« Shaping Strategies | Main | Pareto Paring - Achieving Strategic Cost Reduction »



here's my way of looking at it

demystifying economic leverage

‘Ball’ = ‘economy’ – This needs to be kept rolling for progress
‘Force’ = ‘People’ – All of us
‘Fulcrum’ = ‘Banks’, ’Financial Institutions’ – basically our markets
‘Plank’ = ‘Leverage’ within our markets, for eg. The permission granted to banks to use your $100 deposit to make a loan worth $200. Here the Leverage is 2X (200/100)

Read more about it on my blog



To describe the main idea behind this excellent post, I propose an analogy:

- Economy: Human Body

- Financial Leverage: Circulatory System; keeping the blood flow and pressure steady

- Capability Leverage: Nervous System; keeping all the nerve cells healthy & improving their interaction by creating new synopsis branches

- Learning Leverage: Organs and limbs; increasing the capabilities and strength by exercising and learning.

So according to his model, if we we look at the latest turmoil and its impact to the overall economy the following picture comes out:

The body gained a lot of weight and some vessels were blocked and unfortunately a heart attack occurred. Although some organs and limbs were impacted, the body is still alive...

So, what must we do?

Added to the efforts to let the blood reach to all parts of the body, treatment of the nervous system and the organs is essential! Then, mental and physical practice should be encouraged for the health of the entire body (including the circulatory system!).

[email protected]


Can you share some examples that illustrate capability and learning leverage?

Rod Laird

Nice to see a very topical post John. I would observe somewhat wryly however, that even within organisations, the barriers to capability and insight leverage are enormous. NIH is alive and well...
hope you got my b'day greetings


JH McLaughlin

The faulty assumption employed in financial leverage was that there was only going to be upside. Markets were only going to go up; real estate was only going to increase in value; credit would be limitless and easily accessible to all.

It seems to me that proper "hedging" was the missing fundamental here. Few were preparing for downside; considering what would happen if values decreased, or if people lost their jobs and couldn't pay back their loans.

Refusal to acknowledge the potential downside in my eyes is what fueled the inappropriate adoption of risk; for example, the flurry of no doc and/or NINJA loan approvals.

Interestingly enough, a fact that many have seemed to overlook is that the latest economic meltdown is a repeat of the Orange County scandal of the mid-1990s, but just on a magnificently larger scale. The common bond between them (no pun intended)? Mortgage derivatives and a market that refused to acknowledge all sides of the risk equation.

In the end up, the industry requires a re-shaping in the risk management arena: a re-evaluation of risk applications both proprietary and commercial. This is the only way we can stop repeating history.

Michael P. Gusek

Hi, John...

I really appreciate the fact that you are trying to show everyone that value is not only measurable by money. We are in for quite an adventure!

First a few questions...

Capability Leverage:

How is this different from a traditional consulting model or outsource?

Furthermore, from an IT perspective, how is this different from a utility computing model or cloud computing?

Some comments on your leverage models:

I love the possibility of what you are proposing however, the feasibility for something like this to occur in a market like the U.S. may be blocked a every turn by intrusion in the regulatory environment necessary for it to succeed in a sustainable fashion. To support Capability & Learning Leverage in a way that would be effective, I feel that a next level business infrastructure would need to be in place which the U.S. (the epicenter of the recent quake) could not support in its present form...the EU, Asia, and Australia (I have an intuitive tingle about that market…) will have a better chance at making this move quickly. Emerging markets built on these premises you put forth will dominate future economies. No question.

What would this architecture look like? Well, I am a huge fan of doing what works and what works is nature, so I see a solution a la biomimicry. In this case, maybe a "breathing" of the economy with your three (and potentially more) leverage points as the lungs of the system, effortlessly expanding and contracting to match market pressures. (i.e. Things get bad, the system reacts with surprise and takes a quick breath inflating one of the leverage points, like a startle response almost.) Most importantly, that flexibility would need to be supported autonomously, NOT bureaucratically.

Any type of B2B (or B2C for that matter) contractual agreement would need to be modified in this environment. Almost like one "social/network contract" to be the master variable. AND this master variable would need to be as flexible and autonomous as the operative apparatus itself. IP and NDA's would need serious help too...

The biggest issue I see with this model is one of trust. I will not go into this one too much, because it would tread on too many toes of those who value individual success over that of the whole.

Paul Saffo wrote a great piece on Capitalism which I treat as great truth and a view into the issues we face...


Every time I read it I get a different perspective. Usually, when I find a song or book like that, I call it high art.


The comments to this entry are closed.