## Posts Tagged ‘margin’

### Another Achilles Heel of modern society- narrow margin

Thursday, April 8th, 2010

From our previous article (An Achilles Heel of modern society- specialisation and division of labour), we talked about one of the Achilles Heel of modern society- excessive specialisation and division of labour. Today, we will introduce another Achilles Heel of modern society- lack of margin.

First, we will delve more on the concept of margin. Let’a look at the examples below:

1. When you read a book, you will find the text being surrounded by a narrow band of space. What if the publisher of the book decides to maximise the usage of space and print the text right to the edge of the paper?
2. When you look at the motorway, you will find that many of them have enough space on the edge of the road to fill another car lane. What if the designer of the motorway decides to maximise usage of space and make the lanes so narrow that your car’s wheels are only centimetres from the edge of the road and the next lane?
3. In the world of aviation, aeroplanes must be separated between each other by a considerable distance. Should two planes come within, say 400 metres of each other, it is considered a ‘near’ miss. Why don’t air traffic controller maximise the usage of airspace by letting planes fly less than 400 metres from one another?

In all these examples, the boundary indicating the limit beyond which something should not go or below which something should not fall is very generous (relatively). That is, there is a wide margin. Margin is the space beyond what is exactly needed. It is the extra and excess buffer beyond what is required. To illustrate this point, let’s have some examples:

1. Every year, you earn more than what you need to spend.
2. You arrive at a meeting 15 minutes early.
3. You have a party for 50 people but you order enough food and drinks to feed 60 people.
4. You plan your time for next week such that you will have many hours of free time.

In the above examples, you are giving yourself a buffer (margin) far beyond what is solely needed.

If you live life full of margin, wouldn’t that make you a much happier and relaxed person? As you step towards the edge of your buffer, your stress level goes up, your anxiety goes up and you become much more uptight, irritable and impatient. That’s because you are stepping towards the point of no return (e.g. accidents, bankruptcy, late for important appointment, etc). You see, the whole point of a buffer is to give you a margin for error against the unexpected (i.e. the Black Swans).

But look at the reality of modern society:

1. Back in 2007, when the private equity fashion was in vogue, companies with ‘lazy’ balance sheet (i.e. buffer of cash) are marked for takeover.
2. Home buyers leverage to the hilt and increase their debt servicing burden to the point that they have very little beyond what they absolutely need.
3. As one of readers said, there’s a cult of efficiency in this modern world where everything have to be run at maximum efficiency with as little slack as possible.
4. According to The Ultimate Suburban Survivalist Guide,

Nothing is stored for very long in a supermarket, but then, with just-in-time inventory, nobody stores anything. Grain is produced and stored in the Midwest and shipped daily to the rest of the United States. The system we have now is a huge contrast to what the US did up until the 1980s. At one time, up to a year’s worth of grain was stored in elevators around the country. But now, very little is stored. We produce what we consume each year. So what’s plan B if somethign goes wrong? There’s no plan B.

5. Modern retailers uses a just-in-time strategy “that strives to improve a business’s return on investment by reducing in-process inventory and associated carrying costs.”
6. If you are a professional, you will notice that most people around you have very little time buffer. Every slice of slack time will be eliminated quickly by meetings, deadlines and pressure to produce more and more output in less and less time.
7. Many investor uses margin lending, CFDs and other forms of leverage to ‘maximise’ their returns.

We can go on and on with more and more examples. As you would have noticed by now, modern society disdains the idea of having any slack. Every buffer must be eliminated and utilised. The usage of every penny and second of time must be maximised to produce some kind of output. Even economies are structured that way. The Australian economy, for example, is one of high leverage. In the labour market, it was not long ago that there were cries of “skills shortage.” Also, as we wrote in Black Swans lurking around Australia?s banking system, Australian banks are concentrating their risk on mortgages, in their quest for maximising profit.

What is the consequence of miniscule margin? As you can see by now, by eliminating every slice of margin in the path towards maximising results, the margin for error increases. The GFC is the result of the elimination of financial margins to the extreme. As margins decrease, the vulnerability to Black Swans increases (see Failure to understand Black Swan leads to fallacious thinking).

So, in view of all that, we wonder how much margin does our increasingly complex and marginless society has against threats to our modern way of life?