degree of turbulence and thus uncertainty in in the market. As the following chart shows, the level of fear has fallen significantly since 2009, and hence the corresponding sense of safety has increased 

 


The sense of safety matches the strength of corporate balance sheets in the economy at large. One measure of corporate leverage is the ratio of the corporate sector’s  net debt (debt minus its cash on hand) to its earnings. To use an analogy, one way to assess if a family is highly leveraged, and thus financially vulnerable, is to compare its debt relative to its family income. This measures the family’s ability to pay off its debts and not go bankrupt. In the prelude to the Great Recession many families had too much debt relative to their incomes. Currently, this ratio for the corporate sector as a whole, net debt to earnings,  has fallen by 2/3 since the beginning of the Great Recession. The corporate sector is not leveraged and companies in the main are not vulnerable to sudden downturns. They are safe. This is what we mean when we say that a company’s balance sheet is “strong.”  

Dependency: Stock Market participants increasingly focus on the Federal Reserve Bank (“the Fed”) and its likely decisions, to the exclusion of assessing the fundamentals of the different sectors of the economy, or the performance of different companies.  As Hunt argues, “Over the past five years an extremely powerful narrative has been created, what I call the Narrative of Fed Omnipotence – whatever happens in the market, for good or for bad, happened because of what the Fed did, not because of what happened in the "real" economy.” (http://www.salientpartners.com/epsilontheory/notes/The_Risk_Trilogy.html). This is one result of the Fed’s historically unprecedented policy of creating enormous reserves in the banking system-- see the chart below -- so that interest rates, which measure the balance between the supply and demand for capital are close to zero. 


 

The Fed's primary purpose was to insure that all member banks had adequate cash, and that companies, the banks’ depositors, would not go bankrupt because their assets were illiquid. This was a sensible response to the cash crunch associated with the initial stages of the Great Recession. But one untoward effect has been to inflate the value of most stocks, irrespective of their individual performances, as investors search for ways to earn more than minimal interest on their cash holdings. In effect, the stock market goes up not so much because the business prospects for the future are good, but because there are few alternative ways to earn a return.

This argument suggests that stocks are in fact overvalued. Indeed, one way to assess its overvaluation is to the total value of all stocks on the market, what is called the market’s “total capitalization,” relative to the Gross Domestic Product (GDP), or total measured production. This ratio measures how productive our total wealth, the sum of all of our capital assets, is in producing the income we use every year to both consume goods and services, and to invest in the economy. To use an analogy, it is like measuring the value of a house relative to the annual rents it brings in. When this measure is too high relative to historical standards, we suspect that the home is overvalued, signifying perhaps a bubble in the real estate market. Its value is not consistent with the rents it brings in. 

As one analyst notes, the historical value of this ratio for the stock market, "total capitalization to the GDP," was .55 before the recession but is now 1.35. This(http://www.hussmanfunds.com/wmc/wmc140728.htm).  This suggests that stocks like our imaginary house, are overvalued. Stock prices are not rising because companies are more productive, but rather because the Fed is supporting high prices.
The following graph shows this quite clearly. The ‘SP 500’ (Standard and Poor’s), an index of stock market performance, has been rising in response to the value of the total assets (bonds of many kinds)  that the Fed holds. But the Fed’s assets increase when, to give banks more money, it buys bonds from bank depositors, and deposit the cash in their accounts. The Fed owns more bonds and individuals and companies have more cash.


 


 
The decline of difference. One feature of the Fed’s impact on the stock market is that increasingly stocks move together rather than separately based on companies’ underlying differences. Modern portfolio theory, which lies at the heart of much investing practice,  sums up to a simple maxim, that to be successful one must not put too many eggs (money) in one basket (a stock). This means that investors should diversify their holdings by identifying stocks whose movements up and down are not correlated. But one impact of the Fed’s central role in shaping the market narrative is that stocks increasingly move in concert rather than on the basis of their distinctions. Dependency decreases differentiation.

In 2010 JP Morgan reported that “correlation between stocks are currently at the highest level.” In 2011 another analyst reported that, “My study of the behavior of S&P 500 confirms that correlation is running at record levels. The average trailing two-year correlation between the S&P 500 soared to 
about 60% in the fall. This is higher than during the burst of the Internet bubble or the 1987 stock market crash.” (http://www.forbes.com/sites/greatspeculations/2011/11/30/how-the-correlation-bubble-hurts-us-all/).  

This correlation is one reason for poor hedge fund performance. Hedge fund traders make their living by detecting differences, for example by anticipating that some stocks will go down while others will go up. As correlations between stocks and classes of stocks rise, it is harder for hedge funds to make money. As a Bloomberg, January 2014 news item reports, “Hedge funds trailed the Standard & Poor's 500 Index (SPX), a measure of the stock market, for the fifth straight year.”

 The Inward turn: There are two conceptions of how the stock market moves. We can call one the “fundamental” view, and the other the “sentiment” view. The former is based on investors’ assessments of the real profitability of companies and sectors. The latter is based on assessing what other investors think and feel about the market. Ben Hunt uses the analogy of the poker game. If you trade on fundamentals you are focused on the cards in your hand and what you think you know about the cards in other players’ hands. If you trade on sentiment you focus on what the other players might be thinking about their cards and your cards. Both perspectives are critical. The good poker player plays the players as well as the cards. Warren buffet is a fundamental investor who plays the cards, while many active traders, particularly those that monitor stock charts, are focused on what everybody thinks, and what everybody thinks everybody thinks. They play the players. Describing the market climate today, Hunt writes, “The market will go up because every investor will believe that every other investor heard what Famous Investor X said, and every investor will be forced to update his or her estimation of what every other investor estimates… That’s how the sentiment game works.” (http://www.salientpartners.com/epsilontheory/notes/A_Game_of_Sentiment.html)
The stock market’s “flavor” is based partly on the proportion of these two strategies.

One hypothesis is that in a period when the Fed is the most powerful player and stocks moves up and down together, investors turn increasingly inward toward the stock market itself and away from economic reality. Opportunities to profit arise not because companies perform differentially, but because a trader has been able to intuit the intentions and moods of other traders. This is why it is so important for traders today to focus on the unemployment rate. If the rate falls, it may signal that the Fed, anticipating real-economy growth, will at long last stop buying bonds from the public. If they reduce their demand for bonds, bond prices will fall and thus the interest rates will rise, thereby increasing the attractiveness of bonds relative to stocks. So time to sell stocks. But if the labor participation rate, the proportion of all people who either have jobs or are looking for them falls, then the Fed, concerned that people are giving up looking for work,  might buy more bonds, further lowering the interest rate. So time to buy stocks. The most salient questions becomes, “What is the Fed thinking?” and "What are other investors thinking about what the Fed's thinking?" 

Now, here comes the inward turn, if everyone knows that everyone knows that everyone is paying attention to the unemployment rate, then everyone is dependent on how the Fed will parse its words in its next public statement and how this parsing will affect all investors, and how these investors will interpret what other investors are thinking. When the sentiment game dominates, investors' attention
turns increasingly away from the fundamentals. This represents a flight from reality. The inward turn also accounts for the centrality of business shows on television. The shows’ anchors rarely offer considered or thoughtful advice, they are paid to be flagrant. Instead, since everybody knows that everybody is watching these shows, they provide some insights into what everybody knows what everybody knows.

The Anti-work climate

If I were to describe a work group to you in the following way; its member seek safety, there is unusual dependence on a single leader, differences are only minimally acknowledged ,and group members focus inwardly on their own group dynamic rather than their surround, I think you would conclude that this  group is not prepared to work, that it lack’s vitality, and may be even characterized as depressed or lifeless.  Using group-dynamics theory, we would characterize the collective mood of such a group as “anti-work.” We mean by this that though the group has been called upon to ostensibly accomplish some work, its members act instead as if they were called upon to satisfy their leader, keep one another safe, or feel gratified by ensuring that everyone thinks alike. If we look upon the stock market as the collective expression of our relationship to the work we are called upon to do together --to invent new technologies, to build businesses, to produce products that satisfy customers -- we could say that the stock market is expressing just this mood of anti-work, this lack of belief in our ability to be productively engaged in economic life. Perhaps as the following chart shows, this is one way to interpret the growth in the number of people who are no longer employed and are no longer looking for work at all. 



It is striking in this regard that two mainstream economists, Larry Summers, (https://www.youtube.com/watch?v=KYpVzBbQIX0) the former Secretary of the Treasurer in the Clinton administration, and Paul Krugman the Nobelist and columnist for the New York Times, (
http://krugman.blogs.nytimes.com/2013/11/16/secular-stagnation-coalmines-bubbles-and-larry-summers/?_php=true&_type=blogs&_r=0) have both suggested that we may be facing a period of what they call “secular stagnation.” a more technical term for "lifelessness." In the spirit of Keynesian economics this means that however low the interest rate, investors and businesses cannot be induced to spend their money on capital goods, that instead, in their flight to safety, they prefer to hold risk-free treasury bills, even when the return on these bills is close to 0%, if not zero itself. 

But the presenting question is why do we face such a situation? It takes but a few minutes of reading MIT’s Technology Review or the magazine, Scientific American, to be impressed by the extraordinary technologies, that with sufficient effort and investment, await us in such areas as new biological drugs, nano-technology, quantum-computing, solar energy, nuclear fusion, Big Data, 3-D printing/manufacuting and agile robots. Why would an economy and society be stagnant in the face of such opportunities?  The current mood and the prospects for stagnation beg for an explanation, for an understanding of the social and psychological barriers we ourselves have constructed and that are now getting in our own way. 


 
* When a trader buys an options contract he buys the right but not the obligation to buy or sell a stock at  particular price, called the strike price at a specified time in the future, say 30 days. If in 30 days the strike price is below the actual price, and he now has the right to buy the underlying stock, he can make some money by executing the option and then selling the stock. If the strike price is at the actual price or higher, his contract expires, and he is “out of the money.”