The Virtuous Cycle
| By now, most everyone is familiar with industry’s efforts to bring new electric cars to market. Whether primarily stimulated by environmental concerns or the various tax breaks which have been made available, all auto manufacturers are working on perfecting these “green” vehicles. If you’ve paid much attention to stories about their development, you may have heard today’s title mentioned. It’s an engineering term describing a system in which developments provide positive feedback for each other. In the case of electric vehicles, new technology might make batteries more efficient, allowing them to be smaller and lighter. Such batteries would allow the vehicles themselves to be smaller and lighter, meaning they would require less battery power to operate, quite possibly leading to further efficiencies.Some readers may be more familiar with its opposite - the vicious cycle. A recent example of this phenomenon is Boeing’s attempt to bring its 787 Dreamliner project to fruition. Years behind schedule, Boeing is about to make their first delivery to All Nippon Airlines. Besides numerous assembly-related problems, the plane turned out to be heavier than planned. That meant that room had to be added for additional fuel to propel the extra weight. More fuel, of course, weighs more, so requires - well, you get the picture.
Those who don’t share my interest in engineering may appreciate that this is also a term with application to economics. In the mid-to-late 2000′s, we watched people speculate by purchasing houses to flip. They often borrowed more than the home’s value, so that any slowdown in the buy/sell cycle left them unable to make their payments. As the least solvent of these investors were forced to sell, the value of nearby homes fell, reducing equity and putting other owners at risk. All of this made the bonds which were secured by the underlying mortgages less valuable and that elevated the problem beyond individuals to institutions. Mortgage loan problems felled the once mighty Lehman Brothers in September of 2008. Perhaps closer to home, these issues certainly played a role in the 73 bank failures recorded through September 11th of this year, not to mention the 297 which failed in 2009 and ’10. Fortunately, history includes a long list of virtuous cycles too, in which each improvement has opened the door for another. One that most of us appreciate every day is the regular increase in computing capacity. Back in 1965, Gordon Moore’s “Law” predicted that computing power would double every 18 months. The reason for the increases? The reduction in size and power consumption of the transistors and other components from which computers are built. According to Michio Kaku’s recently published Physics of the Future, today’s singing birthday card contains more computing capacity than was available to all the Allied forces combined in 1945. Still thinking about manufacturing, Kaizen is a Japanese word meaning “improvement” or “change for the better”. Popularized after the Second World War and made famous by Toyota, it’s basically a philosophy of continuous improvement. Kaizen is one of the most important reasons that “Made in Japan” has an entirely different meaning now than it did pre-WW2. The fact that Toyota was required to recall nearly four million vehicles last year shows that cycles can reverse if progress comes to be taken for granted. Virtuous cycles work at an individual level too. Since we are often involved with multiple aspects of our clients’ lives, their health can be as important to us as their finances. Does it seem logical that someone who is overweight might be more inclined to experience joint problems? This is a fairly common situation in which improvements can reinforce each other. Weight loss may forestall joint replacement surgery, make surgery more likely to be successful when it eventually becomes necessary and allow for easier post-surgical recovery. Budgeting is another example where a virtuous cycle can improve our clients’ lives. Those who spend less are automatically saving more, usually resulting in reduced stress and increased ability to enjoy life. Because anyone can spend less, it’s entirely possible to turn a vicious financial cycle into virtuous one. Having additional assets offers more flexibility, whether someone is facing an unexpected financial problem or considering retirement. And, of course, retiring is going to be that much easier for those who are already spending less. At a very basic level, financial planning involves providing options for our clients as every decision point arrives. We help them explore their options and reach decisions that meet their needs, providing peace of mind and often leading to another virtuous cycle. |
